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, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
(Address of principal executive office)
(441) 292-1510
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares, $.05 par value per share
NBR
NYSE
Preferred shares, 6.00% Mandatory Convertible Preferred Shares, Series A, $.001 par value per share
NBR.PRA
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 ☐
Emerging growth company ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of common shares, par value $.05 per share, outstanding as of May 6, 2020 was 7,299,780, excluding 1,090,003 common shares held by our subsidiaries, or 8,389,783 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, 2020 and December 31, 2019
3
Condensed Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2020 and 2019
4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019
5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019
6
Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2020 and 2019
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
PART II OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
45
Defaults Upon Senior Securities
46
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
48
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
December 31,
2020
2019
(In thousands, except per
share amounts)
ASSETS
Current assets:
Cash and cash equivalents
$
480,522
435,990
Short-term investments
9,136
16,506
Accounts receivable, net
454,718
453,042
Inventory, net
173,991
176,341
Assets held for sale
1,936
2,530
Other current assets
150,533
164,257
Total current assets
1,270,836
1,248,666
Property, plant and equipment, net
4,597,308
4,930,549
Goodwill
—
28,380
Deferred income taxes
280,545
305,844
Other long-term assets
159,859
247,219
Total assets (1)
6,308,548
6,760,658
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt
Trade accounts payable
297,274
295,159
Accrued liabilities
252,664
333,282
Income taxes payable
23,057
14,628
Current lease liabilities
11,875
13,479
Total current liabilities
584,870
656,548
Long-term debt
3,388,014
3,333,220
Other long-term liabilities
261,942
292,184
2,800
3,149
Total liabilities (1)
4,237,626
4,285,101
Commitments and contingencies (Note 8)
Redeemable noncontrolling interest in subsidiary (Note 3)
429,824
425,392
Shareholders’ equity:
Preferred shares, par value $0.001 per share:
Series A 6% Cumulative Mandatory Convertible; $50 per share liquidation preference; outstanding 4,870 and 5,613, respectively
Common shares, par value $0.05 per share:
Authorized common shares 16,000; issued 8,389 and 8,324, respectively
419
416
Capital in excess of par value
3,408,454
3,412,972
Accumulated other comprehensive income (loss)
(29,006)
(11,788)
Retained earnings (accumulated deficit)
(508,200)
(104,775)
Less: treasury shares, at cost, 1,090 and 1,056 common shares, respectively
(1,315,751)
(1,314,020)
Total shareholders’ equity
1,555,921
1,982,811
Noncontrolling interest
85,177
67,354
Total equity
1,641,098
2,050,165
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
(In thousands, except per share amounts)
Revenues and other income:
Operating revenues
718,364
799,640
Earnings (losses) from unconsolidated affiliates
(5)
Investment income (loss)
(3,198)
9,677
Total revenues and other income
715,166
809,312
Costs and other deductions:
Direct costs
461,840
520,957
General and administrative expenses
57,384
68,167
Research and engineering
11,409
13,520
Depreciation and amortization
227,063
210,391
Interest expense
54,722
52,352
Impairments and other charges
276,434
Other, net
(17,110)
17,502
Total costs and other deductions
1,071,742
882,889
Income (loss) from continuing operations before income taxes
(356,576)
(73,577)
Income tax expense (benefit):
Current
(7,203)
15,862
Deferred
24,896
13,937
Total income tax expense (benefit)
17,693
29,799
Income (loss) from continuing operations, net of tax
(374,269)
(103,376)
Income (loss) from discontinued operations, net of tax
(93)
(157)
Net income (loss)
(374,362)
(103,533)
Less: Net (income) loss attributable to noncontrolling interest
(17,465)
(14,176)
Net income (loss) attributable to Nabors
(391,827)
(117,709)
Less: Preferred stock dividend
(3,652)
(4,313)
Net income (loss) attributable to Nabors common shareholders
(395,479)
(122,022)
Amounts attributable to Nabors common shareholders:
Net income (loss) from continuing operations
(395,386)
(121,865)
Net income (loss) from discontinued operations
Earnings (losses) per share:
Basic from continuing operations
(56.72)
(18.11)
Basic from discontinued operations
(0.01)
(0.02)
Total Basic
(56.73)
(18.13)
Diluted from continuing operations
Diluted from discontinued operations
Total Diluted
Weighted-average number of common shares outstanding:
Basic
7,051
7,015
Diluted
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Other comprehensive income (loss), before tax:
Translation adjustment attributable to Nabors
(17,365)
9,190
Pension liability amortization and adjustment
51
54
Unrealized gains (losses) and amortization on cash flow hedges
143
140
Other comprehensive income (loss), before tax
(17,171)
9,384
Income tax expense (benefit) related to items of other comprehensive income (loss)
47
Other comprehensive income (loss), net of tax
(17,218)
9,338
Comprehensive income (loss) attributable to Nabors
(409,045)
(108,371)
Net income (loss) attributable to noncontrolling interest
17,465
14,176
Translation adjustment attributable to noncontrolling interest
52
Comprehensive income (loss) attributable to noncontrolling interest
14,228
Comprehensive income (loss)
(391,580)
(94,143)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
Cash flows from operating activities:
Adjustments to net income (loss):
210,397
Deferred income tax expense (benefit)
24,903
13,949
265,779
82
Amortization of debt discount and deferred financing costs
8,153
7,730
Losses (gains) on debt buyback
(15,742)
(2,667)
Losses (gains) on long-lived assets, net
1,391
3,633
Losses (gains) on investments, net
5,539
(7,688)
Provision (recovery) of bad debt
10,417
(419)
Share-based compensation
9,158
8,424
Foreign currency transaction losses (gains), net
(559)
8,548
Other
188
212
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
(16,008)
14,914
Inventory
(1,421)
(685)
12,292
13,458
2,046
(23,907)
Trade accounts payable and accrued liabilities
(76,952)
(95,669)
4,475
6,107
(9,733)
31,144
Net cash provided by (used for) operating activities
59,162
69,854
Cash flows from investing activities:
Purchases of investments
(4,221)
Sales and maturities of investments
1,835
1,134
Cash paid for acquisition of businesses, net of cash acquired
(2,929)
Capital expenditures
(59,430)
(141,070)
Proceeds from sales of assets and insurance claims
6,822
2,642
Net cash (used for) provided by investing activities
(50,773)
(144,444)
Cash flows from financing activities:
Increase (decrease) in cash overdrafts
55
Proceeds from issuance of long-term debt
1,000,000
Reduction in long-term debt
(1,068,405)
(43,540)
Debt issuance costs
(15,737)
(35)
Proceeds from revolving credit facilities
795,000
180,000
Reduction in revolving credit facilities
(650,000)
(50,000)
Proceeds from (payments for) short-term borrowings
289
Repurchase of common and preferred shares
(13,858)
Dividends to common and preferred shareholders
(7,937)
(25,765)
(1,546)
(1,493)
Net cash (used for) provided by financing activities
37,572
59,456
Effect of exchange rate changes on cash and cash equivalents
(2,219)
(2,791)
Net increase (decrease) in cash and cash equivalents and restricted cash
43,742
(17,925)
Cash and cash equivalents and restricted cash, beginning of period
442,038
451,080
Cash and cash equivalents and restricted cash, end of period
485,780
433,155
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents, beginning of period
447,766
Restricted cash, beginning of period
6,048
3,314
Cash and cash equivalents, end of period
429,127
Restricted cash, end of period
5,258
4,028
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Mandatory Convertible
Capital
Accumulated
Preferred Shares
Common Shares
in Excess
Non-
Par
of Par
Comprehensive
Retained
Treasury
controlling
Total
Shares
Value
Income
Earnings
Interest
Equity
As of December 31, 2018
5,750
409,652
410
3,392,937
(29,325)
650,842
49,476
2,750,326
Dividends to common shareholders ($0.01 per share)
(3,947)
Dividends to preferred shareholders ($0.75 per share)
9,390
Accrued distribution on redeemable noncontrolling interest in subsidiary
(5,063)
6,264
(1,251)
(1,245)
As of March 31, 2019
415,916
3,400,110
(19,987)
519,810
63,704
2,650,039
As of December 31, 2019
5,613
416,198
(3,514)
(724)
(1)
(12,126)
(1,731)
(4,432)
3,268
(1,550)
358
(1,189)
As of March 31, 2020
4,889
419,466
Nabors Industries Ltd. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 General
Unless the context requires otherwise, references in this report to “we,” “us,” “our,” “the Company,” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires. References in this report to “Nabors Delaware” mean Nabors Industries, Inc., a wholly owned subsidiary of Nabors.
Our business is comprised of our global land-based and offshore drilling rig operations and other rig related services and technologies. These services include tubular running services, wellbore placement solutions , directional drilling, measurement-while-drilling (“MWD”), logging-while-drilling (“LWD”) systems and services, equipment manufacturing, rig instrumentation and optimization software.
