NABORS INDUSTRIES LTD MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
We often discuss expectations regarding our future markets, demand for our products and services, and our performance in our annual, quarterly and current reports, press releases, and other written and oral statements. Statements relating to matters that are not historical facts are "forward-looking statements" within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These "forward-looking statements" are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "should," "could," "may," "predict" and similar expressions are intended to identify forward-looking statements.
You should consider the following key factors when evaluating these forward-looking statements:
? actual and potential political or economic instability, civil unrest, war
or acts of terrorism involving any of the countries in which we operate;
? the novel coronavirus (“COVID-19”) pandemic and its impact on our operations as
as well as oil and gas markets and prices;
? fluctuations and volatility in world oil prices and demand and
? fluctuations in levels of oil and natural gas exploration and development
? fluctuations in demand for our services;
? competitive and technological changes and other developments in the oil and gas industry
and oil service industries;
? our ability to renew customer contracts in order to maintain our competitiveness;
? the existence of operational risks inherent in oil and gas and oilfields
? the possibility of the loss of one or more of our major customers;
? the impact of long-term debt and other financial commitments on our
financial and operational flexibility;
our access and cost of capital, including the impact of a new
? deterioration in our credit rating, covenant restrictions, availability under our
secured revolving credit facility and future debt or equity issuances
? our dependence on our operating subsidiaries and our investments to meet our
? our ability to retain qualified employees;
? our ability to successfully complete and realize the expected benefits of
? changes in tax laws and the possibility of changes in other laws and
? the possibility of changes to
imposition of embargoes or trade sanctions; and
? general economic conditions, including capital and credit markets.
Our business depends, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of oil or natural gas, that 24
has a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows. The above description of risks and uncertainties is by no means all-inclusive but highlights certain factors that we believe are important for your consideration. For a more detailed description of risk factors that may affect us or our industry, please refer to Item 1A. - Risk Factors in our 2021 Annual Report. Management Overview This section is intended to help you understand our results of operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes thereto. We are a leading provider of advanced technology for the energy industry. With operations in over 15 countries, Nabors has established a global network of people, technology and equipment to deploy solutions that deliver safe, efficient and sustainable energy production. By leveraging its core competencies, particularly in drilling, engineering, automation, data science and manufacturing, Nabors aims to innovate the future of energy and enable the transition to a lower carbon world.
The demand for our services and products is a function of the level of spending by oil and gas companies for exploration, development and production activities. The level of exploration, development and production activities is to a large extent tied to the prices of oil and natural gas, which can fluctuate significantly, are highly volatile and tend to be highly sensitive to supply and demand cycles. Additionally, some oil and gas companies may intentionally limit their capital spending to a percentage of their operating cash flows which may differ from how they have historically made capital allocation decisions. During 2020, the oil markets experienced unprecedented volatility. The COVID-19 outbreak, and its development into a pandemic, along with policies and actions taken by governments and behaviors of companies and customers around the world, had a significant negative impact on demand for oil and gas and by extension our services, which negatively impacted our operating results and cash flow throughout 2020 and into 2021. The Lower-48 drilling rig market began to stabilize during the second half of 2020 and continued to improve at a measured rate throughout 2021. We expect continued measured but steady increases in activity throughout the remainder of 2022 for the Lower-48 market. Our International markets also experienced factors and conditions that led to similar reductions in activity throughout 2020, but the impact varied considerably from country to country. Since 2020, we have seen a substantial resumption of activity to near pre-COVID-19 levels. As government-imposed restrictions continue to ease, we expect our international activity to generally increase through the remainder of the year. More recently, several global commodity markets, including oil and gas, have been impacted by the effects of the war in
Ukraine. These consequences include severe economic sanctions against the Russian government as well as certain Russian businesses and individuals, in addition to a reorientation of the global sources of oil and gas supply and a significant increase in the related commodity prices. While higher commodity prices have historically led to an increase in oilfield activity, the ultimate outcome of these events and the impact on our business remains uncertain.
