NBR

Business Context and Reporting Period

Company: Nabors Industries Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Nabors is the world's largest land drilling contractor, operating approximately 538 land drilling rigs, 600 land workover rigs, and various offshore units globally. The company operates through Contract Drilling, Oil and Gas, and Other Operating Segments. Operations are heavily dependent on oil and natural gas prices and exploration spending.

Key Financial Metrics (Nine Months Ended Sept 30, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased by 31% ($1.2 billion) compared to the nine months ended September 30, 2008, driven by lower drilling activity and dayrates in the U.S. Lower 48, Canada, and U.S. Offshore segments due to falling commodity prices.
• Net Loss: The company reported a net loss of $38.3 million, a reversal from the $582.4 million net income in the prior year period. This was primarily due to a $227.1 million impairment charge and lower operating margins.
• Impairments: Significant non-cash charges of $227.1 million were recorded, including:
  • $112.5 million impairment of an oil and gas financing receivable.
  • $64.2 million impairment of long-lived assets (retired rigs).
  • $35.6 million credit-related impairment on a debt security (MBIA).
  • $14.7 million goodwill impairment.
• Stock Compensation: Share-based compensation expense increased significantly to $103.9 million (vs. $32.9 million prior year) due to the acceleration of vesting for executive awards under new employment agreements.
• Debt Structure: Issued $1.125 billion in 9.25% senior notes in January 2009. Repurchased $888.5 million of 0.94% senior exchangeable notes and retired $225 million of 4.875% senior notes.

Guidance, Outlook, and Risks

• Outlook: Management expects 2009 operating results to decrease substantially from 2008 levels due to continued lower commodity prices. Rig counts in the U.S. Lower 48 have dropped from a peak of 273 to 117. Well-servicing activity is down approximately 59% from its 2008 peak.
• Liquidity: The company maintains strong liquidity with $935 million in cash and cash equivalents and $160.6 million in remaining credit facility availability. Management believes current cash and projected flows are sufficient to meet obligations for the next 12 months.
• Key Risks:
  • Commodity Prices: Sustained low natural gas and oil prices continue to suppress customer capital spending.
  • Convertible Debt: $1.86 billion of 0.94% senior exchangeable notes remain outstanding. If share prices rise significantly above the exchange price, the company may be required to pay cash up to the principal amount upon exchange.
  • Legal Proceedings: Ongoing DOJ inquiry regarding vendor transactions (Panalpina) and a $19.7 million judgment in Algeria (currently under appeal).
  • Executive Compensation: New employment agreements for the CEO and COO include potential severance payments of $100 million and $58 million, respectively, in the event of termination without cause or change in control.

Investor Verification Checklist

• Impairment Sustainability: Verify if the $227 million in impairments represents a one-time event or if further asset writedowns are likely given the prolonged downturn in oil and gas prices.
• Convertible Note Exposure: Assess the risk associated with the $1.86 billion exchangeable notes and the potential cash outflow if share prices recover above the exchange threshold.
• Executive Severance Liability: Review the specific terms of the new employment agreements for Messrs. Isenberg and Petrello regarding the $158 million in potential termination payments.
• Capital Expenditure Discipline: Monitor the reduction in capital expenditures (from $1.1 billion in 2008 to $928 million in 2009) and future guidance on sustaining vs. growth capex.
• Legal Contingencies: Track the status of the DOJ investigation and the Algerian court judgment for potential future accruals.