With operations in approximately 20 countries, we are a global provider of drilling and drilling-related services for land-based and offshore oil and natural gas wells, with a fleet of rigs and drilling-related equipment which, as of March 31, 2020 included:
The outbreak of COVID-19, along with decisions by large oil and natural gas producing countries, has led to decreases in commodity prices, specifically oil and natural gas prices, resulting from oversupply and demand weakness. These price decreases caused significant disruptions and volatility in the global marketplace during the first quarter of 2020, leading to a decrease in the demand for our products and services. Lower prices and the resulting weakness in demand for our services, which have negatively affected our results of operations and cash flows, have persisted into the second quarter, and there remains continuing uncertainty regarding the length and impact of COVID-19 on the energy industry and the outlook for our business.
At a special meeting of shareholders held April 20, 2020, our shareholders authorized a combination of our common shares (the “Reverse Stock Split”) at a ratio of not less than 1-for 15 and not greater than 1-for-50, with the exact ratio to be set within that range at the sole direction of our Board of Directors (the “Board”). On April 20, 2020, the Board set the Reverse Stock Split ratio at 1-for-50. As a result of the Reverse Stock Split, 50 pre-reverse split common shares automatically combined into one new common share, without any action on the part of the shareholders. Nabors’ authorized number of common shares were also proportionally decreased from 800,000,000 to 16,000,000 common shares, and the par value of each common share was proportionally increased from $0.001 to $0.05. In addition, at the special meeting, the shareholders authorized an increase in our common share capital by 100% following the Reverse Stock Split, to $1,600,000. No fractional common shares were issued as a result of the Reverse Stock Split. Any fractional common shares of registered holders resulting from the Reverse Stock Split were rounded up to the nearest whole share. All share and per share information included in the accompanying financial statements has been retrospectively adjusted to reflect this Reverse Stock Split.
Note 2 Summary of Significant Accounting Policies
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of Nabors have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. 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 U.S. 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, 2019 (“2019 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, 2020 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, 2020 may not be indicative of results that will be realized for the full year ending December 31, 2020.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of Nabors, as well as all majority owned and non-majority owned subsidiaries consolidated in accordance with U.S. GAAP. All significant intercompany accounts and transactions are eliminated in consolidation.
In addition to the consolidation of our majority owned subsidiaries, we also consolidate variable interest entities (“VIE”) when we are determined to be the primary beneficiary of a VIE. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our joint venture, SANAD, which is equally owned by Saudi Aramco and Nabors, has been consolidated. As we have the power to direct activities that most significantly impact SANAD’s economic performance, including operations, maintenance and certain sourcing and procurement, we have determined Nabors to be the primary beneficiary. See Note 3—Joint Ventures.
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
143,152
130,414
Work-in-progress
17,288
5,498
Finished goods
13,551
40,429
9
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 may exceed their fair value. We initially assess goodwill for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than 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.
Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management. We primarily calculate fair value in these impairment tests using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement. Our cash flow models involve assumptions based on our utilization of rigs or other oil and gas service equipment, revenues and earnings from affiliates, as well as direct costs, general and administrative costs, depreciation, applicable income taxes, capital expenditures and working capital requirements. Our fair value estimates of these reporting units are sensitive to varying dayrates, utilization and costs. A significantly prolonged period of lower oil and natural gas prices, other than those assumed in developing our forecasts, or changes in laws and regulations could adversely affect the demand for and prices of our services. Our discounted cash flow projections for each reporting unit were based on financial forecasts. The future cash flows were discounted to present value using discount rates determined to be appropriate for each reporting unit. Terminal values for each reporting unit were calculated using a Gordon Growth methodology with a long-term growth rate of approximately 2%. The fair value of certain of our reporting units utilizes a market approach based on comparing the assets and liabilities of companies within our same industry. The market approach involves significant judgment in the selection of the appropriate peer group companies and valuation multiples.
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 compared the sum of our reporting units’ estimated fair value, which included the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assessed 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.
The change in the carrying amount of goodwill for our segments for the three months ended March 31, 2020 was as follows:
Acquisitions
and
Balance at
Purchase
Disposals
Cumulative
Price
Translation
Adjustments
Impairments
Adjustment
Drilling Solutions
11,436
(11,436)
Rig Technologies
16,944
(16,362)
(582)
(27,798)
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes accounting requirements for the recognition of credit losses from an incurred or probable impairment methodology to a current expected credit losses (CECL) methodology. The guidance is effective for interim and annual periods beginning after December 15, 2019. The guidance has been applied using the modified retrospective method with a cumulative effect adjustment to beginning retained earnings. Trade receivables (including the allowance for credit losses) is the only financial instrument in scope for ASU 2016-13 currently held by
10
the Company. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Note 3 Joint Ventures
During 2016, we entered into an agreement with Saudi Aramco to form a joint venture known as SANAD to own, manage and operate onshore drilling rigs in the Kingdom of Saudi Arabia. SANAD is equally owned by Saudi Aramco and Nabors.
During 2017, Nabors and Saudi Aramco each contributed $20 million in cash for the purpose of capitalizing the joint venture upon formation. In addition, since inception Nabors and Saudi Aramco have each contributed a combination of drilling rigs, drilling rig equipment and other assets, including cash, each with a value of approximately $394 million to the joint venture. The contributions were received in exchange for redeemable ownership interests which accrue interest annually, have a twenty-five year maturity and are required to be converted to authorized capital should certain events occur, including the accumulation of specified losses. In the accompanying condensed consolidated balance sheet, Nabors has reported Saudi Aramco’s share of authorized capital as a component of noncontrolling interest in equity and Saudi Aramco’s share of the redeemable ownership interests as redeemable noncontrolling interest in subsidiary, classified as mezzanine equity. The accrued interest on the redeemable ownership interest is a non-cash financing activity and is reported as an increase in the redeemable noncontrolling interest in subsidiary line in our condensed consolidated balance sheet. The assets and liabilities included in the condensed balance sheet below are (1) assets that can either be used to settle obligations of the VIE or be made available in the future to the equity owners through dividends, distributions or in exchange of the redeemable ownership interests (upon mutual agreement of the owners) or (2) liabilities for which creditors do not have recourse to other assets of Nabors.
The condensed balance sheet of SANAD, as included in our condensed consolidated balance sheet, is presented below.
Assets:
307,119
289,575
91,911
68,624
18,403
18,149
450,821
455,751
10,206
15,118
Total assets
878,460
847,217
Liabilities:
Accounts payable
67,875
64,365
20,515
17,929
Total liabilities
88,390
82,294
Note 4 Fair Value Measurements
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we employ valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value
11
determinations in situations where there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances utilizing a fair value hierarchy based on the observability of those inputs.
Under the fair value hierarchy:
Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 consisted 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. There were no transfers of our financial assets between Level 1 and Level 2 measures during the three months ended March 31, 2020. 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. As of March 31, 2020 and December 31, 2019, our short-term investments were carried at fair market value and totaled $9.1 million and $16.5 million, respectively, and primarily consisted of Level 1 measurements. No material Level 2 or Level 3 measurements exist as of any of the periods presented.
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 related to assets held for sale, goodwill, intangible assets and other long-lived assets and assets acquired and liabilities assumed in a business combination. Based upon our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
Fair Value of Financial Instruments
We estimate the fair value of our financial instruments in accordance with U.S. GAAP. The fair value of our long-term debt and revolving credit facilities 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, 2020
December 31, 2019
Carrying
Fair
5.00% senior notes due September 2020
239,791
220,058
282,046
284,907
4.625% senior notes due September 2021
221,032
140,802
634,588
632,516
5.50% senior notes due January 2023
46,410
18,355
501,003
483,834
5.10% senior notes due September 2023
166,001
41,712
336,810
303,860
0.75% senior exchangeable notes due January 2024
478,305
98,774
472,603
431,503
5.75% senior notes due February 2025
775,186
173,200
781,502
705,040
7.25% senior notes due January 2026
600,000
200,586
7.50% senior notes due January 2028
400,000
127,772
2012 Revolving credit facility
300,000
355,000
2018 Revolving credit facility
200,000
3,426,725
1,521,259
3,363,552
3,196,660
Less: current portion
Less: deferred financing costs
38,711
30,332
12
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 Accounts Receivable Sales Agreement
On September 13, 2019, we entered into a $250 million accounts receivable sales agreement (the “A/R Agreement”) whereby certain U.S. operating subsidiaries of the Company (collectively, the “Originators”), sold or contributed, and will on an ongoing basis continue to sell or contribute, certain of their domestic trade accounts receivables to a wholly-owned, bankruptcy-remote, special purpose entity (the “SPE” or “Seller”). The SPE in turn sells, transfers, conveys and assigns to third-party financial institutions (the “Purchasers”) all the rights, title and interest in and to its pool of eligible receivables. The sale of these receivables qualified for sale accounting treatment in accordance with ASC 860. During the period of this program, cash receipts from the Purchasers at the time of the sale were classified as operating activities in our consolidated statement of cash flows. Subsequent collections on the pledged receivables, which were not sold, will be classified as operating cash flows in our consolidated statement of cash flows at the time of collection.
