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NBR > SEC Filings for NBR > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for NABORS INDUSTRIES LTD

Form 10-K for NABORS INDUSTRIES LTD


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 United States and Canada 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 of our customers and, consequently, our financial position, results of operations and cash flows.

The magnitude of customer spending on new and existing wells is the primary driver of our business. 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 to a lesser extent natural gas liquids from unconventional reservoirs (shales). Activity in our international markets is increasingly driven by the development of natural gas reserves. In our Completion & Production Services business line, operations are primarily driven by oil prices.

During 2013, the West Texas Intermediate crude oil spot price averaged $98.02 per barrel, up from $94.10 in 2012 and $95.05 in 2011. The Henry Hub natural gas spot price averaged $3.72 per mcf versus $2.75 in 2012 and $4.00 in 2011. While the commodity price environment has impacted demand for drilling, the technologies used to gain drilling efficiencies have increased. Two factors that have contributed to this increase are the high-performance capabilities of modern A/C rigs, which address the more complex horizontal drilling requirements of the unconventional reservoirs, and the shift by exploration and production operators toward pad drilling.

Crude oil pricing remains volatile and potentially vulnerable, which keeps our customers' forward-spending plans in check. For 2014, we believe natural gas and liquids prices, as well as crude oil prices, are likely to remain in the same range as 2013. With that outlook, it is likely that continuing additions of new rig capacity and improving rig efficiency will result in a continued oversupply of rigs for most, if not all, of the year in our U.S. markets.

Until recently, our international markets have been generally slower to respond to the improving oil prices of the last three years. During 2013, we signed several multiyear contracts for new rigs and


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rig renewals with revenue expected to commence during 2014. Those contracts are consistent with a general tightening of the international rig market. Many of those rigs are likely to deploy on large-scale natural gas projects. For 2014, we expect the international rig market to remain tight, and we anticipate additional opportunities to contract rigs at rates commensurate with this market.

The following table sets forth oil and natural gas price data per Bloomberg for the last three years:

                                 Year Ended December 31,               Increase/(Decrease)
                                2013        2012      2011       2013 to 2012       2012 to 2011
Commodity prices:
Average Henry Hub natural
gas spot price ($/mcf)         $   3.72    $  2.75   $  4.00    $   0.97     35 %  $ (1.25 )   (31 )%
Average West Texas
intermediate crude oil spot
price ($/barrel)               $  98.02    $ 94.10   $ 95.05    $   3.92      4 %  $ (0.95 )    (1 )%

Operating revenues and Earnings (losses) from unconsolidated affiliates in 2013 totaled $6.2 billion, representing a decrease of $402.3 million, or 6%, over 2012. Adjusted income derived from operating activities and net income
(loss) from continuing operations for 2013 totaled $558.2 million and $158.3 million ($0.51/per diluted share), respectively, representing decreases of 39% and 32% when compared to 2012.

Operating revenues and Earnings (losses) from unconsolidated affiliates for 2012 totaled $6.6 billion, representing an increase of $455.4 million, or 7%, over 2011. Adjusted income derived from operating activities for 2012 totaled $908.6 million, representing an increase of 5% over 2011, while net income
(loss) from continuing operations for 2012 totaled $233.0 million ($0.79/per diluted share), representing a decrease of 33% over 2011.

During 2013, our income (loss) from continuing operations was negatively impacted primarily by the $208.2 million loss recognized when we repurchased $785.4 million aggregate principal amount of the 9.25% senior notes in September. Excluding this, our operating results in North American drilling and completion operations decreased due to the industry-wide decrease in land drilling activity and overcapacity in the pressure pumping markets. Our International operations increased significantly resulting from the deployment of additional rigs under long-term contracts and the renewal of existing contracts at current market rates.

