Nabors Industries Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2021, filed November 5, 2021. Nabors provides land-based and offshore drilling, tubular running, directional drilling, measurement-while-drilling, logging-while-drilling, equipment manufacturing, instrumentation and drilling optimization services in approximately 20 countries. The fleet included 304 actively marketed land rigs and 29 offshore rigs at quarter-end.
In July 2021, Nabors sold its Canada Drilling assets for approximately $94.0 million, including 35 land rigs. Management stated that the transaction was not a strategic shift and was not expected to materially affect future operations.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Operating revenue | $524.2 million | $438.4 million | $1.474 billion | $1.691 billion |
| Loss from continuing operations attributable to common shareholders | $(122.5) million | $(161.1) million | $(459.3) million | $(708.3) million |
| Diluted loss per share | $(15.79) | $(23.42) | $(62.26) | $(102.25) |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $326.5 million | $247.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $179.9 million | $153.1 million |
Q3 operating revenue increased 20%, while the net loss attributable to common shareholders narrowed by $38.7 million. The implied net loss margin attributable to common shareholders was approximately 23.4% of revenue in Q3 2021 versus 36.8% in Q3 2020. For the nine-month period, revenue declined 13%, but the loss narrowed substantially, primarily because 2020 included significantly higher impairment and write-off charges.
Q3 direct costs were $336.5 million, general and administrative expense was $52.9 million, research and engineering expense was $9.5 million, depreciation and amortization was $173.4 million, interest expense was $42.2 million, and impairments and other charges were $3.1 million. Nine-month depreciation and amortization declined 19% to $525.4 million, while nine-month interest expense declined 20% to $126.9 million.
Segment adjusted operating loss improved to $15.1 million in Q3 2021 from $64.9 million in Q3 2020. Q3 segment revenue and adjusted operating income or loss were:
| Segment | Revenue | Change | Adjusted operating income/(loss) |
|---|---|---|---|
| U.S. Drilling | $173.4 million | Up 33% | $(19.7) million |
| Canada Drilling | $6.0 million | Down 44% | $1.4 million |
| International Drilling | $270.0 million | Up 9% | $(7.3) million |
| Drilling Solutions | $45.9 million | Up 56% | $8.6 million |
| Rig Technologies | $42.1 million | Up 48% | $1.9 million |
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $771.9 million at September 30, 2021, compared with $472.2 million at December 31, 2020. Working capital increased to $806.5 million from $616.0 million.
- Nine-month operating cash flow was $326.5 million. Investing cash outflow was $65.1 million, including $179.9 million of capital expenditures and $121.7 million of proceeds from asset sales and insurance claims.
- Nine-month financing cash flow was positive $37.8 million. Borrowings under the revolving credit facility helped fund repayment of maturing notes. Subsequent to quarter-end, Nabors repaid approximately $335.0 million of revolving debt with cash on hand.
- Long-term debt, net of deferred financing costs, was $3.076 billion at September 30, 2021, compared with $2.969 billion at December 31, 2020. Gross debt before deferred financing costs was $3.094 billion.
- The 2018 revolving credit facility had $925.0 million outstanding against total commitments of $981.6 million at quarter-end, plus $53.9 million of letters of credit outstanding. The weighted-average borrowing rate was 3.72%.
- The facility requires minimum liquidity of $160.0 million and, while Nabors Delaware was below investment grade, an asset-to-debt coverage ratio of at least 4.25:1. Management reported compliance with all covenants and expects compliance for the following 12 months based on current projections.
- The accounts receivable facility was amended to extend its term to August 2023 and reduce purchaser commitments from $250 million to $150 million, with potential increases up to $200 million. Approximately $96.0 million of receivables had been sold and remained uncollected at quarter-end.
Material Changes Versus the Prior Comparable Period
- Q3 revenue benefited from improving U.S. activity, higher Drilling Solutions and Rig Technologies demand, and an early termination payment in International Drilling. U.S. average rigs working increased 36% year over year, while International average rigs working declined 6%.
- Nine-month revenue remained below the prior year because COVID-19-related market weakness reduced activity and pricing, particularly in U.S. and International Drilling. Average rigs working declined 5% in U.S. Drilling and 17% in International Drilling.
- Nine-month impairments and other charges fell to $65.4 million from $339.3 million. The 2021 amount included a $58.5 million impairment related to the Canada asset sale; 2020 included substantial rig, goodwill and intangible-asset impairments.
- The company recorded a $21.1 million liability for an uncertain tax position in the nine months ended September 30, 2021, contributing to a $37.2 million tax expense versus $18.4 million in the prior-year period.
- Nabors issued approximately 3.2 million warrants in June 2021 with an initial exercise price of $166.66667 per warrant. The warrants were recorded as derivative liabilities; their fair value declined to approximately $0.1 million at quarter-end, producing a $2.6 million gain during 2021.
- Nabors issued 147,974 common shares valued at approximately $12.9 million in July 2021 for development-stage energy-transition technologies. Approximately 71,280 shares are forfeitable if specified milestones are not achieved.
- Management revised the presentation of historical common-share quantities to properly reflect the 1-for-50 reverse stock split. The revision affected share counts in statements of changes in equity but did not affect earnings per share, total equity, financial position, results of operations or cash flows.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance. It expected measured but steady increases in Lower-48 activity and generally increasing international activity through the remainder of 2021 as restrictions eased. The filing states that interim results may not be indicative of full-year results.
- Results remain highly dependent on oil and natural gas prices, customer exploration and production spending, rig demand, contract renewals and pricing.
- COVID-19 effects, supply-and-demand volatility, customer concentration, political instability, sanctions, operating risks and the ability to retain skilled employees remain material risks.
- Failure to satisfy revolving-credit covenants could terminate commitments and accelerate outstanding borrowings. Continued compliance depends on current operational and financial projections.
- Purchase commitments outstanding at September 30, 2021 totaled approximately $261.7 million, primarily for capital expenditures, operating expenses and inventory.
- Financial standby letters of credit and other surety instruments had a maximum amount of $186.9 million. Remaining availability under 18 letter-of-credit facilities was $537.3 million.
- Pending litigation was not expected by management to materially affect consolidated financial position or cash flows, although an unfavorable outcome could materially affect a particular period. The Algeria matter could result in a loss of up to $12.7 million above accrued amounts.
- The company identified uncertainty related to the proposed Nabors Energy Transition Corp. SPAC, including potential delays, additional costs and the possibility that an initial public offering or business combination may not occur on favorable terms.
- The filing discusses potential effects of new OSHA COVID-19 vaccination or testing requirements on the workforce.
Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify post-quarter-end repayment of approximately $335.0 million under the revolving credit facility and the resulting debt, liquidity and covenant headroom.
- Assess whether improving U.S. and international rig activity is translating into sustainable utilization, dayrate improvement and positive segment margins.
- Review near-term maturities, refinancing requirements and the conditions that could accelerate the accounts receivable facility or revolving credit facility.
- Evaluate the recoverability of deferred tax assets and the potential cash impact of uncertain tax positions.
- Monitor the Algeria litigation exposure, other guarantees and the $261.7 million of purchase commitments.
- Analyze potential dilution and accounting volatility from the 3.2 million warrants and milestone-based shares issued for energy-transition technologies.
- Confirm the financial and strategic implications of the Canada asset sale and the proposed energy-transition SPAC.