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NBR > SEC Filings for NBR > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for NABORS INDUSTRIES LTD

Form 10-Q for NABORS INDUSTRIES LTD


2-Aug-2013

Quarterly Report


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 and quarterly 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, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These "forward-looking statements" are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "should," "could," "may," "predict" and similar expressions are intended to identify forward-looking statements.

You should consider the following key factors when evaluating these forward-looking statements:

fluctuations in worldwide prices of and demand for oil and natural gas;

fluctuations in levels of oil and natural gas exploration and development activities;

fluctuations in the demand for our services;

the existence of competitors, technological changes and developments in the oilfield services industry;

the existence of operating risks inherent in the oilfield services industry;

the possibility of changes in tax and other laws and regulations;

the possibility of political instability, war or acts of terrorism; and

general economic conditions including the capital and credit markets.

The above description of risks and uncertainties is not all-inclusive, but highlights certain factors that we believe are important for your consideration. For a more detailed description of risk factors, please refer to Part I, Item 1A. - Risk Factors in our 2012 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 consolidated financial statements and the accompanying notes thereto.

Nabors has grown from a land drilling business centered in the U.S. Lower 48 states, Canada and Alaska to a global business aimed at optimizing the entire well life cycle, with operations on land and offshore in most of the major oil and gas markets in the world. The majority of our business is conducted through two business lines:

Drilling & Rig Services

This business line is comprised of our global drilling rig operations and drilling-related services, consisting of equipment manufacturing, instrumentation optimization software and directional drilling services.

Completion & Production Services

This business line is comprised of our operations involved in the completion, life-of-well maintenance and eventual plugging and abandonment of a well. These product lines include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management.

Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. A sustained increase or decrease in the price of oil or natural gas could materially impact exploration, development and production activities, and consequently, our financial position, results of operations and cash flows.


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Our customers' spending is determined principally by their internally generated cash flow and to a lesser extent by joint venture arrangements and funding from the capital markets. In our Drilling & Rig Services business line, operations have traditionally been driven by natural gas prices, but the majority of current activity is driven by the price of oil and natural gas liquids from unconventional reservoirs (shales). In our Completion & Production Services business line, operations are primarily driven by oil prices for the Production Services segment while the Completion Services segment is driven by the same factors as our Drilling Services.

The following table sets forth oil and natural gas price data per Bloomberg for the 12-month periods ended June 30, 2013 and 2012:

                                        Year Ended June 30,
                                        2013           2012            Increase/(Decrease)
                                                 (In thousands, except percentages)
Average Henry Hub natural gas
spot price ($/thousand cubic
feet)                                $      3.83    $      3.06    $         0.77            25 %
Average West Texas intermediate
crude oil spot price ($/barrel)      $     95.79    $     94.91    $         0.88             1 %

Operating revenues and Earnings (losses) from unconsolidated affiliates for the three months ended June 30, 2013 totaled $1.5 billion, representing a decrease of $109.9 million, or 7%, as compared to the three months ended June 30, 2012. Operating revenues and Earnings (losses) from unconsolidated affiliates for the six months ended June 30, 2013 totaled $3.1 billion, representing a decrease of $350.1 million, or 10%, as compared to the six months ended June 30, 2012.

Adjusted income derived from operating activities for the three and six months ended June 30, 2013 totaled $90.9 million and $240.5 million, respectively, representing decreases of 60% and 56%, compared to the corresponding 2012 periods.

Net income (loss) from continuing operations for the three and six months ended June 30, 2013 totaled $29.3 million ($0.08 per diluted share) and $126.4 million ($0.41 per diluted share), respectively, representing increases of 130% and 188%, compared to the corresponding 2012 periods. During the three months ended June 30, 2012, our net income from continuing operations was negatively impacted as a result of charges arising from oil and gas full-cost ceiling test writedowns and other impairments.

During the three months ended June 30, 2013, operating results continued to be negatively impacted by a depressed natural gas market, while drilling and completion activity in the oil markets experienced demand and pricing deterioration year-over-year. We believe gas and liquids prices are likely to remain weak through 2013. Crude oil pricing has been more resilient, but remains volatile and potentially vulnerable, which keeps our customers' forward-spending plans suppressed in the near term. Projections of stable crude oil pricing at current levels, if realized, should lead to increased domestic drilling activity later in 2013. However, continuing additions of new rig capacity and improving rig efficiency will likely result in a continued oversupply of rigs for most, if not all, of the year. As well, a portion of our customer base has indicated it may curtail activity levels during the second half of 2013, due to customer-specific issues or capital-budget spending rates during the first half of 2013 that exceeded expectations set at the beginning of the year.

