Nabors Industries Ltd. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015; filed May 4, 2015. Nabors operates land-based and offshore drilling rigs and provides drilling, completion, production, technology and related well services. On March 24, 2015, it merged its Completion & Production Services business with C&J Energy Services, retaining approximately 53% of the combined company.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenues | $1.415 billion | $1.590 billion | Down 11% |
| Revenue and affiliate earnings | $1.421 billion | $1.587 billion | Down 10% |
| Adjusted EBITDA | $374.5 million | $391.2 million | Down 4% |
| Adjusted income from operating activities | $93.4 million | $109.0 million | Down 14% |
| Income from continuing operations | $124.4 million | $49.0 million | Up 154% |
| Net income attributable to Nabors | $123.6 million | $49.9 million | Up 148% |
| Diluted EPS | $0.42 | $0.16 | Up $0.26 |
| Net cash from operating activities | $307.2 million | $444.6 million | Down 31% |
Adjusted EBITDA margin was approximately 26.3% of reported segment revenue and affiliate earnings, compared with approximately 24.6% in the prior-year quarter. Adjusted operating margin was approximately 6.6%, compared with 6.9%. Net income benefited materially from the merger-related gain and a deferred tax benefit; reported earnings therefore do not fully reflect underlying operating performance.
- Merger accounting: Nabors received $693.5 million in cash and approximately 62.5 million CJES shares. It recorded an estimated gross gain of $102.2 million, partially offset by $49.6 million of transaction costs, resulting in a net gain of approximately $52.6 million in other income.
- Tax: The effective tax rate from continuing operations was negative 20%, compared with 22% in Q1 2014, primarily because losses arose in higher-tax jurisdictions while income arose in low- or zero-tax jurisdictions. Deferred tax benefit was $68.1 million.
- Cash and liquidity: Cash and short-term investments totaled $621.2 million at March 31, 2015, compared with $536.2 million at December 31, 2014. Working capital was approximately $1.0 billion.
- Debt: Total debt was $3.825 billion, down from $4.355 billion at year-end. Nabors had $200.0 million outstanding under its revolving facility, $250.5 million of commercial paper, and $1.725 billion of total revolving capacity, with approximately $1.3 billion of availability under the revolving facility and commercial paper program. Gross debt-to-capital was 0.44:1 and net debt-to-capital was 0.39:1.
- Capital expenditures: $364.2 million in Q1 2015, compared with $396.5 million in Q1 2014. Management expects approximately $0.7 billion to $0.9 billion of capital expenditures over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Commodity-price weakness reduced customer spending, utilization and pricing. Twelve-month average WTI was $80.79 per barrel, down 18%, and average Henry Hub natural gas was $3.59 per thousand cubic feet, down 30%.
- Drilling & Rig Services revenue declined 3%. U.S. revenue declined 11% and Canada declined 48%, while International revenue increased 19%. International adjusted operating income increased 118%, supported by new rig deployments and stronger activity in Saudi Arabia, Australia and Kazakhstan.
- Completion & Production Services revenue declined 27%. Adjusted operating loss widened to $58.5 million from $3.0 million, reflecting lower utilization, pricing pressure and reduced customer activity. The business was transferred to the CJES joint venture at the merger closing.
- Total rig years declined 15% to 323.3, including a 19% decline in the U.S. and a 42% decline in Canada. Production-services rig hours declined 39%.
- Operating cash flow declined despite higher reported net income, primarily because the prior-year period benefited from more favorable working-capital movements.
- Property, plant and equipment declined to $7.334 billion from $8.599 billion, while investment in unconsolidated affiliates increased to $730.5 million from $58.3 million, principally reflecting the CJES investment.
- Other comprehensive loss was $62.8 million, primarily from foreign-currency translation losses. Comprehensive income was $59.9 million versus a comprehensive loss of $5.7 million in Q1 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2015 operating results to decline from 2014 levels because of lower commodity prices, reduced drilling activity, lower dayrates and falling rig counts. U.S. utilization and rig counts were expected to continue declining into Q2 2015; management also expected International activity and pricing to weaken later in the year.
- Management stated that cost reductions and reduced capital spending are being pursued, and that current cash, operating cash flow, potential asset dispositions and available credit are expected to fund the next 12 months of capital needs, purchase commitments and debt service.
- Pipeline commitments related to assets held for sale totaled approximately $65.3 million undiscounted; liabilities associated with excess capacity were $25.9 million. Lower production or natural-gas prices could create additional charges.
- Potential tax exposure in Mexico related to drilling-rig depreciation assessments was estimated at $30 million to $35 million, with a partial reserve recorded.
- Potential additional losses were disclosed for Algerian matters: up to $10.3 million in excess of amounts accrued for one customs case and up to $21.0 million in excess of amounts accrued for a foreign-currency case. A separate ERG lawsuit seeks damages of up to $750 million, although management believes the claims lack merit and the outcome cannot currently be determined.
- Financial standby letters of credit and other surety instruments had a maximum amount of $202.4 million. Management considered the likelihood of material losses on guarantees remote.
- Disclosure controls and internal control over financial reporting were reported as ineffective because a previously identified material weakness relating to accounting for and disclosure of a complex legal-entity restructuring had not yet been remediated. Management reported ongoing remediation efforts.
- Nabors declared a subsequent quarterly dividend of $0.06 per share on April 24, 2015, payable June 30, 2015.
Investor Verification Points
- Separate recurring operating performance from the $52.6 million net merger-related gain and the $68.1 million deferred tax benefit.
- Monitor CJES share-price performance and the carrying value of Nabors’s approximately $676.2 million CJES investment, which is exposed to impairment risk.
- Verify the pace of U.S. and Canadian rig-count, utilization and dayrate declines and whether International growth offsets North American weakness.
- Assess liquidity against the $450.2 million of purchase commitments, expected $0.7 billion–$0.9 billion of capital expenditures and $3.825 billion of debt.
- Track remediation of the material weakness in internal control over financial reporting.
- Review developments in the Mexican tax assessment, Algerian litigation, ERG litigation and pipeline commitments.