10-Q 1 h84350e10vq.htm FORM 10-Q e10vq
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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 September 30, 2011
 
Commission File Number: 001-32657
 
NABORS INDUSTRIES LTD.
 
 
     
Incorporated in 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
Bermuda
(441) 292-1510
 
 
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 þ NO o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ NO o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller Reporting Company o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO þ
 
 
The number of common shares, par value $.001 per share, outstanding as of November 4, 2011 was 287,554,937.
 


 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
Index
 
                 
PART I FINANCIAL INFORMATION
  Item 1.     Financial Statements        
        Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010     3  
        Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2011 and 2010     4  
        Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010     5  
        Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2011 and 2010     6  
        Notes to Consolidated Financial Statements     8  
        Report of Independent Registered Public Accounting Firm     39  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     40  
  Item 3.     Quantitative and Qualitative Disclosures About Market Risk     56  
  Item 4.     Controls and Procedures     56  
 
PART II OTHER INFORMATION
  Item 1.     Legal Proceedings     57  
  Item 1A.     Risk Factors     57  
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     59  
  Item 6.     Exhibits     60  
Signatures     61  
 EX-15
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
 
                 
    September 30,
    December 31,
 
(In thousands, except per share amounts)   2011     2010  
    (Unaudited)        
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 275,461     $ 641,702  
Short-term investments
    119,859       159,488  
Assets held for sale
    267,911       352,048  
Accounts receivable, net
    1,397,725       1,116,510  
Inventory
    233,298       158,836  
Deferred income taxes
    83,388       31,510  
Other current assets
    166,702       152,836  
                 
Total current assets
    2,544,344       2,612,930  
Long-term investments and other receivables
    40,373       40,300  
Property, plant and equipment, net
    8,577,213       7,815,419  
Goodwill
    501,297       494,372  
Investment in unconsolidated affiliates
    323,066       267,723  
Other long-term assets
    332,053       415,825  
                 
Total assets
  $ 12,318,346     $ 11,646,569  
                 
 
LIABILITIES AND EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 275,227     $ 1,379,018  
Trade accounts payable
    658,692       355,282  
Accrued liabilities
    459,943       394,292  
Income taxes payable
    21,903       25,788  
                 
Total current liabilities
    1,415,765       2,154,380  
Long-term debt
    4,088,133       3,064,126  
Other long-term liabilities
    220,062       245,765  
Deferred income taxes
    881,659       770,247  
                 
Total liabilities
    6,605,619       6,234,518  
                 
Commitments and contingencies (Note 8)
               
Subsidiary preferred stock
    69,188       69,188  
Equity:
               
Shareholders’ equity:
               
Common shares, par value $.001 per share:
               
Authorized common shares 800,000; issued 316,922 and 315,034, respectively
    317       315  
Capital in excess of par value
    2,282,803       2,255,787  
Accumulated other comprehensive income
    269,155       342,052  
Retained earnings
    4,057,410       3,707,881  
Less: treasury shares, at cost, 29,414 common shares
    (977,873 )     (977,873 )
                 
Total shareholders’ equity
    5,631,812       5,328,162  
Noncontrolling interest
    11,727       14,701  
                 
Total equity
    5,643,539       5,342,863  
                 
Total liabilities and equity
  $ 12,318,346     $ 11,646,569  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
(Unaudited)
 
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands, except per share amounts)   2011     2010     2011     2010  
 
Revenues and other income:
                               
Operating revenues
  $ 1,624,791     $ 1,069,261     $ 4,360,975     $ 2,856,636  
Earnings (losses) from unconsolidated affiliates
    33,723       11,842       59,304       28,329  
Investment income (loss)
    738       (733 )     12,056       (976 )
                                 
Total revenues and other income
    1,659,252       1,080,370       4,432,335       2,883,989  
                                 
Costs and other deductions:
                               
Direct costs
    1,030,231       625,561       2,723,714       1,648,289  
General and administrative expenses
    122,372       87,194       366,478       242,957  
Depreciation and amortization
    234,834       198,151       686,848       545,084  
Depletion
    11,789       5,778       18,060       15,646  
Interest expense
    57,907       66,973       195,570       199,035  
Losses (gains) on sales and retirements of long-lived assets and other expense (income), net
    (12,157 )     9,407       (556 )     40,798  
Impairments and other charges
    98,072       123,099       98,072       123,099  
                                 
Total costs and other deductions
    1,543,048       1,116,163       4,088,186       2,814,908  
                                 
Income (loss) from continuing operations before income taxes
    116,204       (35,793 )     344,149       69,081  
Income tax expense (benefit):
                               
Current
    17,698       (71,276 )     42,142       (40,979 )
Deferred
    15,552       67,046       65,079       54,133  
                                 
Total income tax expense (benefit)
    33,250       (4,230 )     107,221       13,154  
Subsidiary preferred stock dividend
    750             2,250        
                                 
Income (loss) from continuing operations, net of tax
    82,204       (31,563 )     234,678       55,927  
Income (loss) from discontinued operations, net of tax
    (7,240 )     (7,591 )     114,496       (12,921 )
                                 
Net income (loss)
    74,964       (39,154 )     349,174       43,006  
Less: Net (income) loss attributable to noncontrolling interest
    (708 )     (453 )     355       1,208  
                                 
Net income (loss) attributable to Nabors
  $ 74,256     $ (39,607 )   $ 349,529     $ 44,214  
                                 
Earnings (losses) per share:
                               
Basic from continuing operations
  $ .28     $ (.11 )   $ .82     $ .21  
Basic from discontinued operations
    (.02 )     (.03 )     .40       (.05 )
                                 
Total Basic
  $ .26     $ (.14 )   $ 1.22     $ .16  
                                 
Diluted from continuing operations
  $ .28     $ (.11 )   $ .80     $ .19  
Diluted from discontinued operations
    (.03 )     (.03 )     .39       (.04 )
                                 
Total Diluted
  $ .25     $ (.14 )   $ 1.19     $ .15  
                                 
Weighted-average number of common shares outstanding:
                               
Basic
    287,487       285,282       286,971       285,045  
Diluted
    291,986       285,282       292,991       289,847  
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
(Unaudited)
 
                 
    Nine Months Ended September 30,  
(In thousands)   2011     2010  
 
Cash flows from operating activities:
               
Net income (loss) attributable to Nabors
  $ 349,529     $ 44,214  
Adjustments to net income (loss):
               
Depreciation and amortization
    686,820       547,399  
Depletion and other exploratory expenses
    31,949       24,587  
Deferred income tax expense (benefit)
    61,566       53,622  
Deferred financing costs amortization
    4,000       3,760  
Pension liability amortization and adjustments
    450       298  
Discount amortization on long-term debt
    26,546       53,818  
Amortization of loss on hedges
    695       464  
Impairments and other charges
    98,072       123,099  
Losses (gains) on long-lived assets, net
    (40,636 )     (3,242 )
Losses (gains) on investments, net
    (8,567 )     4,659  
Losses (gains) on debt retirement, net
    58       7,042  
Losses (gains) on derivative instruments
    267       2,473  
Gain on acquisition
    (12,178 )      
Share-based compensation
    17,249       10,602  
Foreign currency transaction losses (gains), net
    743       16,795  
Equity in (earnings) losses of unconsolidated affiliates, net of dividends
    (135,844 )     (14,494 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (283,082 )     (140,592 )
Inventory
    (76,913 )     (7,779 )
Other current assets
    (2,623 )     (117,599 )
Other long-term assets
    79,770       492  
Trade accounts payable and accrued liabilities
    331,633       40,605  
Income taxes payable
    (466 )     43,458  
Other long-term liabilities
    (20,904 )     (11,547 )
                 
Net cash provided by operating activities
    1,108,134       682,134  
                 
Cash flows from investing activities:
               
Purchases of investments
    (9,567 )     (27,695 )
Sales and maturities of investments
    24,580       32,103  
Cash paid for acquisition of businesses, net
    (55,459 )     (680,230 )
Investment in unconsolidated affiliates
    (54,762 )     (40,936 )
Distribution of proceeds from asset sales from unconsolidated affiliates
    142,984        
Capital expenditures
    (1,532,597 )     (640,953 )
Proceeds from sales of assets and insurance claims
    110,535       26,084  
                 
Net cash used for investing activities
    (1,374,286 )     (1,331,627 )
                 
Cash flows from financing activities:
               
Increase (decrease) in cash overdrafts
    5,074       (4,649 )
Proceeds from issuance of long-term debt
    697,578       691,281  
Proceeds from issuance of common shares
    12,175       5,391  
Proceeds from revolving credit facilities
    1,300,000       600,000  
Debt issuance costs
    (6,065 )     (7,144 )
Reduction in long-term debt
    (1,404,271 )     (314,353 )
Reduction in revolving credit facilities
    (700,000 )     (600,000 )
Repurchase of equity component of convertible debt
    (12 )     (4,712 )
Settlement of call options and warrants, net
          1,134  
Purchase of restricted stock
    (2,579 )     (1,904 )
Tax benefit related to share-based awards
    185       (38 )
                 
Net cash (used for) provided by financing activities
    (97,915 )     365,006  
Effect of exchange rate changes on cash and cash equivalents
    (2,174 )     (3,645 )
                 
Net (decrease) increase in cash and cash equivalents
    (366,241 )     (288,132 )
Cash and cash equivalents, beginning of period
    641,702       927,815  
                 
Cash and cash equivalents, end of period
  $ 275,461     $ 639,683  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
 
 
                                                                           
                              Accumulated
                         
                        Capital in
    Other
                Non-
       
            Common Shares     Excess of
    Comprehensive
    Retained
    Treasury
    controlling
    Total
 
(In thousands)           Shares     Par Value     Par Value     Income     Earnings     Shares     Interest     Equity  
Balances, December 31, 2010
              315,034     $ 315     $ 2,255,787     $ 342,052     $ 3,707,881     $ (977,873 )   $ 14,701     $ 5,342,863  
                                                                           
Comprehensive income (loss):
                                                                         
Net income (loss) attributable to Nabors
  $ 349,529                                         349,529                       349,529  
Translation adjustment attributable to Nabors
    (47,507 )                               (47,507 )                             (47,507 )
Unrealized gains/(losses) on marketable securities, net of income taxes of $19
    (26,053 )                               (26,053 )                             (26,053 )
Less: Reclassification adjustment for (gains)/losses included in net income (loss), net of income taxes of $0
    (5 )                               (5 )                             (5 )
Pension liability amortization, net of income taxes of $176
    275                                 275                               275  
Unrealized gains/(losses) and amortization of (gains)/losses on cash flow hedges, net of income tax benefit of $179
    393                                 393                               393  
                                                                           
Comprehensive income (loss) attributable to Nabors
  $ 276,632                                                                    
                                                                           
Net income (loss) attributable to noncontrolling interest
    (355 )                                                       (355 )     (355 )
Translation adjustment attributable to noncontrolling interest
    (460 )                                                       (460 )     (460 )
                                                                           
Comprehensive income (loss) attributable to noncontrolling interest
    (815 )                                                                  
                                                                           
Total comprehensive income (loss)
  $ 275,817                                                                    
                                                                           
                                                                           
Issuance of common shares for stock options exercised, net of surrender of unexercised stock options
              1,006       1       12,174                                       12,175  
Distributions from noncontrolling interest
                                                              (2,159 )     (2,159 )
Repurchase of equity component of convertible debt
                              (12 )                                     (12 )
Tax benefit related to share-based awards
                              185                                       185  
Restricted stock awards, net
              882       1       (2,580 )                                     (2,579 )
Share-based compensation
                              17,249                                       17,249  
                                                                           
Balances, September 30, 2011
              316,922     $ 317     $ 2,282,803     $ 269,155     $ 4,057,410     $ (977,873 )   $ 11,727     $ 5,643,539  
                                                                           
 
The accompanying notes are an integral part of these consolidated financial statements.


