10-Q 1 a12-22003_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2012

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

 

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

(Address of principal executive offices)

 

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 x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 x  NO £

 

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 x

 

Accelerated Filer £

 

 

 

Non-accelerated Filer £

 

Smaller Reporting Company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £  NO x

 

The number of common shares, par value $.001 per share, outstanding as of October 31, 2012 was 290,383,841.

 

 

 



Table of Contents

 

NABORS INDUSTRIES LTD.  AND SUBSIDIARIES

 

Index

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

3

 

 

 

 

Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011

4

 

 

 

 

Consolidated Statements of Other Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011

5

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

6

 

 

 

 

Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2012 and 2011

7

 

 

 

 

Notes to Consolidated Financial Statements

9

 

 

 

 

Report of Independent Registered Public Accounting Firm

40

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59

 

 

 

Item 4.

Controls and Procedures

59

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

60

 

 

 

Item 1A.

Risk Factors

60

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 3.

Defaults Upon Senior Securities

61

 

 

 

Item 4.

Mine Safety Disclosures

61

 

 

 

Item 5.

Other Information

61

 

 

 

Item 6.

Exhibits

62

 

 

 

Signatures

 

63

 

2



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share amounts)

 

September 30,
2012

 

December 31,
2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

471,562

 

$

398,575

 

Short-term investments

 

148,001

 

140,914

 

Assets held for sale

 

404,234

 

401,500

 

Accounts receivable, net

 

1,529,232

 

1,576,555

 

Inventory

 

257,158

 

272,852

 

Deferred income taxes

 

111,673

 

127,874

 

Other current assets

 

211,789

 

170,044

 

Total current assets

 

3,133,649

 

3,088,314

 

Long-term investments and other receivables

 

5,301

 

11,124

 

Property, plant and equipment, net

 

8,894,084

 

8,629,946

 

Goodwill

 

472,462

 

501,258

 

Investment in unconsolidated affiliates

 

70,172

 

371,021

 

Other long-term assets

 

348,893

 

310,477

 

Total assets

 

$

12,924,561

 

$

12,912,140

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

389

 

$

275,326

 

Trade accounts payable

 

560,641

 

782,753

 

Accrued liabilities

 

573,636

 

744,483

 

Total current liabilities

 

1,134,666

 

1,802,562

 

Long-term debt

 

4,678,896

 

4,348,490

 

Other long-term liabilities

 

448,418

 

292,758

 

Deferred income taxes

 

737,269

 

797,925

 

Total liabilities

 

6,999,249

 

7,241,735

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

Subsidiary preferred stock

 

69,188

 

69,188

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, par value $.001 per share:

 

 

 

 

 

Authorized common shares 800,000; issued 318,797 and 317,042, respectively

 

319

 

317

 

Capital in excess of par value

 

2,332,387

 

2,287,743

 

Accumulated other comprehensive income

 

362,480

 

321,264

 

Retained earnings

 

4,093,321

 

3,956,364

 

Less: treasury shares, at cost, 28,414 and 29,414 common shares, respectively

 

(944,627

)

(977,873

)

Total shareholders’ equity

 

5,843,880

 

5,587,815

 

Noncontrolling interest

 

12,244

 

13,402

 

Total equity

 

5,856,124

 

5,601,217

 

Total liabilities and equity

 

$

12,924,561

 

$

12,912,140

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

1,766,419

 

$

1,608,504

 

$

5,393,959

 

$

4,325,714

 

Earnings (losses) from unconsolidated affiliates

 

(99,527

)

33,723

 

(302,513

)

59,305

 

Investment income (loss)

 

7,224

 

727

 

32,844

 

12,032

 

Total revenues and other income

 

1,674,116

 

1,642,954

 

5,124,290

 

4,397,051

 

Costs and other deductions:

 

 

 

 

 

 

 

 

 

Direct costs

 

1,136,198

 

1,019,412

 

3,444,270

 

2,687,970

 

General and administrative expenses

 

131,887

 

119,431

 

401,845

 

358,352

 

Depreciation and amortization

 

269,597

 

234,085

 

778,234

 

684,337

 

Interest expense

 

63,604

 

58,060

 

189,717

 

195,781

 

Losses (gains) on sales and retirements of long-lived assets and other expense (income), net

 

10,263

 

(11,607

)

21,837

 

(1,100

)

Impairments and other charges

 

 

98,072

 

147,503

 

98,072

 

Total costs and other deductions

 

1,611,549

 

1,517,453

 

4,983,406

 

4,023,412

 

