Nabors Industries Ltd. — FY2018 Form 10-K Summary
Business context and reporting period
Nabors, a Bermuda-based global drilling contractor, reported for the fiscal year ended December 31, 2018. Its five reportable segments are U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies. The company operated 384 actively marketed land rigs and 33 offshore rigs across more than 25 countries at year-end.
Average rigs working increased to 223.0 in 2018 from 207.3 in 2017, including increases in U.S. Drilling to 113.2 rigs and Canada Drilling to 16.9 rigs. International Drilling averaged 92.9 rigs.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $3.058 billion | $2.564 billion | +19% |
| Net loss attributable to Nabors common shareholders | $(653.3) million | $(546.8) million | Loss increased $106.4 million |
| Diluted loss per share | $(1.99) | $(1.90) | Worsened |
| Operating cash flow | $325.8 million | $62.8 million | Improved $263.0 million |
| Capital expenditures | $458.9 million | $574.5 million | Down $115.5 million |
| Interest expense | $227.1 million | $222.9 million | +2% |
| Long-term debt | $3.586 billion | $4.028 billion | Down $441.9 million |
| Cash, cash equivalents and short-term investments | $481.8 million | $365.4 million | +32% |
| Working capital | $761.5 million | $527.9 million | +44% |
The consolidated net loss margin was approximately 21.3% of operating revenue, compared with approximately 21.1% in 2017. Segment adjusted operating income improved to $58.6 million from an adjusted operating loss of $141.9 million, but this improvement was more than offset by corporate costs, interest, taxes and unusual charges.
- U.S. Drilling: Revenue increased 35% to $1.083 billion; adjusted operating loss narrowed to $21.3 million from $213.9 million. Average rigs working increased 12%.
- Canada Drilling: Revenue increased 27% to $105.0 million; adjusted operating loss narrowed to $6.2 million. Average rigs working increased 10%.
- International Drilling: Revenue was essentially flat at $1.469 billion, while adjusted operating income declined 32% to $74.2 million due to contract expirations, dayrate reductions and asset sales.
- Drilling Solutions: Revenue increased 78% to $250.2 million and adjusted operating income increased 125% to $37.6 million, primarily reflecting stronger activity and Tesco-related tubular services.
- Rig Technologies: Revenue increased 16% to $271.0 million; adjusted operating loss narrowed to $25.8 million.
Material changes versus the prior comparable period
- Revenue and activity improved with the recovery in U.S. and Canadian drilling markets, but the benefit did not translate into lower consolidated losses.
- Impairments and other charges rose to $144.4 million from $44.5 million. Significant items included $60.2 million of rig-related and inventory impairments, a $64.7 million loss on the sale of three offshore drilling rigs and eight workover rigs, $14.3 million of transaction-related costs and a $5.3 million debt-extinguishment loss.
- Income tax expense was $79.3 million, compared with an $83.0 million tax benefit in 2017. Nabors recorded a $52 million non-cash valuation allowance against Canadian deferred tax assets.
- Property, plant and equipment declined to $5.468 billion from $6.110 billion, reflecting depreciation, impairments and disposals.
- Nabors issued $800 million of 5.75% senior notes due 2025, issued approximately $301.4 million of common equity proceeds and $277.9 million of mandatory convertible preferred equity proceeds, and used financing activity to reduce other debt.
- The company acquired PetroMar Technologies for an initial $25 million, adding logging-while-drilling tools to Drilling Solutions.
- Nabors adopted ASC 606 revenue guidance with no material financial statement impact. It also adopted new financial-instrument and intra-entity tax guidance, reducing retained earnings by approximately $9.1 million and $34.1 million, respectively.
Cash flow, debt and liquidity
Operating cash flow of $325.8 million was below capital expenditures of $458.9 million, producing negative operating cash flow after capital spending before financing and asset-sale proceeds. Net cash used in investing activities was $367.1 million, while financing activities provided $155.6 million.
Total debt before deferred financing costs was approximately $3.625 billion at year-end. The principal maturities include approximately $785.3 million in 2020, $669.0 million in 2021, $929.5 million in 2023 and $1.367 billion thereafter. The 2018 revolving credit facility had $1.267 billion of capacity and no borrowings; the 2012 facility had $170 million outstanding and $666.25 million of commitments.
Remaining availability under letter-of-credit facilities was $654.3 million. Nabors reported a gross debt-to-capital ratio of 0.57:1, net debt-to-capital ratio of 0.53:1, asset-to-debt coverage ratio of 3.82:1 and interest coverage ratio of 3.3:1. The company was in compliance with its debt covenants at the filing date, but its senior unsecured debt ratings were non-investment grade.
Guidance, outlook, commentary and risks
Management expects approximately $0.4 billion of capital expenditures over the next 12 months and stated that available cash, projected operating cash flow and revolving credit capacity are expected to fund anticipated requirements. Management’s stated priority for 2019 was reducing net debt.
Oil prices declined sharply in the fourth quarter of 2018, prompting some U.S. exploration and production customers to announce lower planned 2019 capital spending. Management nevertheless expected demand for high-specification U.S. Lower 48 rigs to remain strong and cited contracted commitments for additional 2019 rig deployments. The filing does not provide a formal earnings or revenue guidance range.
- Results are highly sensitive to oil and natural gas prices, customer capital spending, utilization and dayrates.
- Saudi Aramco represented approximately 24% of 2018 revenue; the three largest contract drilling customers represented approximately 41%.
- International operations expose Nabors to political instability, currency movements, sanctions, regulatory changes and collection risk, particularly in Venezuela.
- Drilling operations carry substantial environmental, safety, weather, marine, insurance and self-insurance risks. Self-insurance accruals were $143.3 million at year-end.
- The company disclosed an Algeria legal matter with potential additional exposure of up to $16.6 million, Kazakhstan environmental matters with potential additional exposure of approximately $4.0 million, and ongoing Tesco-related shareholder litigation.
- Tax authorities had issued approximately $253 million of audit claims for income, customs and other business taxes; management had not accrued these amounts and did not expect the ultimate resolution to be material, although outcomes remain uncertain.
- Nabors had approximately $578 million of U.S. federal net operating loss carryforwards and approximately $7.1 billion of NOL carryforwards in other jurisdictions, much of which was subject to valuation allowances or expiration risk.
Investor verification checklist
- Verify the sustainability of improved U.S. and Canadian utilization, dayrates and segment adjusted operating income after the late-2018 oil-price decline.
- Review debt maturities, covenant headroom and refinancing requirements, particularly the 2020 and 2021 maturities and the 0.60:1 net debt-to-capital covenant.
- Assess whether operating cash flow can cover planned capital expenditures while management reduces net debt.
- Evaluate concentration in Saudi Aramco and the effect of any contract renegotiation, suspension or termination.
- Monitor further rig impairments, asset-sale losses and potential goodwill impairment if oil prices or utilization remain weak.
- Confirm the financial and dilution effects of the mandatory convertible preferred shares and outstanding exchangeable notes.
- Track the disclosed tax assessments, litigation, Kazakhstan environmental proceedings and Venezuela operating and collection risks.