During 2012, our income (loss) from continuing operations was negatively impacted by impairments and other charges, including full-cost ceiling test writedowns from Sabine totaling $283.4 million, representing our proportionate share of the writedowns, a $75.0 million impairment of an intangible asset related to the Superior trade name, a provision for the retirement of long-lived assets totaling $138.7 million in multiple operating segments, a $50.4 million impairment of some coil-tubing rigs and a goodwill impairment totaling $26.3 million. Partially offsetting these charges were $160 million of asset gains, primarily relating to selling our interest in Sabine at the end of 2012. Excluding these items, our operating results improved as a result of increased demand for our services and products due to increased drilling activity in oil- and liquids-rich shale plays and increased well-servicing activity in the U.S. and Canada. This increase in activity has more than offset the drop in demand from gas-related plays.

During 2011, operating results improved as compared to 2010 primarily due to the incremental revenue and positive operating results from the addition of our Completion Services operating segment beginning in September 2010, increased drilling activity in oil- and liquids-rich shale plays in our drilling operations in both our U.S. lower 48 states and Canada drilling operations and increased well-servicing activity in the U.S. and Canada. However, our operating results and activity levels were negatively impacted in our U.S. offshore operations in response to uncertainty in the regulatory


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environment in the Gulf of Mexico, our Alaskan operations due to key customers' spending constraints, and in Saudi Arabia due to downtime and reduced rates on several jackup rigs.

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

                         Year Ended December 31,                      Increase/(Decrease)
                    2013          2012          2011          2013 to 2012          2012 to 2011
                                 (In thousands, except percentages and rig activity)
                                 Revised       Revised                                 Revised
Reportable
segments:
Operating
revenues and
Earnings
(losses) from
unconsolidated
affiliates
Drilling & Rig
Services:
U.S.             $ 1,914,786   $ 2,276,808   $ 1,999,241   $ (362,022 )   (16 )% $  277,567       14 %
Canada               361,676       429,411       426,455      (67,735 )   (16 )%      2,956        1 %
International      1,464,264     1,265,060     1,104,461      199,204      16 %     160,599       15 %
Rig
Services(2)          516,004       688,310       626,169     (172,306 )   (25 )%     62,141       10 %


Subtotal
Drilling & Rig
Services(3)        4,256,730     4,659,589     4,156,326     (402,859 )    (9 )%    503,263       12 %
Completion &
Production
Services:
Completion
Services           1,074,713     1,462,767     1,237,306     (388,054 )   (27 )%    225,461       18 %
Production
Services           1,009,214     1,000,873       849,522        8,341       1 %     151,351       18 %


Subtotal
Completion &
Production
Services(4)        2,083,927     2,463,640     2,086,828     (379,713 )   (15 )%    376,812       18 %
Other
reconciling
items(5)(7)         (188,603 )    (568,896 )    (144,226 )    380,293      67 %    (424,670 )   (294 )%


Total            $ 6,152,054   $ 6,554,333   $ 6,098,928   $ (402,279 )    (6 )% $  455,405        7 %


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                           Year Ended December 31,                       Increase/(Decrease)
                       2013          2012          2011         2013 to 2012            2012 to 2011
                                    (In thousands, except percentages and rig activity)
                                    Revised      Revised                                   Revised
Adjusted income
(loss) derived
from operating
activities(1)(6)
Drilling & Rig
Services:
U.S.                $   315,496   $   509,894   $  442,831   $ (194,398 )    (38 )%  $   67,063       15 %
Canada                   61,193        91,360       89,344      (30,167 )    (33 )%       2,016        2 %
International           177,833        91,226      123,813       86,607       95 %      (32,587 )    (26 )%
Rig Services(2)          (3,918 )      67,366       55,856      (71,284 )   (106 )%      11,510       21 %


Subtotal
Drilling & Rig
Services(3)             550,604       759,846      711,844     (209,242 )    (28 )%      48,002        7 %
Completion &
Production
Services:
Completion
Services                 51,722       188,518      229,125     (136,796 )    (73 )%     (40,607 )    (18 )%
Production
Services                102,130       108,835       80,018       (6,705 )     (6 )%      28,817       36 %


