Nabors Industries Ltd. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing; fourth-quarter information is included in unaudited quarterly disclosures. Nabors is a global oilfield-services company operating through Drilling & Rig Services and Completion & Production Services.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenues | $6.152 billion | $6.843 billion | Down 10% |
| Revenues and earnings from unconsolidated affiliates | $6.152 billion | $6.554 billion | Down 6% |
| Adjusted income from operating activities | $558.2 million | $908.6 million | Down 39% |
| Income from continuing operations, net | $158.3 million | $233.0 million | Down 32% |
| Net income attributable to Nabors | $140.0 million | $164.8 million | Down 15% |
| Diluted EPS | $0.47 | $0.56 | Down $0.09 |
| Cash provided by operating activities | $1.418 billion | $1.563 billion | Down 9% |
| Capital expenditures | $1.178 billion | $1.519 billion | Down 22% |
| Long-term debt | $3.904 billion | $4.379 billion | Down $475.2 million |
| Cash, cash equivalents and short-term investments | $507.1 million | $778.2 million | Down $271.1 million |
Approximate 2013 margins were 9.1% for adjusted operating income, 2.6% for continuing net income and 2.3% for net income attributable to Nabors. Adjusted operating income is a non-GAAP measure.
Business and Segment Performance
- Drilling & Rig Services revenue declined 9% to $4.257 billion and adjusted income declined 28% to $550.6 million.
- U.S. drilling revenue declined 16% and adjusted income declined 38%, reflecting lower land-drilling activity, lower dayrates and contract renewals at lower market rates.
- Canadian drilling revenue declined 16% and adjusted income declined 33%, primarily due to weaker activity.
- International drilling revenue increased 16% and adjusted income increased 95%, supported by new multiyear contracts, higher utilization and improved margins.
- Rig Services revenue declined 25 and adjusted income fell to a $3.9 million loss, primarily because of weaker demand for top drives, instrumentation, data collection and related services.
- Completion & Production Services revenue declined 15% to $2.084 billion and adjusted income declined 48% to $153.9 million.
- Completion Services revenue declined 27% and adjusted income declined 73%, reflecting pressure-pumping overcapacity, pricing pressure and weather-related activity reductions. Certain Canadian stimulation and U.S. coiled-tubing operations were suspended.
- Production Services revenue increased 1%, partly due to the KVS acquisition, while adjusted income declined 6% because of higher costs associated with expanded rig and truck fleets.
Material Changes and Unusual Items
- Nabors issued $700 million of senior notes in September 2013: $350 million of 2.35% notes due 2016 and $350 million of 5.10% notes due 2023.
- The company repurchased $785.4 million principal amount of 9.25% senior notes for approximately $1.0 billion, recognizing a $208.2 million debt-extinguishment loss.
- 2013 impairments and other charges totaled $287.2 million, including the debt-extinguishment loss, a $45.0 million employment-contract termination charge and a $20.0 million coiled-tubing asset impairment.
- Investment income increased to $96.6 million, including approximately $89.0 million of realized gains from short-term and other long-term investments.
- Nabors acquired Navigate Energy Services for approximately $37.5 million and KVS for total consideration of $149.0 million, including $66.8 million payable through 2016.
- The company sold Peak for gross proceeds of $135.5 million and sold Canadian logistics assets for $9.3 million. Certain oil and gas and other businesses were reclassified to discontinued operations.
- Prior-period financial statements were revised for errors associated with former affiliate Sabine and other immaterial items. Revised net income increased by $0.8 million for 2012 and $4.8 million for 2011; 2013 was not affected.
- Quarterly results were volatile: 2013 net income attributable to Nabors was $99.1 million in the first quarter, a $4.4 million loss in the second quarter, a $105.4 million loss in the third quarter and $150.6 million in the fourth quarter.
Cash Flow, Liquidity and Debt
- Operating cash flow was $1.418 billion, while investing cash outflows were $815.5 million and financing cash outflows were $729.6 million. Cash ended the year at $389.9 million.
- Working capital was $1.442 billion at year-end, compared with $2.000 billion in 2012.
- Nabors reported approximately $1.0 billion of remaining availability under its revolving credit facility and commercial paper program. The filing separately states approximately $1.3 billion of remaining revolving-credit availability; investors should reconcile these related disclosures.
- Commercial paper outstanding was approximately $329.8 million, and revolving-credit borrowings were $170.0 million.
- Gross debt-to-capital was 0.40:1, net debt-to-capital was 0.36:1 and interest coverage was 7.4:1.
- Management expected 2014 capital expenditures of approximately $1.6 billion to $1.8 billion, with purchase commitments of approximately $787.8 million at year-end.
- The board initiated quarterly dividends of $0.04 per share in 2013 and declared another $0.04 per share dividend payable March 31, 2014.
Outlook, Risks and Contingencies
- Management expected oil, natural gas and liquids prices in 2014 to remain broadly within the 2013 range.
- U.S. markets were expected to remain oversupplied with rigs because of continued capacity additions and efficiency improvements.
- International markets were expected to remain relatively tight, with additional multiyear contracting opportunities, particularly for natural-gas projects.
- Primary risks include commodity-price volatility, customer capital-spending reductions, excess rig capacity, dayrate pressure, operational accidents, environmental regulation, hydraulic-fracturing regulation, political instability, foreign-exchange movements and limited insurance coverage.
- Material contingencies include potential additional losses of up to $13.3 million and $26.8 million, respectively, in two Algeria matters, and an ERG lawsuit seeking up to $750 million. Management believes the claims lack merit or are not expected to materially affect consolidated financial position or cash flows, but outcomes remain uncertain.
- Unrecognized tax benefits totaled $47.6 million, excluding approximately $20.6 million of related interest and penalties. Tax audits covering multiple years and jurisdictions remain ongoing.
- Pipeline transportation and processing commitments totaled approximately $171.2 million, with related liabilities of $113.6 million at year-end.
- PwC issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2013.
Investor Verification Checklist
- Reconcile the reported $1.0 billion versus $1.3 billion figures for remaining revolving-credit and commercial-paper availability.
- Assess normalized profitability excluding the $208.2 million debt-extinguishment loss, $45.0 million employment charge, impairments and investment gains.
- Monitor U.S. rig oversupply, utilization, dayrates and the recovery of Completion Services margins.
- Verify the execution, timing and returns of the planned $1.6 billion to $1.8 billion 2014 capital program.
- Review debt maturities, commercial-paper reliance and refinancing requirements beginning in 2016 and 2017.
- Track the Algeria litigation, ERG lawsuit, tax audits, pipeline commitments and self-insurance exposure.
- Use revised 2012 and 2011 figures when comparing historical performance, particularly for affiliate earnings and quarterly results.