Income (loss) from continuing operations before income taxes

 

62,567

 

125,501

 

140,884

 

373,639

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

Current

 

50,979

 

19,676

 

111,683

 

47,214

 

Deferred

 

(54,980

)

17,885

 

(82,832

)

71,546

 

Total income tax expense (benefit)

 

(4,001

)

37,561

 

28,851

 

118,760

 

Subsidiary preferred stock dividend

 

750

 

750

 

2,250

 

2,250

 

Income (loss) from continuing operations, net of tax

 

65,818

 

87,190

 

109,783

 

252,629

 

Income (loss) from discontinued operations, net of tax

 

10,826

 

(12,226

)

26,721

 

96,545

 

Net income (loss)

 

76,644

 

74,964

 

136,504

 

349,174

 

Less: Net (income) loss attributable to noncontrolling interest

 

(988

)

(708

)

453

 

355

 

Net income (loss) attributable to Nabors

 

$

75,656

 

$

74,256

 

$

136,957

 

$

349,529

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

.22

 

$

.30

 

$

.38

 

$

.88

 

Basic from discontinued operations

 

.04

 

(.04

)

.09

 

.34

 

Total Basic

 

$

.26

 

$

.26

 

$

.47

 

$

1.22

 

 

 

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

.22

 

$

.30

 

$

.38

 

$

.86

 

Diluted from discontinued operations

 

.04

 

(.05

)

.09

 

.33

 

Total Diluted

 

$

.26

 

$

.25

 

$

.47

 

$

1.19

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

290,367

 

287,487

 

289,822

 

286,971

 

Diluted

 

292,501

 

291,986

 

292,290

 

292,991

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

75,656

 

$

74,256

 

$

136,957

 

$

349,529

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

31,550

 

(86,856

)

29,157

 

(47,507

)

Unrealized gains/(losses) on marketable securities:

 

 

 

 

 

 

 

 

 

Unrealized gains/(losses) on marketable securities

 

13,667

 

(21,150

)

20,882

 

(26,034

)

Less: reclassification adjustment for (gains)/losses included in net income (loss)

 

(1,523

)

(4

)

(14,007

)

(5

)

Unrealized gains/(losses) on marketable securities

 

12,144

 

(21,154

)

6,875

 

(26,039

)

Pension liability amortization

 

260

 

151

 

780

 

451

 

Unrealized gains/(losses) and amortization of (gains)/losses on cash flow hedges

 

166

 

191

 

548

 

572

 

Other comprehensive income (loss), before tax

 

44,120

 

(107,668

)

37,360

 

(72,523

)

Income tax expense (benefit) related to items of other comprehensive income (loss)

 

(272

)

68

 

(3,856

)

374

 

Other comprehensive income (loss), net of tax

 

44,392

 

(107,736

)

41,216

 

(72,897

)

Comprehensive income (loss) attributable to Nabors

 

120,048

 

(33,480

)

178,173

 

276,632

 

Net income (loss) attributable to noncontrolling interest

 

988

 

708

 

(453

)

(355

)

Translation adjustment attributable to noncontrolling interest

 

390

 

(912

)

417

 

(460

)

Comprehensive income (loss) attributable to noncontrolling interest

 

1,378

 

(204

)

(36

)

(815

)

Comprehensive income (loss)

 

$

121,426

 

$

(33,684

)

$

178,137

 

$

275,817

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

(In thousands)

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

136,957

 

$

349,529

 

Adjustments to net income (loss):

 

 

 

 

 

Depreciation and amortization

 

778,393

 

686,820

 

Depletion and other exploratory expenses

 

223

 

31,949

 

Deferred income tax expense (benefit)

 

(81,116

)

61,566

 

Deferred financing costs amortization

 

3,256

 

4,000

 

Pension liability amortization and adjustments

 

779

 

450

 

Discount amortization on long-term debt

 

1,467

 

26,546

 

Amortization of loss on hedges

 

602

 

695

 

Impairments and other charges

 

162,450

 

98,072

 

Losses (gains) on long-lived assets, net

 

7,016

 

(40,636

)

Losses (gains) on investments, net

 

(27,773

)

(8,567

)

Losses (gains) on debt retirement, net

 

 

58

 

Losses (gains) on derivative instruments

 

103

 

267

 

Gain on acquisition

 

 

(12,178

)

Share-based compensation

 

13,541

 

17,249

 

Foreign currency transaction losses (gains), net

 

5,054

 

743

 

Gain on sale of oil and gas operations

 

