NABORS INDUSTRIES LTD quarterly report, Q3 FY2014

Nabors Industries Ltd. — Q3 2014 Form 10-Q Summary

Business context and reporting period

Nabors is a global oilfield-services company operating primarily through Drilling & Rig Services and Completion & Production Services. Its fleet and services support land and offshore drilling, well completion, maintenance, workover and related activities. The filing covers the three and nine months ended September 30, 2014, with comparative periods ended September 30, 2013. The interim financial statements are unaudited and were reviewed by PricewaterhouseCoopers LLP.

Financial performance and position

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Operating revenues	$1.814 billion	$1.552 billion	$5.020 billion	$4.545 billion
Income from continuing operations, net of tax	$102.4 million	$(90.5) million	$217.1 million	$29.8 million
Net income attributable to Nabors	$106.0 million	$(105.4) million	$220.4 million	$(10.6) million
Diluted EPS	$0.35	$(0.35)	$0.73	$(0.03)
Adjusted operating income	$203.4 million	$165.9 million	$445.9 million	$398.6 million
Operating cash flow	Not separately provided	Not separately provided	$1.244 billion	$974.7 million

Reported operating revenue increased 17% in the quarter and 10% year to date. Adjusted operating income increased 23% in the quarter and 12% year to date. Approximate adjusted operating margins were 11.2% in Q3 and 8.9% for the first nine months, compared with approximately 10.7% and 8.8%, respectively, in the prior-year periods. Net margins attributable to Nabors were approximately 5.8% in Q3 and 4.4% year to date.

Drilling & Rig Services revenue increased 17% in Q3 and 12% year to date; adjusted income increased 35% and 33%, respectively.
Completion & Production Services revenue increased 19% in Q3 and 8% year to date, but adjusted income declined 9% in Q3 and 45% year to date. Completion Services generated a year-to-date adjusted loss of $20.0 million.
Cash and cash equivalents were $404.5 million at September 30, 2014, compared with $389.9 million at December 31, 2013. Cash and short-term investments totaled $464.8 million versus $507.1 million.
Net cash used in investing activities was $1.207 billion, including $1.344 billion of capital expenditures, compared with $511.0 million of investing outflows in the prior-year period.
Net cash used in financing activities was $7.5 million. The company issued $441.5 million of commercial paper, redeemed $70.9 million of subsidiary preferred stock, repurchased $250.0 million of common shares and paid $41.8 million in dividends.
Total debt was $4.255 billion, including $771.4 million of commercial paper and $100.0 million drawn on the revolving facility. Gross debt-to-capital was 0.42:1 and net debt-to-capital was 0.39:1.
Working capital was approximately $1.4 billion. Management reported approximately $0.6 billion of remaining availability under the $1.5 billion revolving credit facility and commercial paper program, and $284.1 million of remaining letter-of-credit availability.

Material changes versus the prior comparable period

Results improved substantially because of higher U.S. and international drilling activity, higher international dayrates, stronger Rig Services sales and the absence of the $242.2 million of Q3 2013 impairment and other charges.
Year-to-date 2013 included $287.2 million of impairment and other charges, including a $208.2 million loss on tendered notes, a $45.0 million employment-contract termination charge and a $20.0 million coil-tubing impairment. No impairment charges were recorded in 2014 through September 30.
Interest expense declined 23% in Q3 and 24% year to date, primarily because of 2013 debt repurchases and lower average borrowing rates.
Investment income fell to $10.2 million year to date from $95.5 million, as the 2013 period benefited from approximately $88.2 million of realized securities gains.
Capital expenditures increased to $1.344 billion from $780.7 million, while operating cash flow increased to $1.244 billion from $974.7 million.
The company completed a $250 million one-time repurchase of 10.375 million shares at $24.10 per share; no broader repurchase program was authorized.
Assets held for sale declined to $158.3 million from $243.3 million, consisting solely of Horn River basin oil and gas properties. Nabors also sold a large portion of its Alaska North Slope properties, recording a $22.2 million gain.

Guidance, outlook, commentary, risks and unusual items

Nabors expected the merger of its Completion & Production Services businesses with C&J Energy Services to close in Q4 2014, although completion could extend into 2015. Nabors expected to own approximately 53% of the combined company and subsequently use the equity method. Management anticipated approximately $0.9 billion of cash proceeds from debt issued by the combined company, primarily for short-term debt reduction, fleet expansion and general corporate purposes.
Expected capital expenditures for the following 12 months were approximately $1.8 billion, with purchase commitments of approximately $967.2 million at September 30, 2014.
Management expected new and upgraded international rigs and dayrate increases beginning in the second half of 2014 to improve international results into 2015.
Management noted that crude oil prices had declined approximately 15% from the preceding 12-month average after quarter-end. A sustained or further decline could reduce customer spending, utilization and dayrates and could trigger future impairment charges.
The filing identifies exposure to oil and natural gas prices, customer capital spending, competition, operational hazards, foreign exchange, political instability, tax-law changes, capital-market access and general economic conditions.
Material contingencies include potential additional Mexican tax exposure of approximately $30 million to $35 million beyond recorded reserves; Algeria matters with potential losses of up to $13.3 million and $26.8 million in excess of accrued amounts; and an ERG lawsuit seeking up to $750 million, whose outcome could not be determined.
Financial guarantees and surety instruments totaled a maximum of $191.7 million. Certain indemnification obligations have no estimable maximum payment, although management considered the likelihood of material losses remote.
The company disclosed a material weakness in internal control over financial reporting related to accounting for a complex legal-entity restructuring connected with the C&J transaction. An initial earnings release materially overstated tax expense; the error was corrected before filing the 10-Q, but remediation was incomplete.
The filing contains an apparent presentation inconsistency: the MD&A states Q3 continuing-operations income of $57.4 million and diluted EPS of $0.19, while the filed consolidated statements report $102.4 million and $0.34. Investors should reconcile this difference with the company’s filed financial statements and subsequent disclosures.

Most important facts for investors to verify

Reconcile the MD&A continuing-operations and diluted-EPS figures with the amounts in the consolidated statements.
Confirm the status, closing conditions, financing and final accounting for the C&J Energy Services transaction, including the expected $0.9 billion debt proceeds.
Assess whether the planned $1.8 billion of capital expenditures and $967.2 million of purchase commitments are consistent with expected operating cash flow and leverage.
Monitor commercial paper refinancing, revolving-credit availability, debt covenants and the effect of any ratings changes.
Evaluate exposure to lower oil prices, weaker utilization or dayrates, and potential future impairment charges.
Track remediation of the material weakness and determine whether any further tax-related corrections or restatements are required.
Review the Mexican tax assessments, Algeria proceedings, ERG litigation, pipeline commitments and other contingencies for changes in exposure.