Nabors Industries Ltd. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Nabors is a global provider of land-based and offshore drilling rigs and related services and technologies, operating in approximately 20 countries. As of March 31, 2021, the company reported 354 actively marketed land rigs and 29 offshore rigs. This unaudited filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenues | $460.5 million | $718.4 million | Down 36% |
| Loss from continuing operations attributable to common shareholders | $140.8 million | $395.4 million | Loss narrowed by $254.6 million |
| Diluted loss per share | $20.16 | $56.72 | Loss narrowed |
| Net cash provided by operating activities | $79.5 million | $59.2 million | Up $20.3 million |
| Capital expenditures | $40.9 million | $59.4 million | Down $18.6 million |
| Interest expense | $43.0 million | $54.7 million | Down 21% |
| Impairments and other charges | $2.5 million | $276.4 million | Down $273.9 million |
Net loss attributable to Nabors common shareholders was approximately 30.6% of operating revenue in Q1 2021, compared with approximately 55.0% in Q1 2020. The filing does not provide a consolidated operating margin or EBITDA measure.
Segment adjusted operating loss was $35.9 million, compared with a $9.1 million loss in the prior-year period. U.S. Drilling generated a $23.3 million loss, International Drilling an $18.6 million loss, Canada Drilling $3.9 million of income, Drilling Solutions $4.7 million of income, and Rig Technologies a $2.6 million loss.
At March 31, 2021, cash and cash equivalents were $417.5 million, short-term investments were negligible at $17 thousand, working capital was $545.2 million, and total assets were $5.25 billion. Long-term debt was $2.90 billion, including $632.5 million outstanding under the revolving credit facility. Total equity was $1.13 billion, and redeemable noncontrolling interest was $396.2 million.
Material changes versus the prior comparable period
- Revenue declined across every operating segment, primarily because of lower drilling activity following the COVID-19-related downturn and weaker oil and gas markets.
- Average rigs working declined 37% in U.S. Drilling, 18% in Canada Drilling, and 25% in International Drilling.
- U.S. Drilling revenue fell 48% to $142.3 million; International Drilling revenue fell 27% to $246.8 million.
- Cost-reduction actions lowered general and administrative expense by 5% and research and engineering expense by 35%, but segment adjusted operating performance deteriorated overall.
- Interest expense decreased by $11.7 million, primarily due to debt restructuring in the fourth quarter of 2020.
- Q1 2020 included substantial impairments of goodwill, intangible assets, rigs, drilling equipment and other assets. Q1 2021 included only $2.5 million of impairments and other charges, principally $1.1 million of severance and reorganization costs and $1.0 million of asset write-downs.
- Operating cash flow improved despite weaker operating results, primarily because working-capital changes provided $27.4 million of cash versus using $85.3 million in Q1 2020.
- During Q1 2021, the company repurchased $25.5 million principal amount of senior notes for approximately $17.4 million in cash and recognized an $8.3 million gain. It also exchanged $40.0 million principal amount of existing notes for $26.1 million of new 9.0% notes.
Guidance, outlook, risks and unusual items
Management expects measured but steady increases in Lower-48 activity during 2021 and expects international activity to increase as governmental restrictions ease. No specific financial revenue, earnings or cash-flow guidance was provided.
Management expects current cash, operating cash flow, financing sources and revolving-credit availability to fund expected requirements for at least the next 12 months, but emphasized uncertainty from the COVID-19 pandemic, oil and gas prices and customer capital-spending decisions. Purchase commitments at March 31, 2021 totaled approximately $132.3 million.
- The company was in compliance with its revolving-credit covenants and expected to remain compliant for the following 12 months based on current projections. The facility requires minimum liquidity of $160.0 million and, while the company is not investment grade, an asset-to-debt coverage ratio of at least 4.25:1.
- The revolving facility had $1.014 billion of total capacity, $632.5 million outstanding, and $60.3 million of letters of credit outstanding at March 31, 2021.
- The $250 million accounts-receivable sales agreement is scheduled to expire August 13, 2021. Approximately $74.0 million of receivables had been sold and remained uncollected at quarter-end.
- The company’s senior unsecured debt ratings are non-investment grade. Further downgrades could increase borrowing costs, restrict capital-market access or require additional letters of credit.
- Key risks include commodity-price volatility, reduced customer exploration and production spending, contract renewals, customer concentration, high indebtedness, covenant compliance, political and regulatory risks, sanctions, foreign exchange exposure, litigation and tax disputes.
- Potential contingencies include an Algerian legal matter with possible exposure of up to $13.0 million in excess of accrued amounts and Kazakhstan environmental-related exposure of approximately $4.0 million, which has been fully accrued.
- The 6% mandatory convertible preferred shares were scheduled to automatically convert into approximately 668 thousand common shares on May 3, 2021, subject to the stated terms.
Important facts for investors to verify
- Whether drilling activity and day rates recover as projected, particularly in the Lower-48 and international markets.
- The company’s ability to maintain revolving-credit covenant compliance and minimum liquidity amid continued operating losses.
- Debt maturities, refinancing requirements and the availability and cost of capital markets financing.
- Renewal or replacement of the accounts-receivable sales agreement after its scheduled August 2021 expiration.
- Whether further asset impairments, restructuring charges or asset-sale losses arise if oil and gas markets remain weak.
- The effect of the mandatory preferred-share conversion on common-share dilution and future dividend obligations.
- The outcome and potential financial impact of disclosed litigation, environmental matters, tax audits and off-balance-sheet guarantees.