Credit agreement 2022
January 21, 2022, we entered into a revolving credit agreement between Nabors Delaware, the guarantors from time to time party thereto, the issuing banks (the "Issuing Banks") and other lenders party thereto (the "Lenders") and Citibank, N.A., as administrative agent (the "2022 Credit Agreement"). The 2022 Credit Agreement replaced the 2018 Revolving Credit Facility. Under the 2022 Credit Agreement, the Lenders have committed to provide up to an aggregate principal amount at any time outstanding not in excess of $350.0 million(with an accordion feature for an additional $100.0 million) to Nabors Delawareunder a secured revolving credit facility, including sub-facilities provided by certain of the Lenders for letters of credit in an aggregate principal amount at any time outstanding not in excess of $100.0 million. The facility matures on the earlier of (a) January 21, 2026and (b) (i) to the extent any principal amount of 25 Table of Contents Nabors Delaware'sexisting 5.1% senior notes due 2023, 5.5% senior notes due 2023 and 5.75% senior notes due 2025 remains outstanding on the date that is 90 days prior to the applicable maturity date for such indebtedness, then such 90th day or (ii) to the extent 50% or more of the outstanding (as of the closing date) aggregate principal amount of the 0.75% senior exchangeable notes due 2024 remains outstanding and not refinanced or defeased on the date that is 90 days prior to the maturity date for such indebtedness, then such 90th day.
Comparison of the three months ended
Operating revenue for the three months ended
Net loss from continuing operations attributable to Nabors common shareholders totaled
$184.5 million( $22.51per diluted share) for the three months ended March 31, 2022compared to a net loss from continuing operations attributable to Nabors common shareholders of $140.8 million( $20.16per diluted share) for the three months ended March 31, 2021, or a $43.7 millionincrease in the net loss. The majority of the increase in net loss is attributable to $73.2 millionin mark-to-market losses from the common stock warrants that were outstanding during the first quarter of 2022. These losses were partially offset by improved market conditions in all our segments from the prior year, together with lower depreciation. General and administrative expenses for the three months ended March 31, 2022totaled $53.6 million, representing a decrease of $1.0 million, or 2%, compared to the three months ended March 31, 2021. Research and engineering expenses for the three months ended March 31, 2022totaled $11.7 million, representing an increase of $4.1 million, or 56%, compared to the three months ended March 31, 2021. This is primarily reflective of an increase in research and development activities, along with the higher general operating activity levels, as market conditions have improved. Depreciation and amortization expense for the three months ended March 31, 2022was $164.4 million, representing a decrease of $12.9 million, or 7%, compared to the three months ended March 31, 2021. The decrease is attributable to the combination of a reduction in depreciation as a result of the many assets that have recently reached the end of their useful lives and limited capital expenditures over recent years. The decrease is also due to the sale of CanadaDrilling assets in July 2021. 26
Segment operating results
The following tables present certain information regarding our reportable segments and our drilling activity:
Three Months Ended March 31, 2022 2021 Increase/(Decrease) (In thousands, except percentages and rig activity) U.S. Drilling Operating revenues
$ 217,583 $ 142,299 $ 75,28453 % Adjusted operating income (loss) (1) $ (5,851)$
$ 17,48575 % Average rigs working (2) 90.3 60.5 29.8 49 % Canada Drilling Operating revenues $ - $ 20,989 $ (20,989)(100) %
Adjusted operating income (loss) (1)
$ (3,926)(100) % Average rigs working (2) - 13.7 (13.7) (100) % International Drilling Operating revenues $ 279,030 $ 246,838 $ 32,19213 %
Adjusted operating income (loss) (1)
$ 12,30566 % Average rigs working (2) 72.0 64.8 7.2 11 % Drilling Solutions Operating revenues $ 54,182 $ 35,706 $ 18,47652 %
Adjusted operating income (loss) (1)
$ 9,999212 % Rig Technologies Operating revenues $ 36,736 $ 25,748 $ 10,98843 %
Adjusted operating income (loss) (1)
Adjusted operating profit (loss) is our measure of segment profit and loss. (1) See Note 11-Segment information to the consolidated financial statements
included in point 1 of the report.
Represents a measure of the average number of platforms in operation during a
period. For example, a rig running 45 days in a quarter represents (2) approximately 0.5 average rigs running during the quarter. Over an annual period,
a platform running 182.5 days is about 0.5 average platform
working for the year.
Operating revenues for our
U.S.Drilling segment increased by $75.3 millionor 53% during the three months ended March 31, 2022compared to the corresponding period in 2021. This increase was due to a 49% increase in the average rigs working, reflecting increased drilling activity as market conditions and demand for our drilling services have rebounded and increased since the prior year.
