Nabors Industries Ltd. 2016 Form 10-K Summary
Business context and reporting period
Nabors Industries Ltd. is a Bermuda-based global drilling contractor with the world’s largest land-based drilling fleet, offshore platform and jackup rigs, drilling equipment, directional drilling, measurement-while-drilling, software and automation services. The filing covers the fiscal year ended December 31, 2016; it is an annual filing rather than a quarterly report.
- Reportable segments: U.S., Canada, International and Rig Services.
- Fleet at year-end: approximately 400 actively marketed land rigs and 41 actively marketed offshore rigs.
- Average rigs working declined to 171.9 in 2016 from 260.7 in 2015, while average utilization fell to 35% from 50%.
- Saudi Aramco represented approximately 33% of consolidated operating revenue, compared with 12% in 2015.
Financial performance and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $2.228 billion | $3.864 billion |
| Revenue change | Down 42% | Down 43% versus 2014 |
| Net loss attributable to Nabors | $1.030 billion | $372.7 million |
| Loss per diluted share | $3.64 | $1.29 |
| Net cash from operating activities | $531.9 million | $856.6 million |
| Capital expenditures | $395.5 million | $867.1 million |
| Interest expense | $185.4 million | $181.9 million |
| Cash and short-term investments | $295.2 million | $274.6 million |
| Working capital | $333.9 million | $469.4 million |
| Long-term debt | $3.578 billion | $3.655 billion |
| Gross debt-to-capital | 0.52:1 | 0.46:1 |
| Net debt-to-capital | 0.50:1 | 0.44:1 |
Continuing operations produced a net loss of $1.011 billion, compared with a $329.5 million loss in 2015. The 2016 loss included $505.2 million of impairments and other charges, including $285.4 million related primarily to tangible assets and equipment and $219.7 million related primarily to equity-method investments. Depreciation and amortization was $871.6 million.
Segment adjusted operating income declined to a $118.3 million loss from income of $316.8 million in 2015. U.S. revenue declined 56% and adjusted operating income turned to a $197.7 million loss. Canada revenue declined 63% and produced a $36.8 million loss. International revenue declined 19%, while adjusted operating income decreased 47% to $164.7 million. Rig Services revenue declined 45% and produced a $48.5 million loss.
Material changes versus the prior comparable period
- Revenue fell primarily because average rigs working declined 34%, dayrates decreased, contracts were repriced or terminated, and certain rigs moved to standby rates.
- U.S. activity began recovering in the second half of 2016; year-end U.S. working rigs were approximately 50% above the early-April trough. Canada also improved late in the year.
- General and administrative expense decreased 30% to $227.6 million, reflecting lower headcount and cost-reduction measures. Research and engineering expense decreased 19% to $33.6 million.
- Nabors’ former Completion & Production Services business was no longer consolidated following the 2015 merger with C&J Energy Services, limiting comparability with earlier periods.
- C&J Energy filed for Chapter 11 in July 2016. Nabors wrote off substantially all of its remaining investment and recorded a $221.9 million loss from unconsolidated affiliates for 2016.
- Capital expenditures declined 54% from 2015 as management curtailed spending during the downturn.
Liquidity, debt and capital allocation
- At December 31, 2016, no amounts were outstanding under the $2.25 billion revolving credit facility and commercial paper program; the company reported compliance with its debt covenants.
- In December 2016, Nabors issued $600 million of 5.50% senior notes due 2023. Proceeds were used to repay the $162.5 million term-loan amount due in 2018, repay revolving credit and commercial paper borrowings, and for other debt and corporate purposes.
- In January 2017, Nabors issued $575 million of 0.75% exchangeable senior 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 address other debt or corporate purposes.
- Remaining availability under letter-of-credit facilities was $608.5 million after $150.4 million of outstanding letters of credit.
- Management expected current liquidity, operating cash flow and revolver availability to fund expected requirements for the following 12 months. Planned capital expenditures were expected to be below $0.6 billion.
- The quarterly dividend remained $0.06 per common share. Cash dividends paid during 2016 totaled $50.9 million.
Outlook, commentary, risks and unusual items
Management stated that oil and gas prices and customer exploration and production spending remain the primary drivers of demand. It viewed the U.S. market as stabilizing and beginning to improve, with early signs of increased international activity. Spot-market pricing remained competitive, but management expected dayrates to improve if rig counts and activity continued to increase during 2017.
- The company entered into an agreement with Saudi Aramco to form an equally owned Saudi Arabian onshore drilling joint venture, expected to begin operations in the second half of 2017. Nabors committed $20 million in cash, five rigs at commencement, five additional rigs in January 2019 and a backstop for its share of purchases of the first 25 rigs if third-party financing or joint-venture cash is insufficient.
- Major risks include prolonged low oil or natural gas prices, excess drilling capacity, declining utilization and dayrates, contract renegotiation or termination, customer concentration, geopolitical instability, foreign exchange exposure, environmental regulation, litigation, cybersecurity incidents and limited access to capital markets.
- Asset impairments included retirement of 24 U.S. SCR rigs, retirement of seven older Canadian rigs and impairments of underutilized or obsolete equipment. Management warned that further weakness in commodity prices or utilization could produce additional impairments.
- Tax exposures included approximately $130.6 million of assessed income, customs and other business taxes that the company was contesting, plus $179.3 million of uncertain tax positions and $24.8 million of uncertain tax liabilities excluded from contractual cash-obligation estimates.
- Significant contingencies included an Algerian matter with potential additional exposure of up to $17.6 million and an ERG lawsuit whose potential recovery was limited by a court ruling to $4.5 million, subject to further proceedings.
- The filing reported approximately $276.4 million of financial standby letters of credit and other financial surety instruments. Self-insurance accruals totaled $157.4 million at year-end.
Most important facts for investors to verify
- Whether the expected recovery in U.S. and international drilling activity translates into higher utilization, dayrates and segment margins.
- Whether leverage, interest costs and upcoming debt maturities remain manageable after the January 2017 exchangeable-note issuance and subsequent debt repurchases.
- The funding requirements and economic benefits of the Saudi Aramco joint venture, including the potential rig-purchase backstop.
- Potential additional fleet, goodwill, investment or discontinued-operation impairments if commodity prices or utilization weaken.
- Customer concentration, particularly Saudi Aramco’s approximately 33% revenue contribution in 2016.
- Resolution of CJES-related claims, tax matters, Algerian proceedings and other litigation or indemnification obligations.
- The effect of the 2015 C&J merger and discontinued operations on comparability with prior-period revenue, earnings and cash flow.