NBR

Nabors Industries Ltd. 10-Q Summary: Period Ended June 30, 2008

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Nabors Industries Ltd., the world's largest land drilling contractor, for the three and six months ended June 30, 2008. The company operates drilling, workover, and well-servicing rigs globally, with significant operations in the U.S., Canada, and International markets. The company also engages in oil and gas exploration and production through joint ventures and provides drilling technology and logistics services.

Key Financial Metrics (Six Months Ended June 30, 2008)

Note: Debt figures include current portion of long-term debt and long-term debt. Cash and Investments include cash equivalents, short-term investments, and long-term investments.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 8.9% year-over-year, driven primarily by a 33% increase in International segment revenues due to higher oil prices and increased rig activity.
• Profitability Decline: Despite revenue growth, Net Income decreased 13.4% and Adjusted Income from Operating Activities decreased 11%. This was caused by higher depreciation expenses from capital expansion, increased operating costs, and lower activity levels in North American natural gas-driven operations (U.S. Lower 48 and Canada).
• Segment Performance:
  • International: Strong growth in revenues (+33%) and adjusted income (+27%).
  • U.S. Lower 48 Land Drilling: Revenues increased slightly (+3%), but adjusted income dropped 20% due to higher costs and depreciation.
  • Canada: Revenues decreased 8% and adjusted income dropped 39% due to depressed market conditions and a stronger Canadian dollar.
  • Oil & Gas: Adjusted income turned negative (-$6.5 million) due to losses in joint ventures from accelerated depletion and mark-to-market losses on derivatives.
• Debt Restructuring: The company redeemed $700 million of zero-coupon senior exchangeable notes due 2023 and $82.8 million of convertible debentures due 2021. Concurrently, it issued $575 million of 6.15% senior notes due 2018.

Guidance, Outlook, and Risks

• Outlook: Management expects 2008 operating results to approximate 2007 levels. International operations are expected to show substantial increases due to new rig deployments and contract renewals at higher rates. Conversely, North American natural gas-driven operations are expected to decrease as older rigs rollover at lower margins.
• Capital Expenditures: Total capital expenditures for the next 12 months are expected to be approximately $1.8 billion to $2.0 billion, with outstanding purchase commitments of roughly $410.8 million as of June 30, 2008.
• Accounting Changes (FSP APB 14-1): The company anticipates adopting a new accounting standard in 2009 regarding convertible debt. This is expected to reduce reported net income by approximately $60-70 million and pre-tax income by $100-110 million for 2009 due to additional non-cash interest expense on its $2.75 billion senior exchangeable notes.
• Liquidity Risk: The company holds $2.75 billion in senior exchangeable notes due 2011. If the stock price exceeds $59.57, these notes can be exchanged, requiring a cash payment of the principal amount. Management believes it can access capital markets to meet this obligation if triggered.
• Legal Proceedings: A shareholder derivative suit regarding stock option pricing was settled for up to $2.85 million in legal fees. An ongoing DOJ inquiry regarding a vendor and the Foreign Corrupt Practices Act remains unresolved.

Investor Verification Checklist

• Convertible Debt Impact: Verify the projected impact of the FSP APB 14-1 adoption on future earnings and EPS, specifically the estimated $60-70 million reduction in net income for 2009.
• North American Activity: Monitor rig utilization and day rates in the U.S. Lower 48 and Canada, as these segments are underperforming despite high commodity prices.
• Joint Venture Performance: Review the performance of the Oil & Gas joint ventures (NFR, Stone Mountain, Remora), which contributed to a loss in the segment due to depletion charges and derivative losses.
• Capital Allocation: Assess the sustainability of the $1.8-2.0 billion capital expenditure plan against projected cash flows and the potential need for additional financing.
• Exchangeable Notes: Track the company's stock price relative to the $59.57 exchange threshold for the $2.75 billion notes due 2011 to evaluate potential liquidity strain.