Operating revenue decreased in the three months ended
compared to the same period last year due to the sale of the assets of Canada Drilling in
Operating revenues for our International Drilling segment increased by
$32.2 millionor 13% compared to the corresponding prior year period. This increase was due to an 11% increase in the average rigs working, reflecting increased drilling activity as market conditions and demand for our drilling services have rebounded and increased since the prior year. 27 Table of Contents Drilling Solutions Operating revenues for this segment increased by $18.5 millionor 52% during the three months ended March 31, 2022compared to the corresponding period in 2021 as market conditions and demand for our services have rebounded and drilling activity has increased since the prior year.
Operating revenue from our Rig Technologies segment increased by
or 43% during the three months ended
Other financial information
Interest expense for the three months ended
March 31, 2022was $46.9 million, representing an increase of $3.9 million, or 9%, compared to the three months ended March 31, 2021. The increase was primarily due to the issuance of $700 millionin 7.375% senior priority guaranteed notes due May 2027in November 2021, partially offset by a reduction to our overall debt levels, outstanding notes and credit facilities. Other, net Other, net for the three months ended March 31, 2022was $80.4 millionof loss. Approximately $73.2 millionof this amount related to mark-to-market losses from the common stock warrants. In addition, there were $4.2 millionin foreign currency loss and an increase of $3.1 millionin litigation reserves. Other, net for the three months ended March 31, 2021was $7.3 millionof loss, which included a net gain on debt buybacks of $8.1 million. This was offset by net losses on sales and disposals of assets of approximately $8.5 million, foreign currency loss of $2.4 millionand an increase in litigation reserves of $1.5 million. Income taxes Our worldwide tax expense for the three months ended March 31, 2022was $13.7 millioncompared to $9.7 millionfor the three months ended March 31, 2021. The increase in tax expense was primarily attributable to the improvement in income before income taxes, excluding the mark-to-market losses related to the common stock warrants, and the geographic mix of our pre-tax earnings (losses).
Cash and capital resources
Financial situation and sources of liquidity
Our primary sources of liquidity are cash and investments, availability under our revolving credit facility and cash generated from operations. As of
March 31, 2022, we had cash and short-term investments of $394.0 millionand working capital of $430.6 million. As of December 31, 2021, we had cash and short-term investments of $991.5 millionand working capital of $1.0 billion.
The 2022 Credit Agreement requires us to maintain an interest coverage ratio (EBITDA/interest expense), which increases on a quarterly basis, and a minimum guarantor value, requiring the guarantors (other than the Company) and their subsidiaries to own at least 90% of the consolidated property, plant and equipment of the Company. Additionally, the Company is subject to certain covenants, which are subject to certain exceptions and include, among others, (i) a covenant restricting our ability to incur liens (subject to the additional liens basket of up to
$150.0 million), (ii) a covenant restricting its ability to pay dividends or make other distributions with respect to its capital stock and to repurchase certain indebtedness and (iii) a covenant restricting the ability of the Company's subsidiaries to incur debt 28
(subject to the grower basket of up to
$100.0 million). As of March 31, 2022, we were in compliance with both the interest coverage ratio and the minimum guarantor value requirements under the 2022 Credit Agreement. We also had $62.6 millionof letters of credit outstanding under the 2022 Credit Agreement. As of the date of this report, we were in compliance with all covenants under the 2022 Credit Agreement. If we fail to perform our obligations under the covenants, the revolving credit commitments under the 2022 Credit Agreement could be terminated, and any outstanding borrowings under the facilities could be declared immediately due and payable. If necessary, we have the ability to manage our covenant compliance by taking certain actions including reductions in discretionary capital or other types of controllable expenditures, monetization of assets, amending or renegotiating the revolving credit agreement, accessing capital markets through a variety of alternative methods, or any combination of these alternatives. We expect to remain in compliance with all covenants under the 2022 Credit Agreement during the twelve month period following the date of this report based on our current operational and financial projections. However, we can make no assurance of continued compliance if our current projections or material underlying assumptions prove to be incorrect. If we fail to comply with the covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facility could be declared immediately due and payable. Our ability to access capital markets or to otherwise obtain sufficient financing may be affected by our senior unsecured debt ratings as provided by the major credit rating agencies in the United Statesand our historical ability to access these markets as needed. While there can be no assurances that we will