NBR

Nabors Industries Ltd. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007. Nabors Industries Ltd. is the world's largest land drilling contractor, operating approximately 670 land drilling rigs globally. The company also provides well-servicing, workover, and offshore platform services, along with ancillary services such as directional drilling and logistics. The company is incorporated in Bermuda.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 3% ($34.0 million) for the quarter and 5% ($180.1 million) for the nine months compared to the prior year periods.
• Profitability Decline: Net income decreased 26% for the quarter and 10% for the nine months year-over-year. Adjusted income derived from operating activities fell 22% (quarter) and 15% (nine months).
• Segment Performance:
  • Declines: U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, and Canada segments saw significant revenue and income drops due to lower natural gas prices, inclement weather, and reduced activity levels.
  • Gains: International and Alaska segments reported strong growth (52% and 28% revenue increases, respectively) driven by high oil prices and fleet expansion.
• Investment Losses: Investment income turned into a net loss of $27.5 million for the quarter and $8.0 million for the nine months, compared to income of $37.2 million and $67.8 million in the prior year periods.
• Discontinued Operations: The company sold its Sea Mar business in August 2007 for $194.3 million, recording a net gain of $19.6 million. Results are now classified as discontinued operations.

Guidance, Outlook, and Risks

• Outlook: Management anticipates 2007 results for U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, and Canadian operations will be significantly lower than 2006 due to market weakness and new rig capacity. Conversely, International and Alaskan operations are expected to increase due to multi-year contract renewals at higher rates.
• Capital Expenditures: Total capital expenditures for the next twelve months are expected to be between $0.8 billion and $1.0 billion, primarily for rig expansion.
• Liquidity and Debt:
  • The company has $700 million in zero-coupon senior exchangeable notes due 2023 that can be put to the company on June 15, 2008. These were reclassified as current liabilities.
  • There is a $2.75 billion senior exchangeable note due 2011 that may be exchanged for cash if share prices exceed specific thresholds.
  • Management believes current cash, investments, and operating cash flows are sufficient to meet obligations, including potential debt exchanges.
• Risks:
  • Executive Compensation: Employment agreements for the CEO and COO include significant termination payments (estimated at $328 million and $111 million, respectively, in a change of control scenario) and potential "true-up" bonuses based on future performance.
  • Tax Contingencies: The company is under audit by the IRS and foreign authorities. While recent IRS appeals were favorable, future audits could impact tax reserves. The adoption of FIN 48 resulted in a $45 million increase to tax reserves in 2007.
  • Legal Proceedings: Ongoing investigations include a grand jury subpoena regarding a 2003 drilling mud spill in Alaska and a Department of Justice inquiry regarding a vendor and the Foreign Corrupt Practices Act.

Investor Verification Checklist

• Debt Maturity Profile: Verify the company's ability to fund the potential $700 million put option on the 2023 notes in June 2008 and the potential cash settlement of the $2.75 billion 2011 notes if share prices rise.
• Executive Compensation Liability: Review the specific terms of the CEO and COO employment agreements regarding termination payments and bonus "true-ups," which represent significant contingent liabilities.
• Investment Portfolio Performance: Assess the volatility and future outlook of the long-term investment portfolio, which contributed significantly to the recent decline in net income.
• Segment Mix Shift: Monitor the continued divergence between the struggling North American gas markets and the growing International/Oil markets to gauge future revenue stability.
• Tax Reserve Volatility: Track updates on the IRS and foreign tax audits, as the release or increase of tax reserves (as seen with the $38.6 million release in Q3) can materially impact effective tax rates and net income.