Nabors Industries Ltd. — 1Q 2014 Form 10-Q Summary
Business context and reporting period
Nabors is a global oilfield-services company operating through Drilling & Rig Services and Completion & Production Services. Its fleet and equipment support land and offshore drilling, well servicing, pressure pumping, completion, maintenance and related technology services. The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The interim financial statements are unaudited but were reviewed by PricewaterhouseCoopers LLP.
Key financial metrics
| Metric | 1Q14 | 1Q13 | Change |
|---|---|---|---|
| Operating revenues | $1.590 billion | $1.535 billion | +3% |
| Total revenues and other income | $1.588 billion | $1.618 billion | -2% |
| Adjusted income from operating activities | $109.0 million | $143.1 million | -24% |
| Income from continuing operations, net of tax | $49.0 million | $92.2 million | -47% |
| Net income attributable to Nabors | $49.9 million | $99.1 million | -50% |
| Diluted EPS | $0.16 | $0.33 | -$0.17 |
| Net cash provided by operating activities | $444.6 million | $179.3 million | +$265.3 million |
| Capital expenditures | $396.5 million | $235.5 million | +$160.9 million |
Based on reported figures, adjusted operating margin was approximately 6.9% versus 9.3% in the prior-year quarter. Continuing-operations net margin was approximately 3.1% versus 6.0%; attributable net margin was approximately 3.1% versus 6.5%.
- Drilling & Rig Services revenue increased 7% to $1.141 billion, while adjusted operating income increased 19% to $155.5 million. International revenue rose 17% and international adjusted income rose 124%; U.S. and Canadian adjusted income declined.
- Completion & Production Services revenue declined 2% to $503.3 million, while adjusted operating income fell to a $3.0 million loss from income of $43.8 million. Completion Services generated a $33.6 million loss, primarily reflecting contract expirations, reduced activity, severe weather and pricing pressure.
- Cash and short-term investments totaled $424.8 million at March 31, 2014, down from $507.1 million at December 31, 2013. Working capital was approximately $1.5 billion.
- Total debt was $3.818 billion, including $117.5 million drawn on the revolving facility and $290.3 million of commercial paper. The company reported approximately $1.1 billion of availability under its $1.5 billion revolving credit facility and commercial paper program.
- Gross debt-to-capital was 0.39:1, net debt-to-capital was 0.36:1, and trailing interest coverage was 7.8:1. The company was in compliance with its revolving-credit covenants.
- Cash flow from operations exceeded investing and financing uses, but cash declined by $63.0 million to $326.9 million because of capital expenditures, debt repayments, dividends and foreign-exchange effects.
Material changes versus the prior comparable period
- Revenue growth was outweighed by lower operating profitability, principally because Completion Services deteriorated substantially and U.S. and Canadian drilling margins declined.
- Interest expense decreased 25% to $44.8 million, reflecting debt refinancing and lower average borrowing rates.
- Investment income fell to $1.0 million from $79.4 million because the prior-year period included approximately $76.2 million of realized investment gains.
- The prior-year period included approximately $45.0 million of costs related to the former chief executive’s employment termination, including $27.0 million of stock and $18.0 million of cash. These costs were not repeated in 1Q14.
- Rig years increased 8% to 380.2, while production-services rig hours declined 3% to 251,522.
- The company corrected a foreign-currency accounting error, reclassifying approximately $91.5 million from accumulated other comprehensive income to retained earnings. Management stated that the revision had no material impact on assets, liabilities, cash flows or profit and loss for presented periods.
- Other comprehensive loss attributable to Nabors was $5.8 million, compared with comprehensive income of $10.7 million in 1Q13, driven primarily by foreign-currency translation losses and unrealized marketable-security losses.
Guidance, outlook, risks and unusual items
- Management expected capital expenditures over the next 12 months of approximately $1.6 billion to $1.8 billion, with purchase commitments of approximately $834.1 million at March 31, 2014. Planned spending could be reduced or increased depending on market conditions and opportunities.
- Management stated that resilient crude-oil prices could support increased U.S. drilling activity for the balance of 2014. It also expected new and upgraded international rigs, along with rate increases, to improve international results beginning in the second half of 2014.
- U.S. natural-gas-directed drilling remained constrained by low gas prices, which management said would need to rise further to materially increase customer activity.
- Key risks include oil and gas price volatility, customer spending and demand, competition, operating and safety risks, foreign-exchange movements, political instability, changes in tax laws, capital-market access and general economic conditions.
- Assets held for sale totaled $231.9 million, primarily related to oil and gas assets. Pipeline commitments had undiscounted contractual obligations of approximately $145.4 million and recorded liabilities of $64.9 million; lower production or natural-gas prices could result in additional charges.
- Remaining assessed or expected Mexican tax exposures ranged from $30 million to $35 million, for which reserves had been recorded. Algeria matters could produce losses of up to $13.3 million and $26.8 million, respectively, in excess of accrued amounts if the company is unsuccessful.
- An ERG lawsuit related to a terminated 2012 transaction sought damages of up to $750 million. Nabors stated that it believes the claims lack merit, but the outcome could not be determined.
- Financial standby letters of credit and other surety instruments had a maximum amount of $155.4 million. Management considered material losses under guarantees unlikely.
- A $0.04-per-share dividend was paid on March 31, 2014, and another $0.04-per-share dividend was declared on April 25, 2014 for payment on June 30, 2014.
Important facts for investors to verify
- Whether the planned $1.6 billion to $1.8 billion of capital spending can be funded while maintaining leverage and liquidity targets.
- Whether Completion Services can return to profitability after contract expirations, weather-related weakness, overcapacity and pricing pressure.
- Whether international rig deployments and rate increases deliver the expected improvement in the second half of 2014.
- The sustainability of operating cash flow given high capital expenditures and working-capital movements.
- Current availability and covenant headroom under the revolving credit facility and commercial paper program.
- Potential cash exposure from Mexican tax matters, Algeria litigation and customs cases, the ERG lawsuit, pipeline commitments and other contingencies.
- The effect of oil and natural-gas prices, foreign-exchange movements and customer spending on utilization and dayrates.
- The impact of the $91.5 million prior-period accounting revision when comparing retained earnings and accumulated other comprehensive income with earlier filings.