NABORS INDUSTRIES LTD quarterly report, Q3 FY2019

Nabors Industries Ltd. — 2019 Q3 Form 10-Q Summary

Business context and reporting period

Nabors is a global provider of land-based and offshore drilling services, drilling-related technologies, equipment manufacturing, instrumentation, optimization software, tubular services, and directional drilling and measurement-while-drilling solutions. As of September 30, 2019, the company actively marketed 375 land rigs and 33 offshore rigs across approximately 25 countries. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.

Financial results and key metrics

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Operating revenues	$758.1 million	$779.4 million	$2.329 billion	$2.276 billion
Net loss attributable to Nabors common shareholders	$123.2 million	$118.9 million	$453.1 million	$465.5 million
Diluted loss per share	$0.37	$0.35	$1.33	$1.44
Net cash provided by operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$430.8 million	$76.9 million
Capital expenditures	Not separately provided for the quarter	Not separately provided for the quarter	$366.6 million	$339.0 million
Interest expense	$51.3 million	$51.4 million	$155.1 million	$173.4 million

Q3 operating revenues declined 3%, reflecting an 8% decline in average rigs working, partly offset by improved U.S. dayrates.
Nine-month revenues increased 2%, driven primarily by higher U.S. Drilling activity and pricing.
Q3 loss from continuing operations attributable to common shareholders was $123.4 million, versus $105.0 million in the prior-year quarter. Management attributed the deterioration primarily to a $7.0 million decline in segment adjusted operating income and a $13.4 million increase in income tax expense.
Adjusted operating income for all segments was $24.7 million in Q3 and $73.7 million for the nine months, compared with $31.7 million and $42.6 million, respectively, in the prior-year periods.
General and administrative expense decreased 5% in Q3 and 6% for the nine months; research and engineering expense decreased 17% and 12%, respectively, due primarily to workforce reductions and cost-control efforts.

Segment performance and material changes

U.S. Drilling: Q3 revenue increased 12% to $307.8 million and adjusted operating income increased to $12.4 million from $2.6 million. Average rigs working increased 2% to 114.1. For the nine months, revenue increased 22% to $951.4 million and adjusted operating income increased to $57.5 million from a $30.3 million loss.
Canada Drilling: Q3 revenue declined 54% to $12.2 million and adjusted operating loss widened to $5.7 million. Average rigs working fell 57% to 7.7. The nine-month revenue decline was 36%.
International Drilling: Q3 revenue declined 13% to $328.3 million and adjusted operating income fell 90% to $2.5 million. The nine-month segment recorded a $10.1 million adjusted operating loss versus $74.7 million of income in 2018, reflecting lower activity, reduced pre-funded amortizing revenue, asset sales, and the Argentina workover business divestiture.
Drilling Solutions: Q3 revenue increased 2% to $62.3 million and adjusted operating income increased 70% to $16.1 million. Nine-month adjusted operating income increased 66% to $42.8 million.
Rig Technologies: Q3 revenue was essentially flat at $63.1 million, while the adjusted operating loss narrowed to $0.6 million. Nine-month adjusted operating loss improved to $5.3 million from $20.6 million.