Subtotal
Completion &
Production
Services(4)             153,852       297,353      309,143     (143,501 )    (48 )%     (11,790 )     (4 )%
Other reconciling
items(7)               (146,237 )    (148,649 )   (154,981 )      2,412        2 %        6,332        4 %


Total adjusted
income (loss)
derived from
operating
activities          $   558,219   $   908,550   $  866,006   $ (350,331 )    (39 )%  $   42,544        5 %


U.S. oil and gas
joint venture
earnings (losses)             -      (289,199 )     88,486      289,199      100 %     (377,685 )   (427 )%
Interest expense       (223,418 )    (251,904 )   (256,632 )     28,486       11 %        4,728        2 %
Investment income
(loss)                   96,577        63,137       19,939       33,440       53 %       43,198      217 %
Gains (losses) on
sales and
disposals of
long-lived assets
and other income
(expense), net          (37,977 )     136,636       (4,474 )   (174,613 )   (128 )%     141,110      n/m (8)
Impairments and
other charges          (287,241 )    (290,260 )   (198,072 )      3,019        1 %      (92,188 )    (47 )%


Income (loss)
from continuing
operations before
income taxes            106,160       276,960      515,253     (170,800 )    (62 )%    (238,293 )    (46 )%
Income tax
expense (benefit)       (55,181 )      40,986      165,083      (96,167 )   (235 )%    (124,097 )    (75 )%
Subsidiary
preferred stock
dividend                  3,000         3,000        3,000            -        -              -        -


Income (loss)
from continuing
operations, net
of tax                  158,341       232,974      347,170      (74,633 )    (32 )%    (114,196 )    (33 )%
Income (loss)
from discontinued
operations, net
of tax                  (11,179 )     (67,526 )    (97,601 )     56,347       83 %       30,075       31 %


Net income (loss)       147,162       165,448      249,569      (18,286 )    (11 )%     (84,121 )    (34 )%
Less: Net
(income) loss
attributable to
noncontrolling
interest                 (7,180 )        (621 )     (1,045 )     (6,559 )    n/m (8)        424       41 %
Net income (loss)
attributable to
Nabors              $   139,982   $   164,827   $  248,524   $  (24,845 )    (15 )%  $  (83,697 )    (34 )%


Rig activity:
Rig years:(9)
U.S.                      195.0         219.1        214.7        (24.1 )    (11 )%         4.4        2 %
Canada                     29.9          34.8         39.8         (4.9 )    (14 )%        (5.0 )    (13 )%
International(10)         124.2         119.3        105.3          4.9        4 %         14.0       13 %


Total rig years           349.1         373.2        359.8        (24.1 )     (6 )%        13.4        4 %


Rig hours:(11)
Production
Services                865,939       853,373      791,956       12,566        1 %       61,417        8 %
Canada Production
Services                152,747       181,185      184,908      (28,438 )    (16 )%      (3,723 )     (2 )%


Total rig hours       1,018,686     1,034,558      976,864      (15,872 )     (2 )%      57,694        6 %


(1)
All periods present the operating activities of our wholly owned oil and gas businesses, our previously held equity interests in oil and gas joint ventures in Canada and Colombia and aircraft logistics operations and construction services as discontinued operations.

(2)
Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software services. These services represent our other companies that are not aggregated into a reportable operating segment.

(3)
Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of ($0.4) million and ($3.1) million for the years ended December 31, 2013 and 2011, respectively.

(4)
Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $0.4 million and $0.5 million for the years ended December 31, 2013 and 2012, respectively.


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(5)
Represents the elimination of inter-segment transactions and earnings (losses), net from the U.S. unconsolidated oil and gas joint venture, accounted for using the equity method until sold in December 2012, of ($289.2) million and $88.5 million for the years ended December 31, 2012 and 2011, respectively.