be able to access these markets in the future, we believe that we will be able to access capital markets or otherwise obtain financing in order to satisfy any payment obligation that might arise upon maturity, exchange or purchase of our notes and our debt facilities, loss of availability of our revolving credit facilities and our A/R Facility (see-Accounts Receivable Purchase and Sales Agreements, below), and that any cash payment due, in addition to our other cash obligations, would not ultimately have a material adverse impact on our liquidity or financial position. The major U.S.credit rating agencies have previously downgraded our senior unsecured debt rating to non-investment grade. These and any further ratings downgrades could adversely impact our ability to access debt markets in the future, increase the cost of future debt, and potentially require us to post letters of credit for certain obligations
We had 18 letter of credit facilities with various banks in
March 31, 2022 (In thousands) Credit available
$ 620,552Less: Letters of credit outstanding, inclusive of financial and performance guarantees 77,064 Remaining availability $ 543,488
Accounts Receivable Purchase and Sale Agreements
September 13, 2019, we entered into an accounts receivables sales agreement (the "A/R Sales Agreement") and an accounts receivables purchase agreement (the "A/R Purchase Agreement" and, together with the A/R Sales Agreement, the "A/R Facility"), whereby the originators sold or contributed, and will on an ongoing basis continue to sell or contribute, certain of their domestic trade accounts receivables to a wholly-owned, bankruptcy-remote special purpose entity ("SPE"). The SPE in turn, sells, transfers, conveys and assigns to third-party Purchasers, all the rights, title and interest in and to its pool of eligible receivables. On July 13, 2021, we entered into the First Amendment to the A/R Purchase Agreement which extends the term of the A/R Facility by two years, to August 13, 2023. However, the expiration of the agreement could be accelerated to July 19, 2022, if any of the 5.5% Senior Notes due 2023 of Nabors Delawareremain outstanding as of such date. The amendment also reduced the commitments of the third-party Purchasers from $250 millionto $150 million, with the possibility of being increased up to $200 million. The amount available for purchase under the A/R Facility fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after excluding excess concentrations and certain other ineligible receivables. The maximum purchase commitment of the third-party Purchasers under the A/R Facility is approximately $150.0 millionand the amount of receivables purchased by the third-party Purchasers as of March 31, 2022
$136.0 million. 29 Table of Contents
Future cash requirements
Our current cash and investments, projected cash flows from operations, proceeds from equity or debt issuances and the facilities under our 2022 Credit Agreement are expected to adequately finance our purchase commitments, capital expenditures, acquisitions, scheduled debt service requirements, and all other expected cash requirements for at least the next 12 months. However, we can make no assurances that our current operational and financial projections will prove to be correct. A sustained period of highly depressed oil and natural gas prices could have a significant effect on our customers' capital expenditure spending and therefore our operations, cash flows and liquidity. Purchase commitments outstanding at
March 31, 2022totaled approximately $251.8 million, primarily for capital expenditures, other operating expenses and purchases of inventory. We can reduce planned expenditures if necessary or increase them if market conditions and new business opportunities warrant it. The level of our outstanding purchase commitments and our expected level of capital expenditures over the next 12 months represent a number of capital programs that are currently underway or planned. See our discussion of guarantees issued by Nabors that could have a potential impact on our financial position, results of operations or cash flows in future periods included below under "Off-Balance Sheet Arrangements (Including Guarantees)."
There were no material changes to the contractual cash obligations that were included in our 2021 Annual Report.
August 25, 2015, our Board authorized a share repurchase program (the "program") under which we may repurchase, from time to time, up to $400.0 millionof our common shares by various means, including in the open market or in privately negotiated transactions. Authorization for the program, which was renewed in February 2019, does not have an expiration date and does not obligate us to repurchase any of our common shares. Since establishing the program, we have repurchased 0.3 million of our common shares for an aggregate purchase price of approximately $121.1 millionunder this program. The repurchased shares, which are held by our subsidiaries, are registered and tradable subject to applicable securities law limitations and have the same voting and other rights as other outstanding shares. As of March 31, 2022, the remaining amount authorized under the program that may be used to purchase shares was $278.9 million. As of March 31, 2022, our subsidiaries held 1.1 million of our common shares. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, both in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and may involve material amounts.
