NABORS INDUSTRIES LTD quarterly report, Q2 FY2014

Nabors Industries Ltd. — 2014 Q2 Form 10-Q Summary

Business Context and Reporting Period

Nabors Industries Ltd. is a global oilfield-services company focused primarily on Drilling & Rig Services and Completion & Production Services. The filing covers the three and six months ended June 30, 2014; interim financial statements are unaudited and were reviewed by PricewaterhouseCoopers LLP.

At June 30, 2014, Nabors actively marketed 496 land drilling rigs, 446 U.S. land well-servicing and workover rigs, approximately 98 Canadian well-servicing and workover rigs, and offshore rigs including 36 platform, seven jackup and one barge rig. The company also had approximately 800,000 hydraulic horsepower for pressure-pumping and related services.

Key Financial Metrics

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Operating revenues	$1.617 billion	$1.458 billion	$3.207 billion	$2.993 billion
Income from continuing operations, net of tax	$65.7 million	$28.1 million	$114.7 million	$120.3 million
Net income attributable to Nabors	$64.4 million	$(4.4) million	$114.4 million	$94.8 million
Diluted EPS	$0.21	$(0.01)	$0.37	$0.32
Cash flow from operations	Not separately provided	Not separately provided	$846.0 million	$665.4 million

Operating revenues increased 11% in the quarter and 7% year to date. Adjusted income derived from operating activities, a non-GAAP measure, was $133.5 million in Q2, up 49%, and $242.5 million for the first six months, up 4%.

Income from continuing operations represented approximately 4.1% of operating revenue in Q2 2014 versus 1.9% in Q2 2013. For the first six months, the comparable margins were approximately 3.6% and 4.0%, respectively. General and administrative expense was 8.3% of revenue in Q2 and 8.4% year to date, compared with 9.0% and 8.8% in the prior-year periods.

Q2 Drilling & Rig Services revenue increased 14% to $1.141 billion; adjusted income increased 49% to $149.8 million.
Q2 Completion & Production Services revenue increased 7% to $535.0 million; adjusted income declined 3% to $29.3 million.
Q2 U.S. Drilling revenue increased 14% and adjusted income increased 29%, supported by higher activity and deployment of new and existing rigs.
Q2 International revenue increased 11% and adjusted income increased 56%, reflecting higher activity and dayrates.
Q2 Canada revenue declined 15% and adjusted income declined 94%, primarily because of lower dayrates and unfavorable foreign exchange.
Q2 Completion Services revenue increased 9%, but adjusted income declined to a $0.6 million loss because of pricing pressure. Production Services adjusted income increased 27%.

Cash Flow, Debt and Liquidity

Cash and cash equivalents were $411.0 million at June 30, 2014, compared with $389.9 million at December 31, 2013. Cash plus short-term investments was $486.3 million versus $507.1 million.
Working capital was approximately $1.5 billion, compared with $1.4 billion at year-end 2013.
Operating cash flow of $846.0 million exceeded capital expenditures of $862.7 million. Investing cash use was $782.9 million, including substantial rig-related capital spending and $69.3 million of proceeds from asset sales.
Financing cash use was $35.1 million, including $70.9 million to redeem subsidiary preferred stock, $23.8 million of shareholder dividends and net commercial-paper borrowings of $111.2 million.
Total debt was approximately $4.0 billion, including $3.956 billion of long-term debt, $441.1 million of commercial paper and $110.0 million drawn under the revolving credit facility. The company reported approximately $0.9 billion of availability under its $1.5 billion revolving credit facility and commercial paper program.
Gross debt to capital was 0.39:1, net debt to capital was 0.36:1 and trailing interest coverage was 8.7:1. Nabors was in compliance with its revolving-credit covenants.

Material Changes Versus the Prior Comparable Period

Quarterly net income attributable to Nabors improved from a $4.4 million loss to $64.4 million of income, primarily because of stronger operating performance and substantially lower discontinued-operation losses.
Year-to-date net income attributable to Nabors increased 21%, although income from continuing operations declined 5%, partly because prior-year results included substantially higher investment gains.
Interest expense declined 23% in Q2 and 24% year to date, reflecting debt refinancing and lower average borrowing rates.
Investment income declined sharply, from $94.2 million to $8.0 million year to date, because 2013 included approximately $88.7 million of realized gains on securities.
Capital expenditures increased 72% year to date, from $500.4 million to $862.7 million, reflecting new rig construction, upgrades and sustaining investment.
Nabors corrected a prior foreign-currency accounting error, increasing beginning retained earnings and reducing accumulated other comprehensive income by approximately $91.5 million. Management stated that the revision had no material impact on assets, liabilities, cash flows or profit and loss for the periods presented.
The company redeemed all outstanding subsidiary Series A preferred stock for $70.9 million and recorded a $1.7 million loss on redemption.

Guidance, Outlook, Risks and Unusual Items

No formal earnings guidance was provided. Management expected resilient crude-oil prices to support U.S. drilling activity for the balance of 2014. It expected international results to improve in the second half of 2014 and into 2015 as new and upgraded rigs are deployed and dayrate increases take effect. Natural-gas prices remained insufficient, in management’s view, to materially increase gas-directed drilling activity.

In June 2014, Nabors signed an agreement to merge its Completion & Production Services businesses with C&J Energy Services. Upon completion, Nabors expected to own approximately 53% of the combined company. Management also anticipated approximately $0.9 billion of cash proceeds from debt issued by the combined company, to be used for debt reduction, fleet expansion and general working capital. A putative shareholder class action was filed in July 2014 seeking to block the transaction; Nabors stated that it considered the claims without merit.

Management expected approximately $2.0 billion of capital expenditures over the following 12 months. Purchase commitments at June 30, 2014 totaled approximately $953.8 million. Liquidity was expected to be adequate for capital expenditures, purchase commitments, acquisitions, debt service and other expected cash requirements.

Results remain sensitive to oil and natural-gas prices, customer exploration and production spending, service demand, competition and industry operating risks.
International operations face political instability, war, terrorism, foreign-exchange exposure and regulatory risks.
Tax audits and litigation could produce outcomes materially different from recorded provisions. Remaining Mexico tax exposures assessed or expected to be assessed were estimated at $30 million to $35 million, for which reserves had been recorded.
Algerian legal matters could result in losses of up to approximately $13.3 million and $26.8 million, respectively, in excess of accrued amounts.
Pipeline commitments related to assets held for sale had undiscounted commitments of approximately $139.2 million and recorded liabilities of $63.1 million; lower production or natural-gas prices could result in additional charges.
Financial standby letters of credit and other surety instruments totaled approximately $191.5 million. Certain indemnification guarantees had no estimable maximum exposure.
On July 31, 2014, Nabors sold Alaska North Slope oil and gas properties for $35 million at closing, with potential additional payments of $27 million subject to production targets.

Most Important Facts for Investors to Verify

Completion, timing and financing terms of the C&J Energy Services transaction, including the expected $0.9 billion debt-funded cash proceeds.
Whether the planned $2.0 billion of capital expenditures can be funded while maintaining leverage and liquidity targets.
Rig utilization, dayrates and margins in the U.S. and international markets, particularly as new rigs are deployed.
The sustainability of Completion Services profitability amid pricing pressure and expired take-or-pay contracts.
Potential outcomes of the Mexico tax matters, Algerian proceedings, pipeline commitments and C&J-related shareholder litigation.
The extent to which reported earnings benefited from discontinued-operation comparisons, lower interest expense and the absence of the unusually large 2013 investment gains.