Nabors Industries Ltd. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Nabors is a global provider of land-based and offshore drilling services, drilling-related technologies, equipment manufacturing, instrumentation, optimization software, tubular services, wellbore placement, directional drilling and measurement-while-drilling services. As of June 30, 2019, it operated 374 actively marketed land rigs and 33 actively marketed offshore rigs in approximately 25 countries.
This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared primarily with the corresponding 2018 periods. Results may not be indicative of full-year performance.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenues | $771.4 million | $761.9 million | $1.571 billion | $1.496 billion |
| Net loss attributable to Nabors common shareholders | $(207.9) million | $(202.4) million | $(329.9) million | $(346.6) million |
| Diluted loss per share | $(0.61) | $(0.61) | $(0.97) | $(1.08) |
| Cash flow from operating activities | Not separately provided | Not separately provided | $273.1 million | $77.4 million |
| Capital expenditures | Not separately provided | Not separately provided | $274.5 million | $209.5 million |
| Interest expense | $51.5 million | $60.6 million | $103.8 million | $122.0 million |
Q2 2019 operating revenues increased 1%, while the company remained loss-making. Six-month revenue increased 5%, and the common-shareholder loss narrowed by $16.7 million. Reported net losses include substantial impairment and other charges.
Q2 adjusted operating income by segment was $20.4 million for U.S. Drilling, $(5.5) million for Canada Drilling, $(6.9) million for International Drilling, $13.8 million for Drilling Solutions and $0.5 million for Rig Technologies. Total segment adjusted operating income was $22.3 million, compared with $10.9 million in Q2 2018.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $367.7 million at June 30, 2019, compared with $447.8 million at December 31, 2018. Cash, short-term investments and working capital were $395.7 million and $694.5 million, respectively.
- Total debt was approximately $3.585 billion before deferred financing costs; long-term debt reported on the balance sheet was $3.551 billion.
- The company repurchased $361.5 million principal amount of senior notes during the first six months for approximately $366.7 million in cash, including accrued interest. It subsequently repurchased another $16.6 million principal amount of 2020 notes through the filing date.
- The 2012 revolving credit facility had $480.0 million outstanding and matures July 14, 2020. The 2018 revolving credit facility had no borrowings outstanding and has stated borrowing capacity of $1.267 billion.
- Net debt-to-capitalization was 0.57:1, against a 0.60:1 covenant limit. Asset-to-debt coverage was 3.65:1 against a 2.50:1 requirement applicable under the 2018 facility. Management reported compliance with all revolving-credit covenants.
- Remaining letter-of-credit availability was $579.7 million. Financial standby letters of credit and other surety instruments had a maximum amount of $219.7 million.
- Management expects current liquidity, operating cash flow, financing sources and revolver availability to fund expected requirements for the next 12 months. Planned capital expenditures over the next 12 months were approximately $0.3 billion, with purchase commitments of approximately $229.5 million at June 30, 2019.
Material changes versus the prior comparable period
- U.S. Drilling improved materially: Q2 revenue rose 22% to $323.4 million, average rigs working increased 9% to 122.2, and adjusted operating income improved from a $13.1 million loss to $20.4 million. Management attributed the improvement to higher dayrates and increased activity.
- International Drilling weakened: Q2 revenue declined 14% to $326.9 million and adjusted operating income fell from $24.5 million to a $6.9 million loss, reflecting lower activity, reduced pre-funded amortizing revenue and the sale of three Middle East jackups.
- Canada Drilling declined: Q2 revenue decreased 35% to $11.4 million and average rigs working fell 27% to 7.4 because of weak market conditions and seasonal declines.
- Drilling Solutions improved: Q2 revenue increased 8% and adjusted operating income increased 83% to $13.8 million, driven by performance tools and cost reductions.
- Cost controls continued: Q2 general and administrative expense declined 5% to $64.4 million, and research and engineering expense declined 4% to $11.9 million.
- Cash generation improved but investment increased: six-month operating cash flow increased by $195.7 million, while capital expenditures increased by $65.0 million. Ending cash and restricted cash declined to $375.4 million from $597.4 million at June 30, 2018.
Guidance, outlook, management commentary and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects approximately $0.3 billion of capital expenditures over the following 12 months and states that liquidity should fund expected obligations.
- Management identified oil and natural gas prices, customer exploration and production spending, demand for drilling services, contract renewals, competition, operating risks, customer concentration, geopolitical conditions, trade restrictions, tax law changes and access to capital as key risks.
- Q2 2019 included $102.6 million of impairments and other charges, including $93.6 million of goodwill impairments and $5.2 million of intangible-asset impairment. The goodwill charges reflected lower market capitalization and reduced projected cash flows tied to commodity-price expectations and demand.
- The six-month effective tax rate was negative 16.2%, partly because of a $31.1 million tax benefit from releasing a valuation allowance. Future geographic earnings mix and deferred-tax-asset realizability could materially affect tax expense.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $42.8 million of right-of-use assets and lease liabilities; lease liabilities totaled $40.5 million at June 30, 2019.
- Potentially material contingencies include an Algeria matter with possible exposure of up to $15.8 million above accrued amounts, Kazakhstan environmental and permitting matters with possible additional exposure of approximately $4.0 million, ongoing litigation and financial guarantees. Management does not expect pending matters to materially affect consolidated financial position or cash flows, but acknowledges that individual-period results could be affected.
- The board declared post-quarter-end dividends of $0.01 per common share and $0.75 per mandatory convertible preferred share. The preferred shares remain potentially dilutive; 38.8 million associated common shares were excluded from diluted EPS as anti-dilutive.
Most important facts for investors to verify
- Whether U.S. Drilling’s improved dayrates and utilization can offset weakness in International and Canada Drilling.
- The company’s ability to refinance or repay the $480.0 million 2012 revolver and other debt maturities while maintaining covenant compliance.
- Liquidity after approximately $0.3 billion of expected capital expenditures, debt service, dividends and purchase commitments.
- Further goodwill or intangible impairments if commodity prices, utilization, dayrates or market capitalization deteriorate.
- Whether projected operating cash flow remains sufficient to support capital spending and debt reduction.
- Potential outcomes of the Algeria, Kazakhstan, shareholder litigation and other legal or guarantee exposures.
- The effect of mandatory preferred-share conversion and other potential dilution on future common-share ownership and EPS.