Nabors Industries Ltd. 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, with comparative periods in 2014. Nabors operates land-based and offshore drilling rigs and related drilling technology and services. At June 30, 2015, its fleet included 469 actively marketed land rigs and 42 offshore rigs.
The March 24, 2015 merger of the Completion & Production Services business with C&J Energy Services removed that business from consolidated operations. Nabors received approximately $693.5 million in cash and 62.5 million CJES shares, representing approximately 53% of CJES, and now accounts for the investment under the equity method. On May 24, 2015, Nabors acquired the remaining 49% of Nabors Arabia for $106.0 million and began consolidating it.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues and earnings from unconsolidated affiliates | $862.2 million | $1,616.4 million | $2,283.4 million | $3,203.6 million |
| Net income attributable to Nabors | $(36.8) million | $64.4 million | $86.8 million | $114.4 million |
| Diluted EPS | $(0.13) | $0.21 | $0.30 | $0.37 |
| Adjusted EBITDA | $288.2 million | $416.3 million | $662.6 million | $807.4 million |
| Adjusted EBITDA margin | 33.4% | 25.8% | 29.0% | 25.2% |
| Adjusted income from operating activities | $70.0 million | $133.5 million | $163.4 million | $242.5 million |
| Income from continuing operations before tax | $24.6 million | $77.7 million | $128.2 million | $141.5 million |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $517.4 million | $846.0 million |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $566.7 million | $862.7 million |
Q2 2015 adjusted EBITDA margin improved because costs declined faster than revenue, while profitability declined substantially in absolute terms. The reported continuing-operations tax rate was 271% in Q2 and 36% for the six-month period, driven primarily by geographic mix and changes in forecasted earnings and losses.
Liquidity, debt and financial position
- Cash and cash equivalents were $436.7 million and short-term investments were $33.2 million at June 30, 2015, for total cash and short-term investments of $469.9 million, compared with $536.2 million at December 31, 2014.
- Total debt was $3.758 billion, including $3.691 billion of long-term debt, versus $4.355 billion at year-end 2014. Commercial paper outstanding was $324.7 million.
- The company had no borrowings under its revolving credit facility at June 30, 2015 and reported approximately $1.4 billion of availability under the $1.725 billion facility and commercial paper program.
- Gross debt-to-capital was 0.43:1, net debt-to-capital was 0.40:1, and trailing twelve-month interest coverage was 9.0:1.
- Working capital was approximately $0.7 billion, down from approximately $1.2 billion at December 31, 2014.
- In July 2015, the revolving facility was increased to $2.2 billion, its maturity was extended to July 2020, and the accordion option was increased to $500 million.
- The company paid a $0.06-per-share dividend on June 30, 2015 and declared another $0.06-per-share dividend for payment on September 30, 2015.
Material changes versus the prior comparable period
- Revenue declined 47% in Q2 and 29% for the first six months, largely because of lower North American drilling activity, lower dayrates, and the deconsolidation of Completion & Production Services.
- U.S. drilling revenue declined 40% in Q2 and U.S. rig years declined 44%; Canadian revenue declined 61% and Canadian rig years declined 55%.
- International revenue increased 17% in Q2 and 18% year to date, supported by Saudi Arabia, Australia, Kazakhstan and newly constructed rigs.
- Q2 net income attributable to Nabors changed from $64.4 million of income to a $36.8 million loss. The six-month result remained profitable but declined 24% year over year.
- The six-month results included a $52.6 million net gain related to the C&J merger, consisting of an estimated $102.2 million gross gain less $49.6 million of transaction costs. The ultimate gain remains subject to post-closing adjustments.
- Operating cash flow decreased 39% year over year, while capital expenditures decreased 34%. Merger proceeds of $660.1 million helped produce positive investing cash flow and fund debt reductions.
- Total rig years declined 30% in Q2 and 22% for the first six months. Management cited customer spending reductions, excess high-specification rig supply, pricing pressure and cost-reduction efforts.
Outlook, commentary, risks and unusual items
Management expected full-year 2015 operating results to decline from 2014 because of lower oil and natural gas prices, lower utilization and lower dayrates. Management expected the decline in utilization and rig counts to moderate in the U.S. during the third quarter, but expected further declines in international rig count and pricing during the remainder of 2015.
Management expected capital expenditures of approximately $0.8 billion to $0.9 billion over the following 12 months. Purchase commitments at June 30, 2015 totaled approximately $391.3 million. Management stated that cash, operating cash flow, asset dispositions, and available credit were expected to fund capital expenditures, acquisitions, debt service and other requirements for the next 12 months.
- Key market risks include volatility in oil and gas prices, customer capital-spending reductions, excess drilling capacity, declining utilization and dayrates, competition, and contract renegotiations or terminations.
- A prolonged period of lower commodity prices could result in future goodwill or other asset impairment charges. No goodwill impairment was recorded in the second-quarter 2015 annual review.
- Assets held for sale totaled $136.7 million and consisted of Horn River basin oil and gas holdings. Related pipeline commitments were approximately $43.2 million undiscounted, with $25.0 million of liabilities recorded; lower production or gas prices could create additional charges.
- Financial standby letters of credit and other surety instruments had a maximum amount of $243.3 million. Total letters of credit outstanding, including financial and performance guarantees, were $202.7 million.
- Potential contingencies include a Mexico tax assessment of approximately $30 million to $35 million, Algeria matters with potential exposure of up to $20.5 million above accrued amounts, and the ERG litigation seeking damages of up to $750 million. Management believes material losses are not expected to adversely affect consolidated financial position or cash flows, but individual matters could affect results in a reporting period.
- The previously reported material weakness related to complex tax restructuring accounting was remediated as of the filing date. Management concluded disclosure controls and procedures were effective.
Investor verification points
- Verify the final post-closing consideration and gain recognized for the C&J merger, including any subsequent purchase-price or merger adjustments.
- Assess whether continued low oil and gas prices caused further reductions in rig utilization, dayrates, backlog, or asset values after June 30, 2015.
- Review the maturity profile and refinancing requirements for the $3.758 billion of debt, particularly the $350 million of senior notes due in September 2016.
- Reconcile cash flow conversion, capital expenditures, purchase commitments and the expected $0.8 billion to $0.9 billion of next-twelve-month capital spending.
- Monitor CJES performance and valuation, given Nabors's approximately 53% equity-method investment and the one-quarter reporting lag.
- Track the Mexico tax assessment, Algeria customs and foreign-exchange litigation, ERG litigation, pipeline commitments, and other guarantees.
- Confirm that the remediation of the tax-related material weakness remains effective in subsequent filings.