Balance sheet, debt, liquidity, and cash flow

At September 30, 2019, cash and cash equivalents were $396.9 million and short-term investments were $22.0 million, compared with combined cash and investments of $481.8 million at December 31, 2018.
Working capital was $698.0 million, compared with $761.5 million at year-end 2018.
Total debt carrying value was $3.550 billion before deferred financing costs; long-term debt reported on the balance sheet was $3.517 billion. Debt declined from $3.624 billion before deferred financing costs at December 31, 2018.
The company repurchased $378.1 million of senior note principal during the first nine months for approximately $383.6 million, including accrued interest. It subsequently repurchased an additional $49.1 million of principal through the filing date.
The 2012 revolving credit facility had $455.0 million outstanding at September 30, 2019 and matures July 14, 2020. The 2018 revolving credit facility had no borrowings outstanding and has borrowing capacity of approximately $1.267 billion.
The net debt-to-capitalization ratio was approximately 0.58:1, against a 0.60:1 covenant limit. The asset-to-debt coverage ratio was 3.57:1 against a 2.50:1 requirement applicable while the company lacks investment-grade ratings.
Remaining availability under letter-of-credit facilities was $790.7 million after $140.3 million of outstanding letters of credit.
Operating cash flow of $430.8 million substantially exceeded capital expenditures of $366.6 million. Investing activities used $333.7 million and financing activities used $141.8 million, resulting in a $49.1 million decrease in cash, cash equivalents, and restricted cash.
The company entered into a $250 million accounts receivable sales facility in September 2019. Eligible receivables totaled $213.6 million, of which $98.0 million had been sold to purchasers at September 30.

Guidance, outlook, risks, contingencies, and unusual items

The filing does not provide a specific revenue, earnings, or margin guidance range. Management expects current cash, investments, operating cash flow, debt or equity financing, and revolver availability to fund expected requirements for the next 12 months.
Management expects approximately $200 million of capital expenditures over the next 12 months. Purchase commitments outstanding at September 30, 2019 totaled approximately $191.4 million.
Management expected to remain in compliance with debt covenants for the following 12 months based on current projections, but cautioned that adverse changes in projections or assumptions could cause noncompliance. A covenant breach could terminate revolver commitments and accelerate outstanding borrowings.
The company recognized $93.6 million of goodwill impairment and $5.2 million of intangible asset impairment during the first nine months, primarily due to lower market capitalization and reduced future cash-flow projections tied to commodity prices and demand.
Q3 included $2.9 million of severance and restructuring costs and a $0.7 million loss on debt repurchases. The nine-month period included $5.4 million of severance costs and a $1.8 million debt-repurchase loss.
A $14.7 million foreign tax settlement increased tax expense during the nine months. The nine-month effective tax rate was negative 19.7%, reflecting geographic earnings mix, a $31.1 million valuation-allowance release, and the tax settlement.
Foreign-currency losses were $8.7 million in Q3 and $18.7 million for the nine months, with Q3 losses primarily attributed to the devaluation of the Argentine peso.
Key operating risks include oil and gas price volatility, customer spending and contract renewals, rig utilization and dayrates, customer concentration, high leverage, credit ratings, covenant compliance, access to capital, geopolitical conditions, foreign exchange, tax disputes, litigation, and potential additional impairment charges.
Financial guarantees and surety instruments had a maximum amount of $221.7 million, principally scheduled in 2019 and 2020. Management considered material losses under broader indemnification arrangements unlikely, although maximum future payments could not be estimated.
Pending matters included an Algeria dispute with potential exposure of up to $15.4 million above accrued amounts, a shareholder litigation appeal related to the Tesco transaction, and Kazakhstan environmental matters with potential penalties and fines of approximately $4.0 million, subject to reimbursement obligations from the operator.

Most important facts for investors to verify

Ability to refinance or repay the $293.2 million of 5.00% senior notes due September 2020 and manage the $455.0 million outstanding under the 2012 revolver before its July 2020 maturity.
Headroom under the 0.60:1 net debt-to-capital covenant and the 2.50:1 asset-to-debt covenant, particularly if commodity prices, utilization, or market capitalization deteriorate.
Sustainability of U.S. Drilling improvements and whether they can offset continuing weakness in International and Canada Drilling.
Cash conversion after capital expenditures, including the effects of receivables sales and working-capital movements.
Potential further goodwill or intangible impairments if oil and gas prices, dayrates, utilization, or demand remain weak.
Timing and outcome of the Algeria, Kazakhstan, Tesco-related, tax, and other litigation or contingency matters.
Potential dilution from the 6% mandatory convertible preferred shares, which had approximately 39.0 million potential common shares excluded from diluted EPS as anti-dilutive.