Nabors Delaware and/or another subsidiary of Nabors act as servicers of the sold receivables. The servicers administer, collect and otherwise enforce these receivables and are compensated for doing so on terms that are generally consistent with what would be charged by an unrelated servicer. The servicers initially receive payments made by obligors on the receivables, then remit those payments in accordance with the Receivables Purchase Agreement. The servicers and the Originators have contingent indemnification obligations to the SPE, and the SPE has contingent indemnification obligations to the Purchasers, in each case customary for transactions of this type. These contingent indemnification obligations are guaranteed by the Company pursuant to an Indemnification Guarantee in favor of the Purchasers. The Purchasers have no recourse for receivables that are uncollectible as a result of the insolvency or inability to pay of the account debtors.
The maximum purchase commitment of the Purchasers under the A/R Agreement is $250.0 million. The amount available for sale to the Purchasers under the A/R Agreement fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after excluding excess concentrations and certain other ineligible receivables. As of March 31, 2020, approximately $175.0 million had been sold to the Purchasers. As of December 31, 2019, approximately $140.0 million had been sold to the Purchasers. Trade accounts receivable sold by the SPE to the Purchasers are derecognized from our condensed consolidated balance sheet. The fair value of the sold receivables approximated book value due to the short-term nature of the receivables and, as a result, no gain or loss on the sale of the receivables was recorded. Trade receivables pledged by the SPE as collateral to the Purchasers (excluding receivables sold to the Purchasers) totaled $94.6 million and $143.6 million as of March 31, 2020 and December 31, 2019, respectively, and are included in accounts receivable, net in our condensed consolidated balance sheet. The assets of the SPE cannot be used by the Company for general corporate purposes. Additionally, creditors of the SPE do not have recourse to assets of the Company (other than assets of the SPE).
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Note 6 Debt
Debt consisted of the following:
5.00% senior notes due September 2020 (1)
2012 Revolving credit facility (1)
During the three months ended March 31, 2020, we repurchased $1.1 billion aggregate principal amount outstanding of our senior unsecured notes for approximately $1.1 billion in cash, including principal, and $11.2 million in accrued and unpaid interest. Approximately $952.9 million of notes were purchased in the tender offers and consent solicitations described below and the remainder were purchased in the open market. In connection with these repurchases, we recognized a net gain of approximately $15.7 million for the three months ended March 31, 2020 and is included in other, net in our condensed consolidated statement of income (loss).
Subsequent to March 31, 2020 through the date of this report, we repurchased $154.9 million aggregate principal amount outstanding of various series of our senior unsecured notes for approximately $132.9 million in cash, reflecting principal, accrued and unpaid interest.
7.25% and 7.50% Senior Notes Due January 2026 and 2028
In January 2020, Nabors completed a private placement of $600.0 million aggregate principal amount of senior guaranteed notes due 2026 (the “2026 Notes”) and $400.0 million aggregate principal amount of senior guaranteed notes due 2028 (the “2028 Notes” and, together with the 2026 Notes, the “Notes”). The 2026 and 2028 Notes will bear interest at an annual rate of 7.25% and 7.50%, respectively. The Notes are fully and unconditionally guaranteed by certain of Nabors’ indirect wholly-owned subsidiaries.
The proceeds from this offering were primarily used to repurchase $952.9 million aggregate principal amount of certain of Nabors Delaware’s senior notes that were tendered pursuant to an offer to purchase and consent solicitation. The aggregate principal amount repurchased included approximately $407.7 million of our 5.50% senior notes due 2023 (the “5.50% Notes”), $379.7 million of our 4.625% senior notes due 2021 (the “4.625% Notes”) and $165.5 million of our 5.10% senior notes due 2023 (the “5.10% Notes”).
2018 Revolving Credit Facility
On December 13, 2019, Nabors Delaware and Nabors Drilling Canada Limited (“Nabors Canada” and together with Nabors Delaware, the “Borrowers”) entered into Amendment No. 2 (the “Second Amendment”) to the existing credit agreement dated October 11, 2018 (as amended, including such amendment, the “2018 Revolving Credit Facility”) by and among the Borrowers, the Guarantors identified therein, HSBC Bank Canada, as the Canadian lender (the “Canadian Lender”) the issuing banks and other lenders party thereto (the “US Lenders” and, together with the Canadian Lender,
14
the “Lenders”) and Citibank, N.A., as administrative agent solely for the U.S. Lenders. Amendment No. 3 to the 2018 Revolving Credit Facility was entered into on March 3, 2020, in order to permit letters of credit from the Canadian Lender on the portion of the facility dedicated to Canadian borrowings. The 2018 Revolving Credit Facility has a borrowing capacity of $1.0136 billion and is fully and unconditionally guaranteed by Nabors and certain of its wholly owned subsidiaries. The 2018 Revolving Credit Facility matures at the earlier of (a) October 11, 2023 and (b) July 19, 2022, if any of Nabors Delaware’s existing 5.50% senior notes due January 2023 remain outstanding as of such date. Certain lenders have committed to provide Nabors Delaware an aggregate principal amount of $981.6 million under the 2018 Revolving Credit Facility, which may be drawn in U.S. dollars, and the Canadian Lender has committed to provide Nabors Canada an aggregate principal amount of $32.0 million in U.S. dollar equivalent, which can be drawn upon in either U.S. or Canadian dollars. The 2018 Revolving Credit Facility contains certain affirmative and negative covenants, including a financial covenant requiring Nabors to maintain net funded debt to EBITDA (as defined in the Second Amendment) at no greater than 5.5 times EBITDA. Additionally, during any period in which Nabors Delaware fails to maintain an investment grade rating from at least two ratings agencies, the guarantors under the facility and their respective subsidiaries will be required to maintain an asset to debt coverage ratio (as defined in the 2018 Revolving Credit Facility) of at least 2.50:1. As of March 31, 2020, we had $200 million outstanding under our 2018 Revolving Credit Facility. The weighted average interest rate on borrowings at March 31, 2020 was 3.67%. In order to make any future borrowings under the 2018 Revolving Credit Facility, Nabors and certain of its wholly owned subsidiaries are subject to compliance with the conditions and covenants contained therein, including compliance with applicable financial ratios.
As of March 31, 2020, we were in compliance with all covenants under the 2018 Revolving Credit Facility. If we fail to perform our obligations under the covenants, including financial covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facilities could be declared immediately due and payable. We expect to remain in compliance with all covenants under the 2018 Revolving Credit Facility during at least the twelve month period following the date of this report based on our current operational and financial projections. However, we can make no assurance of continued compliance if our current projections or material underlying assumptions prove to be incorrect.
2012 Revolving Credit Facility
In connection with entering into the 2018 Revolving Credit Facility, Nabors Delaware entered into Amendment No. 3 to its credit agreement (as amended, including such amendment, the “2012 Revolving Credit Facility”). The 2012 Revolving Credit Facility had a capacity of $666.25 million, of which we had $300.0 million outstanding as of March 31, 2020. The weighted average interest rate on borrowings at March 31, 2020 was 3.02%. The 2012 Revolving credit Facility was due to expire in July 2020, however subsequent to the balance sheet date, we have repaid all outstanding amounts and have terminated the facility.
Note 7 Shareholders’ Equity
Common shares
At a special meeting of shareholders held April 20, 2020, our shareholders authorized the Reverse Stock Split, as described in greater detail in Note 1—General.
Convertible Preferred Shares
During 2018, we issued 5.75 million of our 6% Series A Mandatory Convertible Preferred Shares (the “mandatory convertible preferred shares”), par value $0.001 per share, with a liquidation preference of $50 per share. As of March 31, 2020 and December 31, 2019 we had 4.9 million and 5.6 million mandatory convertible preferred shares outstanding.
The dividends on the mandatory convertible preferred shares are payable on a cumulative basis at a rate of 6% annually on the initial liquidation preference of $50 per share. Dividends accumulate and are paid quarterly to the extent that we have available funds and our Board declares a dividend payable. We may elect to pay any accumulated and unpaid dividends in cash or common shares or any combination thereof. At issuance, each mandatory convertible preferred share was automatically convertible into between 0.1075 and 0.1290 of our common shares based on the average share price over a period of twenty consecutive trading days ending prior to May 1, 2021, subject to anti-dilution adjustments. As a result of the dividends paid on our common shares since the offering, the most recent publicly
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announced conversion rate for each mandatory convertible preferred share is between 0.1144 and 0.1372 of our common shares. Adjustments to the conversion ratio are required to be made and published when such adjustment would result in an increase or decrease of one percent or more of the conversion rate. At any time prior to May 1, 2021, a holder of mandatory convertible preferred shares may convert such mandatory convertible preferred shares into our common shares at the minimum conversion rate, subject to adjustment. Otherwise, the mandatory convertible preferred shares will automatically convert into common shares on May 1, 2021.