Our cash flows depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Sustained decreases in the price of oil or natural gas could have a material impact on these activities and could also materially affect our cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures or acquisitions, purchases and sales of investments, dividends, loans, issuances and repurchases of debt and of our common shares are within our control and are adjusted as necessary based on market conditions. We discuss our cash flows for the three months ended
March 31, 2022and 2021 below. Operating Activities. Net cash provided by operating activities totaled $41.4 millionduring the three months ended March 31, 2022, compared to net cash provided of $79.5 millionduring the corresponding 2021 period. Operating cash flows are our primary source of capital and liquidity. Cash from operating results (before working capital changes) was $68.6 millionfor the three months ended March 31, 2022, an increase of $16.5 millionwhen compared to $52.1 millionin the corresponding 2021 period. This was due to the increase in activity across most of our business for the three month period ended March 31, 2022compared to the three month period ended March 31, 2021. Changes in working 30 Table of Contents capital items such as collection of receivables, other deferred revenue arrangements and payments of operating payables are also significant factors affecting operating cash flows and can be highly volatile in periods of increasing or decreasing activity levels. Changes in working capital items used $27.3 millionin cash flows during the three months ended March 31, 2022, a $54.7 millionunfavorable change as compared to the $27.4 millionin cash flows provided from working capital in the corresponding 2021 period. This is reflective of the increased working capital requirements that are a result of activity level increases. Investing Activities. Net cash used for investing activities totaled $82.1 millionduring the three months ended March 31, 2022compared to net cash used of $19.1 millionduring the corresponding 2021 period. Our primary use of cash for investing activities is capital expenditures for rig-related enhancements, new construction and equipment, as well as sustaining capital expenditures. During the three months ended March 31, 2022and 2021, we used cash for capital expenditures totaling $84.3 millionand $40.9 million, respectively. We received $3.7 millionin proceeds from sales of assets and insurance claims during the three months ended March 31, 2022compared to $10.8 millionfor the corresponding 2021 period. We also received $10.9 millionin sales and maturities of investments for the three months ended March 31, 2021.
Fundraising activities. Net cash used for financing activities totaled
Net cash used for financing activities totaled
$113.9 millionduring the three months ended March 31, 2021. During the three months ended March 31, 2021, we used $49.1 millionfor a redeemable non-controlling interest distribution, $40.0 millionin net amounts repaid under our revolving credit facility and by a $16.8 millionrepayment on our senior notes. Additionally, we paid dividends totaling $3.6 millionto our preferred shareholders.
Summarized combined financial information for the securities guarantee of the subsidiaries
Nabors Delawareis an indirect, wholly owned subsidiary of Nabors. Nabors fully and unconditionally guarantees the due and punctual payment of the principal of, premium, if any, and interest on Nabors Delaware'sregistered notes, which are its (i) 5.10% Senior Notes due 2023 (the "2023 Notes"), (ii) 5.50% Senior Notes due 2023 (the "5.50% 2023 Notes") and (iii) 5.75% Senior Notes due 2025 (the "2025 Notes" and, together with the 2023 Notes and the 5.50% 2023 Notes, the "Registered Notes"), and any other obligations of Nabors Delawareunder the Registered Notes when and as they become due and payable, whether at maturity, upon redemption, by acceleration or otherwise, if Nabors Delawareis unable to satisfy these obligations. Nabors' guarantee of Nabors Delaware'sobligations under the Registered Notes are its unsecured and unsubordinated obligation and have the same ranking with respect to Nabors' indebtedness as the Registered Notes have with respect to Nabors Delaware'sindebtedness. In the event that Nabors is required to withhold or deduct on account of any Bermudian taxes due from any payment made under or with respect to its guarantees, subject to certain exceptions, Nabors will pay additional amounts so that the net amount received by each holder of Registered Notes will equal the amount that such holder would have received if the Bermudian taxes had not been required to be withheld or deducted. The following summarized financial information is included so that separate financial statements of Nabors Delawareare not required to be filed with the SEC. The condensed consolidating financial statements present investments in both consolidated and unconsolidated affiliates using the equity method of accounting. In lieu of providing separate financial statements for issuers and guarantors (the " Obligated Group"), we have presented the accompanying supplemental summarized combined balance sheet and income statement information for the Obligated Groupbased on Rule 13-01 of the SEC'sRegulation S-X that we early adopted effective April 1, 2020. All significant intercompany items among the Obligated Grouphave been eliminated in the supplemental summarized combined financial information. The Obligated Group'sinvestment balances in Subsidiary Non-Guarantors have been excluded from the supplemental combined financial information. Significant intercompany balances and activity for the Obligated Groupwith other related parties, including Subsidiary Non-Guarantors (referred to as "affiliates"), are presented separately in the accompanying supplemental summarized financial
information. 31 Table of Contents
Summarized Combined Balance Sheet and Income Statement Information for the
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