Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
Commission File Number: 001-32657
NABORS INDUSTRIES LTD.
(Exact name of registrant as specified in its charter)
Bermuda
98-0363970
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Crown House
Second Floor
4 Par-la-Ville Road
Hamilton, HM08
(441) 292-1510
(Address of principal executive office)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
Accelerated Filer ☐
Non-accelerated Filer ☐
Smaller reporting company ☐
(Do not check if a smaller reporting company)
Emerging growth company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
The number of common shares, par value $.001 per share, outstanding as of April 25, 2017 was 285,800,732, excluding 49,672,636 common shares held by our subsidiaries, or 335,473,368 in the aggregate.
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
Index
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016
Condensed Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2017 and 2016
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2017 and 2016
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
Exhibit Index
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
December 31,
2017
2016
(In thousands, except per
share amounts)
ASSETS
Current assets:
Cash and cash equivalents
$
200,688
264,093
Short-term investments
27,907
31,109
Accounts receivable, net
514,446
508,355
Inventory, net
109,461
103,595
Assets held for sale
77,118
76,668
Other current assets
193,036
172,019
Total current assets
1,122,656
1,155,839
Property, plant and equipment, net
6,218,699
6,267,583
Goodwill
166,999
166,917
Deferred tax asset
373,973
366,586
Other long-term assets
212,985
230,090
Total assets
8,095,312
8,187,015
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt
313
297
Trade accounts payable
241,332
264,578
Accrued liabilities
497,364
543,248
Income taxes payable
32,640
13,811
Total current liabilities
771,649
821,934
Long-term debt
3,661,665
3,578,335
Other long-term liabilities
467,248
522,456
Deferred income taxes
8,356
9,495
Total liabilities
4,908,918
4,932,220
Commitments and contingencies (Note 7)
Equity:
Shareholders’ equity:
Common shares, par value $0.001 per share:
Authorized common shares 800,000; issued 335,567 and 333,598, respectively
336
334
Capital in excess of par value
2,612,457
2,521,332
Accumulated other comprehensive income (loss)
(11,336)
(12,119)
Retained earnings
1,872,440
2,033,427
Less: treasury shares, at cost, 49,673 and 49,673 common shares, respectively
(1,295,949)
Total shareholders’ equity
3,177,948
3,247,025
Noncontrolling interest
8,446
7,770
Total equity
3,186,394
3,254,795
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
(In thousands, except per share amounts)
Revenues and other income:
Operating revenues
562,550
597,571
Earnings (losses) from unconsolidated affiliates
(167,151)
Investment income (loss)
721
343
Total revenues and other income
563,273
430,763
Costs and other deductions:
Direct costs
387,644
365,023
General and administrative expenses
63,409
62,334
Research and engineering
11,757
8,162
Depreciation and amortization
203,672
215,818
Interest expense
56,518
45,730
Other, net
13,510
182,404
Total costs and other deductions
736,510
879,471
Income (loss) from continuing operations before income taxes
(173,237)
(448,708)
Income tax expense (benefit):
Current
22,689
14,825
Deferred
(48,298)
(66,889)
Total income tax expense (benefit)
(25,609)
(52,064)
Income (loss) from continuing operations, net of tax
(147,628)
(396,644)
Income (loss) from discontinued operations, net of tax
(439)
(926)
Net income (loss)
(148,067)
(397,570)
Less: Net (income) loss attributable to noncontrolling interest
(917)
(724)
Net income (loss) attributable to Nabors
(148,984)
(398,294)
Amounts attributable to Nabors:
Net income (loss) from continuing operations
(148,545)
(397,368)
Net income (loss) from discontinued operations
Earnings (losses) per share:
Basic from continuing operations
(0.52)
(1.41)
Basic from discontinued operations
—
Total Basic
Diluted from continuing operations
Diluted from discontinued operations
Total Diluted
Weighted-average number of common shares outstanding:
Basic
277,781
275,851
Diluted
Dividends declared per common share
0.06
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Other comprehensive income (loss), before tax:
Translation adjustment attributable to Nabors
Unrealized gain (loss) on translation adjustment
3,860
33,362
Less: reclassification adjustment for realized (gain) loss on translation adjustment
Unrealized gains (losses) on marketable securities:
Unrealized gains (losses) on marketable securities
(3,201)
769
Less: reclassification adjustment for (gains) losses included in net income (loss)
Pension liability amortization and adjustment
50
174
Unrealized gains (losses) and amortization on cash flow hedges
153
Other comprehensive income (loss), before tax
862
34,458
Income tax expense (benefit) related to items of other comprehensive income (loss)
79
129
Other comprehensive income (loss), net of tax
783
34,329
Comprehensive income (loss) attributable to Nabors
(148,201)
(363,965)
Net income (loss) attributable to noncontrolling interest
917
724
Translation adjustment attributable to noncontrolling interest
49
419
Comprehensive income (loss) attributable to noncontrolling interest
966
1,143
Comprehensive income (loss)
(147,235)
(362,822)
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
Cash flows from operating activities:
Adjustments to net income (loss):
204,364
216,669
Deferred income tax expense (benefit)
(48,469)
(67,289)
Impairments and other charges
2,735
Deferred financing costs amortization
1,728
1,118
Discount amortization on long-term debt
4,505
568
Losses (gains) on debt buyback
8,596
(6,027)
Losses (gains) on long-lived assets, net
2,875
2,563
Impairments on equity method holdings
177,242
Share-based compensation
10,280
7,374
Foreign currency transaction losses (gains), net
877
4,213
Equity in (earnings) losses of unconsolidated affiliates, net of dividends
(2)
167,151
Other
(751)
(428)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
(19,198)
166,074
Inventory
(5,301)
2,057
(10,725)
(18,651)
15,294
13,214
Trade accounts payable and accrued liabilities
(38,659)
(120,757)
17,929
(53,267)
10,284
Net cash (used for) provided by operating activities
(57,991)
161,506
Cash flows from investing activities:
Purchases of investments
(4)
Sales and maturities of investments
91
41
Capital expenditures
(183,427)
(129,875)
Proceeds from sales of assets and insurance claims
3,253
5,448
(106)
(4,439)
Net cash (used for) provided by investing activities
(180,193)
(128,825)
Cash flows from financing activities:
Increase (decrease) in cash overdrafts
(469)
1,642
Proceeds from issuance of long-term debt
411,200
Debt issuance costs
(10,439)
Proceeds from revolving credit facilities
150,000
Reduction in revolving credit facilities
(70,000)
Proceeds from (payments for) issuance of common shares
8,300
Repurchase of common shares
(1,687)
Reduction in long-term debt
(170,491)
(148,045)
Dividends to shareholders
(17,040)
(16,922)
Proceeds from (payment for) commercial paper, net
1,325
Cash proceeds from equity component of exchangeable debt
159,952
Payments on term loan
(162,500)
Proceeds from (payments for) short-term borrowings
16
(628)
Purchase of capped call hedge transactions
(40,250)
(5,341)
(3,190)
Net cash (used for) provided by financing activities
172,938
(87,505)
Effect of exchange rate changes on cash and cash equivalents
1,841
968
Net increase (decrease) in cash and cash equivalents
(63,405)
(53,856)
Cash and cash equivalents, beginning of period
254,530
Cash and cash equivalents, end of period
200,674
6
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Capital
Accumulated
Common Shares
in Excess
Non-
Par
of Par
Comprehensive
Retained
Treasury
controlling
Total
Shares
Value
Income
Earnings
Interest
Equity
As of December 31, 2015
330,526
331
2,493,100
(47,593)
3,131,134
(1,294,262)
11,158
4,293,868
Dividends to shareholders ($0.06 per share)
Repurchase of treasury shares
34,748
1,149
1
(3,191)
(424)
(3,614)
As of March 31, 2016
331,675
332
2,497,283
(13,264)
2,715,918
11,877
3,916,197
As of December 31, 2016
333,598
(17,153)
832
Issuance of common shares for stock options exercised, net of surrender of unexercised stock options
843
8,299
Equity component of exchangeable debt
116,195
Capped call transactions
Adoption of ASU No. 2016-09
1,943
5,150
7,093
1,126
(5,342)
(290)
(5,631)
As of March 31, 2017
335,567
7
Nabors Industries Ltd. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Nature of Operations
Unless the context requires otherwise, references in this annual report to “we,” “us,” “our,” “the Company,” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires.
