Nabors Industries Ltd. — 3Q 2020 Form 10-Q Summary
Business context and reporting period
Nabors provides land-based and offshore drilling rigs and related services, including tubular running, directional drilling, measurement-while-drilling, equipment manufacturing, instrumentation and optimization software. As of September 30, 2020, the company had 364 actively marketed land rigs and 33 offshore rigs operating across approximately 20 countries. The filing covers the three and nine months ended September 30, 2020; results are unaudited and compared with the corresponding 2019 periods.
Results were materially affected by COVID-19, weak oil and natural gas demand, commodity-price volatility and customer reductions in exploration and production activity.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $438.4 million, down 42% | $1.691 billion, down 27% |
| Loss from continuing operations attributable to common shareholders | $161.1 million, or $23.42 per diluted share | $708.3 million, or $102.25 per diluted share |
| Net loss attributable to Nabors | $157.5 million | $697.4 million |
| Adjusted segment operating income (loss) | $(64.9) million, versus $24.7 million | $(102.7) million, versus $73.7 million |
| Interest expense | $52.4 million | $158.3 million |
| Impairments and other charges | $5.0 million | $339.3 million |
| Net cash provided by operating activities | Not separately provided | $247.9 million, versus $430.8 million |
| Capital expenditures | Not separately provided | $153.1 million, versus $366.6 million |
The filing does not provide a clear consolidated gross or operating margin; however, revenue declined substantially faster than the company’s cost reductions, resulting in negative adjusted segment operating income. General and administrative expense decreased 24% for the nine-month period, research and engineering expense decreased 30%, and depreciation and amortization decreased 1%.
At September 30, 2020, cash and cash equivalents were $505.0 million, short-term investments were $8.8 million, and working capital was approximately $677.0 million. Cash, short-term investments and restricted cash totaled $516.9 million. Total assets were $5.817 billion and total equity was $1.360 billion.
Long-term debt had a carrying value of $3.290 billion, including $752.3 million outstanding under the 2018 Revolving Credit Facility. The facility had approximately $1.014 billion of total borrowing capacity, reduced by $50.6 million due to the minimum-liquidity requirement, and $26.7 million of outstanding letters of credit. The weighted-average interest rate on revolver borrowings was 3.48%.
Material changes versus the prior comparable period
- Third-quarter revenue decreased $319.7 million, primarily from reduced drilling activity. Average U.S. rigs working fell 53%, and international rigs working fell 19%.
- Nine-month revenue decreased $638.5 million. Average U.S. rigs working declined 40%, while international rigs working declined 10%.
- All reportable segments experienced lower third-quarter revenue. U.S. Drilling revenue fell 58%, International Drilling 24%, Drilling Solutions 53% and Rig Technologies 55%.
- Nine-month adjusted segment operating income declined from $73.7 million of profit to a $102.7 million loss. U.S. Drilling shifted from $57.5 million of profit to a $70.0 million loss.
- Nine-month impairments and other charges increased to $339.3 million from $106.0 million, including $194.4 million of long-lived asset impairments, $27.8 million of goodwill impairments and $83.6 million of intangible-asset impairments.
- Operating cash flow declined $182.9 million, while capital expenditures declined $213.5 million as the company reduced spending.
- In January 2020, Nabors issued $600.0 million of 7.25% senior notes due 2026 and $400.0 million of 7.50% senior notes due 2028, primarily to fund repurchases of lower-coupon notes. During the nine months, the company repurchased $1.32 billion principal amount of senior notes and recognized a $65.8 million net gain.
- The 2012 Revolving Credit Facility was repaid and terminated in April 2020.
Guidance, outlook, commentary and risks
Management did not provide specific quantitative revenue, earnings or cash-flow guidance. Management reported that oil-price volatility began to stabilize in the third quarter, U.S. activity stabilized and increased toward quarter-end, and some international markets showed signs of resumed activity. Visibility remained limited and activity varied materially by market.
Management expects current cash, investments, projected operating cash flow, debt or equity financing and revolver availability to fund expected obligations for at least the next 12 months, but emphasized that this assessment depends on forecasts that could be adversely affected by prolonged COVID-19 impacts and depressed commodity prices.
On September 24, 2020, Amendment No. 4 to the 2018 Revolving Credit Facility removed the 5.5-times net-funded-debt-to-EBITDA covenant and replaced it with a minimum-liquidity covenant of $160 million. In exchange, lenders received first-lien security interests in certain U.S. and Canadian drilling rigs. The company stated that it was in compliance with all covenants and concluded that previously disclosed substantial doubt about its ability to continue as a going concern had been alleviated.
Key risks include continued oil and gas price weakness, customer spending reductions, COVID-19-related operating disruptions, high leverage and refinancing needs, non-investment-grade credit ratings, covenant and borrowing-base restrictions, international political and sanctions risk, foreign exchange exposure, asset impairments, litigation, tax disputes and potential loss of major customers. Purchase commitments at September 30, 2020 were approximately $104.3 million. Financial standby letters of credit and other surety instruments totaled $208.4 million.
Subsequent to quarter-end, on October 29, 2020, $115.0 million of 0.75% senior exchangeable notes due 2024 were exchanged for $50.5 million of newly issued 6.50% senior priority guaranteed notes due 2025. Nabors also commenced an offer to exchange certain existing notes for up to $300 million of 9.00% senior priority guaranteed notes due 2025.
Most important facts for investors to verify
- Whether drilling activity, utilization and customer spending recovered or deteriorated after September 30, 2020.
- Compliance with the $160 million minimum-liquidity covenant and the 4.25-to-1 asset-to-debt coverage requirement.
- Near-term maturities, revolver availability, refinancing plans and the effect of subsequent debt exchanges on interest expense and liquidity.
- Whether further oil-price weakness or reduced utilization could produce additional rig, goodwill or intangible-asset impairments.
- The sustainability of operating cash flow after the sharp year-over-year decline and after reduced capital expenditures.
- The collectability and ongoing availability of the $250 million accounts-receivable sales program, including the $52.0 million of receivables sold and uncollected at September 30, 2020.
- The potential impact of COVID-19, international sanctions and political conditions on operations, receivables and asset values.
- The terms and dilution implications of the 6% mandatory convertible preferred shares, including mandatory conversion scheduled for May 1, 2021.