Nabors Industries Ltd. 10-Q Summary
Business Context and Reporting Period
Company: Nabors Industries Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Nabors is the world's largest land drilling contractor, operating approximately 525 land drilling rigs, 589 land workover/well-servicing rigs in the U.S., and 172 in Canada. The company also operates offshore platform rigs and provides ancillary well-site services, manufacturing, and oil and gas exploration/production activities through joint ventures.
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | 2008 (9 Months) | 2007 (9 Months) |
|---|---|---|
| Operating Revenues | $4,036.8 million | $3,621.0 million |
| Net Income | $635.2 million | $708.5 million |
| Diluted EPS | $2.21 | $2.47 |
| Operating Cash Flow | $1,047.5 million | $858.1 million |
| Capital Expenditures | $1,100.8 million | $1,482.8 million |
| Total Debt (Current + Long-term) | $4,211.5 million | $4,006.4 million |
| Cash & Cash Equivalents | $621.5 million | $531.3 million |
| Working Capital | $1,275.8 million | $711.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 11% year-over-year, driven by higher average dayrates and activity levels in most segments, particularly International (up 30%) and U.S. Lower 48 Land Drilling (up 4%).
- Net Income Decline: Despite revenue growth, net income decreased 10% to $635.2 million. This was primarily due to increased operating costs, higher depreciation from capital expansion, and a significant increase in interest expense (up 62%) following new debt issuances.
- Segment Performance:
- International: Strong growth in revenues and adjusted income due to rig deployment and contract renewals.
- Canada: Revenues and income declined due to depressed market conditions and a strengthening Canadian dollar.
- Oil & Gas: Adjusted income dropped 50% due to losses in joint ventures from depletion charges and mark-to-market losses on derivatives.
- Debt Restructuring: The company redeemed $700 million in zero-coupon senior exchangeable notes and $82.8 million in convertible debentures. Concurrently, it issued $975 million in new 6.15% senior notes due 2018.
- Discontinued Operations: The Sea Mar business was sold in 2007; results are now classified as discontinued operations.
Guidance, Outlook, and Risks
- Outlook: Management expects 2008 operating results to slightly exceed 2007 levels. International operations are projected to show substantial increases, while North American natural gas-driven operations are expected to remain relatively flat. Canadian operations are expected to decrease.
- Capital Expenditures: Total capital expenditures for the next 12 months are expected to be approximately $1.8–2.0 billion, with outstanding purchase commitments of $687.4 million as of September 30, 2008.
- Accounting Changes: The company plans to adopt FSP APB No. 14-1 on January 1, 2009. This retrospective adoption is expected to reduce reported net income by approximately $60–70 million for 2009 due to additional non-cash interest expense on convertible debt.
- Risks:
- Commodity Prices: Recent significant declines in oil and natural gas prices (driven by global economic deterioration) could materially reduce customer spending on exploration and development.
- Executive Compensation: Employment agreements for the CEO and COO could result in significant cash payments (approx. $264 million and $103 million, respectively) in the event of death, disability, termination without cause, or a change in control.
- Legal Proceedings: An ongoing DOJ inquiry regarding a vendor (Panalpina) and compliance with the Foreign Corrupt Practices Act remains unresolved.
Key Facts for Investor Verification
- Debt Maturity: $225 million in senior notes is due in August 2009 and has been reclassified as current debt.
- Exchangeable Notes: $2.75 billion in senior exchangeable notes due 2011 could require a significant cash payment if the stock price exceeds the exchange threshold ($59.57), though management believes exchange is unlikely at current prices.
- Share Repurchases: The company repurchased $268.4 million of common shares in the first nine months of 2008. Approximately $35.5 million remains available under the current $500 million program.
- Joint Venture Contributions: The company made $114.8 million in additional capital contributions to oil and gas joint ventures in October 2008.
- Effective Tax Rate: The effective tax rate increased to 26.1% for the nine months ended Sept 30, 2008, compared to 21.2% in the prior year, due to a higher proportion of income generated in the U.S.