Nabors Industries Ltd. — Form 10-Q Summary
Business context and reporting period
Nabors is a global provider of land-based and offshore drilling and drilling-related services, operating in more than 25 countries. At June 30, 2018, its fleet included 405 actively marketed land rigs and 35 offshore rigs. Reportable segments are U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $761.9 million, up 21% | $1.496 billion, up 25% |
| Loss from continuing operations attributable to common shareholders | $201.8 million, or $0.61 per diluted share | $346.0 million, or $1.08 per diluted share |
| Net loss attributable to common shareholders | $202.4 million, or $0.61 per diluted share | $346.6 million, or $1.08 per diluted share |
| Adjusted segment operating income | $10.9 million | $10.8 million |
| Adjusted segment operating margin | Approximately 1.4% | Approximately 0.7% |
| Net cash provided by operating activities | Not separately reported for the quarter | $77.4 million |
| Capital expenditures | Not separately reported for the quarter | $209.5 million |
Second-quarter direct costs were $494.0 million, general and administrative expense was $67.8 million, depreciation and amortization was $218.3 million, interest expense was $60.6 million and other expense was $77.6 million. The six-month effective tax rate was negative 16.0%, reflecting tax expense in certain jurisdictions despite a consolidated pretax loss.
At June 30, 2018, cash and cash equivalents were $593.3 million, short-term investments were $43.3 million, working capital was $908.7 million and total assets were $8.30 billion. Debt, net of deferred financing costs, was $3.82 billion, compared with $4.03 billion at December 31, 2017. Gross debt to capital was 0.55:1 and net debt to capital was 0.51:1. The company had no borrowings outstanding under its $2.25 billion revolving credit facility and was in compliance with its covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher U.S. activity and dayrates, increased international activity and approximately $42.0 million of second-quarter revenue and $75.5 million of six-month revenue from the Tesco acquisition.
- U.S. Drilling revenue increased 41% in the quarter and 45% year to date; average rigs working increased 11% and 18%, respectively. U.S. Drilling’s adjusted loss narrowed materially.
- Drilling Solutions revenue increased 88% in the quarter and 107% year to date, while Rig Technologies revenue increased 33% and 39%, respectively, substantially benefiting from Tesco and stronger activity.
- International Drilling revenue was essentially flat in the quarter, but adjusted operating income declined 32% because of expired higher-margin contracts, lower-margin new awards, dayrate reductions, rig sales and recertification downtime.
- Despite improved segment results, the quarterly and year-to-date common-shareholder losses increased because of a $63.7 million loss on the sale of three offshore jackup rigs and higher income tax expense. Other expense also included transaction costs, litigation reserves and foreign-currency losses.
- The company issued $800 million of 5.75% senior notes due 2025, repaid its $460.8 million of 6.15% notes due February 2018, terminated its commercial paper program and reduced revolving-facility borrowings.
- Nabors issued 40.25 million common shares for approximately $302.0 million of net proceeds and 5.75 million mandatory convertible preferred shares for approximately $278.6 million of net proceeds. The preferred shares carry a 6% dividend and are expected to convert into common shares in 2021 unless converted earlier.
- Operating cash flow improved from $9.5 million used in the first half of 2017 to $77.4 million provided in the first half of 2018, while capital expenditures declined from $315.8 million to $209.5 million.
Guidance, outlook, commentary and risks
No formal earnings or revenue guidance was provided. Management expects approximately $0.5 billion of capital expenditures over the next 12 months and believes cash, investments, projected operating cash flow, financing proceeds and revolver availability will fund expected obligations for the next 12 months. Purchase commitments at June 30, 2018 totaled approximately $226.6 million.
Management cited improving U.S. and international drilling activity, higher dayrates and demand for drilling products and services. However, results remain sensitive to oil and natural-gas prices, customer spending, contract renewals, utilization, dayrates, competition, technology commercialization, large-customer concentration, geopolitical conditions and access to capital.
- The revolving-credit facility is subject to a maximum net debt-to-capital covenant of 0.60:1. A covenant breach could terminate commitments and accelerate outstanding borrowings.
- Credit-rating downgrades could restrict market access, increase borrowing costs and require additional letters of credit.
- Prolonged low oil prices or weaker utilization and dayrates could lead to additional impairment charges. No goodwill impairment was recorded in the second-quarter 2018 annual review.
- The company estimates $212.1 million of maximum financial standby letters of credit and other surety instruments, primarily due in 2018 and 2019.
- Potential exposures include tax disputes, litigation, self-insured losses and an Algerian matter that could result in up to $16.1 million above accrued amounts. Management does not expect pending matters to materially affect consolidated financial position or cash flows, but individual periods could be affected.
- The company reported approximately $486.0 million of U.S. federal NOL carryforwards. Future equity transactions or other ownership changes could limit their utilization under Section 382.
- Assets held for sale included approximately $24.8 million of oil and gas properties, with approximately $7.0 million of undiscounted pipeline commitments related to those properties.
Most important facts for investors to verify
- Whether improving U.S. rig activity and dayrates can offset continuing losses, high depreciation and interest costs.
- The sustainability and cash-flow impact of the $3.82 billion debt balance, upcoming maturities and the 0.60:1 revolver covenant.
- The effect of the 2018 common and mandatory convertible preferred issuances on dilution, dividends and future capital structure.
- Whether Tesco-related revenue and cost synergies translate into sustained segment profitability.
- The likelihood and timing of additional rig impairments, asset-sale losses or contract-related charges.
- Progress on tax matters, NOL utilization, litigation, guarantees and the remaining accounting assessment under U.S. tax reform.
- The company’s actual capital expenditures, operating cash flow and liquidity relative to the stated $0.5 billion next-12-month capital-expenditure expectation.