We own and operate the world’s largest land-based drilling rig fleet and are a leading provider of offshore platform drilling rigs in the United States and multiple international markets. We also provide advanced wellbore placement services, drilling software and performance tools, drilling equipment and innovative technologies throughout the world’s most significant oil and gas markets.
As a global provider of drilling and drilling-related services for land-based and offshore oil and natural gas wells, our fleet of rigs and drilling-related equipment as of March 31, 2017 included:
·
403 actively marketed rigs for land-based drilling operations in the United States, Canada and approximately 20 other countries throughout the world; and
41 actively marketed rigs for offshore drilling operations in the United States and multiple international markets.
Our business consists of four reportable operating segments: U.S., Canada, International and Rig Services.
Note 2 Summary of Significant Accounting Policies
Interim Financial Information
The accompanying unaudited consolidated condensed financial statements of Nabors have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read together with our annual report on Form 10-K for the year ended December 31, 2016 (“2016 Annual Report”). In management’s opinion, the unaudited condensed consolidated financial statements contain all adjustments necessary to state fairly our financial position as of March 31, 2017 and the results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented herein. Interim results for the three months ended March 31, 2017 may not be indicative of results that will be realized for the full year ending December 31, 2017.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of Nabors, as well as all majority owned and non-majority owned subsidiaries required to be consolidated under GAAP. All significant intercompany accounts and transactions are eliminated in consolidation.
Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method. Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our condensed consolidated statements of income (loss). The investments in these entities are included in investment in unconsolidated affiliates in our condensed consolidated balance sheets. We historically recorded our share of the net income (loss) of our equity method investment in C&J Energy Services, Ltd. (“CJES”) on a one-quarter lag, as we were not able to obtain the financial information of CJES on a timely basis. During the third quarter of 2016, CJES filed for bankruptcy, at which time we ceased accounting for our investment in CJES as an equity method investment and now report this investment at our estimate of fair value. See Note 3 — Investments in Unconsolidated Affiliates.
8
Revenue Recognition
We recognize revenues and costs on daywork contracts daily as the work progresses. For certain contracts, we receive lump-sum payments for the mobilization of rigs and other drilling equipment. We defer revenue related to mobilization periods and recognize the revenue over the term of the related drilling contract. We also defer recognition of revenue on amounts received from customers for prepayment of services until those services are provided. At March 31, 2017 and December 31, 2016, our deferred revenues classified as accrued liabilities were $259.7 million and $255.6 million, respectively. At March 31, 2017 and December 31, 2016, our deferred revenues classified as other long-term liabilities were $262.8 million and $321.0 million, respectively.
Costs incurred related to a mobilization period for which a contract is secured are deferred and recognized over the term of the related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. At March 31, 2017 and December 31, 2016, our deferred expenses classified as other current assets were $73.0 million and $63.4 million, respectively. At March 31, 2017 and December 31, 2016, our deferred expenses classified as other long-term assets were $59.6 million and $69.5 million, respectively.
We recognize revenue for top drives and instrumentation systems we manufacture when the earnings process is complete. This generally occurs when products have been shipped, title and risk of loss have been transferred, collectability is probable, and pricing is fixed and determinable.
We recognize, as operating revenue, proceeds from business interruption insurance claims in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in other expense (income), net in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements that are expected to be less than the carrying value of damaged assets are recognized at the time the loss is incurred and recorded in other expense (income), net.
We recognize reimbursements received for out-of-pocket expenses incurred as revenues and account for out-of-pocket expenses as direct costs.
Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out or weighted-average cost methods and includes the cost of materials, labor and manufacturing overhead. Inventory included the following:
Raw materials
83,751
84,431
Work-in-progress
13,288
1,204
Finished goods
12,422
17,960
9
Property, Plant and Equipment
We review our assets for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the estimated undiscounted future cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying amount of the long-lived asset to its estimated fair value. The determination of future cash flows requires the estimation of dayrates and utilization, and such estimates can change based on market conditions, technological advances in the industry or changes in regulations governing the industry.
For an asset classified as held for sale, we consider the asset impaired when its carrying amount exceeds fair value less its cost to sell. Fair value is determined in the same manner as an impaired long-lived asset that is held and used.
Significant and unanticipated changes to the assumptions could result in future impairments. A continuation of the lower oil and natural gas prices experienced over the last two years could continue to adversely affect the demand for and prices of our services. As such, we will continue to assess our asset fleet, particularly our legacy and undersized rigs. Should we continue experiencing weakening in the market for a prolonged period for any specific rig class, this could result in future impairment charges or retirements of assets. As the determination of whether impairment charges should be recorded on our long-lived assets is subject to significant management judgment, and an impairment of these assets could result in a material charge on our condensed consolidated statements of income (loss), management believes that accounting estimates related to impairment of long-lived assets are critical.
We review goodwill for impairment annually during the second quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying amount of such goodwill and intangible assets exceed their fair value. Due to the adoption of Accounting Standards Update (“ASU”) No. 2017-04, effective January 1, 2017, we no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. We will continue to perform our qualitative analysis as well as step one of the impairment test which compares the estimated fair value of the reporting unit to its carrying amount. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
For our goodwill tests prior to adoption of the new standard, we initially assessed goodwill for impairment based on qualitative factors to determine whether to perform the two-step annual goodwill impairment test, a Level 3 fair value measurement. After our qualitative assessment, step one of the impairment test compared the estimated fair value of the reporting unit to its carrying amount. If the carrying amount exceeded the fair value, a second step was required to measure the goodwill impairment loss. The second step compared the implied fair value of the reporting unit’s goodwill to its carrying amount. If the carrying amount exceeded the implied fair value, an impairment loss was recognized in an amount equal to the excess.
Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management. Potential factors requiring assessment include a further or sustained decline in our stock price, declines in oil and natural gas prices, a variance in results of operations from forecasts, a change in operating strategy of assets and additional transactions in the oil and gas industry. Another factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. As part of our annual review, we compare the sum of our reporting units’ estimated fair value, which includes the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assess the reasonableness of our estimated fair value. Any of the above-mentioned factors may cause us to re-evaluate goodwill during any quarter throughout the year.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures, to simplify the transition to the equity method of accounting. This standard eliminates the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. Instead, the equity method investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity
10
method of accounting as of the date the investment qualifies for the equity method of accounting. This guidance is effective for public companies for fiscal years beginning after December 15, 2016. The adoption of this guidance did not have an impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2016. We adopted this guidance on a prospective basis effective January 1, 2017. The impact of adoption was a decrease in deferred tax liabilities of $7.1 million and an increase in retained earnings of $7.1 million related to excess tax benefits on prior awards. Additionally, we elected to account for forfeitures as they occur. The impact of this election resulted in an increase in capital in excess of par and a corresponding decrease in retained earnings of $1.9 million.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019. We have elected to early adopt this guidance on a prospective basis for our annual goodwill impairment test performed subsequent to January 1, 2017. The adoption of this standard had no effect on our financial condition, results of operations or disclosures for our first quarter ended March 31, 2017 as this standard only impacts the measurement of goodwill impairment charges on a prospective basis.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, relating to the revenue recognition from contracts with customers that creates a common revenue standard for GAAP and IFRS. The core principle will require recognition of revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration, including costs incurred, to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. During the first quarter of 2017, we expanded our implementation team and are in the process of reviewing our revenue streams. We have identified a subset of contracts that we believe are representative of our operations and began a detailed analysis of the related performance obligations and pricing arrangements in such contracts. At this time, we expect to apply the modified retrospective approach. However, we are still evaluating the requirements to determine the impact of the adoption on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall, relating to the recognition and measurement of financial assets and liabilities. This standard enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, relating to leases to increase transparency and comparability among companies. This standard requires that all leases with an initial term greater than one year be recorded on the balance sheet as an asset and a lease liability. Additionally, this standard will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2018. Early application is permitted. This standard requires an entity to separate lease components from nonlease components within a contract. While the lease components would be accounted for under ASU No. 2016-02, nonlease components would be accounted for under ASU No. 2014-09. Therefore, we are evaluating ASU No. 2016-02 concurrently with the provisions of ASU No. 2014-09 and the impact this will have on our consolidated financial statements.
11
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16—Income Taxes, which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash to provide guidance on the classification of restricted cash in the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after beginning after December 15, 2017. Early application is permitted. The amendments in the ASU should be adopted on a retrospective basis. We are currently evaluating the impact this will have on our consolidated financial statements.