(48,486

)

 

Equity in (earnings) losses of unconsolidated affiliates, net of dividends

 

302,512

 

(135,844

)

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

Accounts receivable

 

46,973

 

(283,082

)

Inventory

 

10,900

 

(76,913

)

Other current assets

 

(47,086

)

(2,623

)

Other long-term assets

 

(26,743

)

79,770

 

Trade accounts payable and accrued liabilities

 

(221,252

)

331,633

 

Income taxes payable

 

10,576

 

(466

)

Other long-term liabilities

 

65,699

 

(20,904

)

Net cash provided by operating activities

 

1,094,045

 

1,108,134

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments

 

(949

)

(9,567

)

Sales and maturities of investments

 

30,111

 

24,580

 

Cash paid for acquisition of businesses, net

 

 

(55,459

)

Investment in unconsolidated affiliates

 

 

(54,762

)

Distribution of proceeds from asset sales from unconsolidated affiliates

 

 

142,984

 

Capital expenditures

 

(1,221,769

)

(1,532,597

)

Proceeds from sales of assets and insurance claims

 

128,432

 

110,535

 

Net cash used for investing activities

 

(1,064,175

)

(1,374,286

)

Cash flows from financing activities:

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

(1,748

)

5,074

 

Proceeds from issuance of long-term debt

 

 

697,578

 

Proceeds from revolving credit facilities

 

710,000

 

1,300,000

 

Proceeds from issuance of common shares

 

(4,007

)

12,175

 

Debt issuance costs

 

 

(6,065

)

Reduction in long-term debt

 

(276,232

)

(1,404,271

)

Paydown of revolving credit facilities

 

(380,000

)

(700,000

)

Repurchase of equity component of convertible debt

 

 

(12

)

Purchase of restricted stock

 

(2,071

)

(2,579

)

Tax benefit related to share-based awards

 

(54

)

185

 

Net cash provided by (used for) financing activities

 

45,888

 

(97,915

)

Effect of exchange rate changes on cash and cash equivalents

 

(2,771

)

(2,174

)

Net increase (decrease) in cash and cash equivalents

 

72,987

 

(366,241

)

Cash and cash equivalents, beginning of period

 

398,575

 

641,702

 

Cash and cash equivalents, end of period

 

$

471,562

 

$

275,461

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

Excess

 

Other

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Par

 

of Par

 

Comprehensive

 

Retained

 

Treasury

 

controlling

 

Total

 

(In thousands)

 

Shares

 

Value

 

Value

 

Income

 

Earnings

 

Shares

 

Interest

 

Equity

 

Balances, December 31, 2011

 

317,042

 

$

317

 

$

2,287,743

 

$

321,264

 

$

3,956,364

 

$

(977,873

)

$

13,402

 

$

5,601,217

 

Net income (loss)

 

 

 

 

 

 

 

 

 

136,957

 

 

 

(453

)

136,504

 

Comprehensive income (loss), net of tax

 

 

 

 

 

 

 

41,216

 

 

 

 

 

417

 

41,633

 

Issuance of common shares for stock options exercised, net of surrender of unexercised stock options

 

1,111

 

1

 

(4,008

)

 

 

 

 

 

 

 

 

(4,007

)

Capital contribution from forgiveness of liability, net of tax

 

 

 

 

 

62,734

 

 

 

 

 

 

 

 

 

62,734

 

Issuance of treasury shares, net of tax benefit

 

 

 

 

 

(25,496

)

 

 

 

 

33,246

 

 

 

7,750

 

Other

 

 

 

 

 

(2,126

)

 

 

 

 

 

 

(1,122

)

(3,248

)

Share-based compensation

 

644

 

1

 

13,540

 

 

 

 

 

 

 

 

 

13,541

 

Balances, September 30, 2012

 

318,797

 

$

319

 

$

2,332,387

 

$

362,480

 

$

4,093,321

 

$

(944,627

)

$

12,244

 

$

5,856,124

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

Excess

 

Other

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Par

 

of Par

 

Comprehensive

 

Retained

 

Treasury

 

controlling

 

Total

 

(In thousands)

 

Shares

 

Value

 

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

 

Net income (loss)

 

 

 

 

 

 

 

 

 

349,529

 

 

 

(355

)

349,174

 

Comprehensive income, net of tax

 

 

 

 

 

 

 

(72,897

)

 

 

 

 

(460

)

(73,357

)

Issuance of common shares for stock options exercised, net of surrender of unexercised stock options

 

1,006

 

1

 

12,174

 

 

 

 

 

 

 

 

 

12,175

 

Other

 

882

 

1

 

(2,407

)

 

 

 

 

 

 

(2,159

)

(4,565

)

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.