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
                                                                           
                              Accumulated
                         
                        Capital in
    Other
                Non-
       
            Common Shares     Excess of
    Comprehensive
    Retained
    Treasury
    controlling
    Total
 
(In thousands)           Shares     Par Value     Par Value     Income     Earnings     Shares     Interest     Equity  
Balances, December 31, 2009
              313,915     $ 314     $ 2,239,323     $ 292,706     $ 3,613,186     $ (977,873 )   $ 14,323     $ 5,181,979  
                                                                           
Comprehensive income (loss):
                                                                         
Net income (loss) attributable to Nabors
  $ 44,214                                         44,214                       44,214  
Translation adjustment attributable to Nabors
    19,897                                 19,897                               19,897  
Unrealized gains/(losses) on marketable securities, net of income taxes of $7,412
    (30,508 )                               (30,508 )                             (30,508 )
Less: Reclassification adjustment for (gains)/losses included in net income (loss), net of income taxes of $693
    (995 )                               (995 )                             (995 )
Pension liability amortization, net of income taxes of $111
    189                                 189                               189  
Unrealized gains/(losses) and amortization of (gains)/losses on cash flow hedges, net of income tax benefit of $2,178
    (3,294 )                               (3,294 )                             (3,294 )
                                                                           
Comprehensive income (loss) attributable to Nabors
  $ 29,503                                                                    
                                                                           
Net income (loss) attributable to noncontrolling interest
    (1,208 )                                                       (1,208 )     (1,208 )
Translation adjustment attributable to noncontrolling interest
    253                                                         253       253  
                                                                           
Comprehensive income (loss) attributable to noncontrolling interest
    (955 )                                                                  
                                                                           
Total comprehensive income (loss)
  $ 28,548                                                                    
                                                                           
                                                                           
Issuance of common shares for stock options exercised, net of surrender of unexercised stock options
              459               5,391                                       5,391  
Distributions from noncontrolling interest
                                                              (867 )     (867 )
Contributions to noncontrolling interest
                                                              437       437  
Repurchase of equity component of convertible debt
                              (4,712 )                                     (4,712 )
Settlement of call options and warrants, net
                              1,134                                       1,134  
Tax benefit related to share-based awards
                              (38 )                                     (38 )
Restricted stock awards, net
              360               (1,904 )                                     (1,904 )
Share-based compensation
                              10,602                                       10,602  
                                                                           
Balances, September 30, 2010
              314,734     $ 314     $ 2,249,796     $ 277,995     $ 3,657,400     $ (977,873 )   $ 12,938     $ 5,220,570  
                                                                           
 
The accompanying notes are an integral part of these consolidated financial statements.


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Nabors Industries Ltd. and Subsidiaries
 
 
Note 1   Nature of Operations
 
Nabors is the largest land drilling contractor in the world and one of the largest land well-servicing and workover contractors in the United States and Canada:
 
  •  We actively market approximately 491 land drilling rigs for oil and gas land drilling operations in the Lower 48 states, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia and Africa.
 
  •  We actively market approximately 575 rigs for land well-servicing and workover work in the United States and approximately 174 rigs for land well-servicing and workover work in Canada.
 
We are also a leading provider of offshore platform workover and drilling rigs, and actively market 39 platform, 12 jackup and four barge rigs in the United States, including the Gulf of Mexico, and multiple international markets.
 
In addition to the foregoing services:
 
  •  We provide pressure pumping services with over 679,000 hydraulic horsepower in key basins throughout the United States.
 
  •  We offer a wide range of ancillary well-site services, including engineering, transportation and disposal, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in select U.S. and international markets.
 
  •  We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment and rig reporting software.
 
  •  We invest in oil and gas exploration, development and production activities in the United States, Canada and Colombia through both our wholly owned subsidiaries and our oil and gas joint ventures in which we hold 49-50% ownership interests.
 
  •  We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets nine rigs in addition to the rigs we lease to the joint venture.
 
  •  We also provide logistics services for onshore drilling in Canada using helicopters and fixed-wing aircraft.
 
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, well-servicing, fluid logistics and workover operations, on land and offshore. Our hydraulic fracturing and downhole surveying services are included in our Pressure Pumping operating segment. Our oil and gas exploration, development and production operations are included in our Oil and Gas operating segment. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in our Other Operating Segments.
 
On September 10, 2010, we acquired Superior Well Services, Inc. (“Superior”). The effects of the Superior acquisition and the related operating results are included in the accompanying unaudited consolidated financial statements beginning on the acquisition date, and are reflected in the operating segment titled “Pressure Pumping.”
 
Unless the context requires otherwise, references in this report to “we,” “us,” “our,” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires, including Nabors Industries, Inc., a Delaware corporation (“Nabors Delaware”).


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 2   Summary of Significant Accounting Policies
 
Interim Financial Information
 
The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2010 (“2010 Annual Report”). In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2011 and the results of our operations for the three and nine months ended September 30, 2011 and 2010, and our cash flows and changes in equity for the nine months ended September 30, 2011 and 2010, in accordance with GAAP. Interim results for the three and nine months ended September 30, 2011 may not be indicative of results that will be realized for the full year ending December 31, 2011.
 
Our independent registered public accounting firm has reviewed and issued a report on these consolidated interim financial statements in accordance with standards established by the Public Company Accounting Oversight Board. Pursuant to Rule 436(c) under the Securities Act of 1933, as amended (the “Securities Act”), this report should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of such Act.
 
Principles of Consolidation
 
Our consolidated financial statements include the accounts of Nabors, as well as all majority owned and non-majority owned subsidiaries required to be consolidated under GAAP. Our consolidated financial statements exclude majority owned entities for which we do not have either (i) the ability to control the operating and financial decisions and policies of that entity or (ii) a controlling financial interest in a variable interest entity. All significant intercompany accounts and transactions are eliminated in consolidation.
 
Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method. Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss), and our investment in these entities is included as a single amount in our consolidated balance sheets. Investments in unconsolidated affiliates accounted for using the equity method totaled $320.5 million and $265.8 million and investments in unconsolidated affiliates accounted for using the cost method totaled $2.5 million and $1.9 million, respectively, as of September 30, 2011 and December 31, 2010. At September 30, 2011 and December 31, 2010, assets held for sale included investments in unconsolidated affiliates accounted for using the equity method totaling $13.6 million and $79.5 million, respectively. See Note 11 Discontinued Operations for additional information.
 
We have investments in offshore funds, which are classified as long-term investments and are accounted for using the equity method of accounting based on our ownership interest in each fund.
 
Goodwill
 
Goodwill represents the cost in excess of fair value of the net assets of companies acquired. We review goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. The


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
table below reflects the change in the carrying amount of goodwill for our various Contract Drilling segments and our other segments for the nine months ended September 30, 2011:
 
                                         
          Acquisitions
                   
    Balance as of
    and Purchase
          Cumulative
    Balance as of
 
    December 31,
    Price
          Translation
    September 30,
 
    2010     Adjustments     Impairments     Adjustment     2011  
    (In thousands)  
 
Contract Drilling:
                                       
U.S. Lower 48 Land Drilling
  $ 30,154     $     $     $     $ 30,154  
U.S. Land Well-servicing
    55,839       (767 )                 55,072  
U.S. Offshore
    7,296                         7,296  
Alaska
    19,995                         19,995  
International
    18,983                         18,983  
                                         
Subtotal Contract Drilling
    132,267       (767 )                 131,500  
Pressure Pumping
    334,992                         334,992  
Other Operating Segments
    27,113       8,386 (1)           (694 )     34,805  
                                         
Total
  $ 494,372     $ 7,619     $     $ (694 )   $ 501,297  
                                         
 
 
(1) Represents goodwill recorded during the three months ended September 30, 2011 relating to our acquisition of the remaining 50 percent equity interest of Peak Oilfield Service Company (“Peak”). The goodwill is attributable to Peak’s workforce and the synergies and benefits expected from control of this subsidiary. The goodwill is not expected to be deductible for tax purposes. See Note 10 Supplemental Balance Sheet, Income Statement and Cash Flow Information for additional information on this acquisition.
 
Long-lived assets
 
We review our long-lived assets for impairment annually or when events or changes in circumstances indicate that the carrying amounts of property, plant and equipment may not be recoverable. An impairment loss is recorded in the period in which it is determined that the sum of estimated future cash flows, on an undiscounted basis, is less than the carrying amount of the long-lived asset. During 2011 and 2010, our annual review for long-lived asset impairment was performed during the quarter ended September 30. In addition, we review our long-lived assets for obsolence. See Note 10 Supplemental Balance Sheet, Income Statement and Cash Flow Information for additional information.
 
Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to clarify the application of some of the existing fair value measurement and disclosure requirements. These changes are effective for interim and annual periods that begin after December 15, 2011. We are currently evaluating the impact on our consolidated financial statements.
 
In June 2011, the FASB issued an ASU relating to the presentation of other comprehensive income (“OCI”). This ASU does not change the items that are reported in OCI, but does remove the option to present the components of OCI within the statement of changes in equity. In addition, this ASU will require OCI presentation on the face of the financial statements. These changes are effective for interim and annual periods that begin after December 15, 2011, and are applied retrospectively to all periods presented. Early adoption is permitted. We are currently evaluating the impact that this ASU may have on our consolidated financial statements.


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In September 2011, the FASB issued a revised ASU relating to goodwill impairment tests. An entity is allowed to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value is less than its carrying amount. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. We are currently evaluating the impact that this ASU may have on our consolidated financial statements.
 
