Nabors Industries Ltd. 2012 Q1 Form 10-Q Summary
Business context and reporting period
Nabors is a Bermuda-incorporated oilfield services company and the world’s largest land drilling contractor. Its principal businesses are Drilling and Rig Services, Completion and Production Services, and Oil and Gas Operations. The company markets approximately 501 land drilling rigs, 567 U.S. well-servicing rigs, 176 Canadian well-servicing rigs, and offshore, pressure-pumping, directional-drilling, technology, and ancillary service capabilities.
This unaudited Form 10-Q covers the three months ended March 31, 2012, with comparative information for the three months ended March 31, 2011. The interim financial statements were reviewed by PricewaterhouseCoopers LLP but were not audited.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $1.890 billion | $1.374 billion | +38% |
| Total revenues and other income | $1.842 billion | $1.402 billion | +31% |
| Income from continuing operations before tax | $212.4 million | $139.7 million | +52% |
| Income from continuing operations, net of tax | $142.6 million | $94.6 million | +51% |
| Net income attributable to Nabors | $134.1 million | $82.8 million | +62% |
| Diluted EPS from continuing operations | $0.49 | $0.33 | +$0.16 |
| Total diluted EPS | $0.46 | $0.28 | +$0.18 |
| Net cash provided by operating activities | $244.2 million | $290.9 million | -16% |
| Capital expenditures | $473.7 million | $358.6 million | +32% |
Operating income data are not presented as a separate GAAP line item. Adjusted income derived from operating activities, a non-GAAP measure, was $321.2 million versus $207.6 million, up 55%. Based on reported figures, income from continuing operations before tax represented approximately 11.5% of total revenues and other income, while net income attributable to Nabors represented approximately 7.1% of operating revenues.
Discontinued operations produced a net loss of $8.8 million, compared with a $12.4 million loss in Q1 2011. The company reported comprehensive income attributable to Nabors of $155.3 million, including $21.2 million of other comprehensive income after tax.
Liquidity, balance sheet, debt, and cash flow
| Balance-sheet metric | March 31, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $354.0 million | $398.6 million |
| Short-term investments | $140.0 million | $140.9 million |
| Cash and short-term investments | $494.0 million | $539.5 million |
| Total assets | $13.148 billion | $12.912 billion |
| Total debt, including current portion | $4.773 billion | $4.624 billion |
| Total equity | $5.823 billion | $5.601 billion |
| Working capital | Approximately $1.5 billion | Approximately $1.3 billion |
- Operating cash flow was $244.2 million, below capital expenditures of $473.7 million, producing negative free cash flow before asset-sale proceeds of approximately $229.5 million.
- Cash used in investing activities was $429.7 million, primarily due to capital expenditures. Financing activities provided $139.5 million, principally from $150.0 million of revolving-credit borrowings.
- The company had $390 million of remaining availability under revolving credit facilities totaling $1.4 billion. Borrowings carried a weighted-average interest rate of 1.75% at March 31, 2012.
- The $274.8 million of 5.375% senior notes due August 2012 were classified as current. Management expected to fund repayment with cash on hand and revolving-credit capacity.
- Gross funded debt to capital was 0.42:1, net funded debt to capital was 0.40:1, and interest coverage was 8.5:1. These are company-defined, non-GAAP measures.
- The company was in compliance with all revolving-credit covenants at March 31, 2012.
Material changes versus the prior comparable period
- Drilling and Rig Services revenue increased 36% to $1.368 billion, led by U.S. Lower 48 land drilling, U.S. offshore, Alaska, Other Rig Services, and international activity.
- Completion and Production Services revenue increased 49% to $607.7 million, supported by higher U.S. well-servicing and pressure-pumping activity.
- Rig years increased 16% to 405.5, and well-servicing rig hours increased 12% to 270,070.
- U.S. Lower 48 land drilling adjusted operating income increased 64%, reflecting higher dayrates and deployment into oil-rich shale areas.
- International adjusted operating income declined 40% despite a 17% increase in revenue, primarily because of lower dayrates and utilization in certain markets and startup costs in Iraq.
- Interest expense declined 15%, primarily following the May 2011 redemption of $1.4 billion of 0.94% senior exchangeable notes.
- Investment income increased to $20.3 million from $12.3 million, including a $12.5 million realized gain on debt securities and $6.0 million of net unrealized gains on trading securities.
- Operating cash flow declined despite higher earnings because working-capital changes used $235.4 million in Q1 2012 versus $54.5 million in Q1 2011, and capital expenditures increased substantially.
Outlook, management commentary, risks, and unusual items
- Management expected a protracted weak spot market in pressure pumping and flat to slightly lower industry rig activity during 2012. Lower natural-gas prices were reducing gas-related activity and creating an oversupply of pressure-pumping equipment.
- Management expected healthier performance in the remaining segments, supported by existing term contracts, new international rig deployments, and a gradual improvement in U.S. offshore activity as permitting improved.
- Expected capital expenditures over the following 12 months were approximately $1.4 billion to $1.5 billion, with approximately $0.9 billion of outstanding purchase commitments at March 31, 2012.
- A U.S. oil and gas unconsolidated joint venture recorded a full-cost ceiling-test writedown; Nabors’ proportionate share was $68.2 million. This materially reduced reported oil-and-gas earnings but was excluded from adjusted operating income.
- On April 12, 2012, Nabors sold its remaining wholly owned Colombian oil and gas operations for $72.6 million in cash; the assets had a net book value of approximately $30.3 million.
- A $100 million contingent liability related to the October 2011 CEO change was released after the former CEO elected not to trigger the payment. Nabors contributed one million treasury shares to a charitable foundation and recorded the release, net of tax, in capital in excess of par value.
- Material risks include oil and natural-gas price volatility, customer exploration and production spending, oversupply in pressure pumping, operating and accident risks, political instability, foreign exchange, tax-law changes, litigation, and access to capital markets.
- Pending matters included tax assessments in Mexico, an Algeria customs judgment of approximately $19.7 million, an Algeria foreign-exchange case with potential exposure of up to $31.1 million in excess of accrued amounts, SEC inquiries concerning executive perquisites, shareholder derivative lawsuits, and an ERG lawsuit seeking damages of up to $100 million related to the Ramshorn sale. Management stated that outcomes could not be determined for several matters and that certain matters could materially affect a particular reporting period.
- No material changes were reported to the risk factors included in the 2011 Form 10-K. Management concluded that disclosure controls and procedures were effective, and reported no material changes in internal control over financial reporting.
Most important facts for an investor to verify
- Whether pressure-pumping oversupply and lower natural-gas activity reduce utilization, pricing, and margins during the remainder of 2012.
- Whether the $1.4 billion to $1.5 billion capital-spending plan is consistent with operating cash generation and available financing.
- How the August 2012 debt maturity was refinanced or repaid and whether revolving-credit availability changed.
- The sustainability of reported earnings after excluding the $68.2 million joint-venture writedown and investment gains.
- The final proceeds, accounting impact, and remaining liabilities associated with the Colombian asset sale and other discontinued operations.
- Developments and potential financial exposure from the Mexico tax assessments, Algeria proceedings, SEC inquiry, shareholder litigation, and ERG claims.
- Whether the company continues to comply with debt covenants and maintain adequate liquidity as capital expenditures and purchase commitments are funded.