Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Nabors owns and operates a global land-based and offshore drilling fleet, together with drilling technology, equipment manufacturing, directional drilling, instrumentation and software services. At September 30, 2016, the fleet included 430 actively marketed land rigs and 42 actively marketed offshore rigs. The filing covers the three and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods.
The historical Completion & Production Services business was merged with C&J Energy Services in March 2015 and is no longer consolidated. Consequently, the nine-month 2015 results are not directly comparable with 2016. C&J filed for Chapter 11 bankruptcy in July 2016; Nabors wrote its remaining investment carrying value down to zero and ceased equity-method accounting beginning in the third quarter.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenues | $519.7 million | $847.6 million | $1.689 billion | $3.126 billion |
| Adjusted EBITDA | $148.7 million | $247.6 million | $476.3 million | $904.1 million |
| Adjusted EBITDA margin | 28.6% | 29.2% | 28.2% | 28.9% |
| Adjusted operating income (loss) | $(72.0) million | $7.5 million | $(179.1) million | $164.8 million |
| Net loss attributable to Nabors | $(111.2) million | $(295.8) million | $(694.2) million | $(209.0) million |
| Loss per diluted share | $(0.39) | $(1.02) | $(2.46) | $(0.72) |
| Operating cash flow | Not separately provided | Not separately provided | $404.8 million | $605.0 million |
Q3 continuing-operations loss was $97.8 million, or $0.35 per diluted share, versus a $250.9 million loss in the prior-year quarter. The improvement was primarily due to substantially lower unusual charges, particularly C&J-related impairment expense, despite sharply lower operating performance. For the nine months, continuing-operations loss increased to $681.0 million from $168.4 million, driven principally by the $221.9 million equity-method loss from C&J and other impairment charges.
Q3 adjusted operating performance deteriorated to a loss, with U.S. adjusted operating loss of $58.9 million, Canada loss of $10.2 million, International income of $43.6 million and Rig Services loss of $12.9 million. Total rig years declined 32% year over year to 163.5, including declines of 44% in the U.S., 49% in Canada and 20% internationally.
Balance sheet, debt and liquidity
| Metric | September 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $177.0 million | $254.5 million |
| Cash and short-term investments | $200.7 million | $274.6 million |
| Working capital | Approximately $0.3 billion | Approximately $0.5 billion |
| Total debt | $3.490 billion gross; $3.476 billion net of financing costs | $3.680 billion gross; $3.655 billion net of financing costs |
| Total equity | $3.599 billion | $4.294 billion |
| Total assets | $8.425 billion | $9.538 billion |
Nabors had approximately $1.93 billion of remaining availability under its $2.25 billion revolving credit facility and commercial paper program. The revolving facility had $300.0 million outstanding, with approximately $1.9 billion of additional borrowing capacity, and matures in July 2020. Commercial paper outstanding was $23.0 million. The company was in compliance with all revolving-credit covenants.
Gross debt to capital was 0.49:1, net debt to capital was 0.48:1 and trailing twelve-month interest coverage was 3.8:1 at September 30, 2016, compared with 0.46:1, 0.44:1 and 6.2:1, respectively, at December 31, 2015.
Material changes versus the prior comparable period
- Operating revenue declined 39% in Q3 and 46% for the nine months, reflecting lower customer demand, rig counts and dayrates amid prolonged low oil and gas prices.
- Adjusted EBITDA declined 40% in Q3 and 47% for the nine months; adjusted EBITDA margin was broadly stable because of cost reductions and lower activity-related expenses.
- U.S. revenue declined 55% in Q3 and 61% for the nine months; International revenue declined 30% and 18%, respectively; Canada and Rig Services also contracted materially.
- Operating cash flow fell $200.2 million to $404.8 million for the nine months, while capital expenditures fell to $285.0 million from $744.0 million.
- Debt declined by approximately $189.2 million from year-end, including repayment of the $347.955 million senior notes due September 2016 and repurchases of $160.8 million principal amount of senior notes for approximately $156.5 million in cash.
- Cash decreased by $77.5 million during the nine months. Financing cash outflows included $492.6 million of long-term debt reduction and $33.9 million of dividends, partially offset by $300.0 million of net revolving-facility borrowings and $15.0 million of commercial paper proceeds.
- General and administrative expense declined 34% for the nine months, and research and engineering expense declined 22%, reflecting workforce reductions and other cost-control measures.
Outlook, unusual items and risks
Management stated that the U.S. market showed early stabilization, including a slight third-quarter increase in rig counts, but customers remained cautious through the remainder of 2016 and into early 2017. International markets were expected to remain challenging, although management observed early signs of improving activity. Capital expenditures over the following 12 months were expected to be less than $650 million unless oil prices improved; purchase commitments at September 30, 2016 totaled approximately $160.2 million.
Significant unusual items included $220.1 million of impairment and related charges associated with C&J holdings, a $40.5 million net loss on asset sales and disposals, including $22.4 million related to Alaska oil and gas properties, and a $6.7 million gain on debt buybacks. Q3 discontinued-operations loss was $12.2 million, including $15.4 million of impairment charges, and nine-month discontinued-operations loss was $14.1 million.
Key risks include continued oil and natural-gas price weakness, reduced exploration and production spending, lower rig utilization and dayrates, potential impairment or retirement of legacy and undersized rigs, international political and economic instability, foreign exchange exposure, tax disputes, litigation, self-insured losses, credit-market access and covenant compliance. Pipeline commitments associated with discontinued oil and gas operations totaled approximately $19.4 million undiscounted, with $13.9 million of recorded liabilities; further declines in production or gas prices could result in additional charges.
Financial guarantees and surety instruments had a maximum amount of approximately $250.5 million, including $135.6 million of outstanding letters of credit and guarantees under letter-of-credit facilities. Management considered material losses under these arrangements unlikely. On October 31, 2016, Nabors announced an agreement with Saudi Aramco to form an equal-interest Saudi Arabian onshore drilling joint venture; each party’s investment through January 2019 was expected to approach $500 million.
Important facts for investors to verify
- Whether U.S. and international rig counts, utilization and dayrates actually stabilize or improve after September 30, 2016.
- The company’s ability to sustain operating cash flow while funding capital expenditures, dividends, debt service and the planned Saudi Arabian joint venture.
- Remaining liquidity, borrowing-base or covenant capacity and the effect of any credit-rating changes on financing costs and market access.
- Potential additional impairments or retirements of rigs, oil and gas properties, assets held for sale and pipeline commitments.
- Recoveries, if any, from the C&J bankruptcy and the outcome of related litigation and bankruptcy proceedings.
- Resolution of disclosed tax matters, including the Latin American assessment with estimated additional exposure of $3 million to $8 million.
- The comparability of 2016 results with 2015, given the C&J merger, discontinued operations and the cessation of equity-method accounting.