Note 3   Cash and Cash Equivalents and Investments
 
Our cash and cash equivalents, short-term and long-term investments and other receivables consisted of the following:
 
                 
    September 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Cash and cash equivalents
  $ 275,461     $ 641,702  
Short-term investments:
               
Trading equity securities
    11,576       19,630  
Available-for-sale equity securities
    56,654       79,698  
Available-for-sale debt securities
    51,629       60,160  
                 
Total short-term investments
    119,859       159,488  
Long-term investments and other receivables
    40,373       40,300  
                 
Total
  $ 435,693     $ 841,490  
                 


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Certain information related to our cash and cash equivalents and short-term investments follows:
 
                                                 
    September 30, 2011     December 31, 2010  
          Gross
    Gross
          Gross
    Gross
 
          Unrealized
    Unrealized
          Unrealized
    Unrealized
 
    Fair
    Holding
    Holding
    Fair
    Holding
    Holding
 
    Value     Gains     Losses     Value     Gains     Losses  
    (In thousands)  
 
Cash and cash equivalents
  $ 275,461     $     $     $ 641,702     $     $  
                                                 
Short-term investments:
                                               
Trading equity securities
    11,576       5,852             19,630       13,906        
                                                 
Available-for-sale equity securities
    56,654       16,065       (3,207 )     79,698       38,176       (2,274 )
                                                 
Available-for-sale debt securities:
                                               
Commercial paper and CDs
    1,160                   1,275              
Corporate debt securities
    44,600       14,421       (2,187 )     52,022       15,274       (18 )
Mortgage-backed debt securities
    367       19             372       16        
Mortgage-CMO debt securities
    2,797       31       (3 )     3,015       21       (6 )
Asset-backed debt securities
    2,705             (253 )     3,476             (268 )
                                                 
Total available-for-sale debt securities
    51,629       14,471       (2,443 )     60,160       15,311       (292 )
                                                 
Total available-for-sale securities
    108,283       30,536       (5,650 )     139,858       53,487       (2,566 )
                                                 
Total short-term investments
    119,859       36,388       (5,650 )     159,488       67,393       (2,566 )
                                                 
Total cash, cash equivalents and short-term investments
  $ 395,320     $ 36,388     $ (5,650 )   $ 801,190     $ 67,393     $ (2,566 )
                                                 
 
Certain information related to the gross unrealized losses of our cash and cash equivalents and short-term investments follows:
 
                                 
    As of September 30, 2011  
    Less Than 12 Months     More Than 12 Months  
          Gross
          Gross
 
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Loss     Value     Loss  
    (In thousands)  
 
Available-for-sale equity securities
  $ 24,874     $ 3,207     $     $  
Available-for-sale debt securities:(1)
                               
Corporate debt securities
    17,600       2,187              
Mortgage-CMO debt securities
                105       3  
Asset-backed debt securities
                2,705       253  
                                 
Total available-for-sale debt securities
    17,600       2,187       2,810       256  
                                 
Total
  $ 42,474     $ 5,394     $ 2,810     $ 256  
                                 
 
 
(1) Our unrealized losses on available-for-sale debt securities held for more than one year are comprised of various types of securities. Each of these securities has a rating ranging from “A” to “AAA” from


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Standard & Poor’s and ranging from “A2” to “Aaa” from Moody’s Investors Service and is considered of high credit quality. In each case, we do not intend to sell these investments, and it is less likely than not that we will be required to sell them to satisfy our own cash flow and working capital requirements. We believe that we will be able to collect all amounts due according to the contractual terms of each investment and, therefore, did not consider the decline in value of these investments to be other-than-temporary at September 30, 2011.
 
The estimated fair values of our corporate, mortgage-backed, mortgage-CMO and asset-backed debt securities at September 30, 2011, classified by time to contractual maturity, are shown below. Expected maturities differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties and we may elect to sell the securities prior to the contractual maturity date.
 
         
    Estimated
 
    Fair Value  
    September 30,
 
    2011  
    (In thousands)  
 
Debt securities:
       
Due in one year or less
  $ 1,160  
Due after one year through five years
     
Due in more than five years
    50,469  
         
Total debt securities
  $ 51,629  
         
 
Certain information regarding our debt and equity securities is presented below:
 
                 
    Nine Months Ended
 
    September 30,  
    2011     2010  
    (In thousands)  
 
Available-for-sale:
               
Proceeds from sales and maturities
  $ 1,124     $ 12,590  
Realized gains (losses), net
    (5 )     3,647  


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 4   Fair Value Measurements
 
The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2011. Our debt securities could transfer into or out of a Level 1 or 2 measure depending on the availability of independent and current pricing at the end of each quarter. During the three months ended September 30, 2011, there were no transfers of our financial assets and liabilities between Level 1 and 2 measures. Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Recurring Fair Value Measurements
 
                                 
    Fair Value as of September 30, 2011  
    Level 1     Level 2     Level 3     Total  
    (In thousands)  
 
Assets:
                               
Short-term investments:
                               
Available-for-sale equity securities — energy industry
  $ 56,654     $     $     $ 56,654  
Available-for-sale debt securities
                               
Commercial paper and CDs
    1,160                   1,160  
Corporate debt securities
          44,600             44,600  
Mortgage-backed debt securities
          367             367  
Mortgage-CMO debt securities
          2,797             2,797  
Asset-backed debt securities
    2,705                   2,705  
Trading securities — energy industry
    11,576                   11,576  
                                 
Total short-term investments
  $ 72,095     $ 47,764     $     $ 119,859  
                                 
Liabilities:
                               
Derivative contract
  $     $ 1,900     $     $ 1,900  
                                 
 
Nonrecurring Fair Value Measurements
 
Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily to goodwill, oil and gas financing receivables, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination, and asset retirement obligations.


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fair Value of Financial Instruments
 
The fair value of our financial instruments has been estimated in accordance with GAAP. The fair value of our long-term debt and subsidiary preferred stock is estimated based on quoted market prices or prices quoted from third-party financial institutions. The carrying and fair values of these liabilities were as follows:
 
                                 
    September 30, 2011     December 31, 2010  
    Carrying Value     Fair Value     Carrying Value     Fair Value  
    (In thousands)  
 
5.375% senior notes due August 2012(1)
  $ 274,448     $ 284,952     $ 273,977     $ 291,500  
6.15% senior notes due February 2018
    967,186       1,078,984       966,276       1,041,008  
9.25% senior notes due January 2019
    1,125,000       1,438,864       1,125,000       1,393,943  
5.00% senior notes due September 2020
    697,266       721,070       697,037       678,335  
4.625% senior notes due September 2021
    697,607       687,253              
0.94% senior exchangeable notes due May 2011
                1,378,178       1,403,315  
Subsidiary preferred stock
    69,188       68,625       69,188       68,625  
Revolving credit facilities
    600,000       600,000              
Other
    1,853       1,853       2,676       2,676  
                                 
    $ 4,432,548     $ 4,881,601     $ 4,512,332     $ 4,879,402  
                                 
 
 
(1) Includes $.4 million and $.7 million as of September 30, 2011 and December 31, 2010, respectively, related to the unamortized loss on an interest rate swap that was unwound during the fourth quarter of 2005.
 
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.
 
As of September 30, 2011, our short-term investments were carried at fair market value and included $108.3 million and $11.6 million in securities classified as available-for-sale and trading, respectively. As of December 31, 2010, our short-term investments were carried at fair market value and included $139.9 million and $19.6 million in securities classified as available-for-sale and trading, respectively. The carrying value of our long-term investments that are accounted for using the equity method of accounting approximates fair value. The fair value of these long-term investments totaled $6.0 million and $7.4 million as of September 30, 2011 and December 31, 2010, respectively. The carrying value of our oil and gas financing receivables included in long-term investments approximates fair value. The carrying value of our oil and gas financing receivables totaled $34.4 million and $32.9 million as of September 30, 2011 and December 31, 2010, respectively. Income and gains associated with our oil and gas financing receivables are recognized as operating revenues.
 
Note 5   Share-Based Compensation
 
We have several share-based employee compensation plans, which are more fully described in Note 6 Share-Based Compensation to the audited financial statements included in our 2010 Annual Report.
 
Total share-based compensation expense, which includes both stock options and restricted stock, totaled $9.0 million and $3.6 million for the three months ended September 30, 2011 and 2010, respectively, and


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
$17.2 million and $10.6 million for the nine months ended September 30, 2011 and 2010, respectively. Total share-based compensation is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Share-based compensation expense has been allocated to our various operating segments. See Note 12 Segment Information.
 
During the nine months ended September 30, 2011 and 2010, we awarded 1,049,540 and 475,667 shares of restricted stock, respectively, vesting over periods up to four years, to our employees and directors. These awards had an aggregate value at their grant date of $29.3 million and $10.6 million, respectively. The fair value of restricted stock that vested during the nine months ended September 30, 2011 and 2010 was $18.6 million and $23.0 million, respectively.
 
During the nine months ended September 30, 2011 and 2010, we awarded options, vesting over periods up to four years, to purchase 755,166 and 27,907, respectively, of our common shares to our employees and directors. The fair value of stock options granted during the nine months ended September 30, 2011 and 2010, respectively, was calculated using the Black-Scholes option pricing model and the following weighted-average assumptions:
 
                 
    Nine Months Ended
 
    September 30,  
    2011     2010  
 
Weighted-average fair value of options granted
  $ 6.53     $ 6.27  
Weighted-average risk free interest rate
    .66%       1.49%  
Dividend yield
    0%       0%  
Volatility(1)
    51.0%       40.62%  
Expected life
    4.0 years       4.0 years  
 
 
(1) Expected volatilities were based on implied volatilities from publicly traded options to purchase Nabors’ common shares, historical volatility of Nabors’ common shares and other factors
 
The total intrinsic value of stock options exercised during the nine months ended September 30, 2011 and 2010 was $15.8 million and $4.0 million, respectively. The total fair value of stock options that vested during the nine months ended September 30, 2011 and 2010 was $5.2 million and $5.6 million, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 6   Debt
 
Long-term debt consists of the following:
 
                 
    September 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
5.375% senior notes due August 2012
  $ 274,448     $ 273,977  
6.15% senior notes due February 2018
    967,186       966,276  
9.25% senior notes due January 2019
    1,125,000       1,125,000  
5.00% senior notes due September 2020
    697,266       697,037  
4.625% senior notes due September 2021
    697,607        
0.94% senior exchangeable notes due May 2011
          1,378,178  
Revolving credit facilities
    600,000        
Other
    1,853       2,676  
                 
      4,363,360       4,443,144  
Less: current portion
    275,227       1,379,018  
                 
    $ 4,088,133     $ 3,064,126  
                 
 
$700 million Senior Notes due September 2021
 
On August 23, 2011, Nabors Delaware completed a private placement of $700 million aggregate principal amount of 4.625% senior notes due 2021, which are unsecured and fully and unconditionally guaranteed by us. The notes are subject to registration rights. The notes were resold by the initial purchasers to qualified institutional buyers under Rule 144A and to certain investors outside of the United States under Regulation S of the Securities Act. The notes pay interest semiannually on March 15 and September 15, beginning on March 15, 2012, and will mature on September 15, 2021.
 
The notes rank equal in right of payment to all of Nabors Delaware’s other existing and future senior unsubordinated indebtedness, and senior in right of payment to all of Nabors Delaware’s existing and future senior subordinated and subordinated indebtedness. Our guarantee of the notes is unsecured and ranks equal in right of payments to all of our unsecured and unsubordinated indebtedness from time to time outstanding. The indenture governing the notes includes covenants customary for transactions of this type that, subject to significant exceptions, limit the ability of us and our subsidiaries to, among other things, incur certain liens and enter into sale and leaseback transactions. In the event of a change of control triggering event, as defined in the indenture, the holders of the notes may require Nabors Delaware to purchase all or a portion of the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any. The notes are redeemable in whole or in part at any time at the option of Nabors Delaware at a redemption price, plus accrued and unpaid interest, as specified in the indenture. Nabors Delaware used a portion of the proceeds to pay back borrowings on our revolving credit facilities and for other general corporate purposes.
 