Note 3 Investments in Unconsolidated Affiliates
On March 24, 2015, we completed the merger (the “Merger”) of our Completion & Production Services business with C&J Energy Services, Inc. (“C&J Energy”). We received total consideration comprised of approximately $693.5 million in cash ($650.0 million after settlement of working capital requirements) and approximately 62.5 million common shares in the combined company, CJES, representing approximately 53% of the outstanding and issued common shares of CJES as of the closing date. We recognized our share of the net income (loss) of CJES, which was a loss of $167.1 million for the three months ended March 31, 2016, which is reflected in earnings (losses) from unconsolidated affiliates in our condensed consolidated statement of income (loss). Additionally, we recognized an other-than-temporary impairment charge of $153.4 million during the three months ended March 31, 2016, which is reflected in other, net in our condensed consolidated statement of income (loss). During the third quarter of 2016, CJES commenced voluntarily cases under chapter 11 of the U.S. Bankruptcy code. As such, we ceased accounting for our investment in CJES as an equity method investment. See Note 7—Commitments and Contingencies for disclosure surrounding the bankruptcy proceeding.
Note 4 Fair Value Measurements
Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2017 consist of available-for-sale equity and debt securities. Our debt securities could transfer into or out of a Level 1 or 2 measure depending on the availability of independent and current pricing at the end of each quarter. During the three months ended March 31, 2017, there were no transfers of our financial assets between Level 1 and Level 2 measures. Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The majority of our short-term investments are categorized as Level 1 and had a fair value of $27.9 million as of March 31, 2017.
Nonrecurring Fair Value Measurements
We applied fair value measurements to our nonfinancial assets and liabilities measured on a nonrecurring basis, which consist of measurements primarily to assets held for sale, goodwill, equity method investments, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination and our pipeline contractual commitment. Based upon our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
12
Fair Value of Financial Instruments
We estimate the fair value of our financial instruments in accordance with GAAP. The fair value of our long-term debt, revolving credit facility and commercial paper is estimated based on quoted market prices or prices quoted from third-party financial institutions. The fair value of our debt instruments is determined using Level 2 measurements. The carrying and fair values of these liabilities were as follows:
March 31, 2017
December 31, 2016
Carrying
Fair
6.15% senior notes due February 2018
665,222
690,168
827,539
865,300
9.25% senior notes due January 2019
303,489
337,252
337,443
5.00% senior notes due September 2020
669,616
694,311
669,540
689,211
4.625% senior notes due September 2021
694,928
706,658
694,868
708,765
5.50% senior notes due January 2023
600,000
615,378
627,000
5.10% senior notes due September 2023
346,480
351,462
346,448
348,613
0.75% senior exchangeable notes due January 2024
415,228
388,882
Term loan facility
162,500
Revolving credit facility
Commercial paper
3,695,276
3,784,424
3,604,681
3,739,129
Less: Deferred financing costs
33,298
26,049
3,661,978
3,578,632
The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying values due to the short-term nature of these instruments.
Note 5 Debt
Debt consisted of the following:
6.15% senior notes due February 2018 (1)
Less: current portion
Less: deferred financing costs
(1)
The 6.15% senior notes due February 2018 have been classified as long-term because we have the ability and intent to repay this obligation utilizing our revolving credit facility.
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During the three months ended March 31, 2017, we repurchased $162.5 million aggregate principal amount of our 6.15% senior notes due February 2018 for approximately $171.6 million in cash, reflecting principal and approximately $2.2 million of accrued and unpaid interest. The difference represents the premiums incurred in connection with these repurchases and is included in other, net in our condensed consolidated statement of income (loss) for the three months ended March 31, 2017.
0.75% Senior Exchangeable Notes Due January 2024
In January 2017, Nabors Industries, Inc. (“Nabors Delaware”), a wholly owned subsidiary of Nabors, issued $575 million in aggregate principal amount of 0.75% exchangeable senior unsecured notes due 2024, which are fully and unconditionally guaranteed by Nabors. The notes bear interest at a rate of 0.75% per year payable semiannually on January 15 and July 15 of each year, beginning on July 15, 2017. The exchangeable notes are bifurcated for accounting purposes into debt and equity components of $411.2 million and $163.8 million, respectively, based on the relative fair value. Debt issuance costs of $9.6 million and equity issuance costs of $3.9 million were capitalized in connection with the issuance of these notes in long-term debt and netted against the proceeds allocated to the equity component, respectively, in our condensed consolidated balance sheet. The debt issuance costs are being amortized through January 2024.
The exchangeable notes are exchangeable, under certain conditions, at an initial exchange rate of 39.75 common shares of Nabors per $1,000 principal amount of exchangeable notes (equivalent to an initial exchange price of approximately $25.16 per common share). Upon any exchange, Nabors Delaware will settle its exchange obligation in cash, common shares of Nabors, or a combination of cash and common shares, at our election.
In connection with the pricing of the notes, we entered into privately negotiated capped call transactions which are expected to reduce potential dilution to common shares and/or offset potential cash payments required to be made in excess of the principal amount upon any exchange of notes. Such reduction and/or offset is subject to a cap representing a price per share of $31.45, an approximately 75.0% premium over our share price of $17.97 as of the date of the transaction. The net proceeds from the offering of the exchangeable notes were used to prepay the remaining balance of our unsecured term loan originally scheduled to mature in 2020, as well as to pay the cost of the capped call transactions. Any remaining net proceeds from the offering were allocated for general corporate purposes, including to repurchase or repay other indebtedness.
Commercial Paper Program
As of March 31, 2017, we had no borrowings outstanding under this facility. Our commercial paper borrowings are classified as long-term debt because the borrowings are fully supported by availability under our revolving credit facility, which matures as currently structured in July 2020, more than one year from now.
Revolving Credit Facility
As of March 31, 2017, we had no borrowings outstanding under our $2.25 billion revolving credit facility, which matures in July 2020. The revolving credit facility contains various covenants and restrictive provisions that limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain a net funded indebtedness to total capitalization ratio, as defined in the agreement. Availability under the revolving credit facility is subject to a covenant not to exceed a net debt to capital ratio of 0.60:1. We were in compliance with all covenants under the agreement at March 31, 2017. If we fail to perform our obligations under the covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facility could be declared immediately due and payable.
Term Loan Facility
On September 29, 2015, Nabors Delaware entered into a new five-year unsecured term loan facility for $325.0 million, which is fully and unconditionally guaranteed by us. The term loan facility contains a mandatory prepayment of $162.5 million due in September 2018, which was repaid in December 2016 utilizing a portion of the proceeds received in connection with the 5.50% senior notes offering. In January 2017, we repaid the remaining $162.5 million term loan utilizing the proceeds received in connection with the 0.75% senior exchangeable notes and the facility was terminated.
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Note 6 Common Shares
During the three months ended March 31, 2016, we repurchased 0.3 million of our common shares in the open market for $1.7 million, all of which are held in treasury.
On February 17, 2017, a cash dividend of $0.06 per share was declared for shareholders of record on March 14, 2017. The dividend was paid on April 4, 2017 in the amount of $17.2 million and was charged to retained earnings in our condensed consolidated statement of changes in equity for the three months ended March 31, 2017.
Note 7 Commitments and Contingencies
Contingencies
Income Tax
We operate in a number of countries throughout the world and our tax returns filed in those jurisdictions are subject to review and examination by tax authorities within those jurisdictions. We do not recognize the benefit of income tax positions we believe are more likely than not to be disallowed upon challenge by a tax authority. If any tax authority successfully challenges our operational structure, intercompany pricing policies or the taxable presence of our subsidiaries in certain countries, if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure, or if we lose a material tax dispute in any country, our effective tax rate on our worldwide earnings could change substantially.
We have received an assessment from a tax authority in Latin America in connection with a 2007 income tax return. The assessment relates to the denial of depreciation expense deductions related to drilling rigs. Similar deductions were taken for tax year 2009. Although Nabors and its tax advisors believe these deductions are appropriate and intend to continue to defend our position, we have recorded a partial reserve to account for this contingency. If we ultimately do not prevail, we estimate that we would be required to recognize additional tax expense in the range of $3 million to $8 million.
