Nabors Industries Ltd. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; filed April 28, 2017. Nabors is a global provider of land-based and offshore drilling rigs, directional drilling, wellbore placement, drilling software, equipment and related technologies. The company reported four segments: U.S., Canada, International and Rig Services. Its actively marketed fleet included 403 land rigs and 41 offshore rigs.
Financial Highlights
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $562.6 million | $597.6 million | Down 6% |
| Loss from continuing operations | $147.6 million | $396.6 million | Loss narrowed |
| Net loss attributable to Nabors | $149.0 million | $398.3 million | Loss narrowed |
| Diluted loss per share | $0.52 | $1.41 | Improved |
| Adjusted operating loss | $64.3 million | $18.6 million | Loss increased |
| Operating cash flow | $(58.0) million | $161.5 million | Declined |
| Capital expenditures | $183.4 million | $129.9 million | Increased |
| Interest expense | $56.5 million | $45.7 million | Up 24% |
| Dividend declared per share | $0.06 | $0.06 | Unchanged |
Operating revenue margins and operating profitability weakened despite a reduction in depreciation and amortization. Direct costs were $387.6 million, general and administrative expense was $63.4 million, research and engineering expense was $11.8 million, and depreciation and amortization was $203.7 million. The reported effective tax rate was 14.8%, compared with 11.6% in the prior-year quarter.
Liquidity, Debt and Capital Resources
- Cash and short-term investments totaled $228.6 million at March 31, 2017, compared with $295.2 million at December 31, 2016.
- Working capital was $351.0 million, compared with $333.9 million at year-end 2016.
- Total debt was $3.66 billion, compared with $3.58 billion at December 31, 2016.
- No borrowings were outstanding under the $2.25 billion revolving credit facility or commercial paper program; the company was in compliance with its debt covenants.
- Gross debt to capital was 0.54:1 and net debt to capital was 0.52:1, compared with 0.52:1 and 0.50:1, respectively, at year-end 2016.
- Interest coverage was 2.9:1, compared with 3.4:1 at December 31, 2016.
- Credit facilities had $632.3 million of remaining availability after outstanding letters of credit and guarantees.
- Financial guarantees, including standby letters of credit and other surety instruments, had a maximum amount of $288.8 million.
Material Changes Versus Q1 2016
- Revenue declined primarily because international average rigs working fell 19%; U.S. and Canadian activity increased, but U.S. spot pricing remained under pressure.
- U.S. revenue increased 9% to $161.9 million as average rigs working rose 37%, but the segment adjusted operating loss widened to $63.2 million because of pricing pressure and rig reactivation and relocation costs.
- Canada revenue increased 59% to $27.8 million, and its adjusted operating loss improved to $4.0 million.
- International revenue declined 16% to $338.2 million and adjusted operating income declined 74% to $12.0 million, reflecting lower activity, downtime for structural work and related costs.
- Rig Services revenue increased 33% to $71.4 million, and its adjusted operating loss improved to $9.1 million.
- The net loss improved substantially because the company no longer recorded its share of CJES losses or the related impairment charges. Q1 2016 included $167.1 million of equity-method losses and $177.2 million of other expense related principally to CJES.
- Interest expense increased because of the December 2016 issuance of $600 million of 5.50% senior notes and the January 2017 issuance of $575 million of exchangeable notes.
- Operating cash flow shifted from a $161.5 million inflow to a $58.0 million outflow, while capital expenditures increased by $53.6 million.
Financing, Outlook and Risks
In January 2017, Nabors issued $575 million of 0.75% exchangeable senior unsecured notes due 2024. Proceeds were used to repay the remaining $162.5 million term loan, fund approximately $40.3 million of capped-call transactions and repurchase approximately $162.5 million principal amount of 6.15% senior notes due 2018. The exchangeable notes may create future dilution or cash settlement obligations, although the capped calls are intended to reduce potential dilution and excess cash payments.
Management stated that current cash and investments, projected operating cash flow and revolving credit availability are expected to fund purchase commitments, capital expenditures, scheduled debt service and other expected cash requirements for the next 12 months. Capital expenditures over the next 12 months were expected to be less than $0.7 billion. Purchase commitments at March 31, 2017 totaled approximately $219.7 million, primarily for rig enhancements, new equipment, sustaining capital and inventory.
- Results remain highly exposed to oil and natural gas prices, customer exploration and production spending, rig utilization and dayrates.
- Continued weak market conditions could result in additional impairment charges or retirement of legacy and undersized rigs.
- International operations face political, economic, regulatory, currency and operating risks, including downtime and structural work requirements.
- The company is self-insured for certain risks and carries significant deductibles; uninsured or underinsured accidents could materially affect results.
- Material contingencies include a potential additional tax expense of $3 million to $8 million relating to a Latin American tax assessment and potential exposure of up to $17.7 million above accrued amounts in an Algeria litigation matter.
- Assets held for sale included approximately $65.4 million of oil and gas properties, with undiscounted pipeline commitments of approximately $15.7 million.
- The company was implementing new revenue-recognition guidance and evaluating its potential effect on financial statements and disclosures.
Most Important Facts to Verify
- Whether U.S. rig activity can translate into improved pricing and segment profitability.
- Progress toward recovery of international utilization, revenue and margins.
- Operating cash flow generation relative to capital expenditures and the company’s planned sub-$0.7 billion annual capital program.
- Debt maturities, refinancing capacity and compliance with the 0.60:1 net-debt-to-capital covenant.
- Potential dilution or cash settlement obligations from the 2024 exchangeable notes.
- Future impairment risk for legacy and undersized rigs and other long-lived assets.
- Resolution and financial exposure related to tax assessments, Algeria litigation, guarantees and pipeline commitments.