Senior Exchangeable Notes
 
On May 16, 2011, the remaining aggregate principal amount of $1.4 billion of our 0.94% senior exchangeable notes matured and we redeemed them with $1.2 billion of borrowings under our revolving credit facilities and available cash.
 
Revolving Credit Facilities
 
As of September 30, 2011, we had $800 million of remaining availability from a combined total of $1.4 billion under our existing revolving credit facilities. The existing revolving credit facilities mature in


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
September 2014, and can be used for general corporate purposes, including capital expenditures and working capital. The weighted average interest rate on current borrowings was 1.8%. We fully and unconditionally guarantee the obligations under all of these credit facilities.
 
Nabors Delaware has two senior unsecured revolving credit facilities, which total $1.35 billion, and, as of September 30, 2011, $550 million had been utilized. A third unsecured revolving credit facility for $50 million exists with one of our other subsidiaries and, as of September 30, 2011, had been fully utilized. We have the option to increase the aggregate principal amount of commitments by an additional $200 million by either adding new lenders to these facilities or by requesting existing lenders under the facilities to increase their commitments (in each case with the consent of the new lenders or the increasing lenders).
 
Borrowings under the senior unsecured revolving credit facilities bear interest, at Nabors Delaware’s option, for either (x) the “Base Rate” (as defined below) plus the applicable interest margin, calculated on the basis of the actual number of days elapsed in a year of 365 days and payable quarterly in arrears or (y) interest periods of one, two, three or six months at an annual rate equal to the LIBOR for the corresponding deposits of U.S. dollars, plus the applicable interest margin. The “Base Rate” is defined, for any day, as a fluctuating rate per annum equal to the highest of (i) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of 1%, (ii) the prime commercial lending rate of the administrative agent, as established from time to time and (iii) LIBOR for an interest period of one month beginning on such day plus 1%.
 
The revolving credit facilities contain various covenants and restrictive provisions which limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain a net funded indebtedness to total capitalization ratio, as defined in each agreement. We were in compliance with all covenants under the agreement at September 30, 2011. If we should fail to perform our obligations under the covenants, the revolving credit commitment could be terminated and any outstanding borrowings under the facility could be declared immediately due and payable.
 
Note 7   Common Shares
 
During the nine months ended September 30, 2011 and 2010, our employees exercised vested options to acquire 1.0 million and .5 million of our common shares, resulting in proceeds of $12.2 million and $5.4 million, respectively. For the each of the nine months ended September 30, 2011 and 2010, we withheld .1 million of our common shares with a fair value of $2.6 million and $1.9 million, respectively, to satisfy tax withholding obligations in connection with the vesting of stock awards.
 
During the nine months ended September 30, 2010, our outstanding share count increased by 103,925 due to share settlements of stock options exercised by our Chairman and then Chief Executive Officer, Eugene M. Isenberg, and our Deputy Chairman, President and then Chief Operating Officer, Anthony G. Petrello. As part of these transactions, unexercised vested stock options were surrendered to Nabors with a value of approximately $5.9 million to satisfy the option exercise price and related income taxes.
 
Note 8   Commitments and Contingencies
 
Commitments
 
Employment Contracts
 
The employment agreements for each of Messrs. Isenberg and Petrello provide for an extension of the employment term through March 30, 2013, with automatic one-year extensions beginning April 1, 2011, unless either party gives notice of nonrenewal.
 
  •  In the event of Mr. Isenberg’s Termination Without Cause (including in the event of a change of control), or his death or disability, either he or his estate would be entitled to receive a payment of $100 million within 30 days thereafter.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
  •  In the event of Mr. Petrello’s death or disability, either he or his estate would be entitled to receive a payment of $50 million within 30 days; if he experienced a Termination Without Cause (a change of control) or Constructive Termination Without Cause, either he or his estate would be entitled to a payment equal to three times the average of his base salary and annual bonus (calculated as though the bonus formula under his employment agreement as amended in April 2009 had been in effect) during the three fiscal years preceding the termination. If, by way of example, Mr. Petrello were Terminated Without Cause subsequent to September 30, 2011, his payment would be approximately $34 million. The formula will be further reduced to two times the average stated above effective April 1, 2015.
 
As of September 30, 2011, we do not have insurance to cover, and we have not recorded an expense or accrued a liability relating to, these potential obligations. See Note 17 Commitments and Contingencies to our 2010 Annual Report for additional discussion and description of Messrs. Isenberg and Petrello’s employment agreements. See Note 14 Subsequent Event for discussion of recent developments related to the potential obligation to Mr. Isenberg.
 
Contingencies
 
Income Tax Contingencies
 
We are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly audited by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than what is reflected in income tax provisions and accruals. An audit or litigation could materially affect our financial position, income tax provision, net income, or cash flows in the period or periods challenged.
 
It is possible that future changes to tax laws (including tax treaties) could impact our ability to realize the tax savings recorded to date as well as future tax savings, resulting from our 2002 corporate reorganization. See Note 12 Income Taxes to our 2010 Annual Report for additional discussion.
 
On September 14, 2006, Nabors Drilling International Limited, one of our wholly owned Bermuda subsidiaries (“NDIL”), received a Notice of Assessment from Mexico’s federal tax authorities in connection with the audit of NDIL’s Mexico branch for 2003. The notice proposes to deny depreciation expense deductions relating to drilling rigs operating in Mexico in 2003. The notice also proposes to deny a deduction for payments made to an affiliated company for the procurement of labor services in Mexico. The amount assessed was approximately $19.8 million (including interest and penalties). Nabors and its tax advisors previously concluded that the deductions were appropriate and more recently that the government’s position lacks merit. NDIL’s Mexico branch took similar deductions for depreciation and labor expenses from 2004 to 2008. On June 30, 2009, the government proposed similar assessments against the Mexico branch of another wholly owned Bermuda subsidiary, Nabors Drilling International II Ltd. (“NDIL II”) for 2006. We anticipate that a similar assessment will eventually be proposed against NDIL for 2005 through 2008 and against NDIL II for 2007 to 2010. We believe that the potential assessments will range from $6 million to $26 million per year for the period from 2005 to 2009, and in the aggregate, would be approximately $90 million to $95 million. Although we believe that any assessments related to the 2003 and 2005 to 2010 years lack merit, a reserve has been recorded in accordance with GAAP. The statute of limitations for NDIL’s 2004 tax year expired. Accordingly, during the fourth quarter of 2010, we released $7.4 million from our tax reserves, which represented the reserve recorded for that tax year. If these additional assessments were made and we ultimately did not prevail, we would be required to recognize additional tax for the amount in excess of the current reserve.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Self-Insurance
 
We estimate the level of our liability related to insurance and record reserves for these amounts in our consolidated financial statements. Our estimates are based on the facts and circumstances specific to existing claims and our past experience with similar claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid. Although we believe our insurance coverage and reserve estimates are reasonable, a significant accident or other event that is not fully covered by insurance or contractual indemnity could occur and could materially affect our financial position and results of operations for a particular period.
 
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 reasonably 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.
 
On July 5, 2007, we received an inquiry from the U.S. Department of Justice relating to its investigation of one of our vendors and compliance with the Foreign Corrupt Practices Act. The inquiry relates to transactions with and involving Panalpina, which provided freight forwarding and customs clearance services to some of our affiliates. To date, the inquiry has focused on transactions in Kazakhstan, Saudi Arabia, Algeria and Nigeria. The Audit Committee of our Board of Directors has engaged outside counsel to review some of our transactions with this vendor, has received periodic updates at its regularly scheduled meetings, and the Chairman of the Audit Committee has received updates between meetings as circumstances warrant. The investigation includes a review of certain amounts paid to and by Panalpina in connection with obtaining permits for the temporary importation of equipment and clearance of goods and materials through customs. Both the SEC and the Department of Justice have been advised of our investigation. The ultimate outcome of this investigation or the effect of implementing any further measures that may be necessary to ensure full compliance with applicable laws cannot be determined at this time.
 
A court in Algeria entered a judgment of approximately $19.7 million against us related to alleged customs infractions in 2009. We believe we did not receive proper notice of the judicial proceedings, and that the amount of the judgment is excessive. We have asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court. Based upon our understanding of applicable law and precedent, we believe that this challenge will be successful. We do not believe that a loss is probable and have not accrued any amounts related to this matter. However, the ultimate resolution and the timing thereof are uncertain. If we are ultimately required to pay a fine or judgment related to this matter, the amount of the loss could range from approximately $140,000 to $19.7 million.
 
In August 2010, Nabors and its wholly owned subsidiary, Diamond Acquisition Corp. (“Diamond”), were sued in three putative shareholder class actions relating to the Superior acquisition. The complaints sought injunctive relief, including an injunction against the consummation of the Superior acquisition, monetary damages, and attorney’s fees and costs. Two of the cases were dismissed. The remaining case, Jordan Denney,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Individually and on Behalf of All Others Similarly Situated v. David E. Wallace, et al., Civil Action No. 10-1154, in the United States District Court for the Western District of Pennsylvania, was settled, and the Court approved the settlement in September 2011. Superior’s insurers paid $475,000 in attorneys’ fees in full settlement.
 
In March 2011, the Court of Ouargla (in Algeria), sitting at first instance, entered a judgment of approximately $39.1 million against NDIL 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 NDIL 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, and is not payable pending appeal. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals has upheld the lower court’s ruling, and we have appealed the matter to the Algeria Supreme Court. While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, and interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $31.1 million in excess of amounts accrued.
 
On September 21, 2011, we received an informal inquiry from the SEC related to perquisites and personal benefits received by the officers and directors of Nabors, including their use of non-commercial aircraft. Our Audit Committee and Board of Directors have been apprised of this inquiry and we are cooperating with the SEC. The ultimate outcome of this process cannot be determined at this time.
 