Note 8 Commitments and Contingencies
Contingencies
Income Tax
We operate in a number of countries 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.
In certain jurisdictions we have recognized deferred tax assets and liabilities. Judgment and assumptions are required in determining whether deferred tax assets will be fully or partially utilized. When we estimate that all or some portion of certain deferred tax assets such as net operating loss carryforwards will not be utilized, we establish a valuation allowance for the amount we determine to be more likely than not unrealizable. We continually evaluate strategies that could allow for future utilization of our deferred assets. Any change in the ability to utilize such deferred assets will be accounted for in the period of the event affecting the valuation allowance. If facts and circumstances cause us to change our expectations regarding future tax consequences, the resulting adjustments could have a material effect on our financial results or cash flow. At this time, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize the deferred tax assets that we have recognized. However, it is possible that some of our recognized deferred tax assets, relating to net operating loss carryforwards, could expire unused or could carryforward indefinitely without utilization. Therefore, unless we are able to generate sufficient taxable income from our component operations, a substantial valuation allowance to reduce our deferred tax assets may be required, which would materially increase our tax expense in the period the allowance is recognized and materially adversely affect our results of operations and statement of financial condition.
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 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 $22.8 million (at March 31, 2020 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
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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 $14.8 million in excess of amounts accrued.
On September 29, 2017, we were sued, along with Tesco Corporation and its Board of Directors, in a putative shareholder class action filed in the United States District Court for the Southern District of Texas, Houston Division. The plaintiff alleges that the September 18, 2017 Preliminary Proxy Statement filed by Tesco with the United States Securities and Exchange Commission omitted material information with respect to the proposed transaction between Tesco and Nabors announced on August 14, 2017. The plaintiff claims that the omissions rendered the Proxy Statement false and misleading, constituting a violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. The court consolidated several matters and entered a lead plaintiff appointment order. The plaintiff filed their amended complaint, adding Nabors Industries Ltd. as a party to the consolidated action. Nabors filed its motion to dismiss, which was granted by the court on March 29, 2019. The parties have filed appellate briefs with the Fifth Circuit Court of Appeals, and arguments were heard on March 4, 2020. Nabors will continue to vigorously defend itself against the allegations.
Following a routine audit conducted in May and June of 2018 by the Atyrau Oblast Ecology Department (the “AOED”), our joint venture in Kazakhstan, KMG Nabors Drilling Company (“KNDC”), was administratively fined for not having emissions permits for KNDC owned or leased equipment. Prior to this audit, the AOED had always accepted the operator’s permits for all of their subcontractors. However, because of major personnel changes, AOED changed this position and is now requiring that the owner/lessor of the equipment that emits the pollutants must have its own permits. Administrative fines have been issued to KNDC and paid in the amount of $0.8 million for violations regarding the failure to have proper permits. AOED had also assessed additional “environmental damages” in the amount of $3.4 million for the period while KNDC did not hold its’ own emissions permit. However, KNDC appealed this fine and the AOED Economic Court ruled in KNDC’s favor. AOED appealed this decision, which was reversed on February 21, 2020. KNDC appealed to the Supreme Court but was unsuccessful in obtaining a reversal of the lower appeals court ruling. Additional damages in the form of later year audits and taxes could become due as well exposing KNDC to possible penalties and fines in an amount estimated to be up to approximately $4.0 million, of which we have fully accrued as a liability. KNDC and the operator have executed an agreement formalizing the operator’s obligation to reimburse KNDC for many of the financial expenses related to this case as well as penalties and expenses related to future audit periods.
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 include the A/R Agreement (see Note 5—Accounts Receivable Sales Agreement) and certain agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these financial or performance assurances 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
2021
2022
Thereafter
Financial standby letters of credit and other financial surety instruments
215,301
3,804
112
219,217
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Note 9 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. The participating security holders are not contractually obligated to share in losses. Therefore, losses are not allocated to the participating security holders.
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 shares. 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, 2020.
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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: preferred stock dividends
Less: accrued distribution on redeemable noncontrolling interest in subsidiary
Less: distributed and undistributed earnings allocated to unvested shareholders
(125)
(118)
Numerator for basic earnings per share:
Adjusted income (loss) from continuing operations, net of tax - basic
(399,943)
(127,046)
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
All share and per share amounts have been adjusted for the 1-for-50 reverse split that became effective at 11:59 p.m. Eastern time on April 22, 2020.
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. 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. 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 shares outstanding, because their inclusion would be anti-dilutive. The average number of shares from options that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share in the future were as follows:
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Potentially dilutive securities excluded as anti-dilutive
68
Additionally, we excluded 0.79 million common shares from the computation of diluted shares issuable upon the conversion of mandatory convertible preferred shares, because their effect would be anti-dilutive under the if-converted method.
Note 10 Impairments and Other Charges
The components of impairments and other charges are provided below:
Tangible Assets & Equipment:
Impairment of long-lived assets
147,750
Subtotal
Goodwill & Intangible Assets:
Goodwill impairments
27,798
Intangible asset impairment
83,624
111,422
Other Charges:
Other assets
15,078
Severance and transaction-related costs
2,184
During the first quarter of 2020, the oil market experienced unprecedented volatility leading to a significant decline in oil prices resulting from oversupply and demand weakness. As a result of these conditions, we determined a triggering event had occurred which required us to perform impairment testing of our long-lived assets, goodwill and intangible assets. See Note 1—General for further details surrounding the economic environment.
Tangible Assets 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 the extent the carrying amount of the long-lived asset exceeds its estimated fair value. Management considers a number of factors such as estimated future cash flows from the assets, appraisals and current market value analysis in determining fair value. The determination of future cash flows requires the estimation of utilization, dayrates, operating margins, sustaining capital and remaining economic life. Such estimates can change based on market conditions, technological advances in the industry or changes in regulations governing the industry.
Based on our analysis during the first quarter of 2020, we impaired some of our rigs and drilling-related equipment within our U.S. Drilling, International Drilling, Drilling Solutions and Rig Technologies reportable segments resulting in charges of $82.4 million, $30.5 million, $19.8 million and $2.8 million, respectively. Additionally, we recognized an impairment of $12.3 million related to our retained interest in the oil and gas properties located on the North Slope of Alaska. These impairments resulted from the lack of future contractual opportunities on specific rigs or other assets as a result of current market conditions across certain geographic regions. A significantly prolonged period of lower oil and natural gas prices could continue to adversely affect the demand for and prices of our services, which could result in future impairment charges.
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We perform our annual goodwill impairment test during the second quarter of each year. In addition to our annual impairment test, we are required to regularly assess whether a triggering event has occurred which would require interim impairment testing. Due to current industry conditions mentioned above and the corresponding impact on future expectations of demand for our products and services, including the effect on our stock price, we determined a triggering event had occurred and performed a quantitative impairment assessment of our goodwill as of March 31, 2020. Based on the results of our goodwill test, we recognized additional impairment charges to write off the remaining goodwill balances attributable to our Drilling Solutions and Rig Technologies operating segments of $11.4 million and $16.4 million, respectively.
Intangible asset impairments
We also reviewed our intangible assets for impairment. The fair value of our intangible assets are determined using discounted cash flow models. Based on our updated projections of future cash flows, the carrying value of our intangible assets did not support the current fair value. As such, we recognized an impairment of $83.6 million to write off all remaining intangible assets.
We recognized charges of $15.1 million for certain assets, primarily including receivables related to our international operations. The charges were primarily attributable to a number of foreign countries, which have been adversely impacted by foreign sanctions or other political risk issues as well as bankruptcies or other financial problems.
Severance and transaction related costs
During the three months ended March 31, 2020, we recognized charges of $2.2 million due to severance and other related costs incurred to right-size our cost structure.
