Nabors Industries Ltd. 2012 Form 10-K Summary
Business context and reporting period
Nabors is a global contract drilling and oilfield services company with approximately 474 land drilling rigs, 548 land well-servicing and workover rigs in the United States and Canada, offshore rigs, and completion and production services. The filing covers the fiscal year ended December 31, 2012, with comparative results for 2011 and 2010. Operations are organized into Drilling & Rig Services and Completion & Production Services.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenues | $6.990 billion | $6.060 billion | +15% |
| Revenues and earnings from unconsolidated affiliates | $6.688 billion | $6.117 billion | +9% |
| Adjusted income from operating activities | $918.6 million | $867.4 million | +6% |
| Income from continuing operations, net | $239.1 million | $342.2 million | -30% |
| Net income attributable to Nabors | $164.0 million | $243.7 million | -33% |
| Diluted EPS from continuing operations | $0.82 | $1.17 | Down $0.35 |
| Diluted total EPS | $0.56 | $0.83 | Down $0.27 |
| Cash flow from operating activities | $1.563 billion | $1.456 billion | +7% |
| Capital expenditures | $1.519 billion | $2.043 billion | -26% |
Continuing-operations net margin was approximately 3.4% of operating revenues, while total net margin attributable to Nabors was approximately 2.3%. Adjusted income from operating activities was approximately 13.7% of reported operating revenues and earnings from affiliates. The filing identifies adjusted income from operating activities as a non-GAAP measure.
- Cash, cash equivalents and short-term investments were $778.2 million at year-end, versus $539.5 million in 2011.
- Working capital increased to $2.000 billion from $1.286 billion.
- Long-term debt was $4.379 billion, compared with $4.348 billion; gross debt-to-capital was 0.42:1 and net debt-to-capital was 0.38:1.
- The company had $610 million of remaining availability under a new $1.5 billion unsecured revolving credit facility maturing in November 2017. Letter-of-credit availability was $301.3 million.
- Interest coverage improved to 7.9:1 from 7.2:1.
- The Board declared a $0.04-per-share dividend payable in March 2013; Nabors had not paid regular cash dividends since 1982.
Material changes versus the prior comparable period
- Revenue growth reflected higher activity in oil- and liquids-rich shale plays, increased U.S. well-servicing activity, higher U.S. Lower 48 dayrates, and growth in Other Rig Services. Completion Services revenue increased 18%, but its adjusted operating income declined 18% because of lower product-sale margins.
- International revenue increased 15%, but adjusted operating income declined 26% because of lower dayrates and utilization, particularly in Saudi Arabia and Congo.
- U.S. Offshore revenue increased 58%, but the segment remained approximately break-even, with adjusted operating income of negative $0.3 million.
- Natural gas weakness and a second-half contraction in customer spending led to rig oversupply and weaker market conditions. Average Henry Hub natural gas prices declined 31% to $2.75 per Mcf, while average WTI prices declined 1% to $94.10 per barrel.
- Income from unconsolidated affiliates shifted from $56.6 million of earnings to a $301.3 million loss, primarily due to NFR Energy full-cost ceiling-test writedowns. Nabors sold its 49.7% interest in NFR Energy in December 2012.
- Capital expenditures declined substantially, while operating cash flow increased. Nabors received $254.5 million from oil and gas asset and joint-venture disposals.
- Debt-related changes included repayment at maturity of $275 million of 5.375% senior notes and establishment of the new $1.5 billion revolving facility.
- Oil and gas assets were classified as discontinued operations. The discontinued-operations loss narrowed to $74.4 million from $97.4 million, but 2012 included a $128.1 million increase in pipeline contractual liabilities.
Guidance, outlook, risks and unusual items
No formal earnings guidance is provided. Management expected natural gas and liquids prices to remain weak through 2013, with possible improvement in domestic drilling later in the year if crude prices remained stable and liquids prices improved. Management also expected continued rig oversupply for most or all of 2013 because of new capacity and improved rig efficiency. International results were expected to improve as cost pressures abated, rig supply-demand conditions tightened, and major projects commenced.
- 2013 capital expenditures were expected to be approximately $1.0 billion to $1.2 billion, with approximately $0.4 billion of purchase commitments outstanding at year-end.
- Material 2012 charges included $138.7 million for retirement of long-lived assets, a $75.0 million impairment of the Superior trade name, $26.3 million of goodwill impairments, and $50.4 million of long-lived asset impairments.
- These charges were partly offset by approximately $147.5 million of net gains on asset sales, including a gain of approximately $160 million from the NFR Energy sale.
- Pipeline transportation and processing commitments totaled $339.6 million undiscounted, with a recorded liability of $206 million for excess capacity. Lower production or natural gas prices could result in additional charges.
- Key risks include oil and gas price volatility, excess drilling capacity and pricing pressure, customer contract terminations, operating and environmental incidents, hydraulic-fracturing regulation, political and currency risks, debt-service requirements, credit-rating changes, tax audits, and future impairment charges.
- Contingencies include Algerian proceedings with potential exposure of up to approximately $19.7 million and up to $31.1 million in excess of amounts accrued, an SEC inquiry regarding executive perquisites whose outcome was undetermined, and an ERG lawsuit seeking up to $100 million related to a terminated asset-sale transaction.
- The SEC and Department of Justice concluded their Panalpina/Foreign Corrupt Practices Act inquiries without recommending enforcement action.
- Management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective as of December 31, 2012.
Most important facts for investors to verify
- Reconcile reported revenue, affiliate losses, adjusted operating income, and GAAP continuing-operations earnings, particularly the effect of NFR Energy writedowns and asset-sale gains.
- Review debt maturities, revolving-facility covenants, $610 million of remaining revolver availability, and the company’s ability to fund planned 2013 capital expenditures.
- Assess exposure to continued natural gas weakness, rig oversupply, declining dayrates, utilization pressure, and potential additional asset or goodwill impairments.
- Examine the $206 million pipeline liability and the $339.6 million of related contractual commitments associated with discontinued oil and gas operations.
- Monitor the Algerian legal matters, SEC perquisites inquiry, ERG litigation, tax audits and $83.95 million of unrecognized tax benefits.
- Confirm the sustainability of the new quarterly dividend policy and the company’s ability to transfer cash from operating subsidiaries to the Bermuda holding company.