NABORS INDUSTRIES LTD quarterly report, Q3 FY2010

Nabors Industries Ltd. — Q3 2010 Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2010. The interim financial statements are unaudited and should be read with the 2009 Form 10-K. Nabors is a global land and offshore drilling, well-servicing, workover, pressure-pumping, logistics, drilling-technology and oil-and-gas company.

Financial performance and condition

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Operating revenues	$1.069 billion	$789.2 million	$2.857 billion	$2.854 billion
Total revenues and other income	$1.080 billion	$804.5 million	$2.884 billion	$2.826 billion
Adjusted income from operating activities	$164.4 million	$117.2 million	$433.0 million	$395.9 million
Income from continuing operations, net of tax	$(31.6) million	$53.7 million	$55.9 million	$(6.8) million
Net income attributable to Nabors	$(39.6) million	$29.5 million	$44.2 million	$(38.3) million
Diluted EPS from continuing operations	$(0.11)	$0.18	$0.19	$(0.03)
Cash flow from operating activities	Not provided for quarter	Not provided for quarter	$682.1 million	$1.300 billion

Q3 adjusted operating margin was approximately 15.2%, compared with approximately 14.5% in the prior-year quarter. The reported Q3 loss reflected $123.1 million of impairments and other charges, including goodwill, long-lived assets, retired equipment and an oil-and-gas financing receivable, as well as $7.6 million of discontinued-operations losses.

Liquidity: September 30 cash and cash equivalents were $639.7 million; cash, short-term investments and long-term investments or other receivables totaled $809.9 million, compared with $1.192 billion at December 31, 2009.
Working capital: $304.4 million at September 30, 2010, compared with $1.6 billion at year-end 2009.
Debt: Total debt was approximately $4.5 billion, including $1.443 billion classified as current and $3.067 billion long term. Gross funded debt-to-capital was 0.43:1 and net funded debt-to-capital was 0.38:1.
Debt liquidity: Remaining availability under letter-of-credit facilities was $189.7 million. A new $700 million revolving credit facility was established in September, with an option to increase commitments to $850 million.
Capital spending: Nine-month capital expenditures were $641.0 million, down from $928.2 million in the comparable 2009 period.

Material changes versus the prior comparable period

Q3 total revenues and earnings from unconsolidated affiliates increased 34% to $1.081 billion; adjusted operating income increased 40% to $164.4 million.
Nine-month revenue and earnings from unconsolidated affiliates increased 3% to $2.885 billion, while adjusted operating income increased 9% to $433.0 million.
Q3 net income attributable to Nabors declined from $29.5 million to a $39.6 million loss, principally due to the $123.1 million impairment charge, higher depreciation and amortization, and acquisition-related costs.
Nine-month net income attributable to Nabors improved from a $38.3 million loss to $44.2 million of income. Management attributed much of the improvement to lower prior-year impairments and the absence of the 2009 $75 million proportionate share of a full-cost ceiling-test writedown by the U.S. oil-and-gas joint venture.
The U.S. Lower 48 Land Drilling segment grew Q3 revenue 65% and rig years 47%, but nine-month adjusted operating income declined 23% because of higher operating costs and lower average dayrates.
U.S. Pressure Pumping contributed $61.6 million of Q3 revenue and $12.0 million of adjusted operating income following the Superior acquisition.
International revenue declined 6% in Q3 and 18% year to date, with lower dayrates and utilization in Mexico and Saudi Arabia.
General and administrative expense increased 7% in Q3 but declined 31% year to date, primarily because 2009 included approximately $72.1 million of accelerated share-based compensation for senior executives.
Operating cash flow fell to $682.1 million from $1.300 billion, while investing cash use increased to $1.332 billion from $1.007 billion.

Acquisition, outlook and unusual items

On September 10, 2010, Nabors acquired Superior Well Services for approximately $681.3 million in cash. The acquisition added pressure pumping and down-hole surveying services. The preliminary allocation included $309.6 million of goodwill and $106.4 million of intangible assets; the allocation remained subject to adjustment.
Nabors issued $700 million of 5.0% senior notes due 2020, receiving $691.3 million of proceeds, and used part of the proceeds to repay the $600 million revolver borrowing used to fund the Superior acquisition.
The company expects 2010 operating results to approximate 2009 levels, assuming a steady recovery in oil and gas markets. Management expects higher U.S. Lower 48 dayrates as contracts renew, but expects Alaska weakness to persist through 2011 and international results to remain broadly flat in 2011.
The $1.4 billion of 0.94% senior exchangeable notes mature in May 2011. Management believes cash, operating cash flow, potential non-core-asset sales and capital-market access will provide sufficient liquidity, but a required cash settlement could materially reduce available liquidity.
Management expected capital expenditures over the following 12 months to approximate $1.3 billion, including $443.8 million of outstanding purchase commitments.
Assets totaling $345.1 million were classified as held for sale, primarily oil-and-gas properties and related unconsolidated investments in Canada and Colombia. Their results were reported as discontinued operations.
Regulatory uncertainty following the Gulf of Mexico blowout and drilling-permit constraints reduced offshore utilization and resulted in $10.7 million of goodwill impairment and $27.4 million of offshore long-lived-asset impairment.
The EPA initiated a study of hydraulic fracturing practices, including Superior’s activities. Potential future regulation could increase costs, delay operations or reduce demand for pressure-pumping services.

Key risks, contingencies and matters to monitor

Exposure to oil and natural-gas prices, customer exploration and production spending, dayrates and rig utilization.
Substantial leverage and the May 2011 exchangeable-note maturity, together with reliance on operating cash flow, asset sales and capital-market access.
Offshore permitting and regulatory conditions in the Gulf of Mexico, including potential additional impairments.
Integration, synergy and operating risks associated with Superior.
Hydraulic-fracturing regulation and related environmental, permitting and disclosure requirements.
Unresolved tax audits, including Mexican assessments that management estimates could total approximately $90 million to $95 million for 2004–2010 if the company does not prevail.
Department of Justice and SEC-related inquiry involving Panalpina and possible Foreign Corrupt Practices Act issues; the outcome could not be determined.
An Algerian customs judgment of approximately $19.7 million, which Nabors is appealing and has not accrued because management does not consider a loss probable.
Shareholder class actions related to the Superior merger, which Nabors considers without merit.
Potential employment-termination obligations of up to $100 million for the Chairman and $50 million for the President and Chief Operating Officer under specified circumstances.

Investor verification priorities

Verify the final purchase-price allocation, goodwill and intangible-asset valuations for Superior.
Assess the company’s actual refinancing or repayment plan for the approximately $1.4 billion of exchangeable notes due May 2011.
Reconcile reported liquidity with restricted funds, assets held for sale and the quality of oil-and-gas financing receivables.
Monitor Gulf of Mexico permitting, offshore utilization and potential further impairment charges.
Evaluate whether the projected $1.3 billion of next-twelve-month capital expenditures is consistent with expected operating cash flow.
Track developments in hydraulic-fracturing regulation, tax audits, the Panalpina inquiry, Algerian litigation and merger-related shareholder litigation.