Self-Insurance
We estimate the level of our liability related to insurance and record reserves for these amounts in our condensed consolidated financial statements. Our estimates are based on the facts and circumstances specific to existing claims and our past experience with similar claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid and are actuarially supported. Although we believe our insurance coverage and reserve estimates are reasonable, a significant accident or other event that is not fully covered by insurance or contractual indemnity could occur and could materially affect our financial position and results of operations for a particular period.
We self-insure for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Some of our workers’ compensation claims, employers’ liability and marine employers’ liability claims are subject to a $3.0 million per-occurrence deductible; additionally, some of our automobile liability claims are subject to a $2.5 million deductible. General liability claims remain subject to a $5.0 million per-occurrence deductible. Our policies were renewed effective April 1, 2017 and remains subject to these same deductibles.
In addition, we are subject to a $5.0 million deductible for land rigs and for offshore rigs. This applies to all kinds of risks of physical damage except for named windstorms in the U.S. Gulf of Mexico for which we are self-insured.
Litigation
Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of
15
lawsuits and claims, the ultimate outcome may differ from our estimates. For matters where an unfavorable outcome is reasonably possible and significant, we disclose the nature of the matter and a range of potential exposure, unless an estimate cannot be made at the time of disclosure. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.
In March 2011, the Court of Ouargla entered a judgment of approximately $25.7 million (at March 31, 2017 exchange rates) against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals upheld the lower court’s ruling, and we appealed the matter to the Supreme Court. On September 25, 2014, the Supreme Court overturned the verdict against us, and the case was reheard by the Ouargla Court of Appeals on March 22, 2015 in light of the Supreme Court’s opinion. On March 29, 2015, the Ouargla Court of Appeals reinstated the initial judgment against us. We have appealed this decision again to the Supreme Court. While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $17.7 million in excess of amounts accrued.
In March 2012, Nabors Global Holdings II Limited (“NGH2L”) signed an agreement with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company (“Ramshorn”) (“the ERG Agreement”). When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3.0 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012 16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”). The lawsuit also seeks monetary damages of up to $750.0 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. We successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012 and completed the sale of Ramshorn’s Class A shares to a Parex affiliate in April 2012, which mooted ERG’s application for a temporary injunction. The defendants made numerous jurisdictional challenges on appeal, and on April 30, 2015, ERG filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Accordingly, the civil actions are currently subject to the bankruptcy stay and ERG’s claims in the lawsuit are assets of the estate. The lawsuit was stayed, pending further court actions, including appeals of the jurisdictional decisions. On June 17, 2016, the Texas Supreme Court issued its opinion on the jurisdictional appeal holding that jurisdiction exists in Texas for Ramshorn, but not for Parex Bermuda or Parex Canada. ERG retains its causes of action for monetary damages, but we believe the claims are foreclosed by the terms of the ERG Agreement and are without factual or legal merit. On December 28, 2016, the District Court granted Nabors’ Motion for Partial Summary Judgment to Enforce Exclusive Remedies Clause, holding that ERG’s potential recovery in the action may not exceed $4.5 million in accordance with the terms of the ERG Agreement. The plaintiffs have challenged this ruling by filing a motion for rehearing that was heard March 6, 2017. We await the Court’s ruling. Although we continue to vigorously defend the lawsuit, its ultimate outcome cannot be determined at this time.
On July 30, 2014, we and Nabors Red Lion Limited (“Red Lion”), along with C&J Energy and its board of directors, were sued in a putative shareholder class action filed in the Court of Chancery of the State of Delaware (the “Court of Chancery”). The plaintiff alleges that the members of the C&J Energy board of directors breached their fiduciary duties in connection with the Merger, and that Red Lion and C&J Energy aided and abetted these alleged breaches. The plaintiff sought to enjoin the defendants from proceeding with or consummating the Merger and the C&J Energy stockholder meeting for approval of the Merger and, to the extent that the Merger was completed before any relief was granted, to have the Merger rescinded. On November 10, 2014, the plaintiff filed a motion for a preliminary injunction, and, on November 24, 2014, the Court of Chancery entered a bench ruling, followed by a written order on November 25, 2014, that (i) ordered certain members of the C&J Energy board of directors to solicit for a 30 day period alternative proposals to purchase C&J Energy (or a controlling stake in C&J Energy) that were superior to the Merger, and (ii) preliminarily enjoined C&J Energy from holding its stockholder meeting until it complied with the foregoing.
C&J Energy complied with the order while it simultaneously pursued an expedited appeal of the Court of Chancery’s order to the Supreme Court of the State of Delaware (the “Delaware Supreme Court”). On December 19, 2014, the Delaware Supreme Court overturned the Court of Chancery’s judgment and vacated the order. Nabors and the C&J Energy defendants filed a motion to dismiss that was granted by the Chancellor on August 24, 2016, including a ruling that C&J Energy could recover on the bond that was posted to support the temporary restraining order. The plaintiffs filed a Notice of Appeal on September 22, 2016. On March 23, 2017, the Delaware Supreme Court affirmed the dismissal of the lawsuit. The plaintiffs filed a Motion for Reargument, which was denied on March 31, 2017, concluding the case.
On March 24, 2015, we completed the Merger of our Completion & Production Services business with C&J Energy. In the Merger and related transactions, we acquired common shares in the combined entity, CJES, and entered into certain ancillary agreements with CJES, including a tax matters agreement, pursuant to which both parties agreed to indemnify each other following the completion of the Merger with respect to certain tax matters. On July 20, 2016, CJES and certain of its subsidiaries (collectively, the “debtors”) commenced voluntarily cases under chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. On December 12, 2016, we entered into a mediated settlement agreement with various other parties in the CJES bankruptcy proceedings (the “Settlement Agreement”). Pursuant to the Settlement Agreement, we agreed to support the debtors' chapter 11 plan of reorganization in exchange for: (i) two allowed unsecured claims for which we will receive distributions of up to $4.85 million; (ii) an amendment to the tax matters agreement providing that CJES will likely pay up to $11.5 million of obligations for which we would have otherwise been responsible; (iii) cancellation of various other obligations we had to the debtors; (iv) our pro rata share of warrants to acquire 2% of the common equity in the reorganized debtors; and (v) a mutual release of claims. The bankruptcy court approved the terms of the Settlement Agreement and confirmed the debtors' plan and, on January 6, 2017, CJES announced it had emerged from bankruptcy, thus concluding this proceeding.
Off-Balance Sheet Arrangements (Including Guarantees)
We are a party to some transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources. The most significant of these off-balance sheet arrangements involve agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. In addition, we have provided indemnifications, which serve as guarantees, to some third parties. These guarantees include indemnification provided by Nabors to our share transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees.
Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial guarantees issued by Nabors:
Maximum Amount
2018
2019
Thereafter
Financial standby letters of credit and other financial surety instruments
276,391
518
11,914
288,823
Note 8 Earnings (Losses) Per Share
ASC 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have nonforfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings (losses) per share. We have granted and expect to continue to grant to employees restricted stock grants that contain nonforfeitable rights to dividends. Such grants are considered participating securities under ASC 260. As such, we are required to include these grants in the calculation of our basic earnings (losses) per share and calculate basic earnings (losses) per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.
17
Basic earnings (losses) per share is computed utilizing the two-class method and is calculated based on the weighted-average number of common shares outstanding during the periods presented.
Diluted earnings (losses) per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options and unvested restricted stock. Shares issuable upon exchange of the $575 million 0.75% exchangeable notes are not included in the calculation of diluted earnings (losses) per share unless the exchange value of the notes exceeds their principal amount at the end of the relevant reporting period, in which case the notes will be accounted for as if the number of common shares that would be necessary to settle the excess are issued. Such shares are only included in the calculation of the weighted-average number of shares outstanding in our diluted earnings (losses) per share calculation, when the price of our shares exceeds $25.16 on the last trading day of the quarter, which did not occur during the three months ended March 31, 2017.