(6)
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 the 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.

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

(8)
Number is so large that it is not meaningful.

(9)
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.

(10)
International rig years includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates, which totaled 2.5 years in years 2013 and 2012 and 2.1 years in 2011.

(11)
Rig hours represents the number of hours that our well-servicing rig fleet operated during the year.

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.

                       Years Ended December 31,                     Increase/(Decrease)
                   2013          2012          2011          2013 to 2012          2012 to 2011
                               (In thousands, except percentages and rig activity)
U.S.
Revenues        $ 1,914,786   $ 2,276,808   $ 1,999,241   $ (362,022 )    (16 )% $ 277,567      14 %
Adjusted
income          $   315,496   $   509,894   $   442,831   $ (194,398 )    (38 )% $  67,063      15 %
Rig years             195.0         219.1         214.7        (24.1 )    (11 )%       4.4       2 %
Canada
Revenues        $   361,676   $   429,411   $   426,455   $  (67,735 )    (16 )% $   2,956       1 %
Adjusted
income          $    61,193   $    91,360   $    89,344   $  (30,167 )    (33 )% $   2,016       2 %
Rig years              29.9          34.8          39.8         (4.9 )    (14 )%      (5.0 )   (13 )%
International
Revenues        $ 1,464,264   $ 1,265,060   $ 1,104,461   $  199,204       16 %  $ 160,599      15 %
Adjusted
income          $   177,833   $    91,226   $   123,813   $   86,607       95 %  $ (32,587 )   (26 )%
Rig years             124.2         119.3         105.3          4.9        4 %       14.0      13 %
Rig Services
Revenues        $   516,004   $   688,310   $   626,169   $ (172,306 )    (25 )% $  62,141      10 %
Adjusted
income (loss)   $    (3,918 ) $    67,366   $    55,856   $  (71,284 )   (106 )% $  11,510      21 %


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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 decreased from 2012 to 2013 primarily as a result of an industry-wide decrease in land drilling activity over the latter part of 2012 in response to declines in commodity prices. Throughout 2013, this resulted in both reduced drilling activity and lower dayrates for our lower 48 fleet. Expiring term contracts also contributed to the decrease as contracts were renewed at the lower market prices. These decreases were partially offset by slight improvements in margins and costs for our offshore fleet operating in the Gulf of Mexico.

Operating results increased from 2011 to 2012 primarily due to higher average dayrates and a slight increase in drilling activity, as well as $39.6 million in revenues recognized that were related to early contract terminations. These increases were partially offset by higher depreciation expense related to new rigs placed into service during 2012.

Canada

Operating results decreased from 2012 to 2013 also as a result of the industry-wide decrease in land drilling activity, similar to the United States. Strong oil prices and oil-related drilling activities have partially mitigated the impact of the overall natural gas oversupply in North America and the resulting reductions in customer demand for gas drilling.

Operating results increased slightly from 2011 to 2012 primarily due to higher average dayrates, which offset the decreases in drilling and well-servicing activities. The natural gas oversupply in North America and resulting low natural gas prices decreased customer demand for gas drilling and well-servicing activity in 2012. Reduced natural gas drilling activity was largely offset by increased demand in oil exploration. Strong oil prices increased in oil drilling activity and drilling dayrates, with more demand for larger rigs required to drill long-reach horizontal wells in the shale plays and oil sands.

International

Operating results increased from 2012 to 2013 primarily as a result of increases in the utilization of our overall rig fleet and higher average margins from recent rig deployments in Papua New Guinea, Northern Iraq and Abu Dhabi. Results were also impacted by favorable moves on the land rigs, favorable activity on the offshore rigs in Saudi Arabia and overall improvements in operational efficiencies.

