Nabors Industries Ltd. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Nabors operates land-based and offshore drilling rigs and provides drilling technology, wellbore placement, equipment manufacturing, software and related services. Its reportable segments are U.S., Canada, International and Rig Services. As of September 30, 2017, the fleet included 405 actively marketed land rigs and 40 actively marketed offshore rigs. This unaudited filing covers the three and nine months ended September 30, 2017, compared primarily with the same periods in 2016.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $662.1 million, up 27% | $1.856 billion, up 10% |
| Loss from continuing operations attributable to Nabors | $121.4 million, or $0.42 diluted loss per share | $387.4 million, or $1.35 diluted loss per share |
| Net loss attributable to Nabors | $148.5 million, or $0.52 diluted loss per share | $430.5 million, or $1.51 diluted loss per share |
| Net loss margin | Approximately 22.1% | Approximately 23.2% |
| Adjusted operating loss by segment | $33.4 million | $123.9 million |
| Operating cash flow | Not separately provided for the quarter | $(36.1) million |
| Capital expenditures | Not separately provided for the quarter | $448.9 million |
Direct costs were $441.3 million in the third quarter and $1.246 billion for the nine-month period. Interest expense was $54.6 million and $165.8 million, respectively. The effective tax rate was 11.0% for the quarter and 13.5% for the nine months.
At September 30, 2017, cash and cash equivalents were $190.6 million, short-term investments were $29.8 million and working capital was $344.2 million. These liquidity amounts include $40.0 million contributed to the SANAD Saudi Arabian joint venture for its exclusive use.
Total debt was $3.959 billion, net of deferred financing costs, compared with $3.578 billion at December 31, 2016. Gross debt-to-capital was 0.58:1 and net debt-to-capital was 0.56:1, versus 0.52:1 and 0.50:1, respectively, at year-end 2016. The company reported $410.0 million outstanding under its $2.25 billion revolving credit facility and $78.0 million of commercial paper. It was in compliance with applicable revolving-credit covenants.
Material changes versus the prior comparable period
- Revenue increased primarily because U.S. average rigs working rose 87% in the quarter and 69% for the nine months; Canada activity also increased. U.S. third-quarter revenue rose 92% to $222.7 million.
- International average rigs working declined 6% in the quarter and 11% for the nine months, reducing segment profitability. International adjusted operating income fell 26% in the quarter and 44% for the nine months.
- Rig Services revenue increased 48% in the quarter and 66% for the nine months, supported by Canrig equipment deliveries and higher demand for Nabors Drilling Solutions products and services.
- Despite higher activity, lower dayrates continued to constrain margins in the U.S. and Canada. Total segment adjusted operating loss improved modestly in the quarter but worsened to $123.9 million for the nine months.
- Nine-month continuing-operations losses improved from $680.1 million to $387.4 million largely because the 2016 period included $442.0 million of losses and impairment-related charges associated with the former C&J Energy Services investment.
- Operating cash flow declined from $404.8 million provided in the first nine months of 2016 to $36.1 million used in 2017. Working capital used $231.9 million, principally because increased activity required additional receivables and other working capital.
- Capital expenditures increased from $285.0 million to $448.9 million, and the company paid approximately $50.8 million for acquisitions.
Guidance, outlook, risks and unusual items
- Management stated that U.S. rig activity had begun to stabilize and expected average dayrates and margins to improve, but did not provide quantitative earnings or revenue guidance.
- Capital expenditures over the next 12 months were expected to be less than $0.6 billion. Purchase commitments at September 30, 2017 totaled approximately $246.1 million.
- The company expected existing cash, projected operating cash flow and revolving-credit availability to fund expected requirements for the next 12 months, while noting that credit-rating downgrades could increase borrowing costs and reduce capital-market access.
- Nabors agreed to acquire Tesco Corporation in an all-stock transaction expected to require approximately 32 million Nabors shares. Closing remained subject to shareholder, regulatory, court and other approvals and was anticipated in the fourth quarter of 2017. Shareholder dilution, integration costs, litigation and failure to complete the transaction were identified risks.
- Nabors acquired Robotic Drilling Systems AS on September 5, 2017 for an initial cash payment of approximately $50.9 million. The acquisition added approximately $53.3 million of initially recorded intangible assets and approximately $5.7 million of goodwill; its pro forma effect was immaterial.
- Discontinued operations generated losses of $27.1 million in the quarter and $43.1 million for the nine months. These amounts included $35.3 million of dry-gas asset impairment charges and a $16.5 million charge for settlement of Ramshorn-related litigation during the nine months.
- The company repurchased or redeemed approximately $367.9 million principal amount of 6.15% senior notes due February 2018 and issued $575.0 million of 0.75% exchangeable senior notes due 2024. The exchangeable notes included an equity component and were accompanied by $40.3 million of capped-call transactions.
- Financial standby letters of credit and other surety instruments had maximum amounts totaling $263.4 million. The company stated that material losses under guarantees were considered remote.
- Key operating risks include oil and gas price volatility, customer spending, lower utilization and dayrates, international political and operating conditions, asset impairments, credit access, litigation, self-insurance exposures and regulatory or tax changes.
- The company expected to adopt the new revenue-recognition standard using the modified retrospective method in the first quarter of 2018 and was evaluating the effect of the new lease standard, which may require separate recognition of lease and service components of drilling contracts.
Investor verification checklist
- Verify the company’s ability to improve utilization, dayrates and margins, particularly in the U.S. and International segments.
- Reconcile the projected capital-spending program and purchase commitments with operating cash flow, cash balances and revolving-credit availability.
- Review debt maturities, refinancing capacity, covenant headroom and the effect of further credit-rating changes.
- Confirm completion status, final terms, share issuance, dilution and integration costs for the Tesco transaction.
- Assess the recoverability of drilling rigs, goodwill, discontinued oil and gas assets and deferred tax assets under current commodity and utilization assumptions.
- Monitor the effect of the 2018 revenue and lease accounting adoptions on reported revenue, assets, liabilities, controls and disclosures.
- Review the dry-gas impairment exposure, pipeline commitments, Ramshorn settlement and other litigation or self-insurance contingencies.