A reconciliation of the numerators and denominators of the basic and diluted earnings (losses) per share computations is as follows:
BASIC EPS:
Net income (loss) (numerator):
Less: net (income) loss attributable to noncontrolling interest
Less: (earnings) losses allocated to unvested shareholders
3,811
8,199
Numerator for basic earnings per share:
Adjusted income (loss) from continuing operations, net of tax - basic
(144,734)
(389,169)
Weighted-average number of shares outstanding - basic
DILUTED EPS:
Add: effect of reallocating undistributed earnings of unvested shareholders
Adjusted income (loss) from continuing operations, net of tax - diluted
Add: dilutive effect of potential common shares
Weighted-average number of shares outstanding - diluted
For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options with exercise prices greater than the average market price of Nabors’ common shares, because their inclusion would be anti-dilutive and because they are not considered participating securities. For periods in which we experience a net loss from continuing operations, all potential common shares have been excluded from the calculation of weighted-average
18
shares outstanding, because their inclusion would be anti-dilutive. The average number of options that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share in the future were as follows:
Potentially dilutive securities excluded as anti-dilutive
4,647,807
5,414,712
In any period during which the average market price of Nabors’ common shares exceeds the exercise prices of these stock options, such stock options will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting. Restricted stock is included in our basic and diluted earnings (losses) per share computation using the two-class method of accounting in all periods because such stock is considered participating securities.
Note 9 Supplemental Balance Sheet and Income Statement Information
Accrued liabilities included the following:
Accrued compensation
100,783
116,775
Deferred revenue
259,671
255,626
Other taxes payable
16,264
16,419
Workers’ compensation liabilities
18,255
Interest payable
25,804
57,233
Litigation reserves
24,026
24,896
Current liability to discontinued operations
5,566
5,462
Dividends declared and payable
17,154
17,039
Other accrued liabilities
29,841
31,543
Other expense (income), net included the following:
Losses (gains) on sales, disposals and involuntary conversions of long-lived assets
5,298
Charges related to our CJES holdings (1)
Litigation expenses
821
637
Foreign currency transaction losses (gains)
876
4,214
(Gain) loss on debt buyback
Other losses (gains)
342
1,040
Represents impairment charges related to our CJES holdings. See Note 3 — Investments in Unconsolidated Affiliates.
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The changes in accumulated other comprehensive income (loss), by component, included the following:
Unrealized
Gains
gains (losses)
Defined
(losses) on
on available-
benefit
Foreign
cash flow
for-sale
pension plan
currency
hedges
securities
items
(In thousands (1) )
As of January 1, 2016
(1,670)
(314)
(6,568)
(39,041)
Other comprehensive income (loss) before reclassifications
34,131
Amounts reclassified from accumulated other comprehensive income (loss)
93
105
198
Net other comprehensive income (loss)
(1,577)
455
(6,463)
(5,679)
All amounts are net of tax.
As of January 1, 2017
(1,296)
14,235
(3,760)
(21,298)
659
31
124
(1,203)
11,034
(3,729)
(17,438)
The line items that were reclassified to net income included the following:
Other expense (income), net
Total income (loss) from continuing operations before income tax
(203)
(327)
Tax expense (benefit)
(79)
(129)
Reclassification adjustment for (gains)/ losses included in net income (loss)
(124)
(198)
Note 10 Assets Held for Sale and Discontinued Operations
Assets Held for Sale
Assets held for sale as of March 31, 2017 and December 31, 2016 was $77.1 million and $76.7 million, respectively. These assets consisted primarily of our oil and gas holdings which are mainly in the Horn River basin in western Canada of $65.4 million and $65.0 million, respectively, as of the periods noted above and the operating results have been reflected in discontinued operations. The remainder represents assets that meet the criteria to be classified as assets held for sale, but do not represent a disposal of a component of an entity or a group of components of an entity representing a strategic shift that has or will have a major effect on the entity's operations and financial results.
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The carrying value of our assets held for sale represents the lower of carrying value or fair value less costs to sell. We continue to market these properties at prices that are reasonable compared to current fair value.
We have contracts with pipeline companies to pay specified fees based on committed volumes for gas transport and processing associated with these properties held for sale. At March 31, 2017, our undiscounted contractual commitments for these contracts approximated $15.7 million and we had liabilities of $11.6 million, $5.6 million of which were classified as current and were included in accrued liabilities. At December 31, 2016, our undiscounted contractual commitments for these contracts approximated $17.2 million and we had liabilities of $12.5 million, $5.5 million of which were classified as current and were included in accrued liabilities.
The amounts at each balance sheet date represented our best estimate of the fair value of the excess capacity of the pipeline commitments calculated using a discounted cash flow model, when considering our disposal plan, current production levels, natural gas prices and expected utilization of the pipeline over the remaining contractual term. Decreases in actual production or natural gas prices could result in future charges related to excess pipeline commitments.
Discontinued Operations
Our condensed statements of income (loss) from discontinued operations were as follows:
Operating revenues (1)
2,034
377
Income (loss) from Oil & Gas discontinued operations:
Income (loss) from discontinued operations
(590)
(1,326)
Less: Impairment charges or other (gains) and losses on sale of wholly owned assets
Less: Income tax expense (benefit)
(171)
(400)
Income (loss) from Oil and Gas discontinued operations, net of tax
(1) Reflects operating revenues of our historical oil and gas operating segment.
Note 11 Segment Information
The following table sets forth financial information with respect to our reportable operating segments:
Operating revenues:
Drilling & Rig Services:
U.S.
161,934
148,676
Canada
27,808
17,494
International
338,223
401,055
Rig Services
71,441
53,853
Subtotal Drilling & Rig Services
599,406
621,078
Other reconciling items (1)
(36,856)
(23,507)
21
Adjusted operating income (loss): (2)
(63,182)
(47,559)
(4,011)
(7,278)
11,974
46,872
(9,109)
(10,644)
(64,328)
(18,609)
Reconciliation of adjusted operating income (loss) to net income (loss) from continuing operations before income taxes:
Total segment adjusted operating income (loss) (2)
Other reconciling items (3)
(39,604)
(35,157)
(56,518)
(45,730)
(13,510)
(182,404)
Total assets:
3,246,887
3,172,767
332,121
329,620
3,552,771
3,600,057
370,470
359,435
7,502,249
7,461,879
593,063
725,136
Represents the elimination of inter-segment transactions.
Adjusted operating income (loss) is computed by subtracting the sum of direct costs, general and administrative expenses, research and engineering expenses and depreciation and amortization from operating revenues. Management evaluates the performance of our operating segments using adjusted operating income (loss), which is a segment performance measure, because it believes that this financial measure reflects our ongoing profitability and performance. In addition, securities analysts and investors use this measure as one of the metrics on which they analyze our performance. A reconciliation to income (loss) from continuing operations before income taxes is provided in the above table.
(3)
Represents the elimination of inter-segment transactions and unallocated corporate expenses, assets and capital expenditures.
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Note 12 Condensed Consolidating Financial Information
Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware, a wholly owned subsidiary. The following condensed consolidating financial information is included so that separate financial statements of Nabors Delaware are 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.
The following condensed consolidating financial information presents condensed consolidating balance sheets as of March 31, 2017 and December 31, 2016, statements of income (loss) and statements of other comprehensive income (loss) for the three months ended March 31, 2017 and 2016, and statements of cash flows for the three months ended March 31, 2017 and 2016 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt securities guaranteed by Nabors, (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (e) Nabors on a consolidated basis.
