Nabors Industries Ltd. — 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Nabors is a global provider of land-based and offshore drilling and drilling-related services, including drilling solutions, directional drilling, measurement-while-drilling systems, tubular services, rig manufacturing, instrumentation and optimization software. As of March 31, 2019, the company reported 378 actively marketed land rigs and 33 actively marketed offshore rigs across approximately 25 countries. The filing covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018. Financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenues | $799.6 million | $734.2 million | Up 9% |
| Total revenues and other income | $809.3 million | $734.7 million | Up $74.7 million |
| Direct costs | $521.0 million | $475.4 million | Up $45.6 million |
| Adjusted segment operating income | $26.7 million | $(0.1) million | Improved $26.8 million |
| Income from continuing operations before tax | $(73.6) million | $(120.0) million | Improved $46.5 million |
| Net loss attributable to Nabors common shareholders | $(122.0) million | $(144.2) million | Loss narrowed $22.2 million |
| Diluted loss per share | $(0.36) | $(0.46) | Improved $0.10 |
| Net cash provided by operating activities | $69.9 million | $(81.7) million | Improved $151.5 million |
| Capital expenditures | $141.1 million | $94.0 million | Up $47.0 million |
| Net cash used in investing activities | $(144.4) million | $(90.5) million | Greater use of cash |
Operating revenue growth was concentrated in U.S. Drilling, Drilling Solutions and Rig Technologies. U.S. Drilling revenue increased 33% to $320.2 million, while International Drilling revenue declined 9% to $337.3 million and Canada Drilling revenue declined 21% to $25.3 million.
Selected margins were approximately 3.3% for adjusted segment operating income as a percentage of operating revenue and negative 15.3% for net loss attributable to common shareholders as a percentage of operating revenue. The filing does not present a consolidated operating-income margin on a directly comparable basis.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $429.1 million and short-term investments were $40.6 million at March 31, 2019, for combined cash and short-term investments of $469.7 million.
- Working capital was $820.1 million, compared with $761.5 million at December 31, 2018.
- Total debt was $3.714 billion before deferred financing costs; reported long-term debt was $3.678 billion.
- The company had $300.0 million outstanding under its 2012 revolving credit facility and no borrowings under its 2018 revolving credit facility as of the filing date.
- Remaining availability under 15 letter-of-credit facilities was $581.2 million after $96.4 million of outstanding letters of credit and guarantees.
- Net debt to capital was 0.55:1, compared with 0.53:1 at year-end 2018; the applicable covenant limit was 0.60:1. Asset-to-debt coverage was 3.74:1 against a required minimum of 2.50:1 under applicable circumstances.
- The company stated that it was in compliance with all revolving-credit covenants. It expected available liquidity, operating cash flow, financing sources and revolver capacity to fund expected requirements for the next 12 months.
- Management expected approximately $0.4 billion of capital expenditures during the next 12 months and reported approximately $241.0 million of purchase commitments at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased 9%, primarily due to higher U.S. activity and dayrates, together with improved Drilling Solutions and Rig Technologies performance.
- U.S. Drilling average rigs working increased 8% to 120.9, and adjusted operating income improved from a $19.7 million loss to $24.7 million of income.
- International Drilling adjusted operating income declined to a $5.6 million loss from $24.5 million of income. Factors included expired higher-margin contracts, lower activity, dayrate reductions, the sale of three jackup rigs, Venezuela-related instability and temporary fleet idling.
- Canada Drilling average rigs working declined 23% to 16.3 because of weak market conditions, although the segment’s loss narrowed.
- General and administrative expense declined 9% to $68.2 million, and research and engineering expense declined 14% to $13.5 million, reflecting workforce reductions and cost-control efforts.
- Interest expense declined 15% to $52.4 million, primarily because approximately $303.5 million of high-cost senior notes were repaid before January 2019.
- Operating cash flow improved from an $81.7 million use of cash to $69.9 million of cash provided, while capital expenditures increased 50% to $141.1 million.
- Debt increased principally because revolving-credit borrowings rose by $130.0 million net during the quarter. Nabors also repurchased $46.2 million principal amount of senior notes for approximately $44.5 million in cash and recognized a $2.7 million gain.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing approximately $33.1 million of right-of-use assets and lease liabilities; comparative periods were not restated.
Outlook, Commentary, Risks and Unusual Items
Management attributed improved results to better U.S. market conditions, higher activity and pricing, cost reductions, and continued integration and synergies from the Tesco acquisition. The filing does not provide a formal earnings or revenue guidance range. Management expected approximately $0.4 billion of capital expenditures over the next 12 months and stated that spending could be reduced or increased depending on market conditions and opportunities.
- Results remain sensitive to worldwide oil and natural-gas prices, customer exploration and production spending, demand for drilling services, contract renewals, pricing, rig utilization and competition.
- International operations face political and economic instability, sanctions, foreign-exchange exposure and country-specific operating risks, including ongoing effects in Venezuela.
- The company reported non-investment-grade senior unsecured debt ratings. Further downgrades could increase borrowing costs, restrict market access and require additional letters of credit.
- Other, net expense was $17.5 million and included $7.1 million of litigation expenses and reserves, $8.6 million of foreign-currency losses, $3.6 million of asset disposal losses and a $2.7 million debt-buyback gain.
- The effective tax rate was negative 40.5%, as tax expense was incurred despite a consolidated pretax loss because of the geographic mix of earnings and losses.
- Pending matters include an Algerian foreign-exchange-control dispute with potential exposure of up to $15.6 million above accrued amounts, and Kazakhstan environmental matters with potential additional damages and penalties estimated at up to approximately $7.4 million, subject to appeals and contractual reimbursement claims.
- A shareholder class action relating to the Tesco transaction was dismissed on March 29, 2019, although plaintiffs could seek a new trial or appeal.
- Maximum financial standby letters of credit and other surety instruments totaled $214.2 million. Management considered the likelihood of material losses under guarantees to be remote, but could not estimate potential maximum payments under certain indemnifications.
- The company continued to authorize a $400.0 million common-share repurchase program; $280.6 million remained available at March 31, 2019. No shares were repurchased under the public program during the quarter.
Most Important Facts for Investors to Verify
- Whether U.S. drilling utilization, dayrates and adjusted operating income can offset continuing weakness in international and Canadian operations.
- The maturity and refinancing plan for the 5.00% senior notes due September 2020 and the $300.0 million drawn under the 2012 revolving credit facility, which matures in July 2020.
- Compliance with the 0.60:1 net-debt-to-capital covenant and the 2.50:1 asset-to-debt coverage covenant as debt, cash flow and capital expenditures change.
- Whether operating cash flow can sustainably fund the planned capital program, dividends, debt service and purchase commitments without additional borrowing or equity issuance.
- The ultimate outcomes and cash impacts of the Algerian and Kazakhstan legal and environmental matters, as well as other litigation reserves.
- The impact of non-investment-grade credit ratings, oilfield-cycle volatility, customer concentration, sanctions and geopolitical conditions on liquidity and contract renewals.
- The potential dilution from the 5,750,000 mandatory convertible preferred shares and the $575 million principal amount of exchangeable notes.