Nabors Industries Ltd. — 2018 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Nabors is a global provider of land-based and offshore drilling and drilling-related services, operating in more than 25 countries. At March 31, 2018, its actively marketed fleet included 407 land rigs and 38 offshore rigs. Reportable segments are U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenues | $734.2 million | $562.6 million | Up 31% |
| Loss from continuing operations attributable to Nabors | $144.1 million | $148.5 million | Improved $4.4 million |
| Net loss attributable to Nabors | $144.2 million | $149.0 million | Improved $4.8 million |
| Diluted loss per share | $0.46 | $0.52 | Improved |
| Operating cash flow | $(81.7) million | $(58.0) million | More cash used |
| Capital expenditures | $94.0 million | $183.4 million | Down 49% |
| Cash flow from financing | $202.0 million | $172.9 million | Up $29.1 million |
| Cash and cash equivalents at period end | $367.0 million | $200.7 million | Up $166.4 million |
The net loss attributable to Nabors represented approximately 19.6% of revenue, compared with approximately 26.5% in the prior-year quarter. Pre-tax loss from continuing operations was $120.0 million, versus $173.2 million in Q1 2017. Total income tax expense was $23.5 million, compared with a $25.6 million benefit in the prior-year period, materially limiting the improvement in net loss.
At March 31, 2018, total assets were $8.30 billion, total liabilities were $5.36 billion and total equity was $2.74 billion. Total debt, before deferred financing costs, was approximately $4.30 billion, including $445.0 million outstanding under the revolving credit facility. Working capital was $727.5 million, and cash plus short-term investments totaled $393.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $171.6 million, driven by higher activity across the U.S. and international markets and a 13% increase in average rigs working.
- U.S. Drilling revenue rose 49% to $241.0 million, with average rigs working up 26% and adjusted operating loss improving to $19.7 million from $63.2 million.
- International Drilling revenue increased 9% to $368.8 million, while adjusted operating income more than doubled to $24.5 million.
- Drilling Solutions revenue increased 129% to $62.6 million and moved to $8.7 million of adjusted operating income from a $1.0 million loss, partly reflecting the Tesco acquisition.
- Rig Technologies revenue rose 47% to $64.7 million, but adjusted operating loss widened to $13.0 million because of an unfavorable mix of lower-margin activity.
- General and administrative expense increased 18% to $74.6 million, and research and engineering expense increased 34% to $15.8 million, reflecting higher activity, headcount and strategic projects.
- Interest expense increased 9% to $61.4 million, primarily because of the January 2018 debt issuance and higher revolver borrowings, partly offset by repayment of older notes.
- Operating cash flow deteriorated because working-capital changes used approximately $184.0 million, compared with $94.0 million in Q1 2017.
- Capital spending declined substantially from the elevated prior-year level.
Debt, Liquidity and Financing
In January 2018, Nabors issued $800 million of 5.75% senior unsecured notes due February 2025. Proceeds were used primarily to repay the $460.8 million of 6.15% senior notes due February 2018, repay commercial paper and fund general corporate purposes. Revolver borrowings were $445.0 million under a $2.25 billion facility maturing in July 2020, leaving stated borrowing availability of approximately $1.8 billion under the revolver and commercial paper program, subject to covenants.
The company reported a gross debt-to-capital ratio of 0.61:1 and a net debt-to-capital ratio of 0.59:1, compared with 0.58:1 and 0.56:1, respectively, at December 31, 2017. The revolver covenant requires net debt to capital not to exceed 0.60:1; management stated that all covenants were satisfied at quarter-end. Letter-of-credit facilities had $624.8 million of remaining availability after outstanding letters of credit.
Management expects existing cash and investments, operating cash flows, potential debt or equity proceeds and revolver availability to fund expected requirements for the next 12 months. Planned capital expenditures for the next 12 months are expected to be less than $0.5 billion, while outstanding purchase commitments were approximately $220.8 million at March 31, 2018.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal revenue or earnings guidance was provided in the filing. Management stated that activity and market conditions improved across U.S. and international operations, but interim results may not represent full-year results.
- Management identified oil and natural gas prices, exploration and development spending, customer demand, contract renewals, competition, operating risks and loss of major customers as key business sensitivities.
- The company remains highly leveraged and its financing flexibility depends on operating cash flow, capital-market access, asset monetization and compliance with the revolver covenant. Senior unsecured debt ratings had been downgraded to non-investment grade.
- The planned sale of certain jackups remained uncertain. If completed, the company estimated a potential loss of up to $50 million to $70 million; if not completed, the rigs would continue operating under renegotiated contracts.
- Other, net expense included $7.0 million of transaction-related costs, $3.6 million of litigation expenses and reserves, $2.5 million of foreign-currency losses and $2.3 million of asset-disposal losses. The prior-year period included an $8.6 million debt-buyback loss.
- The Tesco acquisition contributed incremental revenue and expenses, including approximately $9.8 million of Drilling Solutions revenue and approximately $13.0 million of Rig Technologies revenue during the quarter.
- Nabors adopted ASC 606 with no material financial statement impact. Adoption of ASU 2016-01 reduced retained earnings by $9.1 million, and adoption of ASU 2016-16 reduced deferred tax assets and retained earnings by approximately $34.1 million.
- Contingencies include a Latin American tax assessment with estimated additional exposure of $3 million to $8 million, an Algerian litigation matter with potential loss of up to $16.7 million beyond accrued amounts, and a shareholder lawsuit related to the Tesco transaction.
- Financial standby letters of credit and other surety instruments totaled $258.2 million. Management considered material losses under guarantees unlikely.
- SANAD, the 50%-owned Saudi Aramco joint venture, is consolidated because Nabors controls the activities most significant to its performance. SANAD assets cannot be used for general corporate purposes.
Important Facts for Investors to Verify
- Whether improving rig utilization and dayrates can produce positive consolidated operating and free cash flow after depreciation, interest and working-capital requirements.
- The company’s ability to maintain compliance with the 0.60:1 net debt-to-capital covenant as debt service, operating cash flow and market conditions change.
- Debt maturities, refinancing requirements and the cost and availability of future capital, particularly given non-investment-grade debt ratings.
- The status and ultimate economics of the proposed jackup sale and any related impairment or disposal loss.
- The resolution and reserve adequacy of the disclosed tax and litigation contingencies, including the Tesco-related shareholder litigation.
- The sustainability of the $0.06 per-share quarterly dividend and the authorized but unused $280.6 million share-repurchase capacity.
- Whether deferred tax assets and approximately $425 million of U.S. federal NOL carryforwards will be realized or become limited or expire unused.