Nabors Industries Ltd. — 2013 First-Quarter Form 10-Q
Business Context and Reporting Period
Nabors is a global oilfield-services company operating primarily through Drilling & Rig Services and Completion & Production Services. Its fleet and services support onshore and offshore drilling, well servicing, completion, stimulation, cementing, directional drilling, rig technology and related activities. This unaudited filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenues | $1.579 billion | $1.890 billion | Down 16% |
| Revenues and earnings from unconsolidated affiliates | $1.582 billion | $1.822 billion | Down 13% |
| Income from continuing operations before taxes | $109.2 million | $212.4 million | Down 49% |
| Income from continuing operations, net of tax | $97.2 million | $142.6 million | Down 32% |
| Net income attributable to Nabors | $99.1 million | $134.1 million | Down 26% |
| Diluted EPS from continuing operations | $0.33 | $0.49 | Down $0.16 |
| Total diluted EPS | $0.33 | $0.46 | Down $0.13 |
| Adjusted income from operating activities | $149.6 million | $315.5 million | Down 53% |
| Net cash provided by operating activities | $183.5 million | $244.2 million | Down 25% |
| Capital expenditures | $235.5 million | $473.7 million | Down 50% |
Operating margin based on operating revenues was approximately 35.0% in Q1 2013 versus 37.4% in Q1 2012. Adjusted operating-activity margin was approximately 9.5% versus 17.3%, using revenues and earnings from unconsolidated affiliates as the denominator. The filing does not present a GAAP operating-income subtotal.
- Cash and cash equivalents were $564.9 million at March 31, 2013, compared with $524.9 million at December 31, 2012.
- Cash and short-term investments totaled $690.5 million, down from $778.2 million at year-end 2012, primarily reflecting sales of securities and other cash uses.
- Working capital was approximately $2.0 billion.
- Total debt was approximately $4.380 billion, including $890.0 million drawn under the revolving credit facility.
- The company reported $610 million of remaining availability under its $1.5 billion revolving credit facility and compliance with all related covenants.
- Gross debt-to-capitalization was 0.42:1; net debt-to-capitalization was 0.38:1; interest coverage was 7.4:1.
- Assets held for sale totaled $385.1 million, including $378.9 million of oil and gas assets.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability declined substantially as depressed natural-gas prices, weaker oilfield activity and pricing pressure reduced customer spending.
- Drilling & Rig Services revenue declined 16% and adjusted income declined 47%. U.S. revenue fell 23% and adjusted income fell 53%; Canadian revenue fell 12% and adjusted income fell 29%. International revenue increased 5%, while adjusted income was essentially flat.
- Completion & Production Services revenue declined 22% and adjusted income declined 53. Production Services revenue declined 2%, while Completion Services revenue declined 34% and adjusted income declined 73%.
- Total rig years declined 13% to 352.3, driven by a 21% decline in the U.S. and an 18% decline in Canada; international rig years increased 4%.
- Investment income increased to $79.4 million from $20.3 million, primarily because of approximately $76.2 million of realized gains on securities. This materially supported reported earnings and is not indicative of recurring operating performance.
- Losses on sales and disposals of long-lived assets and other expense increased to $59.8 million from a $1.8 million gain. The 2013 amount included $45.0 million related to the termination and restructuring of the chief executive officer’s prior employment agreement, including a $27.0 million immediately vested stock grant and $18.0 million cash payment.
- The effective income tax rate declined to approximately 10% from 33%, principally reflecting settlement of a longstanding tax dispute.
- Depreciation and amortization increased 10% to $273.4 million, partly because 26 newly constructed rigs had been placed into service since January 2012.
- Operating cash flow declined by $60.7 million, while capital expenditures declined by $238.1 million. Free cash flow before acquisitions and other investing items was approximately negative $52.0 million in Q1 2013.
- In January 2013, Nabors acquired Navigate Energy Services for approximately $37.5 million, recording approximately $15.8 million of goodwill.
Guidance, Outlook, Risks and Unusual Items
- Management expected natural-gas and liquids prices to remain weak through 2013. Crude oil prices were described as more resilient but volatile, keeping customer spending plans suppressed in the near term.
- Management indicated that stable crude prices and improving liquids prices, if realized, could support increased domestic drilling activity later in 2013; however, new rig capacity and efficiency improvements were expected to maintain an oversupply of rigs for most or all of the year.
- International results were expected to improve as cost issues abated, the rig supply-demand balance tightened, large projects commenced and rigs returned to work.
- Expected capital expenditures for the following 12 months were approximately $1.1 billion to $1.2 billion. Purchase commitments outstanding at March 31, 2013 were approximately $467.7 million.
- Management stated that cash, investments, operating cash flow, possible asset dispositions and revolver availability were expected to fund capital expenditures, acquisitions, debt service and other requirements for the next 12 months.
- Pipeline transportation and processing commitments had undiscounted contractual commitments of approximately $321.9 million and recorded liabilities of $192.6 million. Lower production or natural-gas prices could result in additional charges for excess capacity.
- Remaining assessed or expected Mexican tax amounts after a negotiated settlement were estimated at $30 million to $35 million, with reserves recorded. Additional tax expense could result if the company does not prevail on amounts exceeding the reserve.
- Significant litigation and regulatory matters included an Algerian customs judgment with potential exposure of approximately $0.1 million to $19.7 million, an Algerian foreign-exchange matter with potential additional exposure of up to $31.1 million, an SEC inquiry into officer and director perquisites, and litigation concerning a terminated asset-sale agreement. Outcomes were unresolved where disclosed.
- Financial guarantees, standby letters of credit and other surety instruments had a stated maximum amount of approximately $75.5 million; management considered the likelihood of material losses remote.
- Subsequent to quarter-end, Nabors established a commercial paper program of up to $1.5 billion. By April 29, 2013, it had issued $200 million and used the proceeds, together with $150 million of cash, to reduce revolver borrowings. Reported revolver availability after those transactions was $960 million.
- The board declared a further $0.04-per-share dividend for payment on June 28, 2013.
Important Facts for Investors to Verify
- Whether the large realized investment gains and the lower tax rate materially distort year-over-year earnings comparisons.
- Whether weak natural-gas prices, customer spending reductions, pricing pressure and rig oversupply persist through the remainder of 2013.
- Progress against the $1.1 billion to $1.2 billion capital-expenditure outlook and the company’s ability to fund that spending while maintaining leverage.
- Utilization, dayrates and margins in U.S. drilling, Completion Services and international operations.
- Potential future charges related to pipeline commitments, assets held for sale and discontinued operations.
- Resolution and financial exposure from the Mexican tax matters, Algerian proceedings, SEC inquiry and other litigation.
- Terms and future use of the commercial paper program, including its effect on revolver utilization, liquidity and refinancing risk.
- The effect of the revised chief executive officer compensation arrangements, including future equity awards, severance obligations and related expenses.