Nabors Industries Ltd. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Nabors owns and operates a large land-based drilling fleet and provides offshore drilling, directional drilling, wellbore placement, drilling software, equipment, and related technologies. Reportable segments are U.S., Canada, International, and Rig Services. As of June 30, 2017, the fleet included 405 actively marketed land rigs and 41 actively marketed offshore rigs. The filing covers the three and six months ended June 30, 2017 and was filed August 3, 2017. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Operating revenue | $631.4 million | $571.6 million | $1.194 billion | $1.169 billion |
| Income (loss) from continuing operations | $(115.5) million | $(186.6) million | $(263.1) million | $(583.2) million |
| Net loss attributable to Nabors | $(133.0) million | $(184.7) million | $(281.9) million | $(582.9) million |
| Diluted loss per share | $(0.46) | $(0.65) | $(0.99) | $(2.07) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(9.5) million | $336.7 million |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $315.8 million | $193.2 million |
Continuing-operations losses remained substantial despite year-over-year improvement. Segment adjusted operating loss was $26.2 million in the second quarter and $90.5 million for the first six months, compared with losses of $25.0 million and $43.6 million, respectively, in the comparable 2016 periods. Interest expense increased 21% to $54.7 million in the second quarter and 22% to $111.2 million for the six months.
At June 30, 2017, cash and cash equivalents were $196.6 million, short-term investments were $35.5 million, working capital was $297.6 million, total debt was approximately $3.772 billion before deferred financing costs, and total equity was $3.073 billion. Gross debt-to-capital was 0.55:1 and net debt-to-capital was 0.53:1. The company reported $100.0 million drawn on its $2.25 billion revolving credit facility and $172.0 million of commercial paper outstanding. It was in compliance with debt covenants.
Material changes versus the prior comparable period
- Second-quarter operating revenue increased 10%, primarily from higher U.S. activity and stronger Rig Services revenue. Six-month revenue increased 2%.
- Average U.S. rigs working increased 87% in the second quarter and 60% for the six months; Canada also improved materially. International average rigs working declined 8% in the quarter and 14% for the six months.
- International revenue declined 5% in the quarter and 10% for the six months, with lower activity and downtime related to structural work on rigs in a major international market.
- Rig Services revenue increased 137% in the quarter and 77% for the six months, supported by Canrig equipment deliveries and increased demand for Nabors Drilling Solutions products and services.
- Net loss improved largely because Nabors no longer recorded its share of losses and impairment charges related to C&J Energy Services. The 2016 six-month period included $221.9 million of losses from unconsolidated affiliates and $220.1 million of CJES-related charges in other, net.
- Operating cash flow declined from $336.7 million provided in the first half of 2016 to $9.5 million used in the first half of 2017. Working capital consumed $108.9 million, primarily as higher activity increased receivables and other working-capital needs.
- Capital expenditures rose to $315.8 million from $193.2 million. Financing activities provided $230.4 million, including proceeds from exchangeable notes, commercial paper, and the revolver, partly offset by debt repayments and dividends.
- Debt increased from $3.578 billion at December 31, 2016 to $3.740 billion net of deferred financing costs at June 30, 2017. The company issued $575 million of 0.75% exchangeable notes due 2024, repaid its remaining $162.5 million term loan, and repurchased or redeemed approximately $363.2 million principal amount of 6.15% notes due 2018.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects dayrates and margins to improve, but expects the rate of increase in U.S. rig activity to slow over coming quarters. Spot pricing remains below 2014 levels and continues to constrain margins.
- Management expects capital expenditures over the next 12 months to be less than $0.8 billion. Purchase commitments at June 30, 2017 were approximately $223.4 million, primarily for rig enhancements, equipment, sustaining capital, operating expenses, and inventory.
- Management believes cash, projected operating cash flow, and revolver availability will fund expected obligations for the next 12 months. However, operating cash flow was negative in the first half of 2017 and cash and investments declined to $232.0 million, including $40.0 million restricted for the Saudi Arabian joint venture.
- The Saudi Aramco joint venture is equally owned by Nabors and Saudi Aramco and is expected to commence operations in the second half of 2017. The joint venture had $40.0 million of contributed cash at June 30, 2017.
- Discontinued operations recorded a $15.5 million loss in the quarter and a $15.9 million loss for the six months, including a $16.5 million pre-tax charge related to settlement of litigation involving previously owned Ramshorn properties. The settlement payment was expected in the third quarter of 2017.
- Potential contingencies include an additional $3 million to $8 million of tax expense from a Latin American tax assessment and up to $18.2 million above accrued amounts in an Algerian legal proceeding. Management does not expect pending litigation to materially affect consolidated financial position or cash flows, but individual periods could be materially affected.
- Financial standby letters of credit and other surety instruments had a maximum amount of $266.9 million. The company also self-insures certain risks and has material deductibles for workers’ compensation, liability, property damage, and rig losses.
- Prolonged low oil and natural gas prices, lower customer spending, rig utilization declines, dayrate pressure, international political and operating risks, impairment of rigs or goodwill, interest-rate and refinancing risk, tax disputes, and limited access to capital markets could adversely affect results and liquidity.
- The company adopted stock-compensation and goodwill-accounting updates in 2017 without a material consolidated income-statement impact. It expects to adopt the new revenue-recognition standard using the modified retrospective approach in the first quarter of 2018, but the financial impact remained under evaluation.
- The board declared a $0.06-per-share dividend payable October 3, 2017. The company had $298.7 million remaining under its authorized $400 million share-repurchase program, although no program repurchases occurred during the first half of 2017.
Most important facts for investors to verify
- Whether U.S. rig utilization and dayrate improvements are sufficient to convert higher activity into positive segment operating income.
- The sustainability of liquidity given negative first-half operating cash flow, elevated capital expenditures, debt of approximately $3.8 billion, and upcoming 2018 senior-note maturities.
- The amount of availability remaining under the revolver after commercial paper borrowings, letters of credit, and covenant requirements.
- The timing and economics of the Saudi Aramco joint venture commencement and its effect on consolidated cash flows and results.
- The ultimate outcome of the Latin American tax assessment, Algerian litigation, Ramshorn settlement, and other self-insurance and legal exposures.
- The effect of the planned 2018 revenue-recognition adoption and any future impairment charges for legacy or underutilized rigs.
- Whether the company can maintain the dividend and pursue share repurchases while operating cash flow remains weak and capital requirements remain high.