Nabors Industries Ltd. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Nabors Industries Ltd. is a global provider of land-based and offshore drilling services, drilling-related technologies, performance tools, directional drilling, tubular running services, equipment manufacturing and energy-transition technologies. Operations span more than 15 countries. As of March 31, 2023, the company had 300 actively marketed land rigs and 29 actively marketed offshore platform rigs. This unaudited report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenues | $779.1 million | $568.5 million | Up 37% |
| Income before taxes | $84.1 million | $(161.0) million | Improved $245.1 million |
| Net income attributable to Nabors | $49.2 million | $(184.5) million | Improved $233.7 million |
| Diluted EPS | $4.11 | $(22.51) | Improved $26.62 |
| Net margin attributable to Nabors | 6.3% | (32.4%) | Improved |
| Net cash provided by operating activities | $154.1 million | $41.4 million | Up $112.7 million |
| Capital expenditures | $118.7 million | $84.3 million | Up $34.5 million |
| Long-term debt, net | $2.562 billion | $2.538 billion at Dec. 31, 2022 | Up $24.8 million |
Adjusted operating income by segment was $118.7 million, compared with a $0.2 million loss in the prior-year quarter. U.S. Drilling contributed $85.9 million, International Drilling $2.0 million, Drilling Solutions $27.1 million and Rig Technologies $3.7 million.
Cash and short-term investments totaled $475.7 million at March 31, 2023, compared with $452.3 million at December 31, 2022. Working capital was $472.8 million, compared with $404.2 million at year-end. Cash, cash equivalents and restricted cash totaled $761.5 million at quarter-end, including $292.1 million of restricted cash. The restricted cash primarily relates to the NETC trust account and is not generally available for Nabors’ operating needs.
The company had no borrowings under its $350.0 million revolving credit facility and had $69.7 million of letters of credit outstanding under that facility. Across 18 letter-of-credit facilities, total remaining availability was $521.0 million. Accounts receivable sold to and not yet collected by purchasers under the A/R facility totaled approximately $221.0 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher day rates and increased activity across all operating segments. Average rigs working increased 11% in U.S. Drilling and 6% in International Drilling.
- U.S. Drilling revenue increased 61% to $350.7 million, International Drilling increased 15% to $320.0 million, Drilling Solutions increased 39% to $75.0 million and Rig Technologies increased 59% to $58.5 million.
- Net results benefited from a $34.3 million gain on warrant mark-to-market activity and a $24.9 million gain on debt buybacks. These items compared with a $73.2 million warrant-related loss in Q1 2022.
- In February 2023, Nabors Delaware issued $250.0 million of 1.75% senior exchangeable notes due 2029. During the quarter, the company repurchased $218.6 million principal amount of outstanding notes for approximately $224.9 million in cash, including accrued interest.
- Operating cash flow increased substantially, while capital expenditures also increased. Financing cash flow was positive $2.3 million, compared with a $555.3 million use of cash in Q1 2022.
- General and administrative expense increased 15% to $61.7 million, and research and engineering expense increased 29% to $15.1 million, reflecting higher workforce, operating and development activity.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative full-year revenue, earnings or cash-flow guidance. Management states that demand depends heavily on customer exploration, development and production spending, which is influenced by volatile oil and natural-gas prices.
Management noted that global oilfield activity had substantially returned to pre-COVID levels during 2022. However, energy markets remained volatile in early 2023. U.S. operators reduced drilling activity from late 2022, while lower U.S. natural-gas prices may lead certain operators to reduce near-term activity. Higher oil prices and the future completion of U.S. Gulf Coast liquefied natural-gas terminals could support oil- and gas-related activity.
Management expects existing cash, operating cash flow, financing sources, the A/R facility and the revolving credit facility to fund expected requirements for at least the next 12 months. Purchase commitments were approximately $328.9 million at March 31, 2023. Management expected covenant compliance for the following 12 months based on current projections, but cautioned that compliance is not assured if projections or underlying assumptions change.
- Debt maturities and refinancing risk include $52.0 million of 5.10% notes due September 2023, approximately $167.8 million of 0.75% exchangeable notes due January 2024 and other substantial maturities through 2029.
- The A/R purchase agreement generally expires August 13, 2024 but may accelerate to June 17, 2023 or October 17, 2023 depending on the status of specified notes.
- Oil and natural-gas price volatility, customer capital-spending reductions, customer concentration, operating risks, geopolitical instability, sanctions, energy-transition regulation and access to capital could materially affect results and liquidity.
- Russia represented 1.2% of Q1 2023 operating revenue and 1.1% of property, plant and equipment, net, at March 31, 2023. Nabors reported no assets or operations in Ukraine.
- The NETC business combination agreement with Vast Solar is subject to closing conditions, including a $50 million minimum cash requirement after redemptions and transaction expenses. PIPE financing may be required depending on redemptions.
- An Algerian legal proceeding could result in a loss of up to $12.9 million in excess of accrued amounts, although management continues to appeal the matter.
Most important facts for an investor to verify
- Whether improved drilling activity and pricing persist, particularly in U.S. Drilling, and whether weaker U.S. natural-gas prices reduce demand.
- The company’s plan and available sources of liquidity to address the 2023 and 2024 debt maturities and any acceleration provisions in the credit and A/R facilities.
- The extent to which Q1 earnings depended on nonrecurring warrant valuation gains and debt-buyback gains.
- Future capital-expenditure requirements relative to operating cash flow and the approximately $328.9 million of purchase commitments.
- Compliance with the revolving-credit covenants and the collateral coverage and interest-coverage requirements.
- The outcome, funding requirements and accounting consequences of the NETC–Vast transaction.
- Potential effects of the Algerian litigation, tax disputes, guarantees and other contingencies not fully quantified in the filing.