 

8



Table of Contents

 

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 521 land drilling rigs for oil and gas land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, Mexico, the Middle East, the Far East, the South Pacific, Russia and Africa.

 

·    We actively market approximately 431 rigs for land well-servicing and workover work in the United States and approximately 176 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 40 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 completion and production services, including hydraulic fracturing, cementing, nitrogen and acid pressure pumping services with over 805,000 hydraulic horsepower in key basins throughout the United States and Canada.

 

·                  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 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 have invested in oil and gas exploration, development and production activities through both our wholly owned subsidiaries and our oil and gas joint ventures in which we hold 49-50% ownership interests.

 

The majority of our business is conducted through two business lines:

 

·                  Our Drilling and Rig Services business line includes our drilling operations for oil and natural gas wells, on land and offshore, and companies engaged in drilling technology, top drive manufacturing, directional drilling, construction services, and rig instrumentation and software.

 

·                  Our Completion and Production Services business line includes our well-servicing, fluid logistics, workover operations and our pressure pumping services.

 

In addition to these two primary business lines, we have an Oil and Gas operating segment.  Our oil and gas exploration, development and production operations are included in our Oil and Gas operating segment, or in discontinued operations in some cases.

 

Unless the context requires otherwise, references in this report and in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations to “we,” “us,” “our,” the “Company” 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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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”).  Certain reclassifications have been made to the prior periods to conform to the current-period presentation, with no effect on our consolidated financial position, results of operations or cash flows.  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, 2011 (“2011 Annual Report”).  In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2012, the results of our operations and other comprehensive income for the three and nine months ended September 30, 2012 and 2011, and cash flows and changes in equity for the nine months ended September 30, 2012 and 2011, in accordance with GAAP.  Interim results for the three and nine months ended September 30, 2012 may not be indicative of results that will be realized for the full year ending December 31, 2012.

 

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 nonmajority-owned subsidiaries required to be consolidated under GAAP.  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 in both investment in unconsolidated affiliates and assets held for sale in our consolidated balance sheets. The portion of such investments included in investments in unconsolidated affiliates totaled $70.2 million and $371.0 million as of September 30, 2012 and December 31, 2011, respectively.  At each of September 30, 2012 and December 31, 2011, the portion of such investments included in assets held for sale totaled $13.7 million.  See Note 4 — 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.

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method and includes the cost of materials, labor and manufacturing overhead.  Inventory included the following:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Raw materials

 

$

148,323

 

$

133,480

 

Work-in-progress

 

45,959

 

50,951

 

Finished goods

 

62,876

 

88,421

 

 

 

$

257,158

 

$

272,852

 

 

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Goodwill

 

We determined it was necessary to perform our annual goodwill impairment test, a Level 3 fair value measurement, during the second quarter of 2012.  The impairment test compares the estimated fair value of the reporting unit to its carrying amount.  If the carrying amount exceeds the fair value, a second step is required to measure the goodwill impairment loss.  This second step compares the implied fair value of the reporting unit’s goodwill to its carrying amount.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to the excess.  Our goodwill impairment test results required the second step measurement for two reporting units.

 

The fair values calculated in these impairment tests were determined using discounted cash flow models involving assumptions based on our utilization of rigs or other oil and gas service equipment, revenues and earnings from affiliates, as well as direct costs, general and administrative costs, depreciation, applicable income taxes, capital expenditures and working capital requirements.  Our discounted cash flow projections for each reporting unit were based on financial forecasts.  The future cash flows were discounted to present value using discount rates determined to be appropriate for each reporting unit.  Terminal values for each reporting unit were calculated using a Gordon Growth methodology with a long-term growth rate of 3%.

 

Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management.  Potential factors requiring assessment include a further or sustained decline in our stock price, declines in natural gas and oil prices, a variance in results of operations from forecasts, and additional transactions in the oil and gas industry.  Another factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. As part of our annual review, we compared the sum of our reporting units’ estimated fair value, which included the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assessed the reasonableness of our estimated fair value. Any of the above-mentioned factors may cause us to re-evaluate goodwill during any quarter throughout the year.

