NABORS INDUSTRIES LTD quarterly report, Q2 FY2022

Nabors Industries Ltd. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Nabors is a global provider of land-based and offshore drilling, drilling-related services, technologies and equipment manufacturing, operating in more than 15 countries. As of June 30, 2022, the company had 301 actively marketed land rigs and 29 actively marketed offshore rigs. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.

Key financial metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Operating revenue	$630.9 million	$489.3 million	$1.199 billion	$949.8 million
Net loss attributable to Nabors common shareholders	$(82.9) million	$(196.0) million	$(267.4) million	$(336.7) million
Diluted loss per share	$(9.41)	$(26.59)	$(31.34)	$(46.90)
Net cash provided by operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$162.2 million	$213.2 million
Capital expenditures	Not separately provided for the quarter	Not separately provided for the quarter	$160.9 million	$117.8 million

Q2 operating revenue increased 29%; six-month revenue increased 26%.
Approximate net loss margins improved to 13.1% in Q2 2022 from 40.1% in Q2 2021, and to 20.4% for the six months from 35.5% in the prior-year period.
Q2 adjusted operating income for reportable segments was $33.3 million, compared with a $26.1 million loss in Q2 2021. Six-month adjusted segment operating income was $33.0 million versus a $62.0 million loss.
Cash and short-term investments totaled $418.0 million at June 30, 2022, compared with $991.5 million at December 31, 2021. Working capital was $399.3 million versus approximately $1.0 billion at year-end.
Cash and cash equivalents were $413.0 million; restricted cash was $282.4 million at June 30, 2022.
Long-term debt was $2.602 billion, compared with $3.263 billion at December 31, 2021. No borrowings were outstanding under the $350 million 2022 secured revolving credit facility, although $66.9 million of letters of credit were outstanding.
Net cash used in financing activities was $578.6 million, including $460.0 million of net revolving-credit repayment and $110.0 million of long-term debt repayment.

Material changes versus the prior comparable period

U.S. Drilling revenue rose 57% in Q2 to $253.0 million, driven by a 39% increase in average rigs working to 96.4 and improved day rates. Six-month revenue increased 55%.
International Drilling revenue increased 16% in Q2 to $296.3 million, with average rigs working up 9% to 74.3. Six-month revenue increased 15%.
Drilling Solutions revenue increased 43% in Q2 to $55.9 million, while Rig Technologies revenue increased 31% to $45.1 million.
Canada Drilling revenue ceased following the sale of the Canadian drilling assets in July 2021.
Q2 2021 included a $58.0 million impairment of Canada Drilling assets; no comparable impairment was recorded in Q2 2022. Depreciation and amortization declined 7% in both the quarter and six-month period.
Other, net included a $22.0 million Q2 and $93.7 million six-month mark-to-market loss on common-stock warrants and derivatives. The warrant liability was $78.7 million at June 30, 2022.
General and administrative expense increased 13% in Q2 and 5% for the six months, while research and engineering expense increased 37% and 47%, respectively, reflecting higher activity and workforce and development costs.
Operating cash flow declined despite improved operating results, primarily because increased activity required additional working capital. Capital expenditures increased by $43.1 million for the six-month period.

Guidance, outlook, risks and unusual items

Management expects continued increases in U.S. activity through the remainder of 2022 and 2023. International activity had substantially recovered toward pre-COVID-19 levels in several key markets.
Management stated that current cash, operating cash flow, potential debt or equity proceeds and available credit facilities are expected to fund capital expenditures, scheduled debt service and other requirements for at least the next 12 months, subject to operational and financial projections proving accurate.
The company expected to remain in compliance with the 2022 Credit Agreement covenants for the following 12 months, but warned that covenant compliance could be affected if projections or underlying assumptions prove incorrect.
The 2022 Credit Agreement contains an interest-coverage requirement, minimum guarantor-value requirement, collateral coverage requirements and restrictions on liens, dividends, share repurchases and subsidiary debt. Failure to comply could terminate commitments and accelerate borrowings.
The accounts-receivable facility was amended in June 2022, increasing purchaser commitments from $150 million to $250 million, with potential expansion to $300 million subject to lender approval. Approximately $154.0 million of receivables had been sold and remained uncollected at June 30, 2022. The facility may expire earlier if specified 2023 or 2024 debt remains outstanding.
Debt maturities include $21.1 million of 5.50% notes due January 2023, $53.6 million of 5.10% notes due September 2023 and $177.0 million of 0.75% exchangeable notes due January 2024, based on carrying amounts at June 30, 2022.
Russia and Ukraine-related sanctions and geopolitical developments could require the company to limit or suspend Russian operations. Russia represented 1.6% of six-month operating revenue and 1.2% of net property, plant and equipment at June 30, 2022.
Purchase commitments totaled approximately $247.9 million, primarily for capital expenditures, operating expenses and inventory. Financial standby letters of credit and other surety instruments had a maximum amount of $100.0 million.
Management reported no material adverse effect expected from pending litigation, but an Algerian matter could result in a loss of up to $11.3 million above accrued amounts. Tax authorities may also challenge tax positions, deferred tax assets or the company’s international tax structure.
Disclosure controls and procedures were effective as of June 30, 2022, and no material changes in internal control over financial reporting were reported.

Important facts for investors to verify

Verify the sustainability of improved rig utilization, day rates and segment profitability as oilfield activity and commodity prices fluctuate.
Assess liquidity against near-term debt maturities, accounts-receivable-facility acceleration provisions, capital commitments and covenant requirements.
Separate recurring operating performance from the $93.7 million six-month warrant and derivative mark-to-market loss and other unusual items.
Monitor cash conversion: six-month operating cash flow of $162.2 million was below the $160.9 million of capital expenditures before debt service and other financing uses.
Review potential dilution from approximately 2.5 million outstanding warrants and the 1.1 million shares already issued through warrant exercises.
Evaluate exposure to Russia-related sanctions, international political risk, oil and gas price volatility, customer spending, contract renewals and credit-rating pressure.
Confirm the timing and refinancing plans for 2023–2025 debt maturities and the effect of the 2022 Credit Agreement’s springing maturity provisions.