Operating revenues and Earnings from unconsolidated affiliates increased from 2011 to 2012 as a result of increases in utilization of our overall rig fleet albeit at lower margins. Adjusted income derived from operating activities decreased from 2011 to 2012 primarily from the decreases in average dayrates and lower utilization of our jackup rigs in Saudi Arabia and lower offshore activity in Congo. These decreases were partially offset by new activity in Papua New Guinea and increased utilization of rigs in Mexico.

Rig Services

The decrease in operating results from 2012 to 2013 primarily resulted from reductions to our Canrig activities during 2013 compared to 2012 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.

The increase in operating results from 2011 to 2012 primarily resulted from higher demand in the United States and Canada drilling markets for top drives, rig instrumentation and data collection


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services from oil and gas exploration companies and higher third-party rental and rigwatch units, which generate higher margins, partially offset by a continued decline in customer demand for our construction services in Alaska.

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.

                         Year Ended December 31,                     Increase/(Decrease)
                    2013          2012          2011          2013 to 2012         2012 to 2011
                                (In thousands, except percentages and rig activity)
 Completion
 Services
 Revenues        $ 1,074,713   $ 1,462,767   $ 1,237,306   $ (388,054 )   (27 )% $ 225,461      18 %
 Adjusted
 income          $    51,722   $   188,518   $   229,125   $ (136,796 )   (73 )% $ (40,607 )   (18 )%
 Production
 Services
 Revenues        $ 1,009,214   $ 1,000,873   $   849,522   $    8,341       1 %  $ 151,351      18 %
 Adjusted
 income          $   102,130   $   108,835   $    80,018   $   (6,705 )    (6 )% $  28,817      36 %
 Rig hours
 U.S.                865,939       853,373       791,956       12,566       1 %     61,417       8 %
 Canada              152,747       181,185       184,908      (28,438 )   (16 )%    (3,723 )    (2 )%


                   1,018,686     1,034,558       976,864      (15,872 )    (2 )%    57,694       6 %

Completion Services

Operating results decreased from 2012 to 2013 primarily due to downward pricing pressure across all regions due to continued overcapacity in the pressure pumping market and reduced customer activity in part caused by severe weather in our northern operating areas. During 2013, we suspended some of our stimulation operations in Canada and some of our coil-tubing operations in the United States. We relocated the Canadian assets to the United States.

Operating revenues increased from 2011 to 2012 primarily due to the increased levels of fracturing activity and associated increase in our assets deployed in the major producing areas in the United States. Adjusted income derived from operating activities decreased from 2011 to 2012 due to lower margins on product sales as a result of higher commodity prices.

Production Services

Operating revenues increased from 2012 to 2013 primarily due to our acquisition of KVS. From 2011 to 2012, operating revenues increased primarily due to the mix of higher and lower rate rigs working in our U.S. markets, partially offset by weaker Canada markets. Our U.S. markets have had higher utilization and increases in rig and truck fleets as well as frac tank counts, despite continued pricing challenges. The decrease in adjusted income from 2012 to 2013 reflect the costs that have increased in rig and truck fleets as a result of capital invested over the past few years to increase those fleets.


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OTHER FINANCIAL INFORMATION

                        Year Ended December 31,                    Increase/(Decrease)
                    2013          2012         2011         2013 to 2012          2012 to 2011
                                        (In thousands, except percentages)
General and
administrative
expenses         $   525,330   $   527,953   $ 487,808   $   (2,623 )      -    $  40,145       8 %
Depreciation
and
amortization       1,086,677     1,039,923     918,122       46,754        4 %    121,801      13 %
Interest
expense              223,418       251,904     256,632      (28,486 )    (11 )%    (4,728 )    (2 )%
Investment
income                96,577        63,137      19,939       33,440       53 %     43,198     217 %
Losses (gains)
on sales and
disposals of
long-lived
assets and
other expense
(income), net        (37,977 )     136,636      (4,474 )   (174,613 )   (128 )%   141,110     n/m (1)


--------------------------------------------------------------------------------
    (1)


Number is so large that it is not meaningful.

General and administrative expenses

. . .

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