Nabors Industries Ltd. 10-Q Summary
Business Context and Reporting Period
Nabors provides global land-based and offshore drilling, drilling-related services, technologies, equipment manufacturing and energy-transition solutions. It operated in more than 15 countries with 299 actively marketed land rigs and 29 actively marketed offshore rigs as of June 30, 2023. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared primarily with the same periods in 2022.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Operating revenue | $767.1 million | $630.9 million | $1.546 billion | $1.199 billion |
| Net income (loss) attributable to Nabors | $4.6 million | $(82.9) million | $53.8 million | $(267.4) million |
| Income (loss) before taxes | $42.7 million | $(60.6) million | $126.8 million | $(221.6) million |
| Operating revenue growth | 22% | — | 29% | — |
| Basic EPS | $(0.31) | $(9.41) | $4.05 | $(31.34) |
| Diluted EPS | $(0.31) | $(9.41) | $3.79 | $(31.34) |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $322.5 million | $162.2 million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $263.5 million | $160.9 million |
Q2 net margin attributable to Nabors was approximately 0.6%, compared with negative 13.1% in the prior-year quarter. Six-month net margin was approximately 3.5%, compared with negative 22.3% in the prior-year period. EPS differs from reported net income attributable to Nabors because of allocations to redeemable noncontrolling interests and participating securities.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $413.4 million and short-term investments were $15.7 million at June 30, 2023. Cash and short-term investments totaled $429.1 million, compared with $452.3 million at December 31, 2022.
- Working capital was $433.9 million, up from $404.2 million at year-end 2022.
- Long-term debt was $2.503 billion at June 30, 2023, compared with $2.538 billion at December 31, 2022. Aggregate principal debt was $2.531 billion before deferred financing costs.
- Nabors issued $250.0 million of 1.75% senior exchangeable notes due 2029 and repurchased approximately $227.1 million principal amount of outstanding notes during the first six months.
- The remaining $52.1 million of 5.10% senior notes due September 2023 was fully redeemed in June 2023. Approximately $159.3 million of 0.75% exchangeable notes due January 2024 remained outstanding and was classified as long-term because management had the ability and intent to refinance it.
- No borrowings were outstanding under the $350.0 million secured revolving credit facility; $66.4 million of letters of credit were outstanding.
- Total letter-of-credit facilities had $582.5 million of remaining availability after $79.3 million of outstanding letters of credit and other guarantees.
- The accounts receivable facility had approximately $203.0 million of receivables sold and uncollected at June 30, 2023, against purchaser commitments of up to $250.0 million, potentially expandable to $300.0 million with approval.
Cash Flow and Operating Performance
- Operating cash flow increased to $322.5 million from $162.2 million, primarily reflecting improved operating results.
- Investing cash outflow increased to $283.0 million from $163.2 million, driven largely by higher capital expenditures.
- Financing cash outflow was $247.4 million. Major uses included $292.9 million of debt reduction and a $186.9 million distribution from the NETC trust account to redeeming shareholders; these were partly offset by the $250.0 million exchangeable-note issuance.
- Cash, cash equivalents and restricted cash declined to $520.7 million from $737.1 million at the beginning of the year. Restricted cash held in trust declined to $105.4 million from $284.8 million following NETC redemptions.
- Six-month segment adjusted operating income increased to $237.9 million from $33.1 million. U.S. Drilling contributed $161.3 million, International Drilling $12.4 million, Drilling Solutions $55.5 million and Rig Technologies $8.7 million.
Material Changes Versus Prior Comparable Period
- Operating revenue increased 22% in Q2 and 29% for the six months, with growth across every reportable segment.
- U.S. Drilling revenue rose 24% in Q2 and 41% year to date, mainly from higher day rates, despite average U.S. rigs working declining 8% in Q2.
- International Drilling revenue rose 14% in both Q2 and the six-month period, supported by higher day rates and increased average rigs working.
- Drilling Solutions revenue increased 38% and Rig Technologies revenue increased 41% in Q2; six-month increases were 38% and 49%, respectively.
- General and administrative expense increased 9% in Q2 and 12% year to date, while research and engineering expense increased 21% and 25%, respectively.
- Interest expense increased 8% in Q2 and 2% year to date because of higher effective interest rates.
- Other, net shifted from a $14.5 million loss in Q2 2022 to a $1.8 million gain in Q2 2023, and from a $94.9 million loss to a $44.2 million gain for the six-month period. The change was significantly affected by warrant fair-value gains and debt-buyback gains.
Outlook, Commentary, Risks and Unusual Items
Management expects current cash, investments, operating cash flow, financing sources, the accounts receivable facility and revolving credit facility to fund expected requirements for at least the next 12 months. Management also expects continued compliance with credit-facility covenants, but cautions that this depends on operational projections and underlying assumptions.
- Demand remains dependent on oil and natural gas prices, customer exploration and production spending, commodity volatility and broader economic conditions. U.S. natural gas prices have declined materially since the third quarter of 2022, causing some operators to reduce activity.
- Purchase commitments totaled approximately $352.6 million at June 30, 2023, primarily for capital expenditures, operating expenses and inventory.
- NETC entered into an agreement to combine with Vast Solar Pty Ltd. Closing requires, among other conditions, at least $50 million of cash after expenses and redemptions. Third-party PIPE financing may be necessary, with no assurance it will be available.
- In July 2023, NETC II completed a $305.0 million initial public offering and a $9.5 million private warrant sale. The transaction is intended to pursue an energy-transition business combination.
- Russia represented 1.2% of six-month operating revenue and 1.0% of property, plant and equipment, net, as of June 30, 2023. Nabors reported no assets or operations in Ukraine.
- Material risks include commodity-price and drilling-activity volatility, customer concentration and contract renewals, high leverage and refinancing needs, interest rates, covenant compliance, access to capital, geopolitical events, foreign currency exposure, tax disputes, litigation, energy-transition execution and potential dilution from exchangeable notes and warrants.
- An Algerian legal proceeding remains unresolved. The company disclosed potential additional exposure of up to $12.9 million above amounts accrued.
- Warrant fair value declined to $28.4 million from $80.9 million at year-end, producing a $52.2 million gain for the first six months. This is a material noncash and potentially volatile earnings item.
Important Facts for Investors to Verify
- Refinancing or repayment plans for the $159.3 million of 0.75% exchangeable notes due January 2024 and other near-term maturities.
- Whether Nabors continues to satisfy the revolving-credit interest-coverage, collateral and guarantor-value covenants.
- Actual capital spending, utilization, day rates and free cash flow as drilling activity evolves, particularly in the United States.
- The closing prospects, minimum-cash funding and potential PIPE financing for the NETC-Vast transaction.
- The sustainability of earnings excluding warrant mark-to-market gains, debt-buyback gains and other unusual items.
- Potential dilution from the 2029 exchangeable notes, outstanding warrants and other potentially dilutive securities.
- Exposure to oil and gas price declines, lower U.S. natural gas activity, geopolitical developments, foreign currency losses and litigation outcomes.