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NBR > SEC Filings for NBR > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for NABORS INDUSTRIES LTD


1-Nov-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 September 30, 2013 and 2012:

                                    Year Ended September 30,
                                     2013             2012              Increase/(Decrease)

Average Henry Hub natural gas
spot price ($/thousand cubic
feet)                            $        3.62    $        2.74    $         0.88             32 %
Average West Texas
intermediate crude oil spot
price ($/barrel)                 $       95.63    $       95.59    $         0.04              0 %

Operating revenues and Earnings (losses) from unconsolidated affiliates for the three months ended September 30, 2013 totaled $1.5 billion, representing a decrease of $82.2 million, or 5%, as compared to the three months ended September 30, 2012. Operating revenues and Earnings (losses) from unconsolidated affiliates for the nine months ended September 30, 2013 totaled $4.5 billion, representing a decrease of $424.1 million, or 9%, as compared to the nine months ended September 30, 2012.

Adjusted income derived from operating activities for the three and nine months ended September 30, 2013 totaled $165.9 million and $398.6 million, respectively, representing decreases of 27% and 47%, compared to the corresponding 2012 periods.

Net income (loss) from continuing operations for the three months ended September 30, 2013 totaled $(90.5) million ($(0.30) per diluted share), representing a decrease of 240%, compared to the corresponding 2012 period. Net income (loss) from continuing operations for the nine months ended September 30, 2013 totaled $29.8 million ($0.08 per diluted share), representing a decrease of 70%, compared to the corresponding 2012 period. During the three and nine months ended September 30, 2013, our net income (loss) from continuing operations was negatively impacted as a result of the premium paid to extinguish our 9.25% senior notes due 2019.

During the three months ended September 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 continued demand and pricing deterioration year-over-year. We believe gas and liquids prices are likely to remain weak through the end of 2013. Our business outlook for 2014 reflects our expectation that oil and natural gas prices will remain in the same range as in 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. Moreover, increasing field-level efficiencies enable customers to maintain or increase activity levels without a commensurate increase in spending. Crude oil pricing at current levels has led to an increase in the number of wells drilled, although increasing rig efficiencies have mitigated much of the need for additional working rigs in 2013. Continuing additions of new rig capacity and improving rig efficiency will likely result in a continued oversupply of rigs into 2014. As well, a portion of our customer base has indicated it may curtail activity levels as the end of the calendar year approaches, 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. We have realized some relief on the cost issues and have seen rig demand start to increase. An increase in stability in some of our markets has enabled more consistent operations, which also has improved our financial performance. During the current quarter, we were awarded contracts for 11 new rigs in Saudi Arabia and 2 new rigs in Mexico. We also signed new contracts for several existing rigs at prices that increased from their previous contracts and are more reflective of the current market. We anticipate that the impact of these awards on our financial results will be reflected beginning in the second half of 2014. Through the first half of 2014, we expect that our International operating results will be challenged by the combination of rig contract expirations and several scheduled shipyard projects.


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

                                Three Months                                               Nine Months
                            Ended September 30,                                        Ended September 30,
                            2013           2012           Increase/(Decrease)          2013           2012           Increase/(Decrease)
                                                                 (In thousands, except percentages)

Operating revenues
and Earnings Earnings
(losses) from
unconsolidated
affiliates:

Drilling & Rig
Services:
U.S.                     $   491,857    $   555,784    $       (63,927 )     (12 )% $ 1,443,759    $ 1,781,654    $      (337,895 )     (19 )%
Canada                        81,397        102,993            (21,596 )     (21 )%     273,053        313,743            (40,690 )     (13 )%
International                383,712        329,245             54,467        17 %    1,056,649        940,332            116,317        12 %
Rig Services (1)             131,151        151,625            (20,474 )     (14 )%     383,502        533,934           (150,432 )     (28 )%
Subtotal Drilling &
Rig Services (2)           1,088,117      1,139,647            (51,530 )      (5 )%   3,156,963      3,569,663           (412,700 )     (12 )%
Completion &
Production Services:
Production Services          246,806        254,827             (8,021 )      (3 )%     742,979        752,466             (9,487 )      (1 )%
Completion Services          266,520        381,241           (114,721 )     (30 )%     782,674      1,166,940           (384,266 )     (33 )%
Subtotal Completion &
Production
Services (3)                 513,326        636,068           (122,742 )     (19 )%   1,525,653      1,919,406           (393,753 )     (21 )%
Other reconciling
items (4)                    (53,252 )     (145,335 )           92,083        63 %     (136,726 )     (519,083 )          382,357        74 %
Total                    $ 1,548,191    $ 1,630,380    $       (82,189 )      (5 )% $ 4,545,890    $ 4,969,986    $      (424,096 )      (9 )%

                            Three Months                                           Nine Months
                         Ended September 30,                                   Ended September 30,
                          2013         2012        Increase/(Decrease)          2013         2012        Increase/(Decrease)
                                                         (In thousands, except percentages)
Adjusted income
(loss) derived from
operating activities
(5)

