NBR

Nabors Industries Ltd. - Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. Nabors Industries Ltd. is the world's largest land drilling contractor, operating approximately 537 land drilling rigs and 576 land workover and well-servicing rigs globally. The company operates through Contract Drilling, Oil and Gas, and Other Operating Segments. The Sea Mar business was sold in Q3 2007 and is reported as a discontinued operation.

Key Financial Metrics

Note: Debt figures include the $700 million zero-coupon notes classified as current liabilities due to put options.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 5% year-over-year, driven primarily by a 35% surge in International segment revenues due to higher oil prices and rig deployment.
• Profitability Decline: Net income decreased 12% and Adjusted Income from Operating Activities decreased 16%. This was caused by lower activity levels in North American natural gas-driven operations (U.S. Lower 48 and Canada) and increased depreciation expenses from recent capital expansion.
• Segment Performance:
  • International: Revenues up 35%; Adjusted Income up 37%.
  • U.S. Lower 48 Land Drilling: Revenues down 10%; Adjusted Income down 27% due to lower customer demand.
  • Canada: Revenues down 7%; Adjusted Income down 21% due to depressed market conditions and currency impacts.
  • Oil & Gas: Reported a loss of $4.9 million (vs. $1.1 million profit in 2007) due to accelerated depletion charges and unrealized losses on derivatives in joint ventures.
• Debt Issuance: In February 2008, the company issued $575 million of 6.15% senior notes due 2018, increasing total debt but significantly boosting cash reserves.

Guidance, Outlook, and Risks

• Outlook: Management expects 2008 operating results to approximate 2007 levels. International operations are expected to grow substantially due to new rig deployments and contract renewals at higher rates. Conversely, North American natural gas-driven operations are expected to decrease as older rigs roll over at lower margins.
• Liquidity: The company holds $1.8 billion in cash and investments. Management believes this, combined with operating cash flows, is sufficient to meet obligations, including potential redemption of the $700 million zero-coupon notes putable on June 15, 2008.
• Risks & Contingencies:
  • Executive Compensation: Employment agreements for the CEO and COO could trigger significant cash payments (approx. $264 million and $103 million, respectively) in the event of death, disability, termination without cause, or a change in control.
  • Tax Audits: The company is under audit in Mexico regarding depreciation and labor deductions, with a current assessment of approximately $19.8 million. Future audits for subsequent years are likely.
  • Legal: A shareholder derivative suit regarding stock option practices has been settled subject to court approval (approx. $2.85 million in legal fees). An ongoing DOJ inquiry regarding a vendor and the Foreign Corrupt Practices Act is in early stages.

Investor Verification Checklist

• Verify the impact of the $700 million zero-coupon notes put option on June 15, 2008, and the company's specific funding strategy if redemption is required.
• Monitor the resolution of the Mexican tax audit and potential exposure for tax years 2004-2008.
• Track the performance of the International segment versus the decline in U.S. and Canadian natural gas drilling activity to validate the "offsetting" growth strategy.
• Review the status of the DOJ inquiry regarding the freight forwarding vendor.
• Assess the sustainability of capital expenditures ($327.9 million in Q1) relative to the projected $0.9 - $1.1 billion annual capex guidance.