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Condensed Consolidating Balance Sheets
Nabors
Subsidiaries
(Parent/
Delaware
(Non-
Consolidating
Guarantor)
(Issuer)
Guarantors)
Adjustments
8,579
192,105
57
28,080
164,899
8,636
28,084
1,085,936
Intercompany receivables
144,795
1,117,044
(1,261,839)
Investment in consolidated affiliates
3,044,185
4,779,879
1,151,049
(8,975,113)
Deferred tax assets
469,784
(469,784)
161
301,414
(88,590)
3,197,616
5,277,908
10,415,114
(10,795,326)
113
24
241,195
19,555
27,386
450,423
19,668
27,410
724,571
3,750,255
22,729
444,519
478,140
Intercompany payable
1,261,839
5,062,233
1,647,230
(1,820,213)
Shareholders’ equity
215,675
8,759,438
8,767,884
1,148
10,177
252,768
22,209
149,760
1,198
32,386
1,122,255
142,447
1,342,942
(1,485,389)
3,170,254
4,830,572
1,083,948
(9,084,774)
443,049
(443,049)
344
447,962
(218,216)
3,313,899
5,306,351
10,798,193
(11,231,428)
Current debt
205
264,365
20,669
65,246
457,333
20,874
65,254
735,806
3,796,550
(218,215)
22,659
499,797
452,544
46,000
1,439,390
(1,485,390)
66,874
5,323,853
1,688,147
(2,146,654)
(17,502)
9,102,276
9,110,046
25
Condensed Consolidating Statements of Income (Loss)
Three Months Ended March 31, 2017
(Issuer/
Earnings (losses) from consolidated affiliates
(145,871)
(50,717)
(96,239)
292,827
63
3,621
(2,980)
(145,854)
(50,654)
469,934
289,847
3,298
137
60,153
(179)
203,641
60,755
(4,237)
(159)
11,397
2,093
179
Intercompany interest expense
(9)
3,130
72,320
661,060
(122,974)
(191,126)
Income tax expense (benefit)
(26,735)
(192,252)
(192,691)
(193,608)
26
Three Months Ended March 31, 2016
(395,770)
(106,087)
(137,970)
639,827
123
3,201
(2,981)
Intercompany interest income
160
(160)
(105,804)
295,651
636,686
2,362
131
59,998
(157)
215,787
50,664
(4,934)
157
65
182,025
155
2,524
50,891
826,216
(156,695)
(530,565)
636,846
(18,725)
(33,339)
(497,226)
(498,152)
(498,876)
27
Condensed Consolidating Statements of Comprehensive Income (Loss)
Other comprehensive income (loss) before tax:
(7)
(3,853)
100
(150)
(306)
Other comprehensive income (loss) before tax
196
912
(1,108)
158
(237)
117
754
(871)
(96,122)
(192,854)
288,976
(191,888)
28
(46)
33,316
(33,270)
(769)
348
(522)
281
34,586
(34,867)
152
34,388
(34,540)
(137,818)
(464,488)
602,306
(463,345)
29
Condensed Consolidating Statements Cash Flows
Net cash provided by (used for) operating activities
70,492
(112,431)
53,928
(69,980)
Change in intercompany balances
(198,035)
198,035
Other changes in investing
Net cash provided by (used for) investing activities
17,842
Capped call hedge transactions
Reduction of long-term debt
(57,670)
(112,821)
(20,020)
2,980
Cash proceeds from equity component of convertible debt
Proceeds from issuance of intercompany debt
20,000
(40,000)
Paydown of intercompany debt
(66,000)
(20,000)
86,000
Distribution from subsidiary to parent
(67,000)
67,000
Other changes
(63,061)
300,293
(134,274)
69,980
7,431
(10,173)
(60,663)
30
1,790
(116,240)
278,937
34,916
(34,916)
(163,741)
(19,903)
2,981
Proceeds from (payments for) commercial paper, net
Proceeds (issuance) of intercompany debt
22,000
(22,000)
Proceeds from short-term borrowings
(1,093)
81,325
(170,718)
697
(54,554)
873
253,647
1,570
199,093
Note 13 Subsequent Events
On April 21, 2017, our Board of Directors declared a cash dividend of $0.06 per common share, which will be paid on July 5, 2017 to shareholders of record at the close of business on June 14, 2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
fluctuations and volatility in worldwide prices of and demand for oil and natural gas;
fluctuations in levels of oil and natural gas exploration and development activities;
fluctuations in the demand for our services;
competitive and technological changes and other developments in the oil and gas and oilfield services industries;
our ability to complete, and realize the expected benefits of, strategic transactions, including our recently announced joint venture in Saudi Arabia;
the existence of operating risks inherent in the oil and gas and oilfield services industries;
the possibility of changes in tax laws and other laws and regulations;
the possibility of political or economic instability, civil disturbance, war or acts of terrorism in any of the countries in which we do business; and
general economic conditions, including the capital and credit markets.
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 Part I, Item 1A. — Risk Factors in our 2016 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 own and operate the world’s largest land-based drilling rig fleet and are a leading provider of offshore platform and drilling rigs in the United States and multiple international markets. Our business is comprised of our global land-based and offshore drilling rig operations and other rig services, consisting of equipment manufacturing, rig instrumentation and optimization software. We also specialize in wellbore placement solutions and are a leading provider of directional drilling and MWD systems and services. Our business consists of four reportable operating segments: U.S., Canada, International and Rig Services.
32
Financial Results
Operating revenues for the three months ended March 31, 2017 totaled $562.6 million, representing a decrease of $35.0 million, or 6%, compared to the three months ended March 31, 2016. Although we have seen an increase in the number of rigs working in the U.S., spot prices remain under pricing pressure. Internationally, we experienced a decline in the number of rigs working, approximately 19%, which further impacted operating revenue for the quarter.
Net loss from continuing operations totaled $147.6 million for the three months ended March 31, 2017 ($0.52 per diluted share) compared to a net loss from continuing operations of $396.6 million ($1.41 per diluted share) for the three months ended March 31, 2016. This improvement was primarily a result of no longer maintaining an equity method investment in CJES, which accounted for $344.3 million of the net loss during the three months ended March 31, 2016 from our share of the net loss of CJES as well as impairment charges associated with the investment. Approximately $64.3 million and $18.6 million of the net loss during the three months ended March 31, 2017 and 2016, respectively, was attributable to our segment adjusted operating income (loss), which is our primary measure of operating performance. See Segment Results of Operations for further information on the changes to segment adjusted operating income (loss).
General and administrative expenses for the three months ended March 31, 2017 totaled $63.4 million, representing a marginal increase of $1.1 million, or 2% compared to the three months ended March 31, 2016. This is reflective of a slight increase in salaries and compensation.
Research and engineering expenses for the three months ended March 31, 2017 totaled $11.8 million, representing an increase of $3.6 million, or 44%, compared to the three months ended March 31, 2016. The increase resulted from an increase in headcount and compensation in combination with increased efforts towards a number of strategic research and engineering projects as the market rebalances and activity begins to accelerate.
Depreciation and amortization expense for the three months ended March 31, 2017 was $203.7 million, representing a decrease of $12.1 million, or 6%, compared to the three months ended March 31, 2016. The decrease was primarily due to the impact from retirements and impairments of various rigs and rig equipment in late 2016.
In January 2017, Nabors Delaware issued $575 million in aggregate principal amount of 0.75% exchangeable senior unsecured notes due 2024, which are fully and unconditionally guaranteed by Nabors. The net proceeds from the offering of the exchangeable notes were used to prepay the remaining balance of our unsecured term loan originally scheduled to mature in 2020, as well as to pay approximately $40.3 million for the cost of the capped call transactions related to the note offering. The remaining net proceeds from the offering were allocated for general corporate purposes, including the repurchase of approximately $162.5 million aggregate principal amount of our 6.15% senior notes due February 2018.
Segment Results of Operations
Our business is comprised of our global land-based and offshore drilling rig operations and other rig services, consisting of equipment manufacturing, rig instrumentation and optimization software. We also specialize in wellbore placement solutions and are a leading provider of directional drilling and MWD systems and services. Our business consists of four reportable operating segments: U.S., Canada, International and Rig Services. Our Rig Services segment is comprised of our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software services.
Management evaluates the performance of our operating segments using adjusted operating income (loss), which is our segment performance measure, because it believes that this financial measure reflects our ongoing profitability and performance. In addition, securities analysts and investors use this measure as one of the metrics on which they analyze our performance. Adjusted operating income (loss) is computed by subtracting the sum of direct costs, general and administrative expenses, research and engineering expenses and depreciation and amortization from operating revenues.
33
The following tables set forth certain information with respect to our reportable segments and rig activity:
Increase/(Decrease)
(In thousands, except percentages and rig activity)
13,258
%
Adjusted operating income (loss)
(15,623)
(33)
Average rigs working (1)
88.8
64.9
23.9
37
10,314
59
3,267
45
22.0
12.5
9.5
76
(62,832)
(16)
(34,898)
(74)
89.8
110.5
(20.7)
(19)
17,588
1,535
Represents a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 average rigs working. International average rigs working includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates.
Our U.S. Drilling segment includes land drilling activities in the lower 48 states, Alaska and offshore operations in the Gulf of Mexico.
Operating revenues increased slightly during the three months ended March 31, 2017 compared to the corresponding 2016 period primarily due to a 37% increase in the average number of rigs working during the first quarter of 2017 compared to 2016. Although we experienced an increase in activity, spot rates remain under pricing pressure which mitigated the impact of the rig count increase. Additionally, we incurred incremental costs associated with the conversion of rigs stacked on rate to operating, including reactivation and relocation costs.