Off-Balance Sheet Arrangements (Including Guarantees)
 
We are a party to transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources. The most significant of these off-balance sheet arrangements involve agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. In addition, we have provided indemnifications, which serve as guarantees, to some third parties. These guarantees include indemnification provided by 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  
    Remainder
                         
    of 2011     2012     2013     Thereafter     Total  
    (In thousands)  
 
Financial standby letters of credit and other financial surety instruments
  $ 35,563     $ 78,009     $     $     $ 113,572  


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 9   Earnings (Losses) Per Share
 
A reconciliation of the numerators and denominators of the basic and diluted earnings (losses) per share computations is as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands, except per share amounts)  
 
Net income (loss) (numerator):
                               
Income (loss) from continuing operations, net of tax
  $ 82,204     $ (31,563 )   $ 234,678     $ 55,927  
Less: net (income) loss attributable to noncontrolling interest
    (708 )     (453 )     355       1,208  
                                 
Adjusted income (loss) from continuing operations, net of tax — basic
    81,496       (32,016 )     235,033       57,135  
Add: interest expense on assumed conversion of our 0.94% senior exchangeable notes due 2011, net of tax(1)
                       
                                 
Adjusted net income (loss) from continuing operations, net of tax — diluted
  $ 81,496     $ (32,016 )   $ 235,033     $ 57,135  
                                 
Earnings (losses) per share:
                               
Basic from continuing operations
  $ .28     $ (.11 )   $ .82     $ .21  
                                 
Diluted from continuing operations
  $ .28     $ (.11 )   $ .80     $ .19  
                                 
Income (loss) from discontinued operations, net of tax
  $ (7,240 )   $ (7,591 )   $ 114,496     $ (12,921 )
                                 
Earnings (losses) per share:
                               
Basic from discontinued operations
  $ (.02 )   $ (.03 )   $ .40     $ (.05 )
                                 
Diluted from discontinued operations
  $ (.03 )   $ (.03 )   $ .39     $ (.04 )
                                 
Shares (denominator):
                               
Weighted-average number of shares outstanding — basic
    287,487       285,282       286,971       285,045  
Net effect of dilutive stock options, warrants and restricted stock awards based on the if-converted method
    4,499             6,020       4,802  
Assumed conversion of our 0.94% senior exchangeable notes due 2011(1)
                       
                                 
Weighted-average number of shares outstanding — diluted
    291,986       285,282       292,991       289,847  
                                 
 
 
(1) In May 2011, the remaining aggregate principal amount of our 0.94% senior exchangeable notes matured and we redeemed them with $1.2 billion of borrowings under our revolving credit facilities and available cash. Diluted earnings (losses) per share for the three and nine months ended September 30, 2010 exclude any incremental shares that would have been issuable upon exchange of these notes based on a calculation using our stock price. Our stock price did not exceed the threshold during the period ending September 30, 2010.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options and warrants with exercise prices greater than the average market price of our common shares, because their inclusion would be anti-dilutive and because they are not considered participating securities. The average number of options and warrants that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share in the future was 10,271,673 and 32,543,395 shares during the three months ended September 30, 2011 and 2010, respectively, and 7,678,536 and 14,108,644 shares during the nine months ended September 30, 2011 and 2010, respectively. In any period during which the average market price of our common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting. Restricted stock will be included in our basic and diluted earnings (losses) per share computation using the two-class method of accounting in all periods because such stock is considered participating securities.
 
Note 10   Supplemental Balance Sheet, Income Statement and Cash Flow Information
 
Accrued liabilities include the following:
 
                 
    September 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Accrued compensation
  $ 147,122     $ 116,680  
Deferred revenue
    131,695       88,389  
Other taxes payable
    67,222       25,227  
Workers’ compensation liabilities
    21,489       31,944  
Interest payable
    39,456       89,276  
Due to joint venture partners
    6,041       6,030  
Warranty accrual
    4,422       3,376  
Litigation reserves
    24,513       12,301  
Professional fees
    5,567       3,222  
Current deferred tax liability
          1,027  
Other accrued liabilities
    12,416       16,820  
                 
    $ 459,943     $ 394,292  
                 
 
Investment income (loss) includes the following:
 
                 
    Nine Months Ended
 
    September 30,  
    2011     2010  
    (In thousands)  
 
Interest and dividend income
  $ 5,338     $ 5,525  
Gains (losses) on investments, net(1)
    6,718 (2)     (6,501 )
                 
    $ 12,056     $ (976 )
                 
 
 
(1) Includes unrealized losses of $8.1 million and $10.1 million, respectively, from our trading securities.
 
(2) Includes $12.9 million realized gain related to one of our overseas fund investments classified as long-term investments, partially offset by unrealized losses discussed above.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Losses (gains) on sales and retirements of long-lived assets and other expense (income), net includes the following:
 
                 
    Nine Months Ended
 
    September 30,  
    2011     2010  
    (In thousands)  
 
Losses (gains) on sales and retirements of long-lived assets
  $ (695 )   $ 4,211  
Gain on acquisition of equity method investment
    (12,178 )(1)      
Acquisition-related costs
    151       7,000  
Litigation expenses
    12,221       3,398  
Foreign currency transaction losses (gains)
    606       16,839 (2)
Losses (gains) on derivative instruments
    (1,540 )     707  
Losses (gains) on debt extinguishment
    58       7,042  
Other losses (gains)
    821       1,601  
                 
    $ (556 )   $ 40,798  
                 
 
 
(1) On July 29, 2011, we paid $65 million in cash to acquire the remaining 50 percent equity interest of Peak, making it a wholly owned subsidiary on this date. Peak operates in Alaska, providing construction and rig moving services in icy conditions as well as light and heavy-duty moving, hauling and maintenance services. Previously, we held a 50 percent equity interest with a carrying value of $38.1 million that we had accounted for as an equity method investment. As a result of the acquisition, we have consolidated the assets and liabilities of Peak during the third quarter based on their respective fair values, in accordance with Topic 805 — Business Combinations. The excess of the estimated fair value of the assets and liabilities over the net carrying value of our previously held equity interest resulted in a gain of $12.2 million.
 
(2) Includes $8.2 million foreign currency exchange losses for operations in Venezuela related to the Venezuela government’s decision to devalue its currency in January 2010.
 
Comprehensive loss totaled $33.7 million and $12.0 million for the three months ended September 30, 2011 and 2010, respectively.
 
Impairments and other charges included the following:
 
                 
    Nine Months Ended
 
    September 30,  
    2011     2010  
    (In thousands)  
 
Provision for retirement of long-lived assets
  $ 98,072     $ 23,213  
Impairment of long-lived assets
          34,832  
Impairment of oil and gas-related assets
          54,347  
Goodwill impairments
          10,707  
                 
Impairments and other charges
  $ 98,072     $ 123,099  
                 
 
Provisions for retirement of long-lived assets
 
During the nine months ended September 30, 2011, we recorded a provision for retirement of long-lived assets totaling $98.1 million in multiple operating segments. This related to the decommissioning and retirement of one jackup rig, 116 land rigs, and a number of rigs for well-servicing and trucks. Our U.S. Lower 48 Land Drilling, International and U.S. Land Well-servicing operations recorded $63.2 million, $26.1 million


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and $8.9 million, respectively. These assets were deemed to be functionally or economically non-competitive for today’s market and are being dismantled for parts and scrap.
 
During the nine months ended September 30, 2010, we recorded a provision for retirement of long-lived assets totaling $23.2 million related to the abandonment of certain rig components, comprised of engines, top-drive units, building modules and other equipment that had become obsolete or inoperable in our U.S. Lower 48 Land Drilling, U.S. Well-servicing and U.S. Offshore operating segments.
 
In addition, we recognized $34.8 million in impairment charges recorded during the three months ended September 30, 2010 which included $27.3 million related to the impairment of some jack-up rigs in our U.S. Offshore operating segment and $7.5 million to our aircraft and some drilling equipment in Nabors Blue Sky Ltd. These impairment charges stemmed from annual impairment tests on long-lived assets.
 
The impairments and other charges recognized during 2011 and 2010 were determined necessary as a result of continued lower commodity prices and uncertainty in the oil and gas environment and its related impact on drilling and well-servicing activity and our dayrates. A prolonged period of legislative uncertainty in our U.S. Offshore operations, or continued period of lower natural gas and oil prices and its potential impact on our utilization and dayrates could result in the recognition of future impairment charges to additional assets if future cash flow estimates, based upon information then available to management, indicate that the carrying value of those assets may not be recoverable.
 
Impairments of oil and gas-related assets
 
During the three months ended September 30, 2010, we recognized impairments of $54.3 million related to an impairment of an oil and gas financing receivable as a result of the continued commodity price deterioration in the Barnett Shale area of north central Texas. We determined that this impairment was necessary using estimates and assumptions based on estimated cash flows for proved and probable reserves and current natural gas prices. We believe the estimates used provided a reasonable estimate of current fair value. We determined that this represented a Level 3 fair value measurement. No impairment was recorded in the nine months ended September 30, 2011. However, further protraction or continued period of lower commodity prices could result in recognition of future impairment charges.
 
Goodwill impairments
 
During the three months ended September 30, 2010, we recognized an impairment of approximately $10.7 million relating to our goodwill balance of our U.S. Offshore operating segment. The impairment charge stemmed from our annual impairment test on goodwill, which compared the estimated fair value of each of our reporting units to its carrying value. The estimated fair value of our U.S. Offshore segment was determined using discounted cash flow models involving assumptions based on our utilization of rigs and revenues as well as direct costs, general and administrative costs, depreciation, applicable income taxes, capital expenditures and working capital requirements. We determined that the fair value estimated for purposes of this test represented a Level 3 fair value measurement. The impairment charge was deemed necessary due to the uncertainty of utilization of some of our rigs as a result of changes in our customers’ plans for future drilling operations in the Gulf of Mexico. No impairment was recorded in the nine months ended September 30, 2011. However, a significantly prolonged period of lower oil and natural gas prices or changes in laws and regulations could adversely affect the demand for and prices of our services, which could result in future goodwill impairment charges for other reporting units due to the potential impact on our estimate of our future operating results.


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 11   Discontinued Operations
 
We determined that the plan of sale criteria in the ASC Topic relating to the Presentation of Financial Statements for Assets Sold or Held for Sale had been met during the third quarter of 2010 for our oil and gas assets in the Horn River basin in Canada and in the Llanos basin in Colombia. At September 30, 2010, these assets also included our 49.7% and 50.0% ownership interests in our investments of Remora Energy International, LP (“Remora”) in Colombia and Stone Mountain Ventures Partnership (“SMVP”) in Canada, respectively, which we had accounted for using the equity method of accounting. All of these assets are included in our oil and gas operating segment. Accordingly, we reclassified wholly owned oil and gas assets from our property, plant and equipment, net, as well as our investment balances for Remora and SMVP from investments in unconsolidated affiliates to assets held for sale, in our consolidated balance sheet at September 30, 2010.
 
During the nine months ended September 30, 2011, we sold some of our wholly owned oil and gas assets in Colombia to an unrelated third party. We received proceeds of $89.2 million from this sale and recognized a gain of approximately $39.9 million. Additionally, during the nine months ended September 30, 2011, Remora completed sales of their oil and gas assets in Colombia. Remora received gross proceeds of approximately $279.0 million from these sales and has made cash distributions to us in the amount of $143.0 million with a final distribution expected upon dissolution of the joint venture.
 
In June 2011, the equity owners of SMVP dissolved the partnership and a proportionate share of the assets and liabilities were conveyed to us in exchange for our ownership interest. The exchange was not a material transaction to us and we accounted for it as a business combination. We continue to market these assets for sale and believe that these assets are properly reflected in our assets held for sale balances at September 30, 2011 and December 31, 2010.
 
