NABORS INDUSTRIES LTD annual report, FY2017

Nabors Industries Ltd. 2017 Form 10-K Summary

Business context and reporting period

Nabors filed its annual report for the fiscal year ended December 31, 2017. The company operates land and offshore drilling rigs and provides drilling technologies, directional drilling, measurement-while-drilling, equipment manufacturing, automation, software and related services. Its five reportable segments are U.S., Canada, International, Drilling Solutions and Rig Technologies.

At year-end, Nabors actively marketed 407 land rigs and 38 offshore rigs. Average rigs working increased to 207.3 from 171.9 in 2016, with U.S. activity rising substantially while International activity declined.

Key financial metrics

Metric	2017	2016	Change
Operating revenue	$2.564 billion	$2.228 billion	Up 15%
Loss from continuing operations attributable to Nabors	$503.3 million	$1.011 billion	Loss narrowed
Total net loss attributable to Nabors	$546.8 million	$1.030 billion	Loss narrowed
Diluted loss per share	$1.90	$3.64	Improved
Net cash from operating activities	$62.8 million	$531.9 million	Down sharply
Capital expenditures	$574.5 million	$395.5 million	Up 45%
Cash, cash equivalents and short-term investments	$365.4 million	$295.2 million	Up
Long-term debt	$4.028 billion	$3.578 billion	Up
Working capital	$527.9 million	$333.9 million	Up

The company remained unprofitable, with a consolidated net margin of approximately negative 21%. Interest expense increased 20% to $222.9 million, while depreciation and amortization was $842.9 million. Interest coverage declined to 2.4:1 from 3.4:1. The gross debt-to-capital ratio was 0.58:1 and the net debt-to-capital ratio was 0.56:1.

Segment performance and material changes

U.S.: Revenue rose 45% to $805.2 million as average rigs working increased 63% to 100.8. Adjusted operating loss widened to $213.9 million, primarily because lower average dayrates offset higher activity.
Canada: Revenue increased 61% to $82.9 million and adjusted operating loss narrowed to $22.3 million as activity improved.
International: Revenue declined 2% to $1.474 billion and adjusted operating income fell 34% to $108.4 million. Results were affected by structural work and downtime on rigs in a major market and a 9% reduction in average rigs working.
Drilling Solutions: Revenue increased 121% to $140.7 million and adjusted operating income improved to $16.7 million from a $16.5 million loss, reflecting stronger performance-tool activity and broader technology adoption.
Rig Technologies: Revenue increased 54% to $234.5 million, while adjusted operating loss was $31.0 million, modestly better than in 2016.
In December 2017, Nabors completed its all-stock acquisition of Tesco Corporation, issuing approximately 32.1 million common shares. Tesco contributed $7.7 million of revenue after closing and expanded tubular services, equipment manufacturing and drilling automation capabilities.
Nabors acquired Robotic Drilling Systems for approximately $50.7 million in cash in September 2017 to strengthen automation capabilities.
The 50/50 Saudi Aramco Nabors Drilling Company joint venture commenced operations in the fourth quarter. Each partner contributed $20 million in cash and approximately $204 million of rigs, equipment or other assets. Nabors consolidated the joint venture.
The reporting structure was revised in the fourth quarter to separately present Drilling Solutions and Rig Technologies; prior-period segment information was recast.

Cash flow, liquidity and capital structure

Operating cash flow fell to $62.8 million, primarily because working capital consumed $384.9 million as activity and receivables increased.
Investing activities used $502.0 million, including $574.5 million of capital expenditures.
Financing activities provided $512.2 million, supported by debt issuance and $550.0 million of borrowings under the revolving credit facility and commercial paper program.
At December 31, 2017, $550.0 million was outstanding under the $2.25 billion revolving credit facility and commercial paper program. Availability was subject to a net debt-to-capital covenant of 0.60:1; the company reported a ratio of 0.56:1 and compliance with its covenants.
In January 2018, Nabors issued $800 million of 5.75% senior notes due 2025 and used the proceeds to refinance debt, including the 6.15% notes due February 2018.
Management expected existing cash, operating cash flow and revolver availability to fund expected requirements for the next 12 months. Planned 2018 capital expenditures were approximately $500 million, with purchase commitments of approximately $196 million at year-end.

Guidance, outlook, risks and unusual items

Management reported improving oil-market conditions, higher U.S. rig counts and favorable dayrate increases on new and renewed contracts, particularly in the second half of 2017. Management stated that the dayrate trend continued into 2018, but the filing does not provide formal revenue, earnings or margin guidance.

Oil and natural gas prices, customer capital spending, utilization and dayrates remain the primary operating drivers. Competition and excess drilling capacity may limit pricing recovery.
Saudi Aramco represented approximately 29% of 2017 consolidated revenue, and the three largest contract-drilling customers represented approximately 45%; customer concentration is material.
2017 included $44.5 million of impairments and other charges, including $21.6 million of transaction-related costs, $16.0 million of debt-extinguishment losses and $6.9 million of rig impairments. This compared with $498.5 million in 2016.
The 2017 tax provision included a $167.0 million benefit from favorable tax-audit outcomes, partly offset by a $138.6 million noncash deferred-tax charge from the U.S. Tax Cuts and Jobs Act. The tax accounting remained subject to finalization under SAB 118.
Discontinued operations generated a $43.5 million loss, including $35.3 million of impairment charges and a $16.5 million litigation settlement charge related to previously owned properties.
Nabors disclosed approximately $4.0 billion of debt, non-investment-grade senior unsecured debt ratings and dependence on operating subsidiaries for cash transfers to the holding company.
Additional exposures include oil-price volatility, contract cancellations or renegotiations, operational accidents, environmental liabilities, political and currency risks, cybersecurity events, tax disputes and potential acquisition-integration issues.
The company disclosed an Algerian legal matter with potential loss of up to $16.6 million in excess of accrued amounts, a putative shareholder class action related to the Tesco transaction, and an estimated $163.5 million of contested tax assessments for which no accrual had been recorded.
Nabors agreed to contribute five additional rigs and related assets to SANAD in January 2019 and to backstop its share of purchases of the first 25 rigs if joint-venture cash or third-party financing is insufficient.

Important facts for investors to verify

Whether higher U.S. utilization and dayrates translate into sustainable positive segment margins and consolidated profitability.
The pace of International rig reactivation, structural repairs, contract renewals and dayrate recovery.
Liquidity after the January 2018 refinancing, including debt maturities, revolver availability and compliance with the 0.60:1 net debt-to-capital covenant.
Cash conversion and working-capital requirements, given the sharp decline in operating cash flow despite higher revenue.
Integration results, synergies and customer retention following the Tesco and Robotic Drilling Systems acquisitions.
Capital requirements and potential backstop funding for SANAD, including the planned 2019 rig contribution.
Final tax accounting under the Tax Reform Act, resolution of contested tax assessments and utilization of substantial tax-loss carryforwards.
Potential impairment charges, the outcome of the Algerian matter and the Tesco-related shareholder litigation.