NBR

Nabors Industries Ltd. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005. Nabors Industries Ltd. is the world's largest land drilling contractor, operating nearly 600 land drilling rigs and approximately 660 land workover and well-servicing rigs in the U.S. and Canada. The company also provides offshore platform workover and drilling services, marine transportation, and drilling technology manufacturing. Operations are conducted globally, including in the U.S. Lower 48, Alaska, Canada, South/Central America, the Middle East, the Far East, and Africa.

Key Financial Metrics

Note: Cash and investments include $575.6 million in cash equivalents and $856.0 million in short-term investments as of September 30, 2005.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 53% ($308.0 million) for the quarter and 43% ($735.6 million) for the nine-month period compared to the prior year. This was driven by higher average dayrates and increased activity levels across all segments due to sustained high oil and natural gas prices.
• Profitability: Net income surged 137% for the quarter and 126% for the nine-month period. Adjusted income derived from operating activities increased 188% and 172%, respectively.
• Segment Performance:
  • U.S. Lower 48 Land Drilling: Revenues up 76% (quarter) and 73% (nine months) due to higher natural gas prices driving drilling activity.
  • Canada: Revenues up 47% (quarter) and 32% (nine months) driven by increased dayrates and activity.
  • International: Revenues up 28% (quarter) and 25% (nine months), with growth in South/Central America and the Middle East.
• Impairment Charges: The company recorded impairment charges of approximately $7.6 million in the third quarter related to damage from Hurricanes Katrina and Rita. This resulted in a net loss of $15.7 million in "Gains (losses) on sales of long-lived assets..." for the quarter, compared to a $1.5 million loss in the prior year quarter.
• Tax Rate: The effective income tax rate increased to 26.2% (quarter) and 25.1% (nine months) from 10.3% and 9.7% in the prior year, reflecting a higher proportion of income generated in the U.S.

Guidance, Outlook, and Risks

• Outlook: Management expects fourth-quarter 2005 results to increase from third-quarter levels due to seasonal improvements in Canada and continued higher dayrates in the U.S. Lower 48. The effective tax rate for 2005 is expected to remain in the 25%-27% range.
• Capital Expenditures: Total capital expenditures for the next twelve months are expected to be approximately $1.3 billion, including $544 million in outstanding purchase commitments. This expansion focuses on land drilling and well-servicing rigs.
• Liquidity: The company holds $1.6 billion in cash and investments against $2.0 billion in total debt. Management believes current resources are sufficient to fund operations, debt service (including a potential $826.8 million put option on debentures in Feb 2006), and capital expenditures.
• Risks:
  • Commodity Prices: Business depends heavily on oil and gas exploration spending, which fluctuates with commodity prices.
  • Accounting Changes: Adoption of SFAS No. 123(R) in 2006 will require fair-value accounting for stock options, potentially reducing reported net income.
  • Insurance Exposure: Effective April 1, 2005, the company increased its self-insurance retention, now responsible for 30% of losses in excess of retentions.
  • Debt Conversion: $1.381 billion in zero-coupon convertible debentures can be put to the company in February 2006. Conversion is unlikely unless share prices exceed ~$97, but the put option represents a significant cash obligation.

Investor Verification Checklist

• Debt Maturity Profile: Verify the impact of the $1.381 billion zero-coupon debentures putable in February 2006 and the company's liquidity plan to meet this obligation.
• Capital Expenditure Execution: Monitor the $1.3 billion planned capital expenditure program and its impact on future cash flows and debt levels.
• Commodity Price Sensitivity: Assess the correlation between current oil/gas prices and the company's dayrate sustainability, particularly in the U.S. Lower 48 and Canada.
• Stock-Based Compensation Impact: Review the pro forma impact of SFAS 123(R) adoption on future earnings per share.
• Insurance Claims: Track any additional costs or claims related to Hurricane damage beyond the initial impairment charges recorded in Q3 2005.