The operating results from our oil and gas assets in Canada and Colombia that we have classified as held for sale have been retroactively presented as discontinued operations in the accompanying unaudited consolidated balance sheets and statements of income (loss) and the respective accompanying notes to the consolidated financial statements. Our condensed statements of income (loss) from discontinued operations for the three and nine months ended September 30, 2011 and 2010 were as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
Condensed Statements of Income (Loss) from Discontinued
  September 30,     September 30,  
Operations   2011     2010     2011     2010  
    (In thousands)  
 
Operating revenues and Earnings (losses) from unconsolidated affiliates
  $ 3,684     $ 3,556     $ 101,966 (1)   $ 20,680  
                                 
Income (loss) from discontinued operations:
                               
Income (loss) from discontinued operations
  $ (8,534 )   $ (8,864 )   $ 71,039     $ (13,432 )
Gain (loss) on disposal of wholly owned assets
                39,944        
Less: income tax expense (benefit)
    (1,294 )     (1,273 )     (3,513 )     (511 )
                                 
Income (loss) from discontinued operations, net of tax
  $ (7,240 )   $ (7,591 )   $ 114,496     $ (12,921 )
                                 
 
 
(1) Includes approximately $85 million of equity in earnings during the nine months ended September 30, 2011 for our proportionate share of Remora’s net income, inclusive of the gains recognized for asset sales during the first nine months of 2011.


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 12   Segment Information
 
The following table sets forth financial information with respect to our reportable segments:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
Operating revenues and Earnings (losses) from unconsolidated affiliates from continuing operations:(1)
                               
Contract Drilling:(2)
                               
U.S. Lower 48 Land Drilling
  $ 430,895     $ 350,348     $ 1,214,447     $ 925,262  
U.S. Land Well-servicing
    189,356       119,127       503,752       321,978  
U.S. Offshore
    46,069       26,504       116,807       103,680  
Alaska
    27,027       45,920       100,678       139,099  
Canada
    145,587       85,728       406,004       262,043  
International
    281,686       288,535       809,394       800,886  
                                 
Subtotal Contract Drilling(3)
    1,120,620       916,162       3,151,082       2,552,948  
Pressure Pumping(4)
    343,723       61,611       867,512       61,611  
Oil and Gas(5)
    43,104       11,280       74,987       31,682  
Other Operating Segments(6)(7)
    199,604       130,392       483,478       333,654  
Other reconciling items(8)
    (48,537 )     (38,342 )     (156,780 )     (94,930 )
                                 
Total
  $ 1,658,514     $ 1,081,103     $ 4,420,279     $ 2,884,965  
                                 
Adjusted income (loss) derived from operating activities from continuing operations:(1)(9)
                               
Contract Drilling:
                               
U.S. Lower 48 Land Drilling
  $ 104,877     $ 70,452     $ 284,203     $ 188,907  
U.S. Land Well-servicing
    22,839       9,049       50,488       19,465  
U.S. Offshore
    2,457       (1,090 )     (2,579 )     14,387  
Alaska
    3,021       14,299       22,328       40,644  
Canada
    21,604       1,013       58,084       6,398  
International
    29,015       64,379       100,363       182,930  
                                 
Subtotal Contract Drilling(3)
    183,813       158,102       512,887       452,731  
Pressure Pumping(4)
    65,052       11,987       152,655       11,987  
Oil and Gas(5)
    23,841       1,037       28,030       5,654  
Other Operating Segments(6)(7)
    22,012       17,969       41,791       33,176  
Other reconciling items(10)
    (35,430 )     (24,676 )     (110,184 )     (70,559 )
                                 
Total adjusted income derived from operating activities
  $ 259,288     $ 164,419     $ 625,179     $ 432,989  
Interest expense
    (57,907 )     (66,973 )     (195,570 )     (199,035 )
Investment income (loss)
    738       (733 )     12,056       (976 )
Gains (losses) on sales and retirements of long-lived assets and other income (expense), net
    12,157       (9,407 )     556       (40,798 )
Impairments and other charges
    (98,072 )     (123,099 )     (98,072 )     (123,099 )
                                 
Income (loss) from continuing operations before income taxes
    116,204       (35,793 )     344,149       69,081  
Income tax expense (benefit)
    33,250       (4,230 )     107,221       13,154  
Subsidiary preferred stock dividend
    750             2,250        
                                 
Income (loss) from continuing operations, net of tax
    82,204       (31,563 )     234,678       55,927  
Income (loss) from discontinued operations, net of tax
    (7,240 )     (7,591 )     114,496       (12,921 )
                                 
Net income (loss)
    74,964       (39,154 )     349,174       43,006  
Less: Net income (loss) attributable to noncontrolling interest
    (708 )     (453 )     355       1,208  
                                 
Net income (loss) attributable to Nabors
  $ 74,256     $ (39,607 )   $ 349,529     $ 44,214  
                                 
 


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
    September 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Total assets:
               
Contract Drilling:(11)
               
U.S. Lower 48 Land Drilling
  $ 3,047,093     $ 2,762,362  
U.S. Land Well-servicing
    768,442       630,518  
U.S. Offshore
    385,087       379,292  
Alaska
    281,252       313,123  
Canada
    919,341       1,065,268  
International
    3,594,294       3,279,763  
                 
Subtotal Contract Drilling
    8,995,509       8,430,326  
Pressure Pumping(4)
    1,353,403       1,163,236  
Oil and Gas(12)
    848,135       805,410  
Other Operating Segments(13)
    675,908       539,373  
Other reconciling items(10) (14)
    445,391       708,224  
                 
Total assets
  $ 12,318,346     $ 11,646,569  
                 
 
 
(1) All information presents the operating activities of oil and gas assets in the Horn River basin in Canada and in the Llanos basin in Colombia as discontinued operations.
 
(2) These segments include our drilling, well-servicing and workover operations on land and offshore.
 
(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(.9) million and $.6 million for the three months ended September 30, 2011 and 2010, respectively, and $3.0 million and $3.7 million for the nine months ended September 30, 2011 and 2010, respectively.
 
(4) Includes operating results of our Pressure Pumping operating segment for the period September 10 through September 30, 2010 and for the three and nine months ended September 30, 2011.
 
(5) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $34.9 million and $6.8 million for the three months ended September 30, 2011 and 2010, respectively, and $56.3 million and $14.5 million for the nine months ended September 30, 2011 and 2010, respectively.
 
(6) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.
 
(7) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(.3) million and $4.4 million for the three months ended September 30, 2011 and 2010, respectively, and $0 and $10.1 million for the nine months ended September 30, 2011 and 2010, respectively.
 
(8) Represents the elimination of inter-segment transactions.
 
(9) Adjusted income (loss) derived from operating activities is computed by subtracting direct costs, general and administrative expenses, depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings (losses) from unconsolidated affiliates. Such amounts should not be used as a substitute for those amounts reported under 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 within the above table.

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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(10) Represents the elimination of inter-segment transactions and unallocated corporate expenses.
 
(11) Includes $57.9 million and $54.8 million of investments in unconsolidated affiliates accounted for using the equity method as of September 30, 2011 and December 31, 2010, respectively.
 
(12) Includes $234.6 million and $146.5 million investments in unconsolidated affiliates accounted for using the equity method as of September 30, 2011 and December 31, 2010, respectively.
 
(13) Includes $28.0 million and $64.5 million of investments in unconsolidated affiliates accounted for using the equity method as of September 30, 2011 and December 31, 2010, respectively.
 
(14) Includes $2.5 million and $1.9 million of investments in unconsolidated affiliates accounted for using the cost method as of September 30, 2011 and December 31, 2010, respectively.
 
Note 13   Condensed Consolidating Financial Information
 
Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware. 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 September 30, 2011 and December 31, 2010, statements of income (loss) for the three and nine months ended September 30, 2011 and 2010 and the consolidating statements of cash flows for the nine months ended September 30, 2011 and 2010 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt securities guaranteed by Nabors, (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (e) Nabors on a consolidated basis.


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Balance Sheets
 
                                         
    September 30, 2011  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
ASSETS
Current assets:
                                       
Cash and cash equivalents
  $ 1,156     $ 22     $ 274,283     $     $ 275,461  
Short-term investments
                119,859             119,859  
Assets held for sale
                267,911             267,911  
Accounts receivable, net
                1,397,725             1,397,725  
Inventory
                233,298             233,298  
Deferred income taxes
                83,388             83,388  
Other current assets
    50       1,140       165,512             166,702  
                                         
Total current assets
    1,206       1,162       2,541,976             2,544,344  
Long-term investments and other receivables
                40,373             40,373  
Property, plant and equipment, net
          41,656       8,535,557             8,577,213  
Goodwill
                501,297             501,297  
Intercompany receivables
    162,615             537,881       (700,496 )      
Investment in unconsolidated affiliates
    5,472,298       6,069,063       1,810,558       (13,028,853 )     323,066  
Other long-term assets
          33,402       298,651             332,053  
                                         
Total assets
  $ 5,636,119     $ 6,145,283     $ 14,266,293     $ (13,729,349 )   $ 12,318,346  
                                         
 
LIABILITIES AND EQUITY
Current liabilities:
                                       
Current portion of long-term debt
  $     $ 274,447     $ 780     $     $ 275,227  
Trade accounts payable
    1       148       658,543             658,692  
Accrued liabilities
    4,306       40,586       415,051             459,943  
Income taxes payable
                21,903             21,903  
                                         
Total current liabilities
    4,307       315,181       1,096,277             1,415,765  
Long-term debt
          4,037,060       51,073             4,088,133  
Other long-term liabilities
          32,813       187,249             220,062  
Deferred income taxes
          30,225       851,434             881,659  
Intercompany payable
          651,883       48,613       (700,496 )      
                                         
Total liabilities
    4,307       5,067,162       2,234,646       (700,496 )     6,605,619  
                                         
Subsidiary preferred stock
                69,188             69,188  
                                         
Shareholders’ equity
    5,631,812       1,078,121       11,950,732       (13,028,853 )     5,631,812  
Noncontrolling interest
                11,727             11,727  
                                         
Total equity
    5,631,812       1,078,121       11,962,459       (13,028,853 )     5,643,539  
                                         
Total liabilities and equity
  $ 5,636,119     $ 6,145,283     $ 14,266,293     $ (13,729,349 )   $ 12,318,346  
                                         
 


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    December 31, 2010  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
ASSETS
Current assets:
                                       
Cash and cash equivalents
  $ 10,847     $ 20     $ 630,835     $     $ 641,702  
Short-term investments
                159,488             159,488  
Assets held for sale
                352,048             352,048  
Accounts receivable, net
                1,116,510             1,116,510  
Inventory
                158,836             158,836  
Deferred income taxes
                31,510             31,510  
Other current assets
    50       16,366       136,420             152,836  
                                         
Total current assets
    10,897       16,386       2,585,647             2,612,930  
Long-term investments and other receivables
                40,300             40,300  
Property, plant and equipment, net
          44,270       7,771,149             7,815,419  
Goodwill
                494,372             494,372  
Intercompany receivables
    160,250             322,697       (482,947 )      
Investment in unconsolidated affiliates
    5,160,800       5,814,219       1,665,459       (12,372,755 )     267,723  
Other long-term assets
          36,538       379,287             415,825  
                                         
Total assets
  $ 5,331,947     $ 5,911,413     $ 13,258,911     $ (12,855,702 )   $ 11,646,569  
                                         
 
LIABILITIES AND EQUITY
Current liabilities:
                                       
Current portion of long-term debt
  $     $ 1,378,178     $ 840     $     $ 1,379,018  
Trade accounts payable
                355,282             355,282  
Accrued liabilities
    3,785       89,480       301,027             394,292  
Income taxes payable
          6,859       18,929             25,788  
                                         
