Nabors Industries Ltd. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014, with fourth-quarter results separately disclosed. Nabors is a Bermuda-based global oilfield-services company operating through Drilling & Rig Services and Completion & Production Services. The company operated 466 actively marketed land drilling rigs, 543 land well-servicing and workover rigs, 42 offshore drilling rigs, and approximately 800,000 hydraulic horsepower of pressure-pumping capacity at year-end.
Financial Performance and Position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenues | $6.804 billion | $6.152 billion | Up 10.6% |
| Adjusted income from operating activities | $598.0 million | $558.2 million | Up 7% |
| Income from continuing operations | $(669.3) million | $158.3 million | Declined materially |
| Net loss attributable to Nabors | $(670.7) million | $140.0 million net income | Turned to loss |
| Diluted EPS | $(2.28) | $0.47 | Declined |
| Cash flow from operations | $1.782 billion | $1.418 billion | Up 26% |
| Capital expenditures | $1.821 billion | $1.178 billion | Up 55% |
| Cash, cash equivalents and short-term investments | $536.2 million | $507.1 million | Up 6% |
| Working capital | $1.174 billion | $1.442 billion | Down 19% |
| Total debt | $4.355 billion | $3.914 billion | Up 11% |
| Gross debt-to-capital | 0.47:1 | 0.40:1 | Higher leverage |
| Net debt-to-capital | 0.44:1 | 0.36:1 | Higher leverage |
Adjusted income from operating activities is a non-GAAP measure. Consolidated operating margin before impairments, based on adjusted operating income relative to operating revenues, was approximately 8.8% in 2014 versus 9.1% in 2013. The filing does not provide a single GAAP operating-income margin.
Segment Results
- Drilling & Rig Services: Revenue increased 13% to $4.806 billion and adjusted income increased 30% to $713.2 million. International revenue rose 11% and adjusted income rose 37%, while U.S. revenue rose 13% and adjusted income rose 17%. Canada revenue declined 7% and adjusted income declined 14%.
- Completion & Production Services: Revenue increased 8% to $2.252 billion, but adjusted income fell 49% to $78.3 million. Completion Services generated a $15.1 million adjusted loss versus $51.7 million of adjusted income in 2013, primarily because of pricing pressure and expired take-or-pay contracts.
- Total drilling rig years increased 7% to 373.7, while well-servicing rig hours decreased 7% to 949,376.
Material Changes Versus Prior Period
- Revenue increased despite weakening conditions late in the year, supported by new PACE-X rigs, higher U.S. activity and dayrates earlier in the year, and stronger international operations.
- Oil prices fell sharply during the fourth quarter, reaching $53.27 per barrel in December 2014. Customers reduced or curtailed capital spending, producing downward pressure on utilization, dayrates and service pricing.
- Nabors recorded $1.027 billion of impairments and other charges, compared with $287.2 million in 2013. Charges included $611.6 million for rig retirements and tangible-asset impairments and $386.5 million for goodwill and intangible-asset impairments.
- The company retired approximately 25 mechanical rigs and impaired portions of its lower-48 legacy fleet, SCR fleet, Gulf of Mexico jackups, Canadian coil-tubing rigs and other underutilized assets.
- Goodwill declined from $513.0 million to $173.9 million, primarily because $335.0 million of Completion Services goodwill related to the Superior acquisition was impaired, along with $21.6 million related to Ryan Directional Services.
- Capital expenditures increased substantially as Nabors continued newbuild and upgrade programs, including 16 PACE-X rigs, 10 Saudi Arabian rigs and five Argentine rigs delivered during 2014.
- Interest expense declined 20% to $177.9 million, benefiting from the 2013 refinancing of high-coupon debt and increased use of lower-cost commercial paper.
- Nabors repurchased 10.375 million common shares for approximately $250 million and paid $59.1 million of dividends during 2014. The repurchase was an isolated transaction, not part of an ongoing authorized program.
