Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2018. Nabors provides land-based and offshore drilling and drilling-related services in approximately 25 countries through U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies. The fleet included 399 actively marketed land rigs and 33 offshore rigs at quarter-end.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $779.4 million | $662.1 million | $2.276 billion | $1.856 billion |
| Net loss attributable to Nabors common shareholders | $118.9 million | $148.5 million | $465.5 million | $430.5 million |
| Basic and diluted loss per share | $0.35 | $0.52 | $1.44 | $1.51 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $76.9 million | $(36.1) million |
| Capital expenditures | Not separately provided | Not separately provided | $339.0 million | $448.9 million |
Q3 operating revenue increased 18%, while nine-month revenue increased 23%. Q3 continuing-operations loss attributable to common shareholders improved to $105.0 million from $121.4 million; the nine-month continuing-operations loss increased to $450.9 million from $387.4 million. Approximate revenue-based operating margins were negative 10.7% in Q3 and negative 16.5% for the nine months, based on continuing-operations loss before tax.
At September 30, 2018, cash and cash equivalents were $347.5 million, short-term investments were $41.0 million, working capital was $786.6 million and total debt, net of deferred financing costs, was $3.737 billion. Gross debt to capital was 0.56:1 and net debt to capital was 0.53:1, compared with 0.58:1 and 0.56:1, respectively, at December 31, 2017. Letter-of-credit availability was $647.2 million after outstanding letters of credit.
Material changes versus the prior comparable period
- All operating segments reported higher Q3 revenue. Average rigs working increased 6% globally in Q3 and 8% for the nine-month period.
- Q3 segment adjusted operating income improved to $31.7 million from a $33.4 million loss. The nine-month figure improved to $42.6 million from a $123.9 million loss.
- U.S. Drilling turned profitable in Q3, with adjusted operating income of $2.6 million versus a $53.5 million loss, primarily from higher dayrates and activity.
- International Drilling revenue was broadly flat in Q3, but adjusted operating income declined 21% to $25.7 million because higher-margin contracts expired, dayrates declined and rigs were sold or undergoing recertification.
- Drilling Solutions benefited from higher activity and approximately $19.9 million of Q3 revenue from the Tesco acquisition. Tesco also contributed approximately $18.8 million to Rig Technologies revenue.
- Nine-month results included a $63.7 million loss on the sale of three offshore jackup rigs and $14.7 million of transaction-related costs, primarily associated with Tesco.
- Interest expense declined 6% in Q3 but increased 5% for the nine months because of the new $800 million 5.75% senior notes issued in January 2018.
- Share count increased following the issuance of 40.25 million common shares and 5.75 million mandatory convertible preferred shares in 2018. Net proceeds from these offerings totaled approximately $580.6 million.
Outlook, risks, contingencies and unusual items
Management expects current cash, investments, operating cash flow, financing proceeds and revolving-credit availability to fund expected requirements for the next 12 months. Planned capital expenditures over the next 12 months are approximately $0.4 billion, and purchase commitments at September 30, 2018 totaled approximately $228.7 million.
On October 11, 2018, the company entered into a new five-year unsecured revolving facility with borrowing capacity of $1.267 billion and no borrowings outstanding as of the filing date. The existing 2012 revolving facility was amended to reduce commitments to $666.25 million; $215.0 million was outstanding at September 30. Both facilities include a 0.60:1 net-debt-to-capital covenant. Management reported compliance with applicable covenants.
Key risks include oil and natural-gas price volatility, drilling activity and dayrate reductions, customer concentration and contract renewals, approximately $3.8 billion of debt, non-investment-grade debt ratings, covenant compliance, access to capital, foreign operations, political and currency risks, technology commercialization, and execution of the Saudi Arabia joint venture and Tesco integration.
Discontinued operations generated losses of $13.9 million in Q3 and $14.6 million for nine months, including impairment charges related to western Canadian dry-gas assets. The company also disclosed tax disputes, litigation, self-insurance exposures and $177.3 million of maximum financial guarantees. On October 3, 2018, Nabors acquired PetroMar Technologies for an initial $25.0 million, with potential contingent payments.
Important facts for investors to verify
- Whether improving rig utilization and dayrates can overcome continuing net losses, high depreciation and interest costs.
- The effect of the jackup-rig sale, Tesco integration and PetroMar acquisition on future revenue, margins and cash flow.
- Available borrowing capacity and compliance with the 0.60:1 net-debt-to-capital covenant under the amended and new revolvers.
- Refinancing needs, debt maturities, interest costs and the impact of non-investment-grade ratings on financing access.
- The potential dilution from 5.75 million mandatory convertible preferred shares and exchangeable notes.
- The recoverability of deferred tax assets and possible outcomes of tax disputes, litigation and other contingencies.
- Whether management’s approximately $0.4 billion capital-expenditure expectation remains consistent with operating cash generation.