Nabors Industries Ltd. — 2022 Third-Quarter Form 10-Q
Business Context and Reporting Period
Nabors provides land-based and offshore drilling, drilling-related services, technologies, equipment manufacturing, and drilling optimization solutions in more than 15 countries. As of September 30, 2022, the company reported 299 actively marketed land rigs and 29 actively marketed offshore rigs. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Operating revenue | $694.1 million | $524.2 million | $1.894 billion | $1.474 billion |
| Net income (loss) | $(4.5) million | $(115.7) million | $(249.1) million | $(434.4) million |
| Net loss attributable to Nabors common shareholders | $(13.8) million | $(122.5) million | $(281.2) million | $(459.2) million |
| Diluted loss per share | $(1.80) | $(15.79) | $(32.72) | $(62.26) |
| Adjusted segment operating income | $60.4 million | $(15.1) million | $93.4 million | $(77.1) million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $301.1 million | $326.5 million |
| Capital expenditures | Not separately provided | Not separately provided | $272.1 million | $179.9 million |
Q3 adjusted segment operating margin was approximately 8.7%, compared with a negative margin in the prior-year quarter. GAAP net loss margin was approximately 0.6% in Q3 2022 and 11.3% for the first nine months.
- Cash and cash equivalents were $420.3 million at September 30, 2022, compared with $991.5 million at December 31, 2021. Cash and short-term investments totaled $425.1 million.
- Restricted cash was $283.0 million, primarily associated with the Nabors Energy Transition Corp. trust account. Total cash, cash equivalents, and restricted cash were $704.3 million at quarter-end.
- Working capital was $406.7 million, down from approximately $1.0 billion at year-end 2021.
- Long-term debt was $2.586 billion, compared with $3.263 billion at December 31, 2021. Debt carrying value before deferred financing costs was $2.610 billion.
- The $350 million 2022 secured revolving credit facility had no borrowings outstanding at September 30, 2022; $64.8 million of letters of credit were outstanding under the facility.
- Receivables sold to and not yet collected by purchasers under the A/R facility totaled approximately $167.0 million. The facility had a maximum purchase commitment of approximately $250 million.
Material Changes Versus the Prior Comparable Period
- Q3 operating revenue increased 32%, primarily because of higher U.S. and international drilling activity, improved day rates, and growth in Drilling Solutions and Rig Technologies.
- Nine-month operating revenue increased 28%. U.S. Drilling revenue rose 61%, International Drilling revenue rose 14%, Drilling Solutions revenue rose 43%, and Rig Technologies revenue rose 29%.
- U.S. Drilling average rigs working increased 37% in Q3 and 41% for the nine-month period. International Drilling average rigs working increased 11% in Q3 and 10% year to date.
- Canada Drilling revenue was zero in 2022 because the Canadian drilling assets were sold in July 2021.
- The Q3 net loss narrowed substantially, helped by improved operating performance and a $34.0 million mark-to-market gain on common stock warrants. For the nine months, warrant valuation produced a $59.7 million loss, limiting the improvement in reported earnings.
- Interest expense increased 4% in Q3 and 5% for the nine months, primarily due to the $700 million of 7.375% senior priority guaranteed notes issued in November 2021.
- Operating cash flow declined to $301.1 million from $326.5 million despite improved operating results, reflecting increased working-capital needs. Investing cash use increased materially because capital expenditures rose and 2021 included substantial asset-sale proceeds.
- During the nine months, Nabors repaid $460.0 million of net revolving-facility borrowings and $133.9 million of long-term debt. It also repurchased $69.2 million of principal amount of various notes for approximately $68.8 million in cash.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects U.S. drilling activity to continue increasing through the remainder of 2022 and 2023. International activity had broadly recovered to near pre-COVID-19 levels in several markets.
- The company expects continued growth in energy-transition opportunities, including carbon-emission reduction, geothermal technologies, and energy storage, but the filing does not provide quantified revenue or earnings guidance.
- Management expects current cash, operating cash flow, financing sources, and credit facilities to fund expected requirements for at least the next 12 months, subject to the accuracy of operating and financial projections.
- Management expected continued compliance with the 2022 credit agreement covenants for the following 12 months, but warned that adverse changes in projections or assumptions could cause noncompliance, termination of commitments, or acceleration of borrowings.
- Purchase commitments outstanding at September 30, 2022 totaled approximately $272.5 million, primarily for capital expenditures, operating expenses, and inventory.
- Oil and natural gas price volatility, customer capital spending, contract renewals, customer concentration, access to capital, debt ratings, operating risks, and geopolitical events remain material risks.
- Russia-related exposure included 1.1% of net property, plant, and equipment and 1.6% of nine-month operating revenue. The company warned that sanctions, counter-sanctions, or potential asset nationalization could materially affect its business.
- An Algerian legal matter could result in a loss of up to approximately $11.8 million beyond accrued amounts. Management stated that pending litigation is not expected to materially affect consolidated financial position or cash flows, although individual-period earnings could be affected.
- Financial standby letters of credit and other surety instruments had a maximum amount of $95.8 million. Management considered material losses under guarantees unlikely.
- Adoption of ASU 2020-06 resulted in a $27.5 million pretax debt-discount adjustment and a $60.7 million opening retained-earnings adjustment, with no material effect on the financial statements according to management.
Most Important Facts for Investors to Verify
- Whether improving U.S. and international rig utilization and day rates persist sufficiently to offset high interest expense, capital spending, and working-capital requirements.
- The maturity and refinancing plan for the 5.1% senior notes due 2023, 0.75% exchangeable notes due 2024, and other debt obligations.
- The effect of the announced November 15, 2022 redemption of the 5.5% senior notes due 2023 on liquidity and the A/R facility’s acceleration provisions.
- Compliance with the 2022 credit agreement’s interest-coverage, guarantor-value, collateral, and other covenants.
- The sustainability of operating cash flow after capital expenditures and the extent to which receivables sales support reported liquidity.
- The volatility and potential earnings impact of the common stock warrant liability, including the nine-month $59.7 million mark-to-market loss.
- Potential effects of Russia-related sanctions and the unresolved Algerian litigation matter.