Cash Flow, Debt and Liquidity
- Operating cash flow was $1.782 billion, including $487.8 million of cash provided by working-capital changes.
- Investing cash use was $1.717 billion, primarily reflecting $1.821 billion of capital expenditures. Nabors also paid $40.3 million for the acquisition of 2TD Drilling AS and received $156.8 million from asset sales and insurance claims.
- Financing activities provided $69.8 million. Nabors paid down net commercial paper and revolving-credit borrowings, paid dividends, repurchased shares and redeemed subsidiary preferred stock.
- At December 31, 2014, remaining availability under the revolving credit facility and commercial paper program was $516.9 million. Letter-of-credit facilities had $323.6 million of remaining availability.
- Debt maturities include approximately $350 million in 2016, $983.1 million in 2017, $934.4 million in 2018, $339.6 million in 2019 and $1.75 billion thereafter.
- In February 2015, Nabors increased revolving-credit capacity by $225 million and added a $300 million unsecured three-year term loan, increasing total available borrowing capacity by $525 million to more than $1 billion as of the filing date.
- Management stated that existing cash, operating cash flow, asset-sale proceeds and available credit were expected to fund the next 12 months of capital expenditures, purchase commitments, debt service and other requirements.
Outlook, Transactions and Risks
- Management expected 2015 operating results to decline from 2014 because of lower commodity prices, reduced customer activity, lower utilization and weaker dayrates, particularly in the U.S. lower 48.
- International operations were expected to remain relatively steady because newly deployed rigs were generally supported by long-term contracts, including activity in Saudi Arabia, Kazakhstan and offshore Mexico.
- Planned capital expenditures for the following 12 months were approximately $1.0 billion to $1.2 billion, although management stated that spending could be reduced based on market conditions.
- Nabors agreed to merge its Completion & Production Services business with C&J Energy Services. Under amended terms, Nabors expected approximately $688 million in cash and 62.5 million shares of the combined company and anticipated owning approximately 53% after closing. Completion was expected in March 2015, subject to shareholder approval, financing and other conditions.
- The merger was subject to litigation and regulatory, financing and shareholder-approval risks. A Delaware court order affecting the transaction was vacated by the Delaware Supreme Court in December 2014, but the company could not predict the outcome of related litigation.
- Other significant contingencies included Algerian customs and foreign-currency matters with potential additional exposures of up to approximately $12.0 million and $24.2 million, respectively, and an ERG lawsuit seeking damages of up to $750 million. Management considered the ultimate impact of pending litigation uncertain.
- Uncertain tax positions totaled $203.7 million at year-end, and tax authorities had asserted approximately $209.5 million of income, customs and other tax assessments that Nabors was contesting without an accrual for the full amount.
- PwC issued an adverse opinion on internal control over financial reporting because of a material weakness related to accounting for income taxes and a complex legal-entity restructuring. Management had begun remediation but had not completed all corrective actions.
- Key operating risks include oil and gas price volatility, customer contract termination or renegotiation, excess rig capacity, safety and environmental incidents, international political and currency risk, hydraulic-fracturing regulation, cybersecurity, tax disputes and access to capital.
Important Facts for Investors to Verify
- Whether the C&J Energy Services merger closed on the expected terms, including the cash consideration, share issuance, ownership percentage and required debt financing.
- Whether lower oil prices resulted in additional rig retirements, impairments, goodwill write-downs, lower utilization or reduced dayrates after December 31, 2014.
- Actual 2015 capital expenditures versus the stated $1.0 billion to $1.2 billion plan and the effect on free cash flow and leverage.
- Debt refinancing or repayment requirements around the 2016–2019 maturities and the availability and covenants of credit facilities.
- Progress in remediating the material weakness in tax-related internal controls and any restatement or further reporting consequences.
- Resolution of Algerian, ERG, merger-related and tax contingencies, including amounts ultimately paid or reserved.
- The sustainability of the $0.06 quarterly dividend and any additional share repurchases given the 2014 net loss, higher leverage and expected 2015 downturn.