Nabors Industries Ltd. 2023 Q3 Form 10-Q Summary
Business context and reporting period
Nabors Industries Ltd. is a global provider of land-based and offshore drilling, drilling-related services, technologies, equipment manufacturing and energy-transition solutions. As of September 30, 2023, the company actively marketed 298 land rigs and 28 offshore rigs across more than 15 countries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared primarily with the corresponding 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Operating revenue | $734.0 million | $694.1 million | $2.280 billion | $1.894 billion |
| Net income (loss) | $(31.2) million | $(4.5) million | $46.0 million | $(249.1) million |
| Net income (loss) attributable to Nabors | $(48.9) million | $(13.8) million | $4.9 million | $(281.2) million |
| Basic and diluted EPS | $(6.26) | $(1.80) | $(2.79) | $(32.72) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $455.9 million | $301.1 million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $406.7 million | $272.1 million |
Q3 net loss attributable to Nabors represented approximately a 6.7% net margin, compared with approximately 2.0% in the prior-year quarter. Nine-month attributable earnings represented approximately a 0.2% margin, compared with a negative 14.9% margin in 2022. Segment adjusted operating income was $89.8 million in Q3, or approximately 12.2% of operating revenue, and $327.7 million for the nine-month period.
- Liquidity: Cash and short-term investments were $406.6 million at September 30, 2023. Working capital was $431.9 million.
- Cash and restricted cash: Cash and cash equivalents were $387.5 million, and restricted cash was approximately $420.1 million, producing combined cash and restricted cash of $807.6 million.
- Debt: Long-term debt was $2.501 billion, compared with $2.538 billion at December 31, 2022. The company had no borrowings under its $350 million revolving credit facility, with $45.7 million of letters of credit outstanding.
- Debt activity: Nabors issued $250 million of 1.75% exchangeable notes due 2029, repurchased approximately $230.9 million of outstanding notes for approximately $236.8 million, and redeemed the remaining $52.1 million of 5.10% notes due September 2023.
- Cash generation and uses: Nine-month operating cash flow was $455.9 million, while investing activities used $429.0 million. Financing activities provided $54.2 million, including $305.0 million from the NETC II public offering and $250.0 million of exchangeable-note proceeds.
Material changes versus the prior comparable period
- Q3 operating revenue increased 6%, primarily from stronger international activity, higher day rates and growth in Drilling Solutions and Rig Technologies. U.S. Drilling revenue declined 7% as average rigs working fell 19%, partly offset by higher day rates.
- Nine-month operating revenue increased 20%. U.S. Drilling revenue rose 23%, International Drilling rose 14%, Drilling Solutions rose 31% and Rig Technologies rose 39%.
- Nine-month adjusted operating income increased to $327.7 million from $93.4 million. U.S. Drilling contributed most of the improvement, rising to $210.9 million from $40.2 million.
- Q3 profitability deteriorated despite higher revenue because Other, net changed from a $26.0 million gain to a $35.5 million loss. The 2023 loss included litigation-reserve increases, warrant mark-to-market losses, asset-disposal losses and foreign-currency losses. The 2022 quarter benefited from a $34.0 million warrant valuation gain.
- Nine-month net income improved substantially, aided by operating improvement, a $44.3 million warrant mark-to-market gain and a $25.2 million debt-buyback gain. These items are volatile and may not recur.
- Capital expenditures increased 49% year over year to $406.7 million, exceeding the increase in operating cash flow and contributing to substantial investment cash usage.
- Redeemable noncontrolling interest increased to $834.2 million from $678.6 million, substantially reflecting the consolidated SPAC structures and related redemption values.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical revenue, earnings or cash-flow forecast in the supplied filing text. Management expects current cash, investments, operating cash flow, debt or equity financing, the accounts-receivable facility and the revolving credit facility to fund expected requirements for at least the next 12 months, subject to the accuracy of its operational and financial projections.
- Demand remains dependent on oil and natural gas prices, customer exploration and production spending, contract renewals and global drilling activity. U.S. natural-gas-directed activity had declined following lower gas prices, while international activity benefited from improved pricing and demand.
- Management expected to remain compliant with revolving-credit covenants over the following 12 months, but noted that failure to meet covenants could terminate commitments or accelerate outstanding borrowings.
- Purchase commitments at September 30, 2023 totaled approximately $370.6 million, primarily for capital expenditures, operating expenses and inventory.
- The accounts-receivable facility had a $250 million maximum purchase commitment, of which approximately $174.0 million of receivables had been sold and remained uncollected.
- Material risks include commodity-price volatility, reduced customer capital spending, operating and safety risks, customer concentration, geopolitical events and the Russia-Ukraine conflict, cybersecurity incidents, interest rates, refinancing and credit-rating risk, covenant compliance, tax disputes, litigation, asset impairments and energy-transition execution.
- Russia represented 0.9% of property, plant and equipment, net, and 1.2% of nine-month operating revenue. Nabors reported no assets or operations in Ukraine.
- An Algerian legal matter could result in a loss of up to approximately $12.6 million above accrued amounts, although management states that pending litigation is not expected to materially affect consolidated financial position or cash flows.
- NETC had a pending business combination agreement with Vast Solar and faced a November 19, 2023 deadline, extendable to December 19, 2023, to complete a business combination. Failure could result in mandatory liquidation. NETC II also introduced additional SPAC execution and redemption risks.
Most important facts for an investor to verify
- Reconcile the filing’s EPS disclosures: the income statement reports Q3 2023 diluted EPS of $(6.26), while the MD&A narrative refers to $(6.36).
- Assess the sustainability of improved operating performance after excluding volatile warrant valuation gains, debt-buyback gains, litigation charges and other unusual items.
- Review the maturity and refinancing requirements for the $2.5 billion debt balance, including the $155.5 million of 0.75% exchangeable notes due January 2024 and $474.1 million of 5.75% notes due February 2025.
- Evaluate whether operating cash flow can consistently fund elevated capital expenditures, purchase commitments and debt service.
- Monitor revolving-credit covenant compliance, remaining borrowing capacity, letters of credit and the availability of the accounts-receivable facility.
- Verify the status and outcome of the NETC-Vast transaction and the required resolution or liquidation of NETC.
- Track litigation reserves, the Algerian proceeding, tax exposures and potential impairments or changes in deferred tax-asset realizability.