Our international markets have been much slower to respond to improving oil prices during the last two years, and our results continue to be impacted by cost issues in several markets. Recently, we have begun to realize some relief on the cost issues and believe the rig demand has already started to increase. Our expectations include the commencement of several large projects, and the return to work of other rigs. That combination of factors should improve international results over the balance of 2013 and in 2014.


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The following tables set forth certain information with respect to our reportable segments and rig activity:

                                        Three Months Ended June 30,                                    Six Months Ended June 30,
                                         2013              2012          Increase/(Decrease)            2013            2012          Increase/(Decrease)
                                                                               (In thousands, except percentages)
Operating revenues and Earnings
Earnings (losses) from
unconsolidated affiliates from
continuing operations:
Drilling & Rig Services:
U.S.                                $       467,129    $    598,765    $      (131,636 )    (22 )% $      951,902    $ 1,225,870    $      (273,968 )    (22 )%
Canada                                       64,789          66,015             (1,226 )     (2 )%        191,656        210,750            (19,094 )     (9 )%
International                               351,421         304,622             46,799       15 %         672,937        611,087             61,850       10 %
Rig Services (1)                            152,462         228,614            (76,152 )    (33 )%        331,772        470,372           (138,600 )    (29 )%
Subtotal Drilling & Rig Services
(2)                                       1,035,801       1,198,016           (162,215 )    (14 )%      2,148,267      2,518,079           (369,812 )    (15 )%
Completion & Production
Services:
Production Services                         244,602         240,380              4,222        2 %         496,173        497,639             (1,466 )      -
Completion Services                         254,016         387,663           (133,647 )    (34 )%        516,154        785,699           (269,545 )    (34 )%
Subtotal Completion & Production
Services (3)                                498,618         628,043           (129,425 )    (21 )%      1,012,327      1,283,338           (271,011 )    (21 )%

Other reconciling items (4)                 (41,473 )      (223,262 )          181,789       81 %         (86,108 )     (376,863 )          290,755       77 %
Total                               $     1,492,946    $  1,602,797    $      (109,851 )     (7 )% $    3,074,486    $ 3,424,554    $      (350,068 )    (10 )%




                                        Three Months Ended June 30,                                     Six Months Ended June 30,
                                          2013              2012            Increase/(Decrease)           2013              2012           Increase/(Decrease)
                                                                                  (In thousands, except percentages)
Adjusted income (loss) derived
from operating activities from
continuing operations: (5)
Drilling & Rig Services:
U.S.                                 $       69,813    $       145,351    $      (75,538 )    (52 )% $      147,408    $      312,084    $      (164,676 )    (53 )%
Canada                                        3,895               (529 )           4,424      836 %          34,413            42,617             (8,204 )    (19 )%
International                                32,481             16,401            16,080       98 %          53,950            37,539             16,411       44 %
Rig Services (1)                             (4,044 )           28,179           (32,223 )   (114 )%          3,693            58,025            (54,332 )    (94 )%
Subtotal Drilling & Rig Services
(2)                                         102,145            189,402           (87,257 )    (46 )%        239,464           450,265           (210,801 )    (47 )%
Completion & Production Services:
Production Services                          23,471             25,397            (1,926 )     (8 )%         49,485            53,426             (3,941 )     (7 )%
Completion Services                           6,870             46,144           (39,274 )    (85 )%         24,626           111,004            (86,378 )    (78 )%
Subtotal Completion & Production
Services (3)                                 30,341             71,541           (41,200 )    (58 )%         74,111           164,430            (90,319 )    (55 )%
Other reconciling items (6)                 (41,543 )          (35,596 )          (5,947 )    (17 )%        (73,044 )         (73,812 )              768        1 %
Total adjusted income (loss)
derived from operating activities    $       90,943    $       225,347    $     (134,404 )    (60 )% $      240,531    $      540,883    $      (300,352 )    (56 )%