 

The carrying amounts and change of goodwill for our operating segments as of and for the nine months ended September 30, 2012 were as follows:

 

 

 

Balance as of
December 31,
2011

 

Acquisitions
and
Purchase
Price
Adjustments

 

Disposals
and
Impairments

 

Cumulative
Translation
Adjustment

 

Balance as of
September 30,
2012

 

 

 

(In thousands)

 

Drilling and Rig Services:

 

 

 

 

 

 

 

 

 

 

 

U.S. Lower 48 Land Drilling

 

$

30,154

 

$

 

$

 

$

 

$

30,154

 

U.S. Offshore

 

7,296

 

 

7,296

(1)

 

 

Alaska

 

19,995

 

 

 

 

19,995

 

International

 

18,983

 

 

18,983

(1)

 

 

Other Rig Services

 

34,766

 

 

3,035

(2)

518

 

32,249

 

Subtotal Drilling and Rig Services

 

111,194

 

 

29,314

 

518

 

82,398

 

Completion and Production Services:

 

 

 

 

 

 

 

 

 

 

 

U.S. Land Well-servicing

 

55,072

 

 

 

 

55,072

 

Pressure Pumping

 

334,992

 

 

 

 

334,992

 

Subtotal Completion and Production Services

 

390,064

 

 

 

 

390,064

 

Total

 

$

501,258

 

$

 

$

29,314

 

$

518

 

$

472,462

 

 


(1)          Represents the impairment of goodwill associated with our U.S. Offshore and International reporting units. As of June 30, 2012, these reporting units had no recorded goodwill. The impairments were deemed necessary due to the prolonged 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 as well as our international markets. A significantly prolonged period of lower natural gas prices or changes in laws and regulations could continue to 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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(2)          Represents the removal of goodwill in connection with our sale of Peak USA to an unrelated third party for $13.5 million cash during the second quarter of 2012.  Peak USA, a subsidiary included in our Other Rig Services reporting unit, provided trucking and logistics services to the oilfield service market in the U.S. Lower 48 states.

 

Note 3 Impairments and Other Charges

 

Impairments and other charges included the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

Goodwill impairment

 

$

 

$

 

$

26,279

 

$

 

Intangible asset impairment (1)

 

 

 

74,960

 

 

Provision for retirement of assets (2)

 

 

98,072

 

46,264

 

98,072

 

Total impairments and other charges

 

$

 

$

98,072

 

$

147,503

 

$

98,072

 

 


(1)          Represents $75.0 million related to the impairment of the Superior trade name. The Superior trade name was initially classified as a ten-year intangible asset at the date of acquisition in September 2010. The impairment is a result of the decision to cease using the Superior trade name to reduce confusion in the marketplace and enhance the Nabors brand.

 

(2)          During the second quarter of 2012, we recorded a provision for retirement of long-lived assets in multiple operating segments, including $26.5 million in Pressure Pumping, $15.1 million in Canada and $4.6 million in U.S. Land Well-servicing. The retirements in our Canada operations included functionally inoperable rigs and other drilling equipment. Our U.S. Land Well-servicing retirements included rigs and vehicles that would require significant repair to return to work. As we began the process of streamlining our operations and consolidating our Pressure Pumping and U.S. Land Well-servicing segments into one business line, Nabors Completion & Production Services, we decided to retire certain non-core assets. As we continue to streamline our lines of business, there could be future retirement or impairment charges, which could have a potential impact on our future operating results.

 

During the third quarter of 2011, we recorded a provision for retirement of long-lived assets in multiple operating segments including $63.2 million in U.S. Lower 48 Land Drilling, $26.1 million in International and $8.9 million in U.S. Land Well-servicing. The retirements related to the decommissioning and retirement of a jackup rig, 116 land rigs, and a number of trucks and rigs for well-servicing. These assets were deemed economically noncompetitive for the market and were dismantled for parts and scrap.

 

A prolonged 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.

 

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Table of Contents

 

Note 4 Discontinued Operations

 

Assets held for sale included the following:

 

(In thousands)

 

September 30,
2012

 

December 31,
2011

 

Assets Held for Sale

 

 

 

 

 

Oil and Gas

 

$

394,710

 

$

385,414

 

Other Rig Services

 

9,524

 

16,086

 

Assets Held for Sale

 

$

404,234

 

$

401,500

 

 

Our condensed statements of income (loss) from discontinued operations for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Operating revenues and Earnings (losses) from unconsolidated affiliates

 

 

 

 

 

 

 

 

 

Oil and Gas (1)

 

$

12,859

 

$

10,630

 

$

19,079

 

$

116,046

 

Other Rig Services (2)

 

$

8,334

 

$

9,341

 

$

18,750

 

$

21,180

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from Oil and Gas discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