Drilling & Rig
Services:
U.S.                   $    92,710   $ 115,207   $       (22,497 )    (20 )% $   240,118   $ 427,291   $     (187,173 )    (44 )%
Canada                      12,244      21,679            (9,435 )    (44 )%      46,657      64,296          (17,639 )    (27 )%
International               54,271      30,299            23,972       79 %      108,221      67,838           40,383       60 %
Rig Services (1)             2,357      14,027           (11,670 )    (83 )%      (1,739 )    58,626          (60,365 )   (103 )%
Subtotal Drilling &
Rig Services (2)           161,582     181,212           (19,630 )    (11 )%     393,257     618,051         (224,794 )    (36 )%
Completion &
Production Services:
Production Services         25,909      34,035            (8,126 )    (24 )%      75,394      87,461          (12,067 )    (14 )%
Completion Services         13,024      47,218           (34,194 )    (72 )%      37,650     158,222         (120,572 )    (76 )%
Subtotal
Completion &
Production
Services (3)                38,933      81,253           (42,320 )    (52 )%     113,044     245,683         (132,639 )    (54 )%
Other reconciling
items (7)                  (34,622 )   (36,630 )           2,008        5 %     (107,666 )  (110,442 )          2,776        3 %
Total adjusted
income (loss)
derived from
operating activities   $   165,893   $ 225,835   $       (59,942 )    (27 )% $   398,635   $ 753,292   $     (354,657 )    (47 )%


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                            Three Months                                          Nine Months
                         Ended September 30,                                  Ended September 30,
                          2013         2012        Increase/(Decrease)         2013         2012        Increase/(Decrease)
                                                         (In thousands, except percentages)
Total adjusted
income (loss)
derived from
operating activities
(5)                    $   165,893   $ 225,835   $      (59,942 )    (27 )% $   398,635   $ 753,292   $     (354,657 )    (47 )%
U.S. oil and gas
joint venture
earnings (losses)                -     (98,805 )         98,805      100 %            -    (301,801 )        301,801      100 %
Interest expense           (56,059 )   (63,776 )          7,717       12 %     (176,343 )  (190,068 )         13,725        7 %
Investment income
(loss)                       1,229       7,224           (5,995 )    (83 )%      95,471      32,844           62,627      191 %
Gains (losses) on
sales and disposals
of long-lived assets
and other income
(expense), net              (3,266 )   (10,216 )          6,950       68 %      (27,245 )   (21,777 )         (5,468 )    (25 )%
Impairments and
other charges             (242,241 )         -         (242,241 )   (100 )%    (287,241 )  (147,503 )       (139,738 )    (95 )%
Income (loss) from
continuing
operations before
income taxes              (134,444 )    60,262         (194,706 )   (323 )%       3,277     124,987         (121,710 )    (97 )%
Income tax expense
(benefit)                  (44,684 )    (4,977 )        (39,707 )   (798 )%     (28,798 )    22,121          (50,919 )   (230 )%
Subsidiary preferred
stock dividend                 750         750                -        -          2,250       2,250                -        -
Income (loss) from
continuing
operations, net of
tax                        (90,510 )    64,489         (154,999 )   (240 )%      29,825     100,616          (70,791 )    (70 )%
Income (loss) from
discontinued
operations, net of
tax                        (14,430 )    12,155          (26,585 )   (219 )%     (34,292 )    35,888          (70,180 )   (196 )%
Net income (loss)         (104,940 )    76,644         (181,584 )   (237 )%      (4,467 )   136,504         (140,971 )   (103 )%
Less: Net (income)
loss attributable to
noncontrolling
interest                      (441 )      (988 )            547       55 %       (6,154 )       453           (6,607 )    n/m (6)
Net income (loss)
attributable to
Nabors                 $  (105,381 ) $  75,656   $     (181,037 )   (239 )% $   (10,621 ) $ 136,957   $     (147,578 )   (108 )%

Diluted earnings
(losses) per share:
From continuing
operations             $     (0.30 ) $    0.22                              $      0.08   $    0.35
From discontinued
operations                   (0.05 )      0.04                                    (0.11 )      0.12
Total diluted          $     (0.35 ) $    0.26                              $     (0.03 ) $    0.47




                                   Three Months                                        Nine Months
                               Ended September 30,                                 Ended September 30,
                                2013         2012        Increase/(Decrease)        2013         2012         Increase/(Decrease)
                                                       (In thousands, except percentages and rig activity)
Rig activity:
Rig years: (8)
U.S.                              195.5        211.2           (15.7 )      (7 )%     193.7        228.8            (35.1 )     (15 )%
Canada                             30.0         34.0            (4.0 )     (12 )%      29.1         34.3             (5.2 )     (15 )%
International (9)                 124.2        119.2             5.0         4 %      124.0        119.3              4.7         4 %
Total rig years                   349.7        364.4           (14.7 )      (4 )%     346.8        382.4            (35.6 )      (9 )%
Rig hours: (10)
Production Services             223,504      217,675           5,829         3 %    660,483      651,005            9,478         1 %
Canada Production Services       39,463       43,849          (4,386 )     (10 )%   116,292      136,603          (20,311 )     (15 )%
Total rig hours                 262,967      261,524           1,443         1 %    776,775      787,608          (10,833 )      (1 )%



(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.