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                                        Three Months Ended June 30,                                     Six Months Ended June 30,
                                          2013              2012            Increase/(Decrease)           2013              2012           Increase/(Decrease)
                                                                                 (In thousands, except percentages)
Total adjusted income (loss)
derived from operating activities
(5)                                  $       90,943    $       225,347    $     (134,404 )    (60 )% $      240,531    $      540,883    $     (300,352 )    (56 )%
U.S. oil and gas joint venture                    -           (140,434 )         140,434      100 %               -          (202,996 )         202,996      100 %
Interest expense                            (60,271 )          (63,459 )           3,188        5 %        (120,279 )        (126,113 )           5,834        5 %
Investment income (loss)                     14,821              5,368             9,453      176 %          94,242            25,620            68,622      268 %
Gains (losses) on sales and
disposals of long-lived assets
and other income (expense), net              (9,312 )         (160,917 )         151,605       94 %         (69,119 )        (159,077 )          89,958       57 %
Income (loss) from continuing
operations before income taxes               36,181           (134,095 )         170,276      127 %         145,375            78,317            67,058       86 %
Income tax expense (benefit)                  6,172            (36,192 )          42,364      117 %          17,444            32,852           (15,408 )    (47 )%
Subsidiary preferred stock
dividend                                        750                750                 -        -             1,500             1,500                 -        -
Income (loss) from continuing
operations, net of tax                       29,259            (98,653 )         127,912      130 %         126,431            43,965            82,466      188 %
Income (loss) from discontinued
operations, net of tax                      (28,004 )           24,690           (52,694 )   (213 )%        (25,958 )          15,895           (41,853 )   (263 )%
Net income (loss)                             1,255            (73,963 )          75,218      102 %         100,473            59,860            40,613       68 %
Less: Net (income) loss
attributable to noncontrolling
interest                                     (5,616 )            1,174            (6,790 )   (578 )%         (5,713 )           1,441            (7,154 )   (496 )%
Net income (loss) attributable to
Nabors                               $       (4,361 )  $       (72,789 )  $       68,428       94 %  $       94,760    $       61,301    $       33,459       55 %

Diluted earnings (losses) per
share:
From continuing operations           $         0.08    $         (0.34 )                             $         0.41    $         0.16
From discontinued operations                  (0.09 )             0.09                                        (0.09 )            0.05
Total diluted                        $        (0.01 )  $         (0.25 )                             $         0.32    $         0.21




                                      Three Months Ended June 30,                                 Six Months Ended June 30,
                                         2013             2012          Increase/(Decrease)          2013            2012          Increase/(Decrease)
                                                                     (In thousands, except percentages and rig activity)
Rig activity:
Rig years: (7)
U.S.                                         195.8            236.3           (40.5 )     (17 )%        192.8           237.7            (44.9 )     (19 )%
Canada                                        17.4             20.3            (2.9 )     (14 )%         28.6            34.5             (5.9 )     (17 )%
International (8)                            125.2            120.9             4.3         4 %         124.0           119.3              4.7         4 %
Total rig years                              338.4            377.5           (39.1 )     (10 )%        345.4           391.5            (46.1 )     (12 )%
Rig hours: (9)
Production Services                        224,681          220,304           4,377         2 %       436,979         433,330            3,649         1 %
Canada Production Services                  28,802           35,710          (6,908 )     (19 )%       76,829          92,754          (15,925 )     (17 )%
Total rig hours                            253,483          256,014          (2,531 )      (1 )%      513,808         526,084          (12,276 )      (2 )%



(1) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction services. These services represent our other businesses that are not aggregated into a reportable operating segment.

(2) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $1.2 million and $6.1 million for the three months ended June 30, 2013 and 2012, respectively, and $4.0 million for the six months ended June 30, 2013.


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(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $.2 million and $.1 million for the three and six months ended June 30, 2013, respectively.

(4) Represents the elimination of inter-segment transactions and earnings (losses), net from our former U.S. unconsolidated oil and gas joint venture, accounted for using the equity method of $(140.4) million and $(203.0) million for the three and six months ended June 30, 2012, respectively. In December 2012, we sold our equity interest in the oil and gas joint venture.

(5) Adjusted income (loss) derived from operating activities is computed by subtracting the sum of direct costs, general and administrative expenses, depreciation and amortization, and earnings (losses) from our former U.S. oil and gas joint venture from the sum of Operating revenues and Earnings (losses) from unconsolidated affiliates. These amounts should not be used as a substitute for the amounts reported in accordance with GAAP. However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that these financial measures accurately reflect our ongoing profitability. A reconciliation of this non-GAAP measure to income
(loss) from continuing operations before income taxes, which is a GAAP measure, is provided in the above table.

(6) Represents the elimination of inter-segment transactions and unallocated corporate expenses.

(7) Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years.

(8) International rig years includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates, which totaled 2.5 years during each of the three and six months ended June 30, 2013 and 2012.

(9) Rig hours represents the number of hours that our well-servicing rig fleet operated during the year.


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Segment Results of Operations

Drilling & Rig Services

Our Drilling & Rig Services business line is comprised of drilling on land and offshore, by geographic region. This business line also includes our drilling technology, top drive manufacturing, directional drilling, construction services and rig instrumentation and software businesses.