Note 11 Supplemental Balance Sheet and Income Statement Information
Accrued liabilities included the following:
Accrued compensation
74,576
97,003
Deferred revenue and proceeds on insurance and asset sales
79,622
89,051
Other taxes payable
22,660
31,472
Workers’ compensation liabilities
15,214
30,214
Interest payable
25,065
51,316
Litigation reserves
14,163
14,736
Dividends declared and payable
7,175
7,832
Other accrued liabilities
14,189
11,658
Investment income (loss) includes the following:
Interest and dividend income
2,373
2,033
Gains (losses) on marketable securities
(5,571)
7,644
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Other, net included the following:
Losses (gains) on sales, disposals and involuntary conversions of long-lived assets
Litigation expenses and reserves
700
7,132
Foreign currency transaction losses (gains)
(645)
8,573
(Gain) loss on debt buyback
Other losses (gains)
(2,814)
831
The changes in accumulated other comprehensive income (loss), by component, included the following:
Gains
Defined
(losses) on
benefit
Foreign
cash flow
pension plan
currency
hedges
items
(In thousands (1) )
As of January 1, 2019
(492)
(3,945)
(24,888)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
106
42
148
Net other comprehensive income (loss)
(386)
(3,903)
(15,698)
As of January 1, 2020
(65)
(3,778)
(7,945)
107
40
147
(3,738)
(25,310)
The line items that were reclassified to net income included the following:
142
Total income (loss) from continuing operations before income tax
(194)
Tax expense (benefit)
(47)
(46)
Reclassification adjustment for (gains)/ losses included in net income (loss)
(147)
(148)
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Note 12 Segment Information
The following table sets forth financial information with respect to our reportable operating segments:
Operating revenues:
U.S. Drilling
274,901
320,209
Canada Drilling
25,591
25,315
International Drilling
337,110
337,256
55,384
65,422
42,150
71,753
Other reconciling items (1)
(16,772)
(20,315)
Adjusted operating income (loss): (2)
(7,404)
24,683
37
(59)
(4,147)
(5,637)
10,549
12,855
(8,151)
(5,148)
Total segment adjusted operating income (loss)
(9,116)
26,694
Reconciliation of segment 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)
(30,216)
(40,089)
(54,722)
(52,352)
(276,434)
17,110
(17,502)
Total assets:
2,185,051
2,369,200
186,632
202,706
2,943,739
2,979,494
147,462
218,004
245,347
324,523
600,317
666,731
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Note 13 Revenue Recognition
We recognize revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. Contract drilling revenues are recorded over time utilizing the input method based on time elapsed. The measurement of progress considers the transfer of the service to the customer as we provide daily drilling services. We receive payment after the services have been performed by billing customers periodically (typically monthly). However, a portion of our revenues are recognized at a point-in-time as control is transferred at a distinct point in time such as with the sale of our top drives and other capital equipment. Within our drilling contracts, we have identified one performance obligation in which the transaction price is allocated.
Disaggregation of revenue
In the following table, revenue is disaggregated by geographical region. The table also includes a reconciliation of the disaggregated revenue with the reportable segments:
Lower 48
220,229
35,715
20,531
276,475
U.S. Offshore Gulf of Mexico
39,056
3,165
42,221
Alaska
15,616
986
(9)
16,593
Canada
729
1,612
27,932
Middle East & Asia
201,177
11,037
15,554
227,768
Latin America
84,219
2,827
152
87,198
Europe, Africa & CIS
51,714
925
4,310
56,949
Eliminations & other
March 31, 2019
258,871
44,052
54,735
357,658
41,481
4,244
45,725
19,857
1,728
303
21,888
673
2,628
28,616
187,969
10,505
10,601
209,075
92,366
3,231
920
96,517
56,921
989
2,566
60,476
Contract balances
We perform our obligations under a contract with a customer by transferring goods or services in exchange for consideration from the customer. We recognize a contract asset or liability when we transfer goods or services to a customer and bill an amount which differs from the revenue allocated to the related performance obligations.
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The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on our condensed consolidated balance sheet. In general, we receive payments from customers based on dayrates as stipulated in our contracts (i.e. operating rate, standby rate). The invoices billed to the customer are based on the varying rates applicable to the operating status on each rig. Accounts receivable are recorded when the right to consideration becomes unconditional.
Dayrate contracts also may contain fees charged to the customer for up-front rig modifications, mobilization and demobilization of equipment and personnel. These fees are associated with contract fulfillment activities, and the related revenue (subject to any constraint on estimates of variable consideration) is allocated to a single performance obligation and recognized ratably over the initial term of the contract. Mobilization fees are generally billable to the customer in the initial phase of a contract and generate contract liabilities until they are recognized as revenue. Demobilization fees are generally received at the end of the contract and generate contract assets when they are recognized as revenue prior to becoming receivables from the customer.
We receive reimbursements from our customers for the purchase of supplies, equipment, personnel services and other services provided at their request. Reimbursable revenues are variable and subject to uncertainty as the amounts received and timing thereof are dependent on factors outside of our influence. Accordingly, these revenues are constrained and not recognized until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of the customer. We are generally considered a principal in these transactions and record the associated revenues at the gross amounts billed to the customer.
The opening and closing balances of our receivables, contract assets and current and long-term contract liabilities are as follows:
Contract
Assets
Liabilities
Receivables
(Current)
(Long-term)
(In millions)
507.0
48.6
24.9
66.8
70.5
517.2
44.8
21.9
60.4
65.6
Approximately 46% of the contract liability balance at the beginning of the period is expected to be recognized as revenue during 2020, of which 15% was recognized during the three months ended March 31, 2020, and 30% is expected to be recognized during 2021. The remaining 24% of the contract liability balance at the beginning of the period is expected to be recognized as revenue during 2022 or thereafter.
Additionally, 58% of the contract asset balance at the beginning of the period is expected to be recognized as expense during 2020, of which 21% was recognized during the three months ended March 31, 2020, and 24% is expected to be recognized during 2021. The remaining 18% of the contract asset balance at the beginning of the period is expected to be recognized as expense during 2022 or thereafter. This disclosure does not include variable consideration allocated entirely to a wholly unsatisfied performance obligation or promise to transfer a distinct good or service that forms part of a single performance obligation.
25
Note 14 Condensed Consolidating Financial Information
Nabors has fully and unconditionally guaranteed on a joint and several basis all of the issued public debt securities of Nabors Delaware, a 100% 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, 2020 and December 31, 2019, statements of income (loss) and statements of other comprehensive income (loss) for the three months ended March 31, 2020 and 2019, and statements of cash flows for the three months ended March 31, 2020 and 2019 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.
26
Condensed Consolidating Balance Sheets
Nabors
Subsidiaries
(Parent/Issuer/
Delaware
(Non-
Consolidating
Guarantor)
(Issuer)
Guarantors)
860
83
479,579
50
150,483
910
1,269,843
Intercompany receivables
13,535
23,439
(36,974)
Investment in consolidated affiliates
2,568,327
4,980,066
4,423,623
(11,972,016)
434,919
(434,919)
99
167,086
(7,326)
2,582,772
5,415,167
10,761,844
(12,451,235)
1,143
91
296,040
23,920
9,750
218,994
25,063
9,841
549,966
984,459
2,410,880
(7,325)
20,731
241,211
437,719
Intercompany payable
17,328
251,943
(232,297)
1,026,850
2,693,395
996,599
(479,218)
Redeemable noncontrolling interest in subsidiary
Shareholders’ equity
1,555,922
2,721,772
9,250,244
(11,972,017)
9,335,421
27
(Parent/
319
38
435,633
164,207
369
1,248,259
2,611
(2,662)
2,001,607
5,780,656
4,226,017
(12,008,280)
431,441
(431,441)
254,445
2,002,027
6,212,234
10,996,105
(12,449,708)
128
1
295,030
8,579
51,701
273,002
8,707
51,702
596,139
3,340,545
29,331
262,853
434,590
10,508
231,759
(239,605)
19,215
3,653,337
1,053,977
(441,428)
1,982,812
2,558,897
9,449,382
9,516,736
28
Condensed Consolidating Statements of Income (Loss)
Three Months Ended March 31, 2020
Earnings (losses) from consolidated affiliates
(372,641)
92,561
80,919
199,161
(2,653)
(545)
796,630
198,616
1,961
237
55,348
(162)
32
227,031
Interest expense, net
17,022
37,703
(3)
171
(22,852)
5,409
162
Intercompany interest expense, net
(32)
19,186
15,120
1,037,436
77,441
(240,806)
Income tax expense (benefit)
(3,478)
21,171
(261,977)
(262,070)
(279,535)
29
Three Months Ended March 31, 2019
(115,046)
73,918
35,117
6,011
10,205
(528)
844,957
5,483
2,414
277
65,650
(174)
31
210,360
52,750
(398)
19,758
174
(12)
2,663
50,391
829,835
23,527
15,122
(11,590)
41,389
(26,267)
(26,424)
(40,600)
30
Condensed Consolidating Statements of Comprehensive Income (Loss)
Other comprehensive income (loss) before tax
17,353
102
(153)
(286)
206
(17,120)
16,914
94
(141)
159
(17,214)
17,055
81,078
(296,749)
215,671
(279,284)
(4)
(9,186)
108
(280)
190
9,438
(9,628)
92
(138)
144
9,346
(9,490)
35,261
(31,254)
(4,007)
(17,026)
Condensed Consolidating Statements Cash Flows
10,163
(71,734)
125,578
(4,845)
Cash paid for investments in consolidated affiliates
(977,000)
(81,797)
1,058,797
Change in intercompany balances
913,387
(913,387)
Net cash provided by (used for) investing activities
(1,045,957)
Reduction of long-term debt
Repurchase of preferred shares
(12,127)
(8,209)
(273)
545
Proceeds from issuance of intercompany debt
18,200
(18,200)
Paydown of intercompany debt
(13,200)
13,200
Proceeds from parent contributions
81,797
977,000
(1,058,797)
Distribution from subsidiary to parent
(4,300)
4,300
Other changes
(1,549)
967,378
(841,608)
965,754
(1,053,952)
Net increase (decrease) in cash, cash equivalents and restricted cash
541
43,156
Cash, cash equivalents and restricted cash, beginning of period
441,681
Cash, cash equivalents and restricted cash, end of period
484,837
33
55,162
(88,799)
161,959
(58,468)
Cash paid for acquisitions of businesses, net of cash acquired
(4,000)
4,000
Proceeds from sale of assets and insurance claims
(1,627)
1,627
(146,817)
Proceeds from issuance of common shares, net of issuance costs
(6)
(28,557)
(376)
3,168
Proceeds from (payments for) issuance of intercompany debt
25,000
(25,000)
(50,500)
50,500
(55,300)
55,300
(242)
(55,302)
90,425
(30,135)
54,468
(140)
(17,784)
474
450,564
334
41
432,780
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Note 15 Subsequent Events
On May 5, 2020, our Board adopted a shareholder rights plan and declared a dividend of one right (a “Right”) for each outstanding common share to shareholders of record on May 15, 2020. Each Right entitles the holder to purchase from Nabors one one-thousandth of a Series B Junior Participating Preferred Share, par value $0.001 per share (the “Series B Preferred Shares’), of Nabors at a price of $58.08 per one one-thousandth of a Series B Preferred Share, subject to adjustment. The description of the Rights are set forth in a Rights Agreement, dated May 5, 2020 (the “Rights Agreement”), by and between Nabors and Computershare Trust Company, N.A., as Rights Agent.