Operating results increased during the three months ended March 31, 2017 compared to the corresponding 2016 period due to an increase in drilling rig activity, as evidenced by a 76% increase in average number of rigs working during the first quarter of 2017 compared to 2016.
Operating results decreased during the three months ended March 31, 2017 compared to the corresponding 2016 period primarily due to the loss of revenue and increased costs related to downtime incurred to perform structural work on many of our rigs in our largest international market. Additionally, results were negatively impacted by a 19% reduction in average number of rigs working during the first quarter of 2017 compared to 2016. Partially offsetting these declines were increased drilling activity in Colombia and Kuwait.
Operating results increased during the three months ended March 31, 2017 compared to the corresponding 2016 period primarily due to an increase in drilling activity and demand for our products and services.
34
OTHER FINANCIAL INFORMATION
Earnings (losses) from unconsolidated affiliates represents our share of the net income (loss), as adjusted for our basis differences, of our equity method investments. We previously accounted for our investment in CJES on a one-quarter lag through June 30, 2016. On July 20, 2016, CJES voluntarily filed for protection under Chapter 11 of the Bankruptcy Code. As a result, beginning with the third quarter of 2016, we ceased accounting for our investment under the equity method of accounting. The three months ended March 31, 2016 includes our share of the net income (loss) of CJES from October 1, 2015 through December 31, 2015, resulting in a loss of $167.1 million, inclusive of charges of $131.2 million representing our share of CJES’s fixed asset impairment charges for the period.
Interest expense for the three months ended March 31, 2017 was $56.5 million, representing an increase of $10.8 million, or 24%, compared to the three months ended March 31, 2016. The increase was primarily due to the additional interest expense related to the issuance of $600 million in aggregate principal amount of 5.5% senior notes due 2023 during December 2016 as well as the issuance of $575 million in aggregate principal amount of 0.75% senior exchangeable notes due 2024 during January 2017.
Other, net for the three months ended March 31, 2017 was $13.5 million of expense, which included a loss on debt buy-backs of $8.6 million, net losses on sales and disposals of assets of approximately $2.9 million, increases to our litigation reserves of $0.8 million and foreign currency exchange losses of $0.9 million.
Other, net for the three months ended March 31, 2016 was $182.4 million of expense, of which the majority, or $177.2 million, is attributable to impairments associated with our CJES holdings. During the quarter, we determined the carrying value of our investment in CJES was other than temporarily impaired, which resulted in an impairment charge of $153.4 million to reduce our carrying value to its estimated fair value determined principally based on the average price over a specified period. The balance of the impairment was attributable to our reserve of certain other amounts associated with our CJES holdings, including affiliate receivables. Further contributing to the expense for the quarter were net losses on sales and disposals of assets of approximately $5.3 million and foreign currency exchange losses of approximately $4.2 million, partially offset by a net gain on debt buybacks of approximately $6.0 million.
Income tax rate
Our worldwide effective tax rate during the three months ended March 31, 2017 was 14.8% compared to 11.6% during the three months ended March 31, 2016. The change was attributable to the effect of the geographic mix of pre-tax earnings (losses), including lower losses in low and high tax jurisdictions. The tax effect of our share of the net loss of CJES during the three months ended March 31, 2016 also contributed to the change.
Our discontinued operations during the three months ended March 31, 2017 and 2016 consisted of our historical wholly owned oil and gas businesses. Income (loss) from discontinued operations during the three months ended March 31, 2017 was a loss of $0.4 million compared to $0.9 million during the three months ended March 31, 2016.
Liquidity and Capital Resources
Financial Condition and Sources of Liquidity
Our primary sources of liquidity are cash and investments, availability under our revolving credit facility and commercial paper program, and cash generated from operations. As of March 31, 2017, we had cash and short-term investments of $228.6 million and working capital of $351.0 million. As of December 31, 2016, we had cash and short-term investments of $295.2 million and working capital of $333.9 million. At March 31, 2017, we had no borrowings outstanding under our $2.25 billion revolving credit facility and commercial paper program.
35
In December 2016, Nabors Delaware completed an offering of $600 million aggregate principal amount of 5.50% senior unsecured notes due January 15, 2023, which are fully and unconditionally guaranteed by us. The proceeds from this offering were used to prepay the $162.5 million due in 2018 under our unsecured term loan and all amounts then outstanding under our $2.25 billion revolving credit facility and commercial paper program, or $392.1 million. The remaining proceeds were allocated for general corporate purposes, including to repay and repurchase debt.
In January 2017, Nabors Delaware issued $575 million in aggregate principal amount of its 0.75% exchangeable senior unsecured notes due 2024, which are fully and unconditionally guaranteed by Nabors. The net proceeds from the offering of the exchangeable notes were used to prepay the remaining balance of our unsecured term loan originally scheduled to mature in 2020, as well as to pay approximately $40.3 million for the cost of the capped call transactions. The remaining net proceeds from the offering were allocated for general corporate purposes, including the repurchase of approximately $162.5 million aggregate principal amount of our 6.15% senior notes due February 2018.
We had 15 letter-of-credit facilities with various banks as of March 31, 2017. Availability under these facilities as of March 31, 2017 was as follows:
Credit available
758,906
Less: Letters of credit outstanding, inclusive of financial and performance guarantees
126,623
Remaining availability
632,283
Our ability to access capital markets or to otherwise obtain sufficient financing is enhanced by our senior unsecured debt ratings as provided by the major credit rating agencies in the United States and 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 exchange or purchase of our notes 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. A ratings downgrade 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.
Our gross debt to capital ratio was 0.54:1 as of March 31, 2017 and 0.52:1 as of December 31, 2016. Our net debt to capital ratio was 0.52:1 as of March 31, 2017 and 0.50:1 as of December 31, 2016. The gross debt to capital ratio is calculated by dividing (x) total debt by (y) total capital. Total capital is defined as total debt plus shareholders’ equity. Net debt is defined as total debt minus the sum of cash and cash equivalents and short-term investments. Availability under the revolving credit facility is subject to a covenant not to exceed a net debt to capital ratio of 0.60:1. Neither the gross debt to capital ratio nor the net debt to capital ratio is a measure of operating performance or liquidity defined by GAAP and may not be comparable to similarly titled measures presented by other companies.
Our interest coverage ratio was 2.9:1 as of March 31, 2017 and 3.4:1 as of December 31, 2016. The interest coverage ratio is a trailing 12-month quotient of the sum of (x) operating revenues, direct costs, general and administrative expenses and research and engineering expenses divided by (y) interest expense. The interest coverage ratio is not a measure of operating performance or liquidity defined by GAAP and may not be comparable to similarly titled measures presented by other companies.
Our current cash and investments, projected cash flows from operations and our revolving credit facility are expected to adequately finance our purchase commitments, capital expenditures, acquisitions, scheduled debt service requirements, and all other expected cash requirements for the next 12 months.
Future Cash Requirements
We expect capital expenditures over the next 12 months to be less than $0.7 billion. Purchase commitments outstanding at March 31, 2017 totaled approximately $219.7 million, primarily for rig-related enhancements, new rig equipment, as well as sustaining 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
36
months represent a number of capital programs that are currently underway or planned. We believe these programs will result in the enhancement of a significant number of rigs in our existing Lower 48 fleet. When the programs are completed, we expect to have a larger fleet of high-specification land rigs deployed in the Lower 48. We believe the capabilities of these high-specification rigs will meet or exceed requirements from customers.
We have historically completed a number of acquisitions and will continue to evaluate opportunities to acquire assets or businesses to enhance our operations. Several of our previous acquisitions were funded through issuances of debt or our common shares. Future acquisitions may be funded using existing cash or by issuing debt or additional shares of our stock. Such capital expenditures and acquisitions will depend on our view of market conditions and other factors.
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 have been no material changes to the contractual cash obligations table that was included in our 2016 Annual Report.
On August 25, 2015, our Board of Directors authorized a share repurchase program (the “program”) under which we may repurchase, from time to time, up to $400 million of our common shares by various means, including in the open market or in privately negotiated transactions. This authorization does not have an expiration date and does not obligate us to repurchase any of our common shares. Through March 31, 2017, we repurchased 10.9 million of our common shares for an aggregate purchase price of approximately $101.3 million under this program. As of March 31, 2017, the remaining amount authorized under the program that may be used to purchase shares was $298.7 million. 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, 2017, our subsidiaries held 49.7 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.
