Nabors Industries Ltd. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2020. Nabors provides land-based and offshore drilling rigs and related services and technologies across approximately 20 countries, with 366 actively marketed land rigs and 33 offshore rigs at quarter-end. Results were materially affected by COVID-19, oil-price volatility, oversupply, weaker demand and customer capital-spending reductions.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / Dec. 31, 2019 |
|---|---|---|
| Operating revenue | $718.4 million | $799.6 million |
| Pre-tax income (loss) | $(356.6) million | $(73.6) million |
| Net loss attributable to Nabors common shareholders | $(395.5) million | $(122.0) million |
| Diluted loss per share | $(56.73) | $(18.13) |
| Adjusted segment operating income (loss) | $(9.1) million | $26.7 million |
| Net cash from operating activities | $59.2 million | $69.9 million |
| Capital expenditures | $59.4 million | $141.1 million |
| Cash and short-term investments | $489.7 million | $452.5 million |
| Total debt, net of deferred financing costs | $3.388 billion | $3.333 billion |
| Working capital | $686.0 million | $592.1 million |
The reported pre-tax margin was approximately negative 49.6%, and the net loss attributable to common shareholders was approximately 55.1% of operating revenue. Cash, cash equivalents and restricted cash totaled $485.8 million at March 31, 2020. Revolving-facility borrowings totaled $500.0 million, with approximately $574.1 million of remaining letter-of-credit availability.
Material changes versus the comparable period
- Revenue decreased 10%, primarily because average U.S. rigs working declined 20%, from 120.9 to 96.4.
- U.S. Drilling revenue declined 14% and adjusted operating income fell to a $7.4 million loss from $24.7 million of income.
- International Drilling revenue was essentially flat, while Canada Drilling revenue increased 1%.
- Drilling Solutions revenue decreased 15%, and Rig Technologies revenue decreased 41%.
- Adjusted segment operating income declined from $26.7 million to a $9.1 million loss.
- Net loss attributable to common shareholders increased by $273.5 million, primarily due to $276.4 million of impairments and other charges.
- General and administrative expense declined 16% to $57.4 million; research and engineering expense declined 16% to $11.4 million.
- Depreciation and amortization increased 8% to $227.1 million, including accelerated depreciation on underutilized legacy rigs.
- Capital expenditures were reduced by 58% year over year.
Debt, unusual items, outlook and risks
- Nabors issued $600 million of 7.25% senior notes due 2026 and $400 million of 7.50% senior notes due 2028. It repurchased approximately $1.1 billion of senior notes and recognized a $15.7 million net gain on the repurchases.
- Q1 impairment and other charges included $147.8 million for long-lived assets, $27.8 million for goodwill, $83.6 million for intangible assets, $15.1 million for other assets and $2.2 million of severance and transaction-related costs.
- The company expects U.S. drilling activity to continue declining. It expects international operations to be more resilient but still exposed to government restrictions, customer activity reductions and pricing pressure.
- Management implemented capital-spending reductions, salary reductions and other cost-cutting measures. No quantified earnings or revenue guidance was provided.
- Management expected covenant compliance for at least the following 12 months based on current projections, while acknowledging substantial uncertainty from COVID-19 and oil prices. The company was in compliance at March 31, 2020; net leverage was 3.60x and asset-to-debt coverage was 3.98x.
- The 2018 revolving facility has a $1.014 billion borrowing capacity and requires a net funded debt-to-EBITDA ratio no greater than 5.5x. The 2012 revolving facility was subsequently repaid and terminated after quarter-end.
- Approximately $175 million of receivables had been sold under the $250 million accounts receivable sales agreement at March 31, 2020.
- Material risks include prolonged low oil and gas prices, reduced customer spending, COVID-19 operational disruption, covenant or refinancing risk, credit-rating downgrades, geopolitical and sanctions exposure, tax disputes, litigation and potential additional asset impairments.
- Subsequent events included a 1-for-50 reverse stock split effective April 22, 2020 and adoption of a shareholder rights plan on May 5, 2020, triggered generally at 4.9% ownership.
Most important facts for investors to verify
- Whether the company can sustain covenant compliance and refinance or repay near-term and longer-dated debt under continued depressed activity.
- The pace of U.S. and international rig-count reductions, dayrate changes and contract renewals.
- Actual operating cash flow and liquidity after accounting for receivables sales, capital commitments, guarantees and debt service.
- Whether additional impairments, accelerated depreciation or restructuring charges will be required.
- The duration and operational impact of COVID-19, oil-price weakness and customer capital-spending cuts.
- The effect of the reverse stock split, mandatory convertible preferred shares and shareholder rights plan on future dilution and capital structure.