Business Context and Reporting Period
Company: Nabors Industries Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Nabors is the world's largest land drilling contractor, operating approximately 615 land drilling rigs, 610 land workover rigs, and a significant offshore fleet (platform, jack-up, and barge rigs). Operations span the U.S., Canada, Alaska, and international markets including the Middle East, South/Central America, and Africa. The company also provides ancillary services, manufactures drilling technology (top drives), and holds selective oil and gas investments.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 | 2005 |
|---|---|---|
| Operating Revenues | $4,820,162 | $3,459,908 |
| Total Revenues & Other Income | $4,942,714 | $3,551,009 |
| Net Income | $1,020,736 | $648,695 |
| Diluted Earnings Per Share | $3.40 | $2.00 |
| Operating Cash Flow | $1,486,258 | $1,029,500 |
| Capital Expenditures | $1,997,971 | $1,003,269 |
| Long-Term Debt | $4,004,074 | $1,251,751 |
| Cash & Investments | $1,653,285 | $1,646,327 |
| Working Capital | $1,650,496 | $1,264,852 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 40% to $4.82 billion, driven by higher average dayrates and increased activity levels across all major segments (U.S. Lower 48, International, Canada) due to sustained high oil and gas prices.
- Profitability: Net income rose 57% to $1.02 billion. Adjusted income from operating activities increased 64% to $1.44 billion.
- Debt Structure: Long-term debt increased significantly by approximately $2.0 billion. This was primarily due to the issuance of $2.75 billion in 0.94% senior exchangeable notes in May 2006, partially offset by the redemption of $769.8 million of zero-coupon convertible debentures.
- Capital Expenditures: Capital spending nearly doubled to $2.0 billion, reflecting a major new rig build program (134 new drilling rigs ordered) and acquisitions.
- Acquisitions: Completed acquisitions of 1183011 Alberta Ltd. (logistics) and Pragma Drilling Equipment Ltd. (manufacturing) totaling approximately $69 million in purchase price.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2007 Expectations: Management expects operating results for 2007 to increase from 2006 levels, driven by the deployment of new rigs and multi-year contracts. However, results for U.S. Lower 48 Land Drilling and Canadian operations are expected to be lower in 2007 due to market softening and increased rig capacity.
- Capital Program: Total capital expenditures for the next 12 months are expected to be between $1.7 billion and $1.8 billion.
- Dividends: The company does not currently intend to pay cash dividends.
Risks and Contingencies
- SEC Inquiry: The SEC initiated an informal inquiry regarding the company's stock option granting practices. A voluntary internal review identified incorrect measurement dates for certain awards, resulting in a $51.6 million pre-tax non-cash charge recorded in Q4 2006. No restatement of historical financials was deemed necessary.
- Tax Disputes: The IRS proposed adjustments denying interest expense deductions totaling $292.7 million for tax years 2002 and 2003 related to the company's 2002 inversion. The Mexican tax authority (SAT) assessed approximately $19.8 million for 2003. The company intends to contest these vigorously and has not recorded reserves.
- Commodity Price Sensitivity: Operations are materially dependent on oil and gas prices. A sustained decrease could reduce exploration spending and demand for services.
- Legislative Changes: Recent legislation may restrict the company's ability to time-charter vessels in U.S. coastwise trade starting August 2007, requiring restructuring or redeployment of the Sea Mar fleet.
Investor Verification Checklist
- Stock Option Accounting: Verify the impact of the $51.6 million non-cash charge related to the SEC inquiry and internal review of option measurement dates.
- Tax Liability Exposure: Assess the potential financial impact of the unresolved IRS and Mexican tax audits, which could result in significant additional tax liabilities if the company's positions are rejected.
- Debt Covenants and Ratings: Review the impact of the increased debt load ($4.0 billion) on credit ratings and future borrowing costs.
- Capital Expenditure Execution: Monitor the timely delivery of the 134 new rigs ordered to ensure the company meets its 2007 revenue forecasts and avoids contract penalties.
- Sea Mar Restructuring: Track the company's plan to restructure or redeploy its U.S. coastwise trade vessels in compliance with new legislation effective August 2007.