NABORS INDUSTRIES LTD quarterly report, Q2 FY2013

Nabors Industries Ltd. — Form 10-Q Summary

Business Context and Reporting Period

Nabors is a global oilfield-services provider operating through Drilling & Rig Services and Completion & Production Services, with land and offshore operations. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, with comparisons to the same 2012 periods. The filing was dated August 2, 2013.

Key Financial Metrics

Metric	Three Months Ended June 30, 2013	Six Months Ended June 30, 2013
Operating revenues	$1.492 billion	$3.070 billion
Income from continuing operations, net	$29.3 million	$126.4 million
Net income attributable to Nabors	$(4.4) million	$94.8 million
Diluted EPS	$(0.01)	$0.32
Net cash provided by operating activities	Not separately reported	$665.4 million

• Operating revenues and earnings from unconsolidated affiliates declined 7% year over year in the second quarter and 10% for the six-month period.
• Adjusted income derived from operating activities, a non-GAAP measure, was $90.9 million in the quarter and $240.5 million year to date, down 60% and 56%, respectively.
• Second-quarter continuing-operations EPS was $0.08 versus a loss of $0.34 in 2012; the improvement primarily reflected significant 2012 impairment and other unusual charges.
• Cash and short-term investments totaled $608.0 million at June 30, 2013, compared with $778.2 million at December 31, 2012. Working capital was approximately $1.7 billion.
• Total debt was $4.083 billion, including $295.0 million of commercial paper and $300.0 million outstanding under the revolving credit facility. Remaining revolver availability was $1.2 billion of $1.5 billion.
• Gross debt-to-capital was 0.41:1 and net debt-to-capital was 0.37:1 at June 30, 2013. Interest coverage was 7.0:1.
• Capital expenditures were $500.4 million in the first six months, compared with $967.9 million in 2012. Operating cash flow exceeded capital expenditures by approximately $165.0 million.

Material Changes Versus the Prior Comparable Period

• U.S. Drilling & Rig Services revenue declined 22% in both the quarter and year-to-date period, primarily from lower activity and dayrates. U.S. rig years fell 17% in the quarter and 19% year to date.
• International Drilling & Rig Services revenue increased 15% in the quarter and 10% year to date, supported by higher activity in Papua New Guinea, Mexico and Saudi Arabia.
• Completion Services revenue declined 34% in both comparison periods, while adjusted income declined 85% in the quarter and 78% year to date because of lower customer activity, pricing pressure and excess pressure-pumping capacity.
• Production Services revenue was broadly stable, but adjusted income declined 8% in the quarter and 7% year to date.
• Investment income increased to $14.8 million in the quarter and $94.2 million year to date, including realized gains of approximately $12.5 million and $88.7 million, respectively, on securities sales.
• 2012 results included $46.3 million of asset-retirement provisions, a $75.0 million trade-name impairment and a $26.3 million goodwill impairment. These charges did not recur in 2013.
• 2013 included a one-time $45.0 million charge related to the termination of the former employment agreement with the chief executive officer, consisting of a $27.0 million immediately vested stock grant and $18.0 million in cash.
• Six-month share-based compensation expense increased to $38.8 million from $8.8 million, primarily because of the one-time stock grant.
• Debt declined from $4.380 billion at December 31, 2012. Nabors issued $295.0 million of commercial paper and used the proceeds to reduce revolver borrowings by $590.0 million.

Guidance, Outlook, Risks and Unusual Items

• Management expects capital expenditures over the following 12 months of approximately $1.0 billion to $1.2 billion. Purchase commitments outstanding at June 30, 2013 were approximately $549.6 million.
• Management expected cash, investments, operating cash flow, potential non-core asset sales and revolver availability to fund anticipated requirements for the next 12 months.
• Management stated that gas and liquids prices were likely to remain weak through 2013. Oil prices were more resilient but volatile, and customer spending plans remained constrained.
• New rig capacity and improving rig efficiency were expected to sustain an oversupply of rigs for most or all of 2013. Some customers indicated possible activity reductions in the second half of the year.
• Management expected international results to improve during the balance of 2013 and in 2014 as large projects commenced and rigs returned to work, although cost issues remained in several markets.
• Oil and gas assets held for sale totaled $351.3 million at June 30, 2013 after a $34.4 million carrying-value adjustment. In July 2013, Nabors sold some of these assets for initial proceeds of $90 million, subject to post-closing adjustments.
• Pipeline commitments had undiscounted contractual commitments of approximately $290 million and recorded liabilities of $177 million. Lower production or natural-gas prices could result in additional charges.
• Remaining assessed or expected Mexican tax exposure was estimated at $30 million to $35 million, with reserves recorded. A longstanding tax settlement reduced reserves by approximately $20 million in the first quarter.
• Algerian litigation matters could result in losses of up to $13.6 million and $27.8 million, respectively, in excess of accrued amounts. An ERG lawsuit seeks up to $100 million, although management believes the claims lack merit and the outcome cannot be determined.
• The SEC concluded its inquiry into officer and director perquisites and informed Nabors that it would not recommend enforcement action.
• The board declared a $0.04-per-share dividend payable September 27, 2013 to shareholders of record September 6, 2013.
• Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective.

Important Facts for Investors to Verify

• Whether weak natural-gas markets, customer budget reductions and rig oversupply continue to pressure utilization, dayrates and Completion Services pricing.
• Whether the planned $1.0 billion to $1.2 billion of capital expenditures is consistent with expected operating cash flow and leverage targets.
• The timing and final proceeds from additional oil and gas asset dispositions and the effect on discontinued-operations results.
• Potential additional charges related to pipeline commitments, asset impairments, tax audits and Algerian or other litigation matters.
• The sustainability of 2013 investment gains, which materially supported reported earnings and were substantially non-operating.
• Compliance with revolver covenants and continued access to commercial paper and other capital markets.