Nabors Industries Ltd. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing includes quarterly information, including fourth-quarter 2015 results, but is an annual Form 10-K. Nabors is a Bermuda-based global provider of land and offshore drilling rigs, rig services, drilling technology and related equipment. At year-end, the fleet included 430 actively marketed land rigs and 42 offshore rigs.
Business Context and Reporting Changes
- Nabors completed the merger of its Completion & Production Services business with C&J Energy Services on March 24, 2015. Nabors received approximately $650.1 million in net cash and an equity interest in CJES, which is now accounted for under the equity method rather than consolidated.
- Nabors acquired the remaining 49% of Nabors Arabia in May 2015 for $106.0 million, making the Saudi Arabian operation wholly owned and consolidating its results from the acquisition date.
- Because of the CJES transaction, 2015 results are not directly comparable with 2014 and 2013, which included the consolidated Completion & Production Services business.
- 2015 activity was heavily affected by the oil-price downturn, excess rig capacity, lower customer capital spending, reduced utilization and pricing pressure.
Financial and Operating Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $3.864 billion | $6.804 billion | Down 43% |
| Loss from continuing operations, net of tax | $329.5 million | $669.3 million | Loss narrowed |
| Net loss attributable to Nabors | $372.7 million | $670.7 million | Loss narrowed |
| Total diluted loss per share | $1.29 | $2.28 | Improved |
| Adjusted EBITDA | $1.127 billion | $1.749 billion | Down 36% |
| Adjusted operating income | $157.0 million | $604.3 million | Down 74% |
| Net cash from operating activities | $856.6 million | $1.782 billion | Down 52% |
| Capital expenditures | $867.1 million | $1.821 billion | Down 52% |
2015 GAAP results included approximately $369.0 million of impairments and other charges, including $140.1 million for tangible assets and equipment, $180.6 million for an other-than-temporary impairment of the CJES investment and $48.3 million related to international operations. Discontinued operations produced a $42.8 million net loss, including a $51.0 million impairment of western Canadian dry-gas assets.
Segment Performance
- U.S. Drilling: Revenue was $1.257 billion, down 42%; rig years declined 44% to 120.0; adjusted operating income fell 76% to $87.1 million.
- Canada Drilling: Revenue was $137.5 million, down 59%; rig years declined 51% to 16.7; adjusted operating income was a $7.0 million loss.
- International Drilling: Revenue increased 15% to $1.862 billion and adjusted operating income increased 26% to $308.3 million, aided by Nabors Arabia consolidation and additional rigs.
- Rig Services: Revenue declined 44% to $391.1 million and adjusted operating income was a $12.6 million loss, reflecting lower equipment sales and weak directional-drilling activity.
- Total Drilling & Rig Services revenue was $3.648 billion, down 24%, while total rig years declined 30% to 260.7. Average utilization was 50% for the drilling fleet.
Liquidity, Debt and Capital Resources
- Cash and short-term investments were $274.6 million at December 31, 2015, versus $536.2 million a year earlier. Working capital was approximately $469.4 million, versus $1.174 billion.
- Long-term debt was $3.655 billion, compared with $4.332 billion in 2014. Total debt before deferred financing costs was approximately $3.680 billion.
- Gross debt-to-capital was 0.46:1 and net debt-to-capital was 0.44:1, compared with 0.47:1 and 0.43:1, respectively, in 2014. Interest coverage declined to 6.2:1 from 9.8:1.
- Available capacity under the revolving credit facility and commercial paper program was approximately $2.24 billion of a $2.25 billion total capacity. The facility matures in July 2020 and includes a 0.60:1 net debt-to-capital covenant; Nabors reported compliance at year-end.
- Nabors had $325.0 million outstanding under a new unsecured term loan and only $8.0 million of commercial paper outstanding at year-end.
- 2016 expected capital expenditures were approximately $0.5 billion to $0.6 billion. Purchase commitments outstanding at year-end were approximately $216.9 million.
- Nabors paid $69.4 million in dividends during 2015 and declared a $0.06-per-share dividend payable March 31, 2016. It repurchased 10.6 million shares for $99.6 million under a $400 million authorization.
Material Changes Versus the Prior Comparable Period
- Revenue fell primarily because Completion & Production Services was no longer consolidated after the CJES merger, combined with materially lower U.S. and Canadian drilling activity and dayrates.
- U.S. and Canadian rig years declined sharply, while international revenue and operating income increased following the Nabors Arabia acquisition and continued international project activity.
- Operating cash flow fell substantially, although lower capital spending and merger proceeds helped reduce net debt and financing requirements.
- General and administrative expense declined 35% to $324.3 million, reflecting the CJES separation, workforce reductions and cost-control initiatives; however, G&A increased as a percentage of revenue to 8.4% from 7.3%.
- Property, plant and equipment declined to $7.028 billion from $8.599 billion after asset retirements, impairments, the business separation and lower capital spending.
- The investment in unconsolidated affiliates increased to $415.2 million from $58.3 million, primarily reflecting the CJES investment, despite the $180.6 million impairment charge.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued erosion in industry rig counts, utilization and pricing through at least the first half of 2016, in both domestic and international markets.
- Oil prices had fallen to approximately $35 per barrel in late 2015 and subsequently reached $26.21 per barrel on February 11, 2016. Sustained low prices could further reduce customer spending, dayrates, utilization, cash flows and asset values.
- Several customer contracts were scheduled to expire in 2016. Customers may seek renegotiation, suspension or termination, and early termination payments may be insufficient or unavailable.
- Further impairments remain possible for rigs, equipment, assets held for sale and the CJES investment. Management performed an updated goodwill analysis in the fourth quarter and recorded no goodwill impairment in 2015.
- Customer concentration is material: Saudi Arabian Oil Company represented approximately 12% of 2015 consolidated revenue, and the three largest contract-drilling customers represented approximately 26%.
- Other risks include approximately $3.7 billion of debt, access to capital markets, foreign exchange exposure, political and economic instability, environmental and operational liabilities, cybersecurity, tax disputes and litigation.
- Outstanding financial guarantees and standby letters of credit totaled approximately $237.5 million. Letters of credit outstanding were $211.7 million, with $445.6 million of remaining availability.
- Significant contingencies include an Algerian foreign-exchange matter with potential loss of up to $18.7 million above accrued amounts, an ERG litigation claim seeking up to $750 million that is currently stayed, and tax assessments and uncertain tax positions. The filing states that material adverse effects on consolidated financial position or cash flows are not expected, but particular-period earnings impacts remain possible.
Investor Verification Checklist
- Verify the comparability of 2015 revenue and margin trends after the CJES deconsolidation and Nabors Arabia consolidation.
- Reconcile adjusted EBITDA and adjusted operating income to GAAP results and assess the recurring versus nonrecurring effects of the $369.0 million of 2015 charges.
- Review debt maturities, refinancing plans and compliance with the revolving-credit net debt-to-capital covenant.
- Monitor rig utilization, dayrates, contract renewals and customer termination or renegotiation activity during 2016.
- Assess the carrying value and market value of the CJES investment and the potential for additional impairment.
- Evaluate whether planned capital expenditures of $0.5 billion to $0.6 billion are appropriate relative to operating cash flow and market conditions.
- Review the status and potential exposure of Algerian proceedings, ERG litigation, tax assessments and other contingent liabilities.