NBR

Nabors Industries Ltd. Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Nabors Industries Ltd. is the world's largest land drilling contractor and a major provider of land well-servicing, workover, and offshore platform services. The company operates globally with significant segments in the U.S. Lower 48, Alaska, Canada, and International markets. The company also maintains an Oil and Gas exploration and production segment and an "Other Operating Segments" division for technology and logistics.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 25% year-over-year to $902.0 million, driven by lower drilling activity and dayrates across most segments due to sustained commodity price deterioration.
• Profitability Drop: Net income attributable to Nabors fell 68% to $40.2 million. This decline is partially attributable to the absence of a $75.0 million full-cost ceiling test writedown recorded in the Oil and Gas segment during Q1 2009.
• Segment Performance:
  • U.S. Lower 48 Land Drilling: Revenues down 30% and adjusted income down 53% due to lower natural gas prices and reduced early contract termination revenue.
  • International: Revenues down 28% and adjusted income down 48% due to lower utilization in Mexico, Saudi Arabia, and other regions.
  • Canada: The only Contract Drilling segment to show growth, with revenues up 2% and adjusted income up 9%, aided by higher dayrates and a stronger Canadian dollar.
• Unusual Items: Q1 2010 included a net loss of $20.3 million in "other expense," primarily driven by $9.3 million in foreign currency exchange losses (including $8.2 million related to Venezuela's currency devaluation) and $3.7 million in litigation expenses.

Guidance, Outlook, and Risks

• Outlook: Management expects 2010 operating results to approximate 2009 levels. They anticipate continued lower commodity prices will negatively impact U.S. Lower 48 and Land Well-servicing operations. International operations are expected to decrease, though new long-term contracts may provide some offset.
• Liquidity: The company holds $1.06 billion in cash and investments. It has $3.86 billion in total debt, including $1.5 billion in 0.94% senior exchangeable notes maturing in May 2011. Management believes operating cash flow and capital market access are sufficient to meet the 2011 maturity obligation.
• Capital Expenditures: Expected to total $0.7 billion to $0.8 billion for the next 12 months, primarily for rig enhancements and sustaining capital.
• Risks and Contingencies:
  • Legal: A $19.7 million judgment in Algeria regarding customs infractions is being appealed; the company does not believe a loss is probable but estimates a potential range of $140,000 to $19.7 million.
  • Regulatory: An ongoing DOJ inquiry regarding compliance with the Foreign Corrupt Practices Act involving a vendor (Panalpina) in Kazakhstan, Saudi Arabia, Algeria, and Nigeria.
  • Executive Compensation: Significant potential severance obligations exist for the Chairman/CEO ($100 million) and President/COO ($45-$50 million) in the event of death, disability, or termination without cause.

Investor Verification Checklist

• Verify the status of the $1.5 billion exchangeable notes maturing in May 2011 and the company's refinancing or repayment strategy.
• Monitor the outcome of the Algerian customs judgment appeal and the DOJ investigation into vendor transactions.
• Track commodity price trends (natural gas and oil) as primary drivers for U.S. and Canadian segment performance.
• Review the impact of the Venezuelan currency devaluation on future receivables and operations in that region.
• Assess the sustainability of capital expenditure levels ($700M-$800M) relative to current cash flow generation.