Initially, the Rights will not be exercisable and will trade with our common shares. Under the Rights Agreement, the Rights will become exercisable only if a person or group or persons acting together (each, an “acquiring person”) acquires beneficial ownership of 4.9% or more of our outstanding common shares.
If the Rights are triggered, each holder of a Right (other than the acquiring person, whose Rights will become void) will be entitled to purchase additional shares of our common stock at a 50% discount. In addition, if we are acquired in a merger or other business combination after an Acquiring Person acquires more than 4.9% of our outstanding common shares, each holder of a Right would then be entitled to purchase shares of the acquiring company’s stock at a 50% discount. Our Board, at its option, may exchange each Right (other than Rights owned by the acquiring person that have become void) in whole or in part, at an exchange ratio of one common share per outstanding Right, subject to adjustment. Except as provided in the Rights Agreement, our Board is entitled to redeem the Rights at $0.01 per Right.
A person or group of persons that beneficially owns our common shares at or above the 4.9% threshold as of the time of the public announcement of the Rights Agreement generally will not trigger the Rights until such person or group of persons increases its ownership by 0.5% or more.
35
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:
Our business depends, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of oil or natural gas, that has a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
The above description of risks and uncertainties is by no means all-inclusive, but highlights certain factors that we believe are important for your consideration. For a more detailed description of risk factors that may affect us or our industry, please refer to Item 1A. — Risk Factors in our 2019 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 one of the world’s largest land-based drilling rig fleets and provide offshore rigs in the United States and numerous international markets. Our business is comprised of our global land-based and offshore drilling rig operations and other rig related services and technologies, consisting of equipment manufacturing, rig instrumentation and optimization software. We also specialize in tubular services, wellbore placement solutions and are a leading provider of directional drilling and measurement-while-drilling systems and services.
Outlook
The demand for our services is a function of the level of spending by oil and gas companies for exploration, development and production activities. The primary driver of customer spending are their cash flow and earnings, which are largely driven by oil and natural gas prices and customers’ production volumes. The oil and natural gas markets have traditionally been volatile and tend to be highly sensitive to supply and demand cycles.
During the first quarter of 2020, the oil markets have experienced unprecedented volatility. The outbreak of the coronavirus (“COVID-19”), along with decisions by large oil and natural gas producing countries, have resulted in a combination of oversupply and demand weakness. This combination has led to a significant drop in oil prices. Pricing for West Texas Intermediate crude oil reached a low of approximately $20 per barrel during the quarter. Subsequently, in late April, crude oil prices have continued to fall and to be impacted by oversupply fears, as considerable uncertainty remains as to timing of a resumption of normal levels of economic activity following the COVID-19 related restrictions. This has led many of our customers to make significant cuts in their activity, as evidenced by the U.S. land rig count decline of roughly 40% since the end of the first quarter. These cuts reflect capital spending reductions by operators due primarily to low oil prices. Given the current trends, we expect drilling activity will continue to fall in the U.S. in the coming months. And while we believe our international operations will be more resilient than the U.S., we expect these operations will be impacted by restrictive actions of some governments and by activity and pricing pressure from customers. We are uncertain as to the extent of the impact these events will have on the energy industry and on our business.
The decline in oil price and uncertainty surrounding the ultimate impact of COVID-19 has resulted in a significant decline in drilling activity, which has had an adverse impact on our business. In response to these market challenges, we have implemented various measures to mitigate the potential impact. These include reducing planned capital expenditures, salary reductions across most of our employees and other steps to further streamline our operations. Although we cannot predict the full impact of COVID-19 on global oil demand, it could have a larger material adverse effect on our business, financial condition, results of operations and cash flows beyond what is discussed within this report.
Recent Developments
Tender Offers
In January 2020, Nabors completed a private placement of $600.0 million aggregate principal amount of senior guaranteed notes due 2026 (the “2026 Notes”) and $400.0 million aggregate principal amount of senior guaranteed notes due 2028 (the “2028 Notes” and, together with the 2026 Notes, the “Notes”). The 2026 and 2028 Notes bear interest at an annual rate of 7.25% and 7.50%, respectively. The Notes are fully and unconditionally guaranteed by certain of Nabors’ indirect wholly owned subsidiaries. The proceeds from this offering were used primarily to repurchase $952.9 million aggregate principal amount of certain of Nabors Delaware’s senior notes that were tendered pursuant to an offer to purchase certain of our senior notes (the “Tender Offers”). The aggregate principal amount repurchased included approximately $407.7 million of our 5.50% Notes, $379.7 million of our 4.625% Notes and $165.5 million of our 5.10%
Notes. We also repurchased an additional $134.8 million in aggregate principal amount of various senior notes during the quarter, for a combined total of $1.1 billion. We realized a net gain of $15.7 million from these repurchases.
Reverse Stock Split
At a special meeting of shareholders held April 20, 2020, our shareholders authorized the Reverse Stock Split at a ratio of not less than 1-for 15 and not greater than 1-for-50, with the exact ratio to be set within that range at the sole direction of our Board. On April 20, 2020, the Board set the Reverse Stock Split ratio at 1-for-50. As a result of the Reverse Stock Split, 50 pre-reverse split common shares were automatically combined into one new common share, without any action on the part of the shareholders. Our authorized number of common shares were also proportionally decreased from 800,000,000 to 16,000,000 common shares, and the par value of each common share was proportionally increased from $0.001 to $0.05. In addition, at the special meeting, the shareholders authorized an increase in our common share capital by 100% following the Reverse Stock Split, to $1,600,000. No fractional common shares were issued as a result of the Reverse Stock Split. Any fractional common shares of registered holders resulting from the Reverse Stock Split were rounded up to the nearest whole share. Unless otherwise noted, all share and per share information included in this quarterly report on Form 10-Q has been retrospectively adjusted to reflect this Reverse Stock Split.
Financial Results
Comparison of the three months ended March 31, 2020 and 2019
Operating revenues for the three months ended March 31, 2020 totaled $718.4 million, representing a decrease of $81.3 million, or 10%, compared to the three months ended March 31, 2019. The primary driver was a decrease in activity domestically in response to the rapid decline in market conditions, as evidenced by the 20% decline in average rigs working within our U.S. Drilling operating segment. This led to a decrease in operating revenue across virtually all of our operating segments, and specifically within the U.S. markets. For a more detailed description of operating results see Segment Results of Operations, below.
Net loss from continuing operations attributable to Nabors common shareholders totaled $395.4 million ($56.72 per diluted share) for the three months ended March 31, 2020 compared to a net loss from continuing operations attributable to Nabors common shareholders of $121.9 million ($18.11 per diluted share) for the three months ended March 31, 2019, or a $273.5 million increase in the net loss. The majority of the increase to the net loss is attributable to $276.4 million in various impairments and other charges recognized during the three months ended March 31, 2020. These charges were the direct result of the reduction in oil prices as well as the impact of the COVID-19 pandemic worldwide, which has adversely affected our projected future cash flows.