Total current liabilities
    3,785       1,474,517       676,078             2,154,380  
Long-term debt
          3,062,291       1,835             3,064,126  
Other long-term liabilities
          12,787       232,978             245,765  
Deferred income taxes
          71,815       698,432             770,247  
Intercompany payable
          301,451       181,496       (482,947 )      
                                         
Total liabilities
    3,785       4,922,861       1,790,819       (482,947 )     6,234,518  
                                         
Subsidiary preferred stock
                69,188             69,188  
                                         
Shareholders’ equity
    5,328,162       988,552       11,384,203       (12,372,755 )     5,328,162  
Noncontrolling interest
                14,701             14,701  
                                         
Total equity
    5,328,162       988,552       11,398,904       (12,372,755 )     5,342,863  
                                         
Total liabilities and equity
  $ 5,331,947     $ 5,911,413     $ 13,258,911     $ (12,855,702 )   $ 11,646,569  
                                         

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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Statements of Income (Loss)
 
                                         
    Three Months Ended September 30, 2011  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
Revenues and other income:
                                       
Operating revenues
  $     $     $ 1,624,791     $     $ 1,624,791  
Earnings (losses) from unconsolidated affiliates
                33,723             33,723  
Earnings (losses) from consolidated affiliates
    77,212       111,096       87,037       (275,345 )      
Investment income (loss)
                738             738  
Intercompany interest income
          16,615             (16,615 )      
                                         
Total revenues and other income
    77,212       127,711       1,746,289       (291,960 )     1,659,252  
                                         
Costs and other deductions:
                                       
Direct costs
                1,030,231             1,030,231  
General and administrative expenses
    2,809       154       119,557       (148 )     122,372  
Depreciation and amortization
          872       233,962             234,834  
Depletion
                11,789             11,789  
Interest expense
          64,655       (6,748 )           57,907  
Intercompany interest expense
                16,615       (16,615 )      
Losses (gains) on sales and retirements of long-lived assets and other expense (income), net
    147       (574 )     (11,878 )     148       (12,157 )
Impairments and other charges
                98,072             98,072  
                                         
Total costs and other deductions
    2,956       65,107       1,491,600       (16,615 )     1,543,048  
                                         
Income (loss) from continuing operations before income taxes
    74,256       62,604       254,689       (275,345 )     116,204  
Income tax expense (benefit)
          (17,942 )     51,192             33,250  
Subsidiary preferred stock dividend
                750             750  
                                         
Income (loss) from continuing operations, net of tax
    74,256       80,546       202,747       (275,345 )     82,204  
Income (loss) from discontinued operations, net of tax
                (7,240 )           (7,240 )
                                         
Net income (loss)
    74,256       80,546       195,507       (275,345 )     74,964  
Less: Net (income) loss attributable to noncontrolling interest
                (708 )           (708 )
                                         
Net income (loss) attributable to Nabors
  $ 74,256     $ 80,546     $ 194,799     $ (275,345 )   $ 74,256  
                                         
 


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Three Months Ended September 30, 2010  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
Revenues and other income:
                                       
Operating revenues
  $     $     $ 1,069,261     $     $ 1,069,261  
Earnings (losses) from unconsolidated affiliates
                11,842             11,842  
Earnings (losses) from consolidated affiliates
    (38,086 )     (176,410 )     (200,847 )     415,343        
Investment income (loss)
    5             (738 )           (733 )
Intercompany interest income
          18,178             (18,178 )      
                                         
Total revenues and other income
    (38,081 )     (158,232 )     879,518       397,165       1,080,370  
                                         
Costs and other deductions:
                                       
Direct costs
                625,561             625,561  
General and administrative expenses
    2,250       119       85,109       (284 )     87,194  
Depreciation and amortization
          871       197,280             198,151  
Depletion
                5,778             5,778  
Interest expense
          69,021       (2,048 )           66,973  
Intercompany interest expense
                18,178       (18,178 )      
Losses (gains) on sales and retirements of long-lived assets and other expense (income), net
    (724 )     1,151       8,696       284       9,407  
Impairments and other charges
                123,099             123,099  
                                         
Total costs and other deductions
    1,526       71,162       1,061,653       (18,178 )     1,116,163  
                                         
Income (loss) from continuing operations before income taxes
    (39,607 )     (229,394 )     (182,135 )     415,343       (35,793 )
Income tax expense (benefit)
          (19,604 )     15,374             (4,230 )
                                         
Income (loss) from continuing operations, net of tax
    (39,607 )     (209,790 )     (197,509 )     415,343       (31,563 )
Income (loss) from discontinued operations, net of tax
                (7,591 )           (7,591 )
                                         
Net income (loss)
    (39,607 )     (209,790 )     (205,100 )     415,343       (39,154 )
Less: Net (income) loss attributable to noncontrolling interest
                (453 )           (453 )
                                         
Net income (loss) attributable to Nabors
  $ (39,607 )   $ (209,790 )   $ (205,553 )   $ 415,343     $ (39,607 )
                                         
 

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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Nine Months Ended September 30, 2011  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
Revenues and other income:
                                       
Operating revenues
  $     $     $ 4,360,975     $     $ 4,360,975  
Earnings (losses) from unconsolidated affiliates
                59,304             59,304  
Earnings (losses) from consolidated affiliates
    358,778       189,960       109,212       (657,950 )      
Investment income (loss)
    4       68       11,984             12,056  
Intercompany interest income
          52,704             (52,704 )      
                                         
Total revenues and other income
    358,782       242,732       4,541,475       (710,654 )     4,432,335  
                                         
Costs and other deductions:
                                       
Direct costs
                2,723,714             2,723,714  
General and administrative expenses
    8,803       244       357,881       (450 )     366,478  
Depreciation and amortization
          2,614       684,234             686,848  
Depletion
                18,060             18,060  
Interest expense
          211,063       (15,493 )           195,570  
Intercompany interest expense
                52,704       (52,704 )      
Losses (gains) on sales and retirements of long-lived assets and other expense (income), net
    450       (1,382 )     (74 )     450       (556 )
Impairments and other charges
                98,072             98,072  
                                         
Total costs and other deductions
    9,253       212,539       3,919,098       (52,704 )     4,088,186  
                                         
Income (loss) from continuing operations before income taxes
    349,529       30,193       622,377       (657,950 )     344,149  
Income tax expense (benefit)
          (59,114 )     166,335             107,221  
Subsidiary preferred stock dividend
                2,250             2,250  
                                         
Income (loss) from continuing operations, net of tax
    349,529       89,307       453,792       (657,950 )     234,678  
Income (loss) from discontinued operations, net of tax
                114,496             114,496  
                                         
Net income (loss)
    349,529       89,307       568,288       (657,950 )     349,174  
Less: Net (income) loss attributable to noncontrolling interest
                355             355  
                                         
Net income (loss) attributable to Nabors
  $ 349,529     $ 89,307     $ 568,643     $ (657,950 )   $ 349,529  
                                         
 

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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Nine Months Ended September 30, 2010  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
Revenues and other income:
                                       
Operating revenues
  $     $     $ 2,856,636     $     $ 2,856,636  
Earnings (losses) from unconsolidated affiliates
                28,329             28,329  
Earnings (losses) from consolidated affiliates
    35,930       (104,135 )     (192,837 )     261,042        
Investment income (loss)
    12             (988 )           (976 )
Intercompany interest income
          54,121             (54,121 )      
                                         
Total revenues and other income
    35,942       (50,014 )     2,691,140       206,921       2,883,989  
                                         
Costs and other deductions:
                                       
Direct costs
                1,648,289             1,648,289  
General and administrative expenses
    6,033       298       237,182       (556 )     242,957  
Depreciation and amortization
          2,432       542,652             545,084  
Depletion
                15,646             15,646  
Interest expense
          206,736       (7,701 )           199,035  
Intercompany interest expense
                54,121       (54,121 )      
Losses (gains) on sales and retirements of long-lived assets and other expense (income), net
    (14,305 )     22,443       32,104       556       40,798  
Impairments and other charges
                123,099             123,099  
                                         
Total costs and other deductions
    (8,272 )     231,909       2,645,392       (54,121 )     2,814,908  
                                         
Income (loss) from continuing operations before income taxes
    44,214       (281,923 )     45,748       261,042       69,081  
Income tax expense (benefit)
          (65,781 )     78,935             13,154  
                                         
Income (loss) from continuing operations, net of tax
    44,214       (216,142 )     (33,187 )     261,042       55,927  
Income (loss) from discontinued operations, net of tax
                (12,921 )           (12,921 )
                                         
Net income (loss)
    44,214       (216,142 )     (46,108 )     261,042       43,006  
Less: Net (income) loss attributable to noncontrolling interest
                1,208             1,208  
                                         
Net income (loss) attributable to Nabors
  $ 44,214     $ (216,142 )   $ (44,900 )   $ 261,042     $ 44,214  
                                         

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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Consolidating Statements of Cash Flows
 
                                         
    Nine Months Ended September 30, 2011  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
Net cash provided by (used for) operating activities
  $ 6,163     $ 227,747     $ 874,224     $     $ 1,108,134  
                                         
Cash flows from investing activities:
                                       
Purchases of investments
                (9,567 )           (9,567 )
Sales and maturities of investments
                24,580             24,580  
Cash paid for acquisition of business, net
                (55,459 )           (55,459 )
Investment in unconsolidated affiliates
                (54,762 )           (54,762 )
Distribution of proceeds from asset sales from unconsolidated affiliates
                142,984             142,984  
Capital expenditures
                (1,532,597 )           (1,532,597 )
Proceeds from sales of assets and insurance claims
                110,535             110,535  
Cash paid for investments in consolidated affiliates
    (25,450 )     (65,000 )           90,450        
                                         
Net cash provided by (used for) investing activities
    (25,450 )     (65,000 )     (1,374,286 )     90,450       (1,374,286 )
                                         
Cash flows from financing activities:
                                       
Increase (decrease) in cash overdrafts
                5,074             5,074  
Proceeds from issuance of long-term debt
          697,578                   697,578  
Proceeds from issuance of common shares, net
    12,175                         12,175  
Proceeds from revolving credit facilities
          1,250,000       50,000             1,300,000  
Debt issuance costs
          (6,065 )                 (6,065 )
Reduction in long-term debt
          (1,404,245 )     (26 )           (1,404,271 )
Reduction in revolving credit facilities
          (700,000 )                 (700,000 )
Repurchase of equity component of convertible debt
          (12 )                 (12 )
Purchase of restricted stock
    (2,579 )                       (2,579 )
Tax benefit related to share-based awards
          (1 )     186             185  
Proceeds from parent contributions
                90,450       (90,450 )      
                                         
Net cash (used for) provided by financing activities
    9,596       (162,745 )     145,684       (90,450 )     (97,915 )
Effect of exchange rate changes on cash and cash equivalents
                (2,174 )           (2,174 )
                                         
Net (decrease) increase in cash and cash equivalents
    (9,691 )     2       (356,552 )           (366,241 )
Cash and cash equivalents, beginning of period
    10,847       20       630,835             641,702  
                                         