5,826

 

$

(20,167

)

$

(2,095

)

$

42,746

 

Gain (loss) on sale of wholly owned assets

 

3,662

 

 

39,772

 

39,944

 

Less: income tax expense (benefit)

 

(1,604

)

(6,189

)

2,623

 

(14,752

)

Income (loss) from Oil and Gas discontinued operations, net of tax

 

$

11,092

 

$

(13,978

)

$

35,054

 

$

97,442

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from Other Rig Services discontinued operations: (2)

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

2,199

 

$

2,336

 

$

(3,320

)

$

(1,197

)

Gain (loss) on sale of assets

 

(2,554

)

 

(7,796

)

 

Less: income tax expense (benefit)

 

(89

)

584

 

(2,783

)

(300

)

Income (loss) from Other Rig Services discontinued operations, net of tax

 

$

(266

)

$

1,752

 

$

(8,333

)

$

(897

)

 


(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.

 

(2)          Represents our aircraft logistics operations in Canada included in our Other Rig Services operating segment.

 

In April 2012, we sold our remaining wholly owned oil and gas business in Colombia to an unrelated third party for a cash purchase price of $72.6 million, which resulted in a pre-tax gain of approximately $48.5 million. This business was included in our assets held for sale as part of our Oil and Gas operating segment.

 

In May 2012, we sold some of our U.S. wholly owned oil and gas assets in the Fayetteville Shale, Floyd Shale, and Barnett Shale areas to unrelated third parties for cumulative cash receipts of $5.7 million, which did not result in any gain or loss.  In September 2012, we sold additional assets from our U.S. wholly owned oil and gas business for $7.3 million, which resulted in a gain of approximately $3.7 million. These assets were included in our assets held for sale as part of our Oil and Gas operating segment. Based on current market conditions, we adjusted the carrying value of our U.S. wholly owned oil and gas business in the second quarter of 2012 to reflect our assessment of its current fair value.

 

Our contracts with pipeline companies include pipeline transmission commitments in the Horn River Basin.  During the year ended December 31, 2011, we evaluated current production levels, natural gas prices and the anticipated sales cycle related to the sale of properties corresponding to these commitments.  As a result, we recorded liabilities for excess pipeline

 

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Table of Contents

 

capacity. At September 30, 2012, we recorded liabilities of $92.2 million, of which $68.5 million is included in accrued liabilities and $23.7 million is included in other long-term liabilities. At December 31, 2011, we recorded liabilities of $125.7 million, of which $54.3 million is included in accrued liabilities and $71.4 million is included in other long-term liabilities. These amounts represent our best estimate of the excess capacity of the pipeline, based upon the estimated sales date of the properties, as compared to the contractual commitments. Our commitments beyond December 31, 2013 could approximate $274.8 million if the related properties are not sold or developed. Decreases in actual production, natural gas prices or a change in the estimated sales date could result in future charges related to excess capacity of the pipeline that may materially impact our results of operations.

 

Based on current market conditions, we adjusted the carrying value of our aircraft logistics assets by $7.8 million in 2012 to reflect our assessment of its current fair value.

 

Note 5 Cash and Cash Equivalents and Short-term Investments

 

Our cash and cash equivalents and short-term investments consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

471,562

 

$

398,575

 

Short-term investments:

 

 

 

 

 

Trading equity securities

 

23,242

 

11,600

 

Available-for-sale equity securities

 

89,689

 

71,433

 

Available-for-sale debt securities

 

35,070

 

57,881

 

Total short-term investments

 

$

148,001

 

$

140,914

 

 

Certain information related to our cash and cash equivalents and short-term investments follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Fair
Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

471,562

 

$

 

$

 

$

398,575

 

$

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading equity securities

 

23,242

 

17,517

 

 

11,600

 

5,876

 

 

Available-for-sale equity securities

 

89,689

 

53,798

 

(2,467

)

71,433

 

33,075

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper and CDs

 

180

 

 

 

1,230

 

 

 

Corporate debt securities

 

31,680

 

10,826

 

(1,919

)

51,300

 

22,494

 

(2,095

)

Mortgage-backed debt securities

 

246

 

15

 

 

309

 

10

 

 

Mortgage-CMO debt securities

 

1,078

 

12

 

(4

)

2,547

 

13

 

(15

)

Asset-backed debt securities

 

1,886

 

 

(140

)

2,495

 

 

(238

)

Total available-for-sale debt securities

 

35,070

 

10,853

 

(2,063

)

57,881

 