General and administrative expenses for the three months ended March 31, 2020 totaled $57.4 million, representing a decrease of $10.8 million, or 16%, compared to the three months ended March 31, 2019. This is reflective of a reduction in workforce and general cost-reduction efforts across our operating segments and our corporate offices.
Research and engineering expenses for the three months ended March 31, 2020 totaled $11.4 million, representing a decrease of $2.1 million, or 16%, compared to the three months ended March 31, 2019. The decrease is primarily attributable to a reduction in staffing levels and other cost control efforts across many of our research and engineering projects and initiatives.
Depreciation and amortization expense for the three months ended March 31, 2020 was $227.1 million, representing an increase of $16.7 million, or 8%, compared to the three months ended March 31, 2019. The increase is primarily due to accelerated depreciation on certain underutilized, lower specification legacy rigs across our global fleet.
Segment Results of Operations
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)
(45,308)
(14)
%
Adjusted operating income (loss) (1)
(32,087)
(130)
Average rigs working (2)
96.4
120.9
(24.5)
(20)
276
96
163
16.8
16.3
0.5
(146)
(0)
1,490
86.7
89.7
(3.0)
(10,038)
(15)
(2,306)
(18)
(29,603)
(41)
(3,003)
(58)
Operating revenues decreased during the three months ended March 31, 2020 compared to the corresponding period primarily due to a decrease in activity as reflected by a 20% decrease in the average number of rigs working, which accounted for approximately $45.4 million of the decrease in operating revenue. This segment benefited from declines in operating costs resulting from fewer rigs working during the period, which partially offset the decrease in operating revenue.
Operating revenues increased marginally during the three months ended March 31, 2020 compared to the corresponding period, primarily due to an increase in activity as evidenced by the 3% increase in average rigs working. This increase was partially offset by a decrease in dayrates during the period. Direct costs within this operating segment also increased with the increase in activity, which more than offset the marginal increase in operating revenue. However, this operating segment benefitted from various cost reduction initiatives across the organization, resulting in marginal adjusted operating income for the period.
Operating revenues during the three months ended March 31, 2020 were virtually flat when compared to the corresponding period. This operating segment benefitted from declines in operating costs and depreciation resulting from fewer rigs working during the period as well as a reduction in direct costs as a result of the sale of our workover rigs in Argentina.
39
Operating revenues decreased during the three months ended March 31, 2020 compared to the corresponding period primarily due to the reduced activity across the U.S. as the market softened in response to reduced oil prices, most notably within our wellbore placement product line. The reduction in activity and operating revenues was partially offset by cost management initiatives mainly focusing on labor and repair and maintenance costs as well as an overall reduction in administrative expenses.
Operating revenues decreased during the three months ended March 31, 2020 compared to the corresponding period due to the overall decline in activity in the U.S. which led to fewer capital equipment and part sales as well as a decline in repairs and service jobs. Direct costs and manufacturing costs also declined during the period, driven by the aforementioned decline in activity. Additionally, this operating segment experienced a decrease in labor costs due to an overall reduction in headcount.
Other Financial Information
Interest expense for the three months ended March 31, 2020 was $54.7 million, representing an increase of $2.4 million, or 5%, compared to the three months ended March 31, 2019. The increase was primarily due to the higher interest rates on the 2026 Notes and the 2028 Notes, which were issued in January 2020, compared to the lower interest rate debt that was repurchased in the Tender Offers using the proceeds from that offering.
During the three months ended March 31, 2020, we recognized impairments and other charges of approximately $276.4 million, which primarily included impairments of long-lived assets of $147.8 million comprised of underutilized rigs and drilling-related equipment across all of our operating segments. We recognized impairments of $16.4 million for the remaining goodwill balance attributable to our Rig Technologies operating segment and $11.4 million for the remaining goodwill balance attributable to our Drilling Solutions operating segment. Additionally, we recognized an impairment of $83.6 million to write off our remaining intangible assets.
Other, net for the three months ended March 31, 2020 was $17.1 million of income, which included a net gain on debt buybacks of $15.7 million, release of contingent consideration reserves in connection with a previous acquisition of $8.6 million and foreign currency exchange gains of $0.6 million. This was partially offset by net losses on sales and disposals of assets of approximately $1.4 million and an increase in litigation reserves of $0.7 million.
Other, net for the three months ended March 31, 2019 was $17.5 million of expense, which included foreign currency exchange losses of $8.6 million, an increase in litigation reserves of $7.1 million and net losses on sales and disposals of assets of approximately $3.6 million. Partially offsetting these losses was a net gain on debt buybacks of $2.7 million.
Income tax rate
Our worldwide effective tax rate for the three months ended March 31, 2020 was (5.0%) compared to (40.5%) for the three months ended March 31, 2019. The decrease in tax expense during 2020 compared to 2019 was primarily attributable to the change in our geographic mix of our pre-tax earnings (losses). The ratio of our pre-tax earnings in certain low tax jurisdictions compared to high tax jurisdictions increased in 2020 compared to 2019, resulted in a decrease in tax expense. Future changes in the mix or pre-tax earnings could materially change the effective income tax rate.
Liquidity and Capital Resources
Financial Condition and Sources of Liquidity
Our primary sources of liquidity are cash and investments, availability under our revolving credit facilities and cash provided by operating activities. As of March 31, 2020, we had cash and short-term investments of $489.7 million and working capital of $686.0 million. As of December 31, 2019, we had cash and short-term investments of $452.5 million and working capital of $592.1 million. At March 31, 2020, we had $500.0 million of borrowings outstanding under our revolving credit facilities.
We had 18 letter-of-credit facilities with various banks as of March 31, 2020. Availability under these facilities as of March 31, 2020 was as follows:
Credit available
720,902
Less: Letters of credit outstanding, inclusive of financial and performance guarantees
146,776
Remaining availability
574,127
Our ability to access capital markets or to otherwise obtain sufficient financing may be affected by our senior unsecured debt ratings as provided by the major credit rating agencies in the United 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 maturity, exchange or purchase of our notes and our debt facilities, loss of availability of our revolving credit facilities and our A/R Agreement, and that any cash payment due, in addition to our other cash obligations, would not ultimately have a material adverse impact on our liquidity or financial position. The major U.S. credit rating agencies have previously downgraded our senior unsecured debt rating to non-investment grade. These and any further ratings downgrades could adversely impact our ability to access debt markets in the future, increase the cost of future debt, and potentially require us to post letters of credit for certain obligations.
The 2018 Revolving Credit Facility requires us to maintain a net leverage ratio 5.50:1 or less and an asset to debt coverage ratio of at least 2.50:1, as of the end of each calendar quarter. The asset to debt coverage ratio applies only during the period which Nabors Delaware fails to maintain an investment grade rating from at least two rating agencies, which was the case as of the date of this report. Our asset to debt coverage ratio was 3.98:1 as of March 31, 2020 and 4.28:1 as of December 31, 2019. Our net leverage ratio was 3.60:1 as of March 31, 2020 and 3.55:1 as of December 31, 2019.
As of the date of this report, we were in compliance with all covenants under the 2018 Revolving Credit Facility. If we fail to perform our obligations under the covenants, the revolving credit commitments under the 2018 Revolving Credit Facility could be terminated, and any outstanding borrowings under the facilities could be declared immediately due and payable. If necessary, we have the ability to manage these ratios by taking certain actions including reductions in discretionary capital or other types of controllable expenditures, monetization of assets, amending or renegotiating the revolving credit agreement, accessing capital markets through a variety of alternative methods, or any combination of these alternatives. We expect to remain in compliance with all covenants under the 2018 Revolving Credit Facility during at least the twelve month period following the date of this report based on our current operational and financial projections. However, we can make no assurance of continued compliance if our current projections or material underlying assumptions prove to be incorrect, especially in light of the effects the COVID-19 pandemic has on oil and natural gas prices and, in turn, our business. The net leverage ratio and the asset to debt coverage ratio are not measures of operating performance or liquidity defined by U.S. GAAP and may not be comparable to similarly titled measures presented by other companies.
Accounts Receivable Sales Agreement
On September 13, 2019, we entered into the $250 million A/R Agreement whereby the Originators sold or contributed, and will on an ongoing basis continue to sell or contribute, certain of their domestic trade accounts receivables to a wholly-owned, bankruptcy-remote, SPE. The SPE would in turn, sell, transfer, convey and assign to third-party Purchasers, all the rights, title and interest in and to its pool of eligible receivables.
The amount available for purchase under the A/R Agreement fluctuates over time based on the total amount of eligible receivables generated during the normal course of business after excluding excess concentrations and certain other ineligible receivables. The maximum purchase commitment of the Purchasers under the A/R Agreement is approximately $250.0 million and the amount of receivables purchased by the Purchasers as of March 31, 2020 was $175.0 million.
