Nabors Industries Ltd. — Q1 2011 Form 10-Q Summary
Business context and reporting period
Nabors is a global land and offshore drilling, well-servicing, workover and pressure-pumping contractor, with ancillary drilling technology, logistics and oil and gas activities. The filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. The interim financial statements are unaudited and prepared under U.S. GAAP.
The September 2010 acquisition of Superior Well Services is included in the 2011 results through the Pressure Pumping segment. Oil and gas assets in Canada and Colombia classified as held for sale are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenues | $1.381 billion | $891.3 million | 55% |
| Total revenues and other income | $1.410 billion | $896.4 million | 57% |
| Adjusted income from operating activities | $191.0 million | $141.8 million | 35% |
| Income from continuing operations, net of tax | $84.3 million | $43.5 million | 94% |
| Net income attributable to Nabors | $82.8 million | $40.2 million | 106% |
| Diluted earnings per share | $0.28 | $0.14 | 100% |
| Cash flow from operations | $290.9 million | $223.1 million | 30% |
| Capital expenditures | $358.6 million | $150.7 million | 138% |
Approximate margins were 13.8% for adjusted operating income as a percentage of operating revenues, compared with 15.9% in the prior-year quarter; income from continuing operations margin was approximately 6.1%, compared with 4.9%; and net income attributable to Nabors margin was approximately 6.0%, compared with 4.5%. Adjusted operating income is a non-GAAP measure.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $569.7 million at March 31, 2011, down from $641.7 million at December 31, 2010.
- Cash, short-term investments and long-term investments or other receivables totaled $774.1 million, compared with $841.5 million at year-end 2010.
- Working capital was $480.5 million, compared with $458.6 million at December 31, 2010.
- Total debt, including current maturities, was approximately $4.5 billion. The current portion included approximately $1.4 billion of 0.94% senior exchangeable notes due May 15, 2011.
- At March 31, 2011, the company reported $1.35 billion of aggregate borrowing capacity under revolving credit facilities and $162.8 million of remaining letter-of-credit availability.
- Gross funded debt to capital was 0.42:1 and net funded debt to capital was 0.37:1. Interest coverage was 7.4:1, compared with 7.0:1 at December 31, 2010.
Material changes versus the prior comparable period
- Revenue and profitability benefited substantially from the Superior acquisition, which contributed $257.9 million of Pressure Pumping revenue and $43.7 million of adjusted operating income.
- U.S. Lower 48 Land Drilling revenue increased 39% and adjusted operating income increased 33%, driven by higher dayrates and increased activity in oil- and liquids-rich shale areas.
- U.S. Land Well-servicing revenue increased 53%, supported by higher utilization and limited pricing improvement.
- Canada revenue increased 49% and adjusted operating income increased 162%, reflecting higher drilling and well-servicing activity, stronger oil-related demand and favorable currency effects.
- U.S. Offshore adjusted operating income declined to a $4.0 million loss from $7.4 million of income, primarily because of permitting delays and reduced Gulf of Mexico activity following the 2010 explosion and oil spill.
- International adjusted operating income declined 34% despite a 7% revenue increase, primarily because of lower jackup dayrates and utilization in Saudi Arabia, higher rig upgrade costs and start-up costs for new markets.
- Depreciation and amortization increased 32% to $226.1 million, primarily from Superior assets, rig upgrades and other capital spending.
- Interest expense increased 11% to $73.9 million, primarily because of the September 2010 issuance of 5.0% senior notes due 2020.
- Investment income improved to $12.3 million from a $2.6 million loss, including a $12.9 million realized gain on an overseas fund investment.
Cash flow, outlook and unusual items
Operating cash flow increased to $290.9 million, but substantially higher capital expenditures caused investing cash use to increase to $374.4 million. Cash decreased by $72.0 million during the quarter. Management expected 2011 operating results to improve significantly from 2010, driven by higher oil prices, increased activity in oil- and liquids-rich areas, the full-year contribution from Superior and improved utilization of newer or upgraded rigs.
Management expected international results to remain generally flat in 2011, while U.S. Offshore and Alaska were expected to remain under pressure. The company expected Alaska conditions to remain adverse through 2011 and noted uncertainty regarding the pace of Gulf of Mexico permitting. Planned capital expenditures for the following 12 months were approximately $1.7 billion to $2.0 billion, with approximately $1.0 billion of purchase commitments outstanding at March 31, 2011.
The company expected to use cash and revolving facilities to meet the May 2011 exchangeable-note maturity. On April 20, 2011, Nabors entered into a new $550 million senior unsecured revolving facility, with an option to increase commitments to $700 million and maturity in September 2014. Management stated that cash, operating cash flow, potential asset-sale proceeds and revolver availability were expected to fund projected requirements for the next 12 months.
Nabors and a joint venture agreed to sell most Colombian assets, with closings expected in the second quarter of 2011. The company estimated its proportionate share of pretax gains at $150 million to $200 million. Discontinued operations generated a $2.2 million net loss in Q1 2011, compared with a $4.4 million loss in Q1 2010.
Risks, contingencies and unusual exposures
- Results are highly sensitive to oil and natural gas prices, customer exploration and production spending, service demand, dayrates and utilization.
- Key operational risks include Gulf of Mexico permitting uncertainty, weak Alaska activity, Saudi Arabian jackup downtime and reduced rates, political instability, terrorism, foreign currency movements and changing tax laws.
- The company disclosed a $39.9 million Algerian judgment relating to alleged foreign-exchange-control violations. Nabors appealed, believes a loss is not probable and recorded no liability.
- A separate Algerian customs judgment of approximately $19.7 million remains under appeal; the potential loss was described as ranging from approximately $140,000 to $19.7 million, with no amount accrued.
- A Department of Justice and SEC-related investigation concerning transactions involving Panalpina and potential Foreign Corrupt Practices Act issues remained unresolved.
- Potential Mexican tax assessments for 2004 through 2010 were estimated at approximately $90 million to $95 million in aggregate; a reserve had been recorded, while management disputed the underlying positions.
- Financial standby letters of credit and other surety instruments had a maximum aggregate amount of approximately $351.5 million.
- Employment agreements could require payments of up to $100 million to the former chairman’s estate and $50 million to the president’s estate upon specified termination, death or disability events; no liability was accrued.
Facts investors should verify
- Whether the May 15, 2011 exchangeable-note maturity was refinanced or repaid as planned and the resulting effect on cash and debt.
- Completion timing and actual proceeds or gains from the Colombian asset sales.
- Whether Gulf of Mexico permitting improved and whether U.S. Offshore utilization recovered.
- The sustainability of Superior’s contribution and the effect of its integration on margins and cash flow.
- Actual capital expenditures against the $1.7 billion to $2.0 billion forecast and the approximately $1.0 billion of purchase commitments.
- Developments in the Algerian proceedings, Panalpina-related investigation and Mexican tax contingencies.
- The impact of oil and natural gas prices, dayrates, utilization and customer spending on future results.