Cash and cash equivalents, end of period
  $ 1,156     $ 22     $ 274,283     $     $ 275,461  
                                         


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Nine Months Ended September 30, 2010  
          Nabors
    Other
             
    Nabors
    Delaware
    Subsidiaries
             
    (Parent/
    (Issuer/
    (Non-
    Consolidating
    Consolidated
 
    Guarantor)     Guarantor)     Guarantors)     Adjustments     Total  
    (In thousands)  
 
Net cash provided by (used for) operating activities
  $ 87,995     $ 325,427     $ 268,712     $     $ 682,134  
                                         
Cash flows from investing activities:
                                       
Purchases of investments
                (27,695 )           (27,695 )
Sales and maturities of investments
                32,103             32,103  
Cash paid for acquisition of business, net
                (680,230 )           (680,230 )
Investment in unconsolidated affiliates
                (40,936 )           (40,936 )
Capital expenditures
                (640,953 )           (640,953 )
Proceeds from sales of assets and insurance claims
                26,084             26,084  
Cash paid for investments in consolidated affiliates
    (99,300 )     (732,000 )           831,300        
                                         
Net cash provided by (used for) investing activities
    (99,300 )     (732,000 )     (1,331,627 )     831,300       (1,331,627 )
                                         
Cash flows from financing activities:
                                       
Increase (decrease) in cash overdrafts
                (4,649 )           (4,649 )
Proceeds from issuance of long-term debt
          691,281                   691,281  
Proceeds from issuance of common shares, net
    5,391                         5,391  
Proceeds from revolving credit facilities
          600,000                   600,000  
Debt issuance costs
          (7,144 )                 (7,144 )
Reduction in long-term debt
          (274,095 )     (40,258 )           (314,353 )
Reduction in revolving credit facilities
          (600,000 )                 (600,000 )
Repurchase of equity component of convertible debt
          (4,712 )                 (4,712 )
Settlement of call options and warrants, net
          1,134                   1,134  
Purchase of restricted stock
    (1,904 )                       (1,904 )
Tax benefit related to share-based awards
                (38 )           (38 )
Proceeds from parent contributions
                831,300       (831,300 )      
                                         
Net cash (used for) provided by financing activities
    3,487       406,464       786,355       (831,300 )     365,006  
Effect of exchange rate changes on cash and cash equivalents
                (3,645 )           (3,645 )
                                         
Net (decrease) increase in cash and cash equivalents
    (7,818 )     (109 )     (280,205 )           (288,132 )
Cash and cash equivalents, beginning of period
    11,702       135       915,978             927,815  
                                         
Cash and cash equivalents, end of period
  $ 3,884     $ 26     $ 635,773     $     $ 639,683  
                                         


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Nabors Industries Ltd. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 14   Subsequent Event
 
On October 28, 2011, the Board of Directors appointed Anthony Petrello as President and Chief Executive Officer. Due to the transfer of the CEO responsibilities, Eugene Isenberg may be entitled to terminate his employment agreement with the Company and Nabors Delaware based on a Constructive Termination Without Cause. If he elects to do so, he may be entitled to a payment of $100 million from Nabors Delaware pursuant to the agreement. In addition, the agreement provides for Mr. Isenberg’s unvested restricted shares and stock options to vest immediately, any accrued but unpaid amounts (including a prorated annual bonus) owed to him to be paid, continued participation by him and his wife in our medical, dental and life insurance coverage, and the continuation of certain other executive benefits. Mr. Isenberg will have no unvested restricted shares or stock options at the time the charge discussed below is taken, and we do not believe that the value of any of the unaccrued benefits will be significant.
 
The Board also terminated the automatic extension contemplated in Mr. Isenberg’s employment agreement. In the event he does not terminate the agreement as described above, it will expire according to its terms on March 30, 2015.
 
As a result of these events, we have determined that it is probable that Nabors Delaware will be obligated to make the severance payment and intend to record a charge in the amount of our estimated obligation of approximately $100 million in our fourth-quarter results and year-end financial statements. See Note 8 Commitments and Contingencies.


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Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders
of Nabors Industries Ltd.:
 
We have reviewed the accompanying consolidated balance sheet of Nabors Industries Ltd. and its subsidiaries (the “Company”) as of September 30, 2011, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and 2010, and the consolidated statements of cash flows and of changes in equity for the nine-month periods ended September 30, 2011 and 2010. This interim financial information is the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
 
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of income, changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated March 1, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
 
/s/  PricewaterhouseCoopers LLP
 
Houston, Texas
November 9, 2011


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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING STATEMENTS
 
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 of 1933, as amended, and Section 21E of 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 natural gas and oil;
 
  •  fluctuations in levels of natural gas and oil 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 in any of the countries where we operate; and
 
  •  general economic conditions including the capital and credit markets.
 
Our businesses depend 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 natural gas or oil that has a material impact on exploration, development or 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 is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please refer to Part I, Item 1A. — Risk Factors in our 2010 Annual Report.
 
Management Overview
 
The following discussion and analysis is intended to help the reader understand the results of our 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.
 
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, well-servicing and workover operations, on land and offshore. Our hydraulic fracturing and downhole surveying services are included in our Pressure Pumping operating segment. Our oil and gas exploration, development and production operations are included in our Oil and Gas operating segment. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in our Other Operating Segments.


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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 U.S. Lower 48 Land Drilling and Canadian Drilling business units, operations have traditionally been driven by natural gas prices but the majority of the current activity is being driven by the price of oil and natural gas liquids from unconventional reservoirs (shales). In our Alaskan, International, U.S. Offshore (Gulf of Mexico), Canadian Well-servicing and U.S. Land Well-servicing business units, operations are driven by oil prices. Both natural gas and oil prices impact our customers’ activity levels and spending for our Pressure Pumping operations. Oil and natural gas liquids prices are beginning to be more significant factors in some of the traditionally natural-gas-driven operating segments. The Henry Hub natural gas spot price (per Bloomberg) averaged $4.11 per thousand cubic feet (mcf) during the 12-month period ended September 30, 2011, down from a $4.51 per mcf average during the prior 12 months. West Texas intermediate spot crude oil prices (per Bloomberg) averaged $92.80 per barrel for the 12 months ended September 30, 2011, up from a $77.19 per barrel average during the preceding 12 months.
 
Operating revenues and Earnings (losses) from unconsolidated affiliates for the three months ended September 30, 2011 totaled $1.7 billion, representing an increase of $577.4 million, or 53%, as compared to the three months ended September 30, 2010, and $4.4 billion for the nine months ended September 30, 2011, representing an increase of $1.5 billion, or 53%, as compared to the nine months ended September 30, 2010. Adjusted income derived from operating activities and income (loss) from continuing operations, net of tax, for the three months ended September 30, 2011 totaled $259.3 million and $82.2 million ($.28 per diluted share), respectively, representing increases of 58% and 360%, respectively, compared to the three months ended September 30, 2010. Adjusted income derived from operating activities and income (loss) from continuing operations, net of tax, for the nine months ended September 30, 2011 totaled $625.2 million and $234.7 million ($.80 per diluted share), respectively, representing increases of 44% and 320%, respectively, compared to the nine months ended September 30, 2010.
 
During the nine months ended September 30, 2011, operating results improved as compared to the prior year period primarily due to the incremental revenue and positive operating results from the addition of our Pressure Pumping operating segment beginning in September of 2010, increased drilling activity in oil- and liquids-rich shale plays in our drilling operations in both U.S. Lower 48 Land and Canada and increased well-servicing activity in the U.S. and Canada. However, our operating results and activity levels continued to be negatively impacted in our U.S. Offshore operations in response to uncertainty in the regulatory 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.
 
Our net income during the nine months ended September 30, 2011 was negatively impacted by $98.1 million in a provision for retirement of long-lived assets recorded by multiple operating segments. This related to the decommissioning and retirements of assets previously utilized in our U.S. Lower 48 Land Drilling, International and U.S. Well-servicing operations and the amounts are reflected in the Impairments and other charges line in our consolidated statements of income (loss).
 
During the nine months ended September 30, 2011, we sold some of our wholly owned oil and gas assets in Colombia and received proceeds of $91.4 million. Additionally, Remora completed sales of their oil and gas assets in Colombia for gross proceeds of $279.0 million and has made cash distributions to us totaling $143.0 million during the nine months ended September 30, 2011 with a final distribution expected upon dissolution of the joint venture. The effect of these sales is reflected in income (loss) from discontinued operations, net of tax, of $114.5 million ($.39 per diluted share) for the nine months ended September 30, 2011.


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We expect our operating results for 2011 to increase significantly from 2010 levels, driven by anticipated sustained higher oil prices and the related impact on drilling and well-servicing activity and dayrates, along with a full year contribution from our Pressure Pumping line of business. The major factors that support our projections of an improved year are:
 
  •  An increase in drilling in oil- and liquids-rich areas incremental to traditional dry gas regions by our U.S. Lower 48 Land and Canada Drilling and Well-servicing operations,
 
  •  An expected incremental increase from ancillary well-site services, primarily technical pumping services and down-hole surveying services, resulting from our Pressure Pumping operating segment for the new line of business acquired in the third quarter of 2010, and
 
  •  The anticipated positive impact on our overall level of drilling and well-servicing activity and margins resulting from the new and upgraded rigs and equipment added to our fleet over the past five years, which we expect will enhance our competitive position as market conditions improve.


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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,     Increase/
    Ended September 30,     Increase/
 
    2011     2010     (Decrease)     2011     2010     (Decrease)  
    (In thousands, except percentages and rig activity)  
 
Reportable segments:
                                                               
Operating revenues and Earnings (losses) from unconsolidated affiliates from continuing operations:(1)
                                                               
Contract Drilling:(2)
                                                               
U.S. Lower 48 Land Drilling
  $ 430,895     $ 350,348     $ 80,547       23 %   $ 1,214,447     $ 925,262     $ 289,185       31 %
U.S. Land Well-servicing
    189,356       119,127       70,229       59 %     503,752       321,978       181,774       56 %
U.S. Offshore
    46,069       26,504       19,565       74 %     116,807       103,680       13,127       13 %
Alaska
    27,027       45,920       (18,893 )     (41 )%     100,678       139,099       (38,421 )     (28 )%
Canada
    145,587       85,728       59,859       70 %     406,004       262,043       143,961       55 %
International
    281,686       288,535       (6,849 )     (2 )%     809,394       800,886       8,508       1 %
                                                                 
Subtotal Contract Drilling(3)
    1,120,620       916,162       204,458       22 %     3,151,082       2,552,948       598,134       23 %
Pressure Pumping(4)
    343,723       61,611       282,112       458 %     867,512       61,611       805,901       n/m(11 )
Oil and Gas(5)
    43,104       11,280       31,824       282 %     74,987       31,682       43,305       137 %
Other Operating Segments(6)(7)
    199,604       130,392       69,212       53 %     483,478       333,654       149,824       45 %
Other reconciling items(8)
    (48,537 )     (38,342 )     (10,195 )     (27 )%     (156,780 )     (94,930 )     (61,850 )     (65 )%