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(2) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(2.9) million and $(0.7) million for the three months ended September 30, 2013 and 2012, respectively, and $1.0 million and $(0.7) million for the nine months ended September 30, 2013 and 2012, respectively.

(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $0.3 million and $0.6 million for the three and nine months ended September 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 $(98.8) million and $(301.8) million for the three and nine months ended September 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) The number is so large that it is not meaningful.

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

(8) 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.

(9) 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 nine months ended September 30, 2013 and 2012.

(10) 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                                            Nine Months
                    Ended September 30,                                    Ended September 30,
                     2013         2012        Increase/(Decrease)          2013          2012         Increase/(Decrease)
                                             (In thousands, except percentages and rig activity)
U.S.
Revenues          $   491,857   $ 555,784   $       (63,927 )    (12 )% $ 1,443,759   $ 1,781,654   $     (337,895 )    (19 )%
Adjusted income   $    92,710   $ 115,207   $       (22,497 )    (20 )% $   240,118   $   427,291   $     (187,173 )    (44 )%

Rig years               195.5       211.2             (15.7 )     (7 )%       193.7         228.8            (35.1 )    (15 )%

Canada
Revenues          $    81,397   $ 102,993   $       (21,596 )    (21 )% $   273,053   $   313,743   $      (40,690 )    (13 )%
Adjusted income   $    12,244   $  21,679   $        (9,435 )    (44 )% $    46,657   $    64,296   $      (17,639 )    (27 )%

Rig years                30.0        34.0              (4.0 )    (12 )%        29.1          34.3             (5.2 )    (15 )%

International
Revenues          $   383,712   $ 329,245   $        54,467       17 %  $ 1,056,649   $   940,332   $      116,317       12 %
Adjusted income   $    54,271   $  30,299   $        23,972       79 %  $   108,221   $    67,838   $       40,383       60 %

Rig years               124.2       119.2               5.0        4 %        124.0         119.3              4.7        4 %

Rig Services
Revenues          $   131,151   $ 151,625   $       (20,474 )    (14 )% $   383,502   $   533,934   $     (150,432 )    (28 )%
Adjusted income   $     2,357   $  14,027   $       (11,670 )    (83 )% $    (1,739 ) $    58,626   $      (60,365 )   (103 )%

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 nine months ended September 30, 2013 compared to the corresponding 2012 periods, primarily due to lower average dayrates in the lower 48 states and Alaska, offset slightly by a modest improvement in dayrates in offshore operations. Drilling activity also decreased in the lower 48 states, offshore and Alaska during the first nine months of 2013 compared to the corresponding 2012 period. 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 both oil and natural gas.

Canada

Operating results decreased during the three and nine months ended September 30, 2013 compared to the corresponding 2012 periods, primarily as a result of continued decreases in drilling activity, partially offset by a favorable rig mix resulting in increased drilling dayrates. Drilling activity during the first three quarters of 2013 was lower than the corresponding 2012 period due to reduced customer budgets with the continued uncertainty around pipeline infrastructure and decreased customer demand for gas-drilling activities related to the lower natural gas prices and a continued oversupply of natural gas in the North American market.


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International

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

Rig Services

Operating results decreased primarily from our Canrig activities during the three and nine months ended September 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                                           Nine Months
                  Ended September 30,                                   Ended September 30,
                   2013         2012        Increase/(Decrease)         2013         2012         Increase/(Decrease)
                                          (In thousands, except percentages and rig activity)
Production
Services
Revenues        $   246,806   $ 254,827   $        (8,021 )     (3 )% $ 742,979   $   752,466   $        (9,487 )     (1 )%
Adjusted
income          $    25,909   $  34,035   $        (8,126 )    (24 )% $  75,394   $    87,461   $       (12,067 )    (14 )%

Rig hours:
U.S.                223,504     217,675             5,829        3 %    660,483       651,005             9,478        1 %
Canada               39,463      43,849            (4,386 )    (10 )%   116,292       136,603           (20,311 )    (15 )%

Completion
Services
Revenues        $   266,520   $ 381,241   $      (114,721 )    (30 )% $ 782,674   $ 1,166,940   $      (384,266 )    (33 )%
Adjusted
income          $    13,024   $  47,218   $       (34,194 )    (72 )% $  37,650   $   158,222   $      (120,572 )    (76 )%

Production Services

Operating results decreased slightly during the three and nine months ended September 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

. . .

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