Nabors Industries Ltd. — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
Nabors provides land-based and offshore drilling rigs and related services, including directional drilling, measurement-while-drilling, tubular services, equipment manufacturing and drilling technologies. As of June 30, 2020, the company marketed 365 land-based rigs and 33 offshore rigs across approximately 20 countries.
The filing covers the three and six months ended June 30, 2020, compared primarily with the corresponding 2019 periods. Results were materially affected by COVID-19, oil-market oversupply, sharply lower commodity prices and reduced customer drilling activity.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $533.9 million, down 31% | $1.252 billion, down 20% |
| Net loss attributable to Nabors common shareholders | $151.8 million, or $22.13 per diluted share | $547.2 million, or $78.85 per diluted share |
| Net loss margin attributable to common shareholders | Approximately 28.4% | Approximately 43.7% |
| Operating cash flow | Not separately reported for the quarter | $201.8 million, down from $273.1 million |
| Capital expenditures | Not separately reported for the quarter | $106.8 million, down from $274.5 million |
| Interest expense | $51.2 million | $105.9 million |
| Impairments and other charges | $57.9 million | $334.3 million |
Segment adjusted operating income was a loss of $28.7 million in the second quarter and a loss of $37.8 million for the first six months, compared with income of $22.3 million and $49.0 million, respectively, in the comparable 2019 periods. The filing does not provide a consolidated GAAP operating margin.
At June 30, 2020, cash and cash equivalents were $484.3 million and short-term investments were $9.9 million. Working capital was $629.2 million. Total assets were $6.0 billion, total liabilities were $4.0 billion and total equity was $1.5 billion.
Long-term debt, net of deferred financing costs, was $3.276 billion, compared with $3.333 billion at December 31, 2019. The company had $560 million outstanding under its 2018 revolving credit facility and approximately $449 million of remaining borrowing availability. Separately, letter-of-credit facilities had $488.4 million of remaining availability.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined $237.5 million, primarily because average U.S. rigs working fell 48%, from 122.2 to 63.8.
- Six-month revenue declined $318.8 million, with average U.S. rigs working down 34%, from 121.5 to 80.1.
- U.S. Drilling revenue fell 46% in the second quarter and 30% for the six-month period; its adjusted operating result shifted to a loss of $23.4 million in the quarter and $30.8 million year-to-date.
- International Drilling revenue declined 8% in the second quarter and 4% year-to-date, but adjusted operating results improved to $0.3 million of income in the quarter from a $6.9 million loss.
- General and administrative expense declined 28% in the quarter and 22% year-to-date; research and engineering expense declined 39% and 26%, respectively, reflecting workforce and cost reductions.
- Six-month net loss attributable to common shareholders increased by $217.5 million, primarily because impairments and other charges increased from $99.9 million to $334.3 million.
- Operating cash flow declined $71.3 million, while capital expenditures declined $167.7 million.
Debt, Liquidity, Outlook and Risks
In January 2020, Nabors issued $600 million of 7.25% senior notes due 2026 and $400 million of 7.50% senior notes due 2028. The proceeds were used primarily to repurchase approximately $952.9 million of senior notes through tender offers, with additional open-market repurchases. For the six months, the company repurchased approximately $1.3 billion of principal amount of senior notes for approximately $1.2 billion in cash and recognized a $51.7 million net gain.
The 2018 revolving credit facility requires a net funded debt-to-EBITDA ratio no greater than 5.5 times and, while the company is below investment grade, an asset-to-debt coverage ratio of at least 2.50:1. At June 30, 2020, the reported net leverage ratio was 3.69:1 and the asset-to-debt coverage ratio was 3.79:1. Nabors was in compliance with its covenants at quarter-end.
Management stated that continued weak drilling activity could cause a covenant breach in 2021. Failure to obtain an amendment or waiver could result in an event of default and potential acceleration of the revolving facility. The filing states that this uncertainty raises substantial doubt about the company’s ability to continue as a going concern over the twelve-month period following issuance of the financial statements. The statements were nevertheless prepared on a going-concern basis.
Management is pursuing lender amendments, workforce and discretionary-cost reductions, lower capital expenditures and dividends, refinancing, asset divestitures and operational improvements. Management expects U.S. drilling activity to continue falling in the near term and expects foreign restrictions and national oil company actions to negatively affect activity. No specific full-year revenue or earnings guidance is provided.
Additional unusual items included $194.0 million of long-lived asset impairments and write-offs, $83.6 million of intangible-asset impairments, $27.8 million of goodwill impairments, and $11.2 million of severance and restructuring costs in the first six months. The company also wrote off $32.6 million of Venezuelan rig and equipment value in the second quarter.
Other material risks include COVID-19 disruption, oil and gas price volatility, customer budget reductions, political and sanctions risk, international litigation and tax uncertainty, refinancing and credit-rating risk, and potential impairment of assets or deferred tax assets. Accounts receivable sold and not yet collected under the receivables program totaled approximately $120.0 million at June 30, 2020. Financial standby letters of credit and other surety instruments totaled $219.3 million of maximum exposure.
Important Facts for Investors to Verify
- Whether the company secured an amendment or waiver of the 5.5-times leverage covenant and whether subsequent operating results maintained covenant compliance.
- Liquidity after scheduled debt maturities, required debt repayments, interest payments and any potential acceleration of the revolving facility.
- The pace of U.S. and international rig-count reductions, customer contract renewals, day-rate trends and utilization.
- Whether additional impairments, asset write-offs or restructuring charges were recognized after June 30, 2020.
- The sustainability of operating cash flow, receivables sales and reduced capital expenditures under continued weak market conditions.
- The outcome of lender negotiations, planned refinancing, asset divestitures and other liquidity measures.
- The potential effects of the mandatory conversion of the remaining Series A preferred shares, the 1-for-50 reverse stock split and the shareholder rights plan.
- Developments in disclosed litigation, including the Algeria matter and Kazakhstan environmental claims, and any changes to tax-related valuation allowances.