Cash Flows
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, 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, 2017 and 2016 below.
Operating Activities. Net cash used for operating activities totaled $58.0 million during the three months ended March 31, 2017, compared to net cash provided of $161.5 million during the corresponding 2016 period. Operating cash flows are our primary source of capital and liquidity. The decrease in our operating cash flows was due in part to the decrease in adjusted operating income as a direct result of reductions in the level of drilling activity in our International drilling segment. Additionally, changes in working capital items such as collection of receivables, other deferred revenue arrangements and payments of operating payables are significant factors affecting operating cash flows. Bonuses and semi-annual interest payments are paid out during the first quarter, which is reflected in the changes in working capital items. Changes in working capital items used $93.9 million and provided $53.2 million in cash during the three months ended March 31, 2017 and 2016, respectively.
Investing Activities. Net cash used for investing activities totaled $180.2 million during the three months ended March 31, 2017 compared to $128.8 million during the corresponding 2016 period. Our primary use of cash for investing activities is for capital expenditures related to rig-related enhancements, new construction and equipment, as well as sustaining capital expenditures. During the three months ended March 31, 2017 and 2016, we used cash for capital expenditures totaling $183.4 million and $129.9 million, respectively.
Financing Activities. Net cash provided by financing activities totaled $172.9 million during the three months ended March 31, 2017 compared to net cash used of $87.5 million during the corresponding 2016 period. During the three months ended March 31, 2017 we received net proceeds in connection with the issuance of our exchangeable senior unsecured notes of $520.5 million. This was partially offset by the repayment of the remaining balance of our unsecured term loan of $162.5 million and the repurchase of $170.5 million in long-term debt due in 2018. Additionally, we paid dividends of $17.1 million and had proceeds of $8.3 million due to stock options exercised during the three months ended March 31, 2017. During the three months ended March 31, 2016, we repurchased $148.0 million in long-term debt, partially offset by amounts borrowed under our revolving credit facility, net, of $80.0 million.
Other Matters
Recent Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies.
We are a party to transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources. The most significant of these off-balance sheet arrangements involve agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. In addition, we have provided indemnifications, which serve as guarantees, to some third parties. These guarantees include indemnification provided by us to our share transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees. Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote.
The following table summarizes the total maximum amount of financial guarantees issued by Nabors:
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to market risks arising from the use of financial instruments in the ordinary course of business as discussed in our 2016 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d‑15(e) under the Exchange Act) designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. We have investments in certain unconsolidated entities that we do not control or manage. Because we do not control or manage these entities, our disclosure controls and procedures with respect to these entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries.
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report
38
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
39
ITEM 1. LEGAL PROCEEDINGS
Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. For matters where an unfavorable outcome is reasonably possible and significant, we disclose the nature of the matter and a range of potential exposure, unless an estimate cannot be made at the time of disclosure. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our condensed consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period. See Note 7 — Commitments and Contingencies for a description of such proceedings.
ITEM 1A. RISK FACTORS
In addition to the information set forth elsewhere in this report, the risk factors set forth in Item 1A. Risk Factors in our 2016 Annual Report should be carefully considered when evaluating us. These risks are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We withheld the following shares of our common stock to satisfy tax withholding obligations in connection with grants of stock awards during the three months ended March 31, 2017 from the distributions described below. These shares may be deemed to be “issuer purchases” of shares that are required to be disclosed pursuant to this Item, but were not purchased as part of a publicly announced program to purchase common shares:
Approximated
Total Number
Dollar Value of
of Shares
Shares that May
Average
Purchased as
Yet Be
Number of
Price
Part of Publicly
Purchased
Period
Paid per
Announced
Under the
Repurchased
Share (1)
Program
Program (2)
January 1 - January 31
17.45
298,716
February 1 - February 28
15.31
March 1 - March 31
119
13.66
Shares were withheld from employees and directors to satisfy certain tax withholding obligations due in connection with grants of shares under our 2003 Employee Stock Plan, the 2013 Stock Plan and the 2016 Stock Plan. Each of the 2016 Stock Plan, the 2013 Stock Plan, the 2003 Employee Stock Plan and the 1999 Stock Option Plan for Non-Employee Directors provide for the withholding of shares to satisfy tax obligations, but do not specify a maximum number of shares that can be withheld for this purpose. These shares were not purchased as part of a publicly announced program to purchase common shares.
In August 2015, our Board of Directors authorized a share repurchase program under which we may repurchase up to $400 million of our common shares in the open market or in privately negotiated transactions. Through March 31, 2017, we repurchased 10.9 million of our common shares for an aggregate purchase price of approximately $101.3 million under this program. As of March 31, 2017, we had $298.7 million that remained authorized under the program that may be used to repurchase shares. The repurchased shares are held by our subsidiaries are registered and tradable subject to applicable securities law limitations and have the same voting, dividend and other rights as other outstanding shares. As of March 31, 2017, our subsidiaries held 49.7 million of our common shares.
40
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Description
4.1
Indenture, dated as of January 13, 2017, by and among Nabors Industries, Inc., as issuer, Nabors Industries Ltd., as guarantor, Citibank, N.A., as securities administrator and Wilmington Trust, National Association, as trustee.*
10.1(a)(+)
Nabors Industries Ltd. 2016 Stock Plan (incorporated by reference to Exhibit 99.1 to our Form S-8 (File No. 333-212781) filed with the SEC on July 29, 2016).
10.1(b)(+)
Form of Stock Option Agreement – Others, pursuant to the 2016 Stock Plan.*
10.1(c)(+)
Form of Restricted Stock Agreement – Others, pursuant to the 2016 Stock Plan.*
10.1(d)(+)
Form of Nabors Industries Ltd. TSR Stock Grant Agreement – Anthony G. Petrello, pursuant to the 2016 Stock Plan.*
10.1(e)(+)
Form of Nabors Corporate Services, Inc. TSR Stock Grant Agreement – Anthony G. Petrello, pursuant to the 2016 Stock Plan*
10.1(f)(+)
Form of Nabors Industries Ltd. TSR Stock Grant Agreement – William Restrepo, pursuant to the 2016 Stock Plan.*
10.1(g)(+)
Form of Nabors Corporate Services, Inc. TSR Grant Agreement – William Restrepo, pursuant to the 2016 Stock Plan*
10.1(h)(+)
Form of Nabors Industries Ltd. Restricted Stock Agreement – Anthony G. Petrello, pursuant to the 2016 Stock Plan.*
10.1(i)(+)
Form of Nabors Corporate Services, Inc. Restricted Stock Agreement – Anthony G. Petrello, pursuant to the 2016 Stock Plan.*
10.1(j)(+)
Form of Nabors Industries Ltd. Restricted Stock Agreement – William Restrepo, pursuant to the 2016 Stock Plan.*
10.1(k)(+)
Form of Nabors Corporate Services, Inc. Restricted Stock Agreement – William Restrepo, pursuant to the 2016 Stock Plan.*
10.2(+)
Form of Stock Option Agreement to the Amended and Restated 1999 Stock Option Plan for Non-Employee Directors.*
10.3(a)(+)
Nabors Industries, Inc. Executive Deferred Compensation Plan (as Amended and Restated Effective as of April 1, 2017).*
10.3(b)(+)
Form of Deferred Bonus Agreement under the Nabors Industries, Inc. Executive Deferred Compensation Plan.*
10.4
Nabors Industries, Inc. Deferred Compensation Plan (as Amended and Restated Effective as of January 1, 2017).*
31.1
Rule 13a-14(a)/15d-14(a) Certification of Anthony G. Petrello, Chairman, President and Chief Executive Officer*
31.2
Rule 13a-14(a)/15d-14(a) Certification of William Restrepo, Chief Financial Officer*
32.1
Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Anthony G. Petrello, Chairman, President and Chief Executive Officer and William Restrepo, Chief Financial Officer.*
101.INS
XBRL Instance Document*
101.SCH
XBRL Schema Document*
101.CAL
XBRL Calculation Linkbase Document*
101.LAB
XBRL Label Linkbase Document*
101.PRE
XBRL Presentation Linkbase Document*
101.DEF
XBRL Definition Linkbase Document*
*Filed herewith.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ ANTHONY G. PETRELLO
Anthony G. Petrello
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ WILLIAM RESTREPO
William Restrepo
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
Date:
April 28, 2017
43
(+)Management contract or compensatory plan or arrangement.
44