The Originators, Nabors Delaware, the SPE, and the Company provide representations, warranties, covenants and indemnities under the A/R Agreement and the Indemnification Guarantee. See further details at Note 5—Accounts Receivable Sales Agreement.
Future Cash Requirements
Our current cash and investments, projected cash flows from operations, proceeds from equity or debt issuances and our revolving credit facilities are expected to adequately finance our purchase commitments, capital expenditures, acquisitions, scheduled debt service requirements, and all other expected cash requirements for at least the next 12 months. However, we can make no assurances that our current operational and financial projections will prove to be correct, especially in light of the effects the COVID-19 pandemic has on oil and natural gas prices and, in turn, our business. A sustained period of highly depressed oil and natural gas prices could have a significant effect on our customers’ capital expenditure spending and therefore our operations, cash flows and liquidity.
Purchase commitments outstanding at March 31, 2020 totaled approximately $200.4 million, primarily for capital expenditures, other operating expenses and purchases of inventory. We can reduce planned expenditures if necessary or increase them if market conditions and new business opportunities warrant it. The level of our outstanding purchase commitments and our expected level of capital expenditures over the next 12 months represent a number of capital programs that are currently underway or planned.
See our discussion of guarantees issued by Nabors that could have a potential impact on our financial position, results of operations or cash flows in future periods included below under “Off-Balance Sheet Arrangements (Including Guarantees).”
There have been no material changes to the contractual cash obligations table that was included in our 2019 Annual Report.
On August 25, 2015, our Board authorized a share repurchase program (the “program”) under which we may repurchase, from time to time, up to $400.0 million of our common shares by various means, including in the open market or in privately negotiated transactions. Authorization for the program, which was renewed in February 2019, does not have an expiration date and does not obligate us to repurchase any of our common shares. Since establishing the program, we have repurchased 0.3 million of our common shares for an aggregate purchase price of approximately $121.1 million under this program. The repurchased shares, which are held by our subsidiaries, are registered and tradable subject to applicable securities law limitations and have the same voting and other rights as other outstanding shares. As of March 31, 2020, the remaining amount authorized under the program that may be used to purchase shares was $278.9 million. As of March 31, 2020, our subsidiaries held 1.1 million of our common shares.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, both in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and may involve material amounts.
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, dividends, loans, issuances and repurchases of debt and of our common shares are within our control and are adjusted as necessary based on market conditions. We discuss our cash flows for the three months ended March 31, 2020 and 2019 below.
Operating Activities. Net cash provided by operating activities totaled $59.2 million during the three months ended March 31, 2020, compared to net cash provided of $69.9 million during the corresponding 2019 period. Operating cash flows are our primary source of capital and liquidity. The increase in cash flows from operations is primarily attributable to increases in activity and margins in our U.S. Drilling operating segment. Additionally, changes in working capital items such as collection of receivables, other deferred revenue arrangements and payments of operating payables and interest payments are significant factors affecting operating cash flows. Changes in working capital items used $85.3 million and used $54.6 million in cash during the three months ended March 31, 2020 and 2019, respectively.
Investing Activities. Net cash used for investing activities totaled $50.8 million during the three months ended March 31, 2020 compared to net cash used of $144.4 million during the corresponding 2019 period. Our primary use of cash for investing activities is capital expenditures for rig-related enhancements, new construction and equipment, as well as sustaining capital expenditures. During the three months ended March 31, 2020 and 2019, we used cash for capital expenditures totaling $59.4 million and $141.1 million, respectively.
Financing Activities. Net cash provided by financing activities totaled $37.6 million during the three months ended March 31, 2020 compared to net cash provided of $59.5 million during the corresponding 2019 period. During the three months ended March 31, 2020, we received net proceeds of $1.0 billion in proceeds from the issuance of new long term debt as well as $145.0 million in net amounts borrowed under our revolving credit facilities. This was partially offset by a $1.1 billion repayment on our senior notes. Additionally, we paid dividends totaling $7.9 million to our common and preferred shareholders.
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 include the A/R Agreement (see —Accounts Receivable Sales Agreement, above) and certain agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these financial or performance assurances 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:
43
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 2019 Annual Report. There were no material changes in our exposure to market risk during the three months ended March 31, 2020 from those disclosed in our 2019 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.
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 8 — Commitments and Contingencies — Litigation for a description of such proceedings.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes from the risk factors previously disclosed in Part 1, Item 1A, of our 2019 Annual Report, which in addition to the information set forth elsewhere in this report and the 2019 Annual Report, should be carefully considered when evaluating us. These risks are not the only risks we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business.
The outbreak of COVID-19 and recent events in the energy markets has had, and may continue to have an adverse impact on our financial condition, results of operations and cash flows.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency with respect to a new strain of coronavirus known as COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global infections. The COVID-19 outbreak triggered a sharp sell-off in energy commodities markets during the first quarter of 2020 due to the sudden drop in worldwide consumption of oil, gas and other energy products as a result of measures taken worldwide to contain the spread of the disease. In addition, a dispute
between Russia and Saudi Arabia regarding proposed oil production cuts to counteract decreased demand resulting from the COVID-19 outbreak has also recently put downward pressure on energy markets.
The recent significant weakness in oil and natural gas prices has resulted in reductions in the exploration and production capital and operating budgets of our customers. Demand for our services and associated product offerings and the rates we are able to charge our customers is closely tied to such exploration and production activities and the significant price weakness and associated volatility surrounding recent global events has had, and is reasonably likely to continue to have, an adverse impact on the demand for our services.
Future increases in commodity prices may not necessarily translate into the resumption of exploration and production activities (and a corresponding increase in demand for our services) because our customers’ expectations of future prices may also influence or limit their activity. As a result of these factors, lower industry demand for oil and natural gas field services may persist for a significant period, which would continue to materially adversely affect the rates that we are able to charge our customers and the demand for our services.
The spread of the virus into our workforce may also prevent us from meeting the demands of our customers in the future. For example, if the COVID-19 pandemic were to impact a location where we have a high concentration of business and resources, our local workforce could be affected by the outbreak, which could significantly disrupt our operations or lead to a shutdown of operations in the impacted location.
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, 2020 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
Part of Publicly
Purchased
Period
Paid per
Announced
Under the
Repurchased
Share (1)
Program
Program (2)
January 1 - January 31
2.95
280,645
February 1 - February 28
2.29
March 1 - March 31
1.57
278,914
Share
Program (1)
388
23.70
4,066
355
11.42
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Description
3.1
Certificate of Deposit of Memorandum of Increase of Share Capital.
3.2
Amended and Restated Bye-Laws of Nabors Industries Ltd. (incorporated by reference to Exhibit 3.1 to our Form 8-K (File No. 001-32657) filed with the SEC on April 22, 2020).
3.3
Certificate of Designation of Series B Junior Participating Preferred Shares of Nabors Industries Ltd. (incorporated by reference to Exhibit 3.1 to our Form 8-K (File No. 001-32657) filed with the SEC on May 6, 2020).
4.1
Rights Agreement, dated May 5, 2020 between Nabors Industries Ltd. and Computershare Trust Company, N.A., as Rights Agent, including the Certificate of Designation of Series B Junior Participating Preferred Shares, the Form of Right Certificate, and the Summary of Rights to Purchase Preferred Shares, respectively attached thereto as Exhibits A, B and C. (incorporated by reference to Exhibit 4.1 to our Form 8-K (File No. 001-32657) filed with the SEC on May 6, 2020).
10.1
Third Amendment to 2018 Credit Agreement, dated as of March 3, 2020, by and among Nabors Industries, Inc., as US Borrower, Nabors Drilling Canada Limited, as Canadian Borrower Nabors Industries Ltd., as Holdings, the other Guarantors from time to time party thereto, HSBC Bank Canada, as Canadian Lender, the Issuing Banks and other Lenders party thereto and Citibank, N.A., as Administrative Agent solely for the US Lenders and not for the Canadian Lender.*
10.2
Eighth Amendment to Executive Employment Agreement, dated April 6, 2020, among Nabors Industries Ltd., Nabors Industries, Inc. and Anthony G. Petrello (incorporated by reference to Exhibit 10 Exhibit 10.1 to our Form 8-K (File No. 00132657) filed with the SEC on April 9, 2020).
10.3
First Amendment to Amended and Restated Employment Agreement, dated April 6, 2020, among Nabors Industries Ltd., Nabors Industries, Inc. and William Restrepo (incorporated by reference to Exhibit 10.2 to our Form 8-K (File No. 00132657) filed with the SEC on April 9, 2020).
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
Inline XBRL Instance Document*
101.SCH
Inline XBRL Schema Document*
101.CAL
Inline XBRL Calculation Linkbase Document*
101.LAB
Inline XBRL Label Linkbase Document*
101.PRE
Inline XBRL Presentation Linkbase Document*
101.DEF
Inline XBRL Definition Linkbase Document*
104
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document)
*Filed herewith.
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:
May 8, 2020