Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Nabors is a global land drilling contractor and provider of well-servicing, workover, completion, pressure-pumping, offshore drilling, drilling technology and related oilfield services. The filing covers the three and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues | $1.737 billion | $1.344 billion | $3.628 billion | $2.717 billion |
| Revenue and affiliate earnings | $1.603 billion | $1.352 billion | $3.450 billion | $2.754 billion |
| Adjusted income from operating activities | $230.4 million | $177.5 million | $551.6 million | $385.1 million |
| Income from continuing operations | $(98.7) million | $70.9 million | $44.0 million | $165.4 million |
| Net income attributable to Nabors | $(72.8) million | $192.4 million | $61.3 million | $275.3 million |
| Diluted EPS | $(0.25) | $0.65 | $0.21 | $0.94 |
| Cash flow from operations | Not separately provided | Not separately provided | $711.9 million | $869.9 million |
- Adjusted operating margin was approximately 14.4% in Q2 2012 versus approximately 13.2% in Q2 2011; for the first six months, it was approximately 15.9% versus 14.1%.
- Operating cash flow declined despite higher adjusted operating income, principally because working capital used $159.6 million in the first half of 2012 versus providing $189.7 million in the prior-year period.
- Capital expenditures were $967.9 million in the first half of 2012 versus $1.003 billion in the prior-year period, producing negative investing cash flow of $826.2 million.
- Cash and cash equivalents were $320.4 million at June 30, 2012, compared with $398.6 million at December 31, 2011. Cash plus short-term investments totaled $455.2 million, down from $539.5 million.
- Working capital was approximately $1.5 billion at June 30, 2012, compared with $1.3 billion at year-end 2011.
- Total debt was approximately $4.674 billion, including $275.3 million current debt and $4.398 billion long-term debt. Revolving credit borrowings were $910 million, with $490 million of remaining availability under $1.4 billion of facilities.
- The gross funded debt-to-capital ratio was 0.42:1 and the net funded debt-to-capital ratio was 0.40:1. Management reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue and affiliate earnings increased 18% in Q2 and 25% for the first six months, while adjusted operating income increased 30% and 43%, respectively.
- Drilling and Rig Services revenue increased 24% in Q2 and 30% year to date; Completion and Production Services increased 40% and 44%, respectively.
- U.S. Lower 48 land drilling benefited from higher dayrates and oil-rich shale activity. U.S. Offshore improved with higher utilization and construction-project profits. Other Rig Services benefited from stronger Canrig demand and related equipment and software activity.
- International revenue increased, but adjusted operating income declined 54% in Q2 and 47% year to date because of lower dayrates, lower Saudi Arabian jackup utilization, reduced Congo offshore activity and lower Iraq margins.
- The Oil and Gas segment recorded losses from unconsolidated affiliates of $140.4 million in Q2 and $203.0 million year to date, compared with earnings of $6.2 million and $21.4 million in the prior-year periods. The decline primarily reflected the company’s share of full-cost ceiling-test writedowns of $145.5 million in Q2 and $213.7 million year to date.
- Q2 2012 included $147.5 million of impairments and other charges: $75.0 million for the Superior trade name, $46.2 million for retirement of long-lived assets and $26.3 million of goodwill impairment. No comparable charges were recorded in 2011.
- Discontinued operations contributed $24.7 million in Q2 and $15.9 million year to date, down substantially from $121.2 million and $108.8 million in the prior-year periods. The company sold its remaining Colombia oil and gas business for $72.6 million and certain U.S. oil and gas properties for $5.7 million.
- The company released a previously accrued $100 million contingent termination liability after its former chief executive elected not to trigger the payment; the net-of-tax effect was recorded in equity.
Outlook, commentary, risks and unusual items
- Management expected a protracted weak spot market in pressure pumping and flat to slightly lower industry rig activity during 2012, primarily because of lower natural gas prices and oversupply of pumping equipment in gas-driven markets.
- Management expected healthier results in other segments, supported by term contracts and new rig deployments, increased international activity and gradual improvement in U.S. Offshore operations as permitting improved.
- Henry Hub natural gas averaged $3.06 per mcf during the 12 months ended June 30, 2012, down from $4.16; West Texas Intermediate averaged $94.91 per barrel, up from $89.41.
- Management expected approximately $1.2 billion of capital expenditures over the following 12 months and had approximately $0.8 billion of outstanding purchase commitments at June 30, 2012.
- The $275.0 million of 5.375% senior notes were due in August 2012. The company intended to use cash on hand and revolving credit capacity to meet the obligation.
- Pipeline transmission commitments related to discontinued Canadian operations could require approximately $265.4 million beyond December 31, 2013 if the related properties were not sold or developed. Lower production, natural gas prices or delayed asset sales could produce additional charges.
- Potential future impairments remain a risk if oil and gas prices, utilization, dayrates or projected cash flows deteriorate. The company also faces commodity-price, customer-spending, operational, political, foreign-exchange, interest-rate, tax and regulatory risks.
- Material contingencies include tax assessments in Mexico, Algeria-related litigation, an SEC inquiry concerning executive perquisites, shareholder litigation and ERG litigation related to the sale of Ramshorn. Outcomes were not determinable for several matters.
- On July 16, 2012, the board adopted a shareholder rights plan with a 10% ownership trigger and a July 16, 2013 expiration date, subject to earlier redemption or extension.
Important facts for investors to verify
- Whether the full-cost ceiling-test writedowns and other Q2 impairments are nonrecurring or indicate continuing pressure on the Oil and Gas, offshore and international asset bases.
- The August 2012 repayment or refinancing of the $275.0 million senior notes and the company’s post-repayment cash and revolver availability.
- Actual capital expenditures, purchase commitments and free cash flow relative to management’s $1.2 billion forward capital-expenditure expectation.
- Pressure-pumping utilization, pricing and margins in the context of continued natural gas weakness and equipment oversupply.
- Progress on international contracts, U.S. Offshore permitting and the expected contribution from new rig deployments.
- Potential additional pipeline-capacity charges, tax exposures, litigation outcomes and any future impairment charges.
- The extent to which discontinued-operations gains and asset-sale proceeds affected reported earnings and liquidity.