Nabors Industries Ltd. — 2Q16 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2016. Nabors operates land-based and offshore drilling rigs and related drilling technology and services, with 427 actively marketed land rigs and 42 offshore rigs at quarter-end. Reportable segments are U.S., Canada, International and Rig Services.
Comparability with the six months ended June 30, 2015 is limited because Nabors completed the merger of its Completion & Production Services business with C&J Energy Services in March 2015 and no longer consolidates that business.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $571.6 million, down 34% | $1.169 billion, down 49% |
| Net loss attributable to Nabors | $184.7 million, or $0.65 diluted loss per share | $582.9 million, or $2.07 diluted loss per share |
| Loss from continuing operations | $186.6 million | $583.2 million |
| Adjusted EBITDA | $165.5 million; approximately 29.0% of revenue | $327.6 million; approximately 28.0% of revenue |
| Adjusted operating income (loss) | $(53.4) million; approximately (9.3)% of revenue | $(107.2) million; approximately (9.2)% of revenue |
| Operating cash flow | Not separately reported for the quarter | $336.7 million, versus $517.4 million |
| Capital expenditures | Not separately reported for the quarter | $193.2 million, versus $566.7 million |
At June 30, 2016, cash and cash equivalents were $233.8 million, short-term investments were $22.1 million, and working capital was approximately $0.3 billion. Total debt was $3.5188 billion before deferred financing costs, versus $3.6797 billion at December 31, 2015. The company reported $2.24 billion of availability under its $2.25 billion revolving credit facility and commercial paper program, no revolving-credit borrowings outstanding, and compliance with debt covenants.
Material changes versus the prior comparable period
- Low oil and natural-gas prices reduced customer capital spending, rig activity, dayrates and demand across the business. Second-quarter rig years declined 55% in the U.S., 57% in Canada and 20% internationally.
- Drilling & Rig Services revenue declined 35% in the second quarter and 39% for the six-month period. U.S. revenue declined 56% in the quarter; Canada declined 69%; International declined 13%; and Rig Services declined 61%.
- Second-quarter adjusted EBITDA declined 43% year over year, while six-month adjusted EBITDA declined 50%. Adjusted operating income moved from income of $70.3 million to a loss of $53.4 million in the quarter.
- General and administrative expense declined 25% in the quarter and 38% year to date, reflecting cost reductions, workforce reductions and the discontinued consolidation of Completion & Production Services. G&A as a percentage of revenue increased to 9.9% from 8.8% in the quarter.
- Net losses from unconsolidated affiliates were $54.8 million in the quarter and $221.9 million year to date, compared with losses of $1.1 million and income of $5.4 million, respectively, in the prior-year periods.
- The company repurchased approximately $154.1 million principal amount of senior notes for approximately $150.4 million in cash and recognized a gain of approximately $6.0 million.
Outlook, unusual items, risks and contingencies
- Management stated that the U.S. market appeared to be stabilizing but expected customers to remain cautious through the remainder of 2016 and into early 2017. International activity was expected to decline further during the remainder of 2016.
- Management expects capital expenditures over the next 12 months to be less than $0.5 billion unless oil prices improve. Purchase commitments at June 30, 2016 totaled approximately $142.1 million.
- C&J Energy Services filed for Chapter 11 protection on July 20, 2016. Nabors recorded $220.1 million of impairment and related charges on its CJES holdings during the first six months, including a $39.0 million write-off in the second quarter, and expected to cease equity-method accounting beginning in the third quarter.
- Other second-quarter unusual charges included $28.7 million of net losses on asset sales and disposals, including a $19.7 million reserve related to retained North Slope oil and gas properties, and $2.8 million of foreign-currency losses.
- Assets held for sale totaled $86.6 million, primarily oil and gas holdings. Pipeline commitments associated with discontinued operations were approximately $21.4 million undiscounted, with $15.2 million of recorded liabilities.
- Financial guarantees, standby letters of credit and other surety instruments totaled $250.0 million of maximum exposure. Letters of credit outstanding, including financial and performance guarantees, were $135.1 million, leaving $552.2 million of availability in related facilities.
- Key risks include continued oil and gas price weakness, reduced drilling activity and dayrates, customer concentration and credit risk, impairment of long-lived assets or equity-method investments, international political and currency risks, litigation, tax disputes and potential future charges related to pipeline commitments.
- Pending matters include litigation involving ERG Resources, C&J Energy merger-related claims and Algeria-related customs and foreign-exchange proceedings. Management stated that pending litigation is not expected to materially affect financial position or cash flows, although particular periods could be materially affected.
Investor verification points
- Verify the effect of CJES’s Chapter 11 filing on any remaining receivables, guarantees, recovery prospects and future earnings presentation.
- Assess whether the company’s liquidity and $2.24 billion of revolver/commercial-paper availability remain sufficient against approximately $3.52 billion of debt and scheduled maturities.
- Monitor U.S. and international rig utilization, dayrates and customer capital spending, particularly the expected further international decline.
- Reconcile adjusted EBITDA and adjusted operating income to GAAP results and distinguish recurring operating performance from CJES impairments, asset write-downs and other unusual items.
- Evaluate the recoverability of assets held for sale, North Slope properties, goodwill and other long-lived assets if commodity prices remain depressed.
- Review the tax assessment exposure of approximately $3 million to $8 million and the disclosed litigation, guarantee and pipeline-commitment contingencies.