22,517

 

(2,348

)

Total available-for-sale securities

 

124,759

 

64,651

 

(4,530

)

129,314

 

55,592

 

(2,348

)

Total short-term investments

 

148,001

 

82,168

 

(4,530

)

140,914

 

61,468

 

(2,348

)

Total cash, cash equivalents and short-term investments

 

$

619,563

 

$

82,168

 

$

(4,530

)

$

539,489

 

$

61,468

 

$

(2,348

)

 

14



Certain information related to the gross unrealized losses of our cash and cash equivalents and short-term investments follows:

 

 

 

As of September 30, 2012

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

 

 

Fair Value

 

Gross
Unrealized
Loss

 

Fair Value

 

Gross
Unrealized
Loss

 

 

 

(In thousands)

 

Available-for-sale equity securities

 

$

16,428

 

$

2,467

 

$

 

$

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities (1)

 

 

 

17,900

 

1,919

 

Mortgage-CMO debt securities (2) 

 

842

 

3

 

45

 

1

 

Asset-backed debt securities (2)

 

 

 

1,886

 

140

 

Total available-for-sale debt securities

 

842

 

3

 

19,831

 

2,060

 

Total

 

$

17,270

 

$

2,470

 

$

19,831

 

$

2,060

 

 


(1)         Our unrealized loss on corporate debt securities relates to our investment in NFR Energy LLC’s 9.75% senior notes. This investment is in addition to our equity interest in NFR Energy LLC. The senior notes mature in 2017 and interest is paid semi-annually on February 15 and August 15.  We do not intend to sell this investment, and it is less likely than not that we will be required to sell it to satisfy our own cash flow and working capital requirements.  We believe that we will continue to collect all amounts due according to the contractual terms of the investment and, therefore, do not consider the decline in value of the investment to be other-than-temporary at September 30, 2012. See Note 8 Investments in Unconsolidated Affiliates for additional discussion of our equity investment.

 

(2)         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 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, do not consider the decline in value of these investments to be other-than-temporary at September 30, 2012.

 

The estimated fair values of our corporate, mortgage-backed, mortgage-CMO and asset-backed debt securities at September 30, 2012, 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, 2012

 

 

 

(In thousands)

 

Debt securities:

 

 

 

Due in one year or less

 

$

180

 

Due after one year through five years

 

17,900

 

Due in more than five years

 

16,990

 

Total debt securities

 

$

35,070

 

 

Certain information regarding our debt and equity securities is presented below:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

Proceeds from sales and maturities

 

$

3,953

 

$

342

 

$

23,186

 

$

1,124

 

Realized gains (losses), net

 

1,732

 

2

 

14,007

 

(5

)

 

15



 

Note 6 Fair Value Measurements

 

The following table sets forth, by level within the fair value hierarchy, our financial assets that are accounted for at fair value on a recurring basis as of September 30, 2012.  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, 2012, there were no transfers of our financial assets between Level 1 and Level 2 measures. Our financial assets 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, 2012

 

 

 

Level
1

 

Level
2

 

Level
3

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities — energy industry

 

$

81,538

 

$

8,151

 

$

 

$

89,689

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

Commercial paper and CDs

 

180

 

 

 

180

 

Corporate debt securities

 

 

31,680

 

 

31,680

 

Mortgage-backed debt securities

 

 

246

 

 

246

 

Mortgage-CMO debt securities

 

 

1,078

 

 

1,078

 

Asset-backed debt securities

 

1,886

 

 

 

1,886

 

Trading securities — energy industry

 

23,242

 

 

 

23,242

 

Total short-term investments

 

$

106,846

 

$

41,155

 

$

 

$

148,001

 

 

Nonrecurring Fair Value Measurements

 

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would primarily consist of goodwill, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination, and asset retirement obligations.

 

Fair Value of Financial Instruments

 

The fair value of our financial instruments has been estimated in accordance with GAAP.  We measure the estimated fair value of our long-term debt, subsidiary preferred stock and revolving credit facilities using significant other observable inputs, which represent Level 2 fair value measurements, including quoted market prices or prices quoted from third-party financial institutions as well as the terms and credit spreads for such instruments. The carrying and fair values of these liabilities were as follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

 

 

(In thousands)

 

5.375% senior notes due August 2012

 

$

 

$

 

$

274,604

 

$

281,188

 

6.15% senior notes due February 2018

 

968,403

 

1,155,180

 

967,490

 

1,113,986

 

9.25% senior notes due January 2019

 

1,125,000

 