                       Three Months Ended June 30,                                       Six Months Ended June 30,
                         2013               2012            Increase/(Decrease)            2013             2012           Increase/(Decrease)
                                                         (In thousands, except percentages and rig activity)
U.S.
Revenues            $       467,129    $       598,765    $     (131,636 )     (22 )%  $     951,902    $  1,225,870    $      (273,968 )     (22 )%
Adjusted income     $        69,813    $       145,351    $      (75,538 )     (52 )%  $     147,408    $    312,084    $      (164,676 )     (53 )%

Rig years                     195.8              236.3             (40.5 )     (17 )%          192.8           237.7              (44.9 )     (19 )%

Canada
Revenues            $        64,789    $        66,015    $       (1,226 )      (2 )%  $     191,656    $    210,750    $       (19,094 )      (9 )%
Adjusted income     $         3,895    $          (529 )  $        4,424       836 %   $      34,413    $     42,617    $        (8,204 )     (19 )%

Rig years                      17.4               20.3              (2.9 )     (14 )%           28.6            34.5               (5.9 )     (17 )%

International
Revenues            $       351,421    $       304,622    $       46,799        15 %   $     672,937    $    611,087    $        61,850        10 %
Adjusted income     $        32,481    $        16,401    $       16,080        98 %   $      53,950    $     37,539    $        16,411        44 %

Rig years                     125.2              120.9               4.3         4 %           124.0           119.3                4.7         4 %

Rig Services
Revenues            $       152,462    $       228,614    $      (76,152 )     (33 )%  $     331,772    $    470,372    $      (138,600 )     (29 )%
Adjusted income     $        (4,044 )  $        28,179    $      (32,223 )    (114 )%  $       3,693    $     58,025    $       (54,332 )     (94 )%

U.S.

Our U.S. drilling segment includes land drilling activities in the lower 48 states, Alaska and offshore operations in the Gulf of Mexico.

Operating results for this segment decreased during the three and six months ended June 30, 2013 compared to the corresponding 2012 periods, primarily due to lower average dayrates and decreases in drilling activity in both the lower 48 states and Alaska. Realized dayrates for a portion of our rig fleet declined as term contracts expired; current market rates for drilling rigs are now generally lower than rates reflected in expiring term contracts. Results for this segment were also impacted by the industry-wide decrease in land drilling focused on natural gas.

Canada

Operating revenues decreased during the three and six months ended June 30, 2013 compared to the corresponding 2012 periods, primarily as a result of decreases in drilling activity, partially offset by increased drilling dayrates. Drilling activity during the first half of 2013 was lower than the corresponding 2012 period due to decreased customer demand for gas-drilling activities related to the lower natural gas prices and a continued oversupply of natural gas in this market, resulting from lower prices.

International

Operating results increased during the three and six months ended June 30, 2013 compared to the corresponding 2012 periods primarily as a result of increases in overall rig activity with rig deployments in Papua New Guinea and offshore rigs in Mexico and Saudi Arabia, partially offset by reduced rig activity in Colombia.


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Rig Services

Operating results decreased primarily from our Canrig activities during the three and six months ended June 30, 2013 compared to the corresponding 2012 periods due to lower demand in the United States and Canada drilling markets for top drives, rig instrumentation and data collection services from oil and gas exploration companies, along with lower third-party rental and RigWatchTM units, which generate higher margins.

Completion & Production Services



Our Completion & Production Services business line includes well-servicing,
fluid logistics, workover operations and stimulation services in the U.S. and
Canada.



                          Three Months Ended June 30,                                         Six Months Ended June 30,
                            2013               2012             Increase/(Decrease)             2013              2012            Increase/(Decrease)
                                                              (In thousands, except percentages and rig activity)
Production Services
Revenues               $       244,602    $       240,380    $         4,222         2 %   $      496,173    $      497,639    $        (1,466 )       -
Adjusted income        $        23,471    $        25,397    $        (1,926 )      (8 )%  $       49,485    $       53,426    $        (3,941 )      (7 )%

Rig hours:
U.S.                           224,681            220,304              4,377         2 %          436,979           433,330              3,649         1 %
Canada                          28,802             35,710             (6,908 )     (19 )%          76,829            92,754            (15,925 )     (17 )%

Completion Services
Revenues               $       254,016    $       387,663    $      (133,647 )     (34 )%  $      516,154    $      785,699    $      (269,545 )     (34 )%
Adjusted income        $         6,870    $        46,144    $       (39,274 )     (85 )%  $       24,626    $      111,004    $       (86,378 )     (78 )%

Production Services

Operating results decreased slightly during the three and six months ended June 30, 2013 compared to the corresponding 2012 periods, primarily due to the mix of higher and lower rate rigs working in our Canada markets. U.S. markets have had higher utilization, despite continued pricing challenges. Costs have increased in rig and truck utilization as a result of capital invested over the past few years to increase our rig and truck fleets as well as frac tanks.

Completion Services

Operating results decreased during the three and six months ended June 30, 2013 compared to the corresponding 2012 periods, due to reduced customer activity in part caused by severe weather in our northern operating areas as well as downward pricing pressure across all regions due to continued overcapacity in the pressure pumping market.

. . .

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