Nabors Industries Ltd. 2011 Q2 SEC Filing Summary
Business context and reporting period
Nabors Industries Ltd., a Bermuda-incorporated oilfield services company, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Its businesses include land and offshore contract drilling, well-servicing, pressure pumping, oil and gas activities, drilling technology, equipment manufacturing, and logistics. The filing includes the acquired Superior Well Services pressure-pumping operations beginning in September 2010.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Operating revenues | $1.355 billion | $896.0 million | $2.736 billion | $1.787 billion |
| Adjusted income from operating activities | $174.8 million | $126.8 million | $365.9 million | $268.6 million |
| Income from continuing operations, net of tax | $68.1 million | $44.0 million | $152.5 million | $87.5 million |
| Net income attributable to Nabors | $192.4 million | $43.6 million | $275.3 million | $83.8 million |
| Diluted EPS | $0.65 | $0.15 | $0.94 | $0.29 |
| Cash flow from operations | Not separately provided | Not separately provided | $869.9 million | $469.9 million |
- Operating revenues and earnings from unconsolidated affiliates increased 51% in the second quarter and 53% for the six-month period.
- Adjusted operating margin was approximately 12.9% for the quarter and 13.4% for the six months, based on adjusted operating income divided by operating revenues.
- Income from discontinued operations contributed $123.9 million in the quarter and $121.7 million for the six months, including gains on Colombian oil and gas asset sales. Consequently, reported net income and EPS were materially higher than continuing-operations results.
- Capital expenditures were $1.003 billion for the six months, compared with $369.5 million in the prior-year period. Investing cash outflow was $799.1 million.
- Cash and cash equivalents were $528.8 million at June 30, 2011, compared with $641.7 million at December 31, 2010. Cash, short-term investments, and long-term investments and other receivables totaled $715.2 million.
- Total assets were $12.116 billion and total equity was $5.668 billion at June 30, 2011.
- Total debt was approximately $4.265 billion, including $1.2 billion drawn on revolving credit facilities. The company reported $200 million of remaining revolving-credit availability and $147.4 million of remaining letter-of-credit availability.
- Gross funded debt to capital was 0.40:1, net funded debt to capital was 0.36:1, and trailing interest coverage was 7.7:1. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Growth was driven by the Superior pressure-pumping acquisition, higher activity and dayrates in U.S. Lower 48 land drilling, increased U.S. land well-servicing utilization, and stronger Canadian drilling activity.
- Pressure Pumping generated $265.9 million of second-quarter revenue and $43.9 million of adjusted operating income; no comparable segment existed in the 2010 period.
- Contract Drilling revenue increased 22% in the quarter and 24% for the six months. U.S. Lower 48 land drilling revenue rose 33% in the quarter and 36% for the six months, while U.S. land well-servicing revenue rose 57% and 55%, respectively.
- U.S. Offshore adjusted operating income declined to a $1.1 million loss in the quarter and a $5.0 million loss for the six months, reflecting permit delays, standby rates, and lower utilization. Alaska and international operations also experienced lower profitability.
- General and administrative expense increased 56% in the quarter and 57% for the six months, primarily because of the Superior acquisition, higher staffing, and expanded operations. Depreciation and amortization increased 29% and 30%, respectively, due to acquired pressure-pumping assets, new rigs, and capital upgrades.
- In May 2011, Nabors redeemed the remaining $1.4 billion of 0.94% senior exchangeable notes using $1.2 billion of revolving-credit borrowings and available cash. Current debt declined from $1.379 billion at year-end 2010 to $0.9 million, while long-term debt increased to $4.265 billion.
- Operating cash flow increased by $400.0 million year over year, aided by stronger earnings and a $189.7 million working-capital cash contribution.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2011 operating results to increase significantly from 2010, supported by sustained higher oil prices, increased drilling in oil- and liquids-rich areas, a full-year contribution from Pressure Pumping, and newer or upgraded equipment.
- Management expected capital expenditures of approximately $1.8 billion to $1.9 billion over the following 12 months and reported approximately $1.1 billion of outstanding purchase commitments, primarily for rigs, equipment, enhancements, sustaining capital, and operating expenses.
- Management believed cash, investments, operating cash flow, asset-sale proceeds, and revolving facilities would adequately fund purchase commitments, debt service, and other anticipated needs for the next 12 months.
- Key operating risks include oil and natural-gas price volatility, customer exploration and production spending, service demand, competition, operating hazards, interest rates, foreign currency, regulatory uncertainty in the Gulf of Mexico, political instability, terrorism, and access to capital markets.
- Discontinued operations included Canadian and Colombian oil and gas assets held for sale. Nabors received $91.4 million from a Colombian asset sale and $119.2 million from a distribution by unconsolidated affiliate Remora. Additional Remora asset sales were expected to close in the third quarter of 2011.
- Material contingencies included Mexican tax assessments with potential aggregate exposure of approximately $90 million to $95 million before consideration of recorded reserves; an Algerian customs judgment of approximately $19.7 million; and an Algerian foreign-exchange judgment of approximately $39.1 million, with potential loss of up to $31.1 million above accrued amounts.
- The company remained subject to a U.S. Department of Justice and SEC-related inquiry concerning transactions involving freight-forwarding vendor Panalpina. The ultimate outcome could not be determined.
- Employment agreements could require payments of up to $100 million to the former chairman and $50 million to the president upon specified termination, death, disability, or change-in-control events; these obligations were not accrued.
Most important facts for an investor to verify
- Separate recurring continuing-operations performance from the $123.9 million of second-quarter discontinued-operation income and related asset-sale gains.
- Verify the sustainability of revenue and margin growth after normalizing for the Superior acquisition and other nonrecurring items.
- Assess the funding and execution risk associated with $1.8 billion to $1.9 billion of planned capital expenditures and approximately $1.1 billion of purchase commitments.
- Review refinancing and liquidity requirements for the $275 million of senior notes due August 2012 and the $1.2 billion of revolving borrowings due September 2014.
- Monitor U.S. Offshore and international utilization, dayrates, regulatory delays, and customer spending constraints in Alaska and Saudi Arabia.
- Evaluate the potential financial impact of tax audits, Algerian proceedings, the Panalpina-related investigation, self-insurance claims, and other litigation.
- Confirm that the remaining $200 million of revolving-credit availability and reported covenant compliance remain adequate under weaker oilfield-market conditions.