Nabors Industries Ltd. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Nabors is a global provider of land-based and offshore drilling and related services, including tubular running, directional drilling, MWD/LWD, equipment manufacturing and drilling optimization technologies. As of June 30, 2021, the company had 354 actively marketed land rigs and 29 actively marketed offshore rigs across approximately 20 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenues | $489.3 million | $533.9 million | $949.8 million | $1.252 billion |
| Net loss attributable to common shareholders | $(196.0) million | $(151.8) million | $(336.7) million | $(547.2) million |
| Diluted loss per share | $(26.59) | $(22.13) | $(46.90) | $(78.86) |
| Adjusted segment operating income (loss) | $(26.1) million | $(28.7) million | $(62.0) million | $(37.8) million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $213.2 million | $201.8 million |
| Capital expenditures | Not separately provided | Not separately provided | $117.8 million | $106.8 million |
Q2 operating revenue declined 8% year over year, while the six-month decline was 24%. Approximate operating margin was negative 5.3% in Q2 2021 versus negative 5.4% in Q2 2020; six-month operating margin was negative 6.5% versus negative 3.0%. The company remained materially loss-making, with Q2 losses affected by a $58.0 million impairment of Canada Drilling assets, higher taxes and the absence of the $35.9 million debt-buyback gain recognized in Q2 2020.
At June 30, 2021, cash and cash equivalents were $399.9 million, compared with $472.2 million at December 31, 2020. Working capital was $465.5 million, down from $616.0 million. Total long-term debt, net of deferred financing costs, was $2.823 billion, compared with $2.969 billion at year-end 2020. The company also had $557.5 million outstanding under its revolving credit facility, with $53.9 million of letters of credit outstanding.
Material changes versus the prior comparable period
- International Drilling revenue decreased 15% in Q2 and 21% for the six-month period, primarily from lower activity; average rigs working declined 17% and 21%, respectively.
- U.S. Drilling revenue decreased 7% in Q2 and 32% for the six-month period. Q2 average rigs working increased 8%, but pricing declines offset the activity improvement; the six-month average declined 19%.
- Canada Drilling revenue increased 245% in Q2 and 14% for the six-month period as activity improved. The segment was subsequently sold for approximately $95.5 million and the sale closed in July 2021.
- Drilling Solutions revenue increased 18% in Q2 but decreased 15% for the six-month period. Q2 adjusted operating income improved to $6.5 million from $1.7 million.
- Rig Technologies revenue increased 3% in Q2 but decreased 20% for the six-month period; cost reductions improved its adjusted operating result despite lower revenue.
- Interest expense declined 19% in Q2 and 20% for the six-month period, primarily due to debt restructuring completed in the fourth quarter of 2020.
- Six-month impairments and other charges fell to $62.4 million from $334.3 million, mainly because substantial goodwill, intangible and rig impairments were recorded in 2020.
- The company generated $213.2 million of operating cash flow, used $84.9 million in investing activities and used $199.4 million in financing activities. Financing uses included $115.0 million of net revolving-credit repayments, $21.8 million of senior-note repayments and a $50.9 million distribution related to redeemable noncontrolling interest.
Guidance, outlook, risks and unusual items
Management expects measured but steady increases in Lower-48 activity during 2021 and generally higher international activity as restrictions ease. The filing does not provide quantitative revenue, earnings or cash-flow guidance.
- The company’s results remain highly dependent on oil and natural gas prices, customer capital spending, rig utilization, pricing and contract renewals. COVID-19 effects and market volatility remain significant uncertainties.
- Management expected to remain in compliance with revolving-credit covenants for the following 12 months based on current projections, but warned that incorrect assumptions could result in covenant breaches, termination of commitments or acceleration of borrowings.
- The revolving facility requires minimum liquidity of $160.0 million and, while the company is below investment grade, an asset-to-debt coverage ratio of at least 4.25:1. The company reported compliance at June 30, 2021.
- The accounts receivable facility was amended in July 2021: its term was extended to August 2023, purchaser commitments were reduced from $250 million to $150 million with potential expansion to $200 million, and certain events could accelerate expiration. Approximately $84.0 million of receivables had been sold and remained uncollected at June 30.
- Nabors issued approximately 3.24 million warrants in June 2021 with an initial exercise price of $166.66667 per share and a current expiration date of June 11, 2026. The warrants are derivative liabilities; their fair value was $1.0 million at June 30, 2021.
- The Series A mandatory convertible preferred shares converted into approximately 668,000 common shares on May 3, 2021. The company also had approximately 1.1 million common shares held by subsidiaries.
- Purchase commitments totaled approximately $244.4 million at June 30, 2021. Financial standby letters of credit and other surety instruments totaled $187.5 million of maximum potential amounts.
- Material contingencies include tax audits and uncertain tax positions, litigation in Algeria with potential exposure of up to $13.0 million above accrued amounts, and environmental matters involving a Kazakhstan joint venture.
- The company identified risks associated with pursuing the initial public offering of Nabors Energy Transition Corp., including regulatory uncertainty, delays, additional costs and the possibility that a business combination may not be completed.
Important facts for investors to verify
- Verify the company’s ability to refinance or repay near-term maturities, including the 4.625% notes due September 2021 and other 2023 maturities, and monitor revolving-facility maturity and covenant requirements.
- Reconcile reported liquidity with cash, revolver availability, letters of credit, the amended receivables facility and restricted or subsidiary-level cash.
- Assess whether expected recovery in Lower-48 and international activity is occurring and whether pricing and utilization improvements can offset the company’s substantial fixed-cost and debt burden.
- Review the July 2021 Canada Drilling sale proceeds, assets sold, debt effects and any resulting gain or loss.
- Evaluate potential dilution and accounting volatility from the warrants, including exercise terms, anti-dilution provisions and fair-value remeasurement.
- Review tax, litigation, environmental, political and sanctions-related exposures, along with the potential for additional impairments if oilfield activity or asset values remain weak.