1,470,139

 

1,125,000

 

1,419,514

 

5.00% senior notes due September 2020

 

697,572

 

769,146

 

697,343

 

734,475

 

4.625% senior notes due September 2021

 

697,847

 

726,285

 

697,667

 

708,176

 

Subsidiary preferred stock

 

69,188

 

68,625

 

69,188

 

68,625

 

Revolving credit facilities

 

1,190,000

 

1,190,000

 

860,000

 

860,000

 

Other

 

463

 

463

 

1,712

 

1,712

 

 

 

$

4,748,473

 

$

5,379,838

 

$

4,693,004

 

$

5,187,676

 

 

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, 2012, our short-term investments were carried at fair market value and included $124.8 million and

 

16



 

$23.2 million in securities classified as available-for-sale and trading, respectively.  As of December 31, 2011, our short-term investments were carried at fair market value and included $129.3 million and $11.6 million in securities classified as available-for-sale and trading, respectively.

 

Note 7 Share-Based Compensation

 

We have several share-based employee compensation plans, which are more fully described in Note 8 Share-Based Compensation in our 2011 Annual Report. Total share-based compensation expense, which includes both stock options and restricted stock, totaled $4.8 million and $9.0 million for the three months ended September 30, 2012 and 2011, respectively, and $13.5 million and $17.2 million for the nine months ended September 30, 2012 and 2011, 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 15 — Segment Information.

 

During the nine months ended September 30, 2012 and 2011, we awarded 934,648 and 1,049,540 shares of restricted stock, respectively, vesting over periods of up to four years, to our employees and directors.  These awards had an aggregate value at their grant date of $19.4 million and $29.3 million, respectively.  The fair value of restricted stock that vested during the nine months ended September 30, 2012 and 2011 was $9.4 million and $18.6 million, respectively.

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2012 and 2011 was $5.7 million and $15.8 million, respectively.  Additionally, the intrinsic value of stock options surrendered during the nine months ended September 30, 2012 was $17.9 million.  The total fair value of stock options that vested during the nine months ended September 30, 2012 and 2011 was $7.6 million and $5.2 million, respectively.

 

Note 8 Investments in Unconsolidated Affiliates

 

We have several unconsolidated affiliates that are integral to our operations.  For a full description, refer to Note 10 — Investments in Unconsolidated Affiliates in our 2011 Annual Report.

 

At September 30, 2012 and December 31, 2011, our consolidated balance sheets reflect our investments in unconsolidated affiliates accounted for using the equity method totaling $70.2 million and $371.0 million, respectively.  In addition, assets held for sale include investments in unconsolidated affiliates accounted for using the equity method totaling $13.7 million at each of September 30, 2012 and December 31, 2011, respectively.

 

During each quarter of 2012 our unconsolidated U.S. oil and gas joint venture has recorded full-cost ceiling test writedowns of which we have recognized $310.0 million during the nine months ended September 30, 2012 representing our proportionate share.  The full-cost ceiling test writedowns during 2012 occurred as a result of the sustained low natural gas price environment when using the prior 12-month average natural gas price.  We recorded these writedowns against the carrying value of our investment and, as of September 30, 2012, our equity investment has been written down to a zero balance.

 

Presented below is summarized income statement (loss) information for our unconsolidated U.S. oil and gas joint venture:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenues

 

$

91,445

 

$

65,985

 

$

216,914

 

$

169,738

 

Gross margin

 

$

63,462

 

$

51,640

 

$

146,519

 

$

133,858

 

Net income (loss)

 

$

(240,414

)

$

15,127

 

$

(649,926

)

$

53,918

 

Nabors’ earnings (losses) from our U.S. oil and gas joint venture (1)

 

$

(98,805

)

$

34,909

 

$

(301,800

)

$

56,285

 

 


(1)         During the three and nine months ended September 30, 2012, our unconsolidated U.S. oil and gas joint venture recorded full-cost ceiling test writedowns, of which our proportionate share was $96.3 million and $310.0 million, respectively.  The writedowns are included in our Oil and Gas operating segment.

 

17



 

Note 9 Debt

 

Long-term debt consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

5.375% senior notes due August 2012

 

$

 

$

274,604

 

6.15% senior notes due February 2018

 

968,403

 

967,490

 

9.25% senior notes due January 2019

 

1,125,000

 

1,125,000

 

5.00% senior notes due September 2020

 

697,572

 

697,343

 

4.625% senior notes due September 2021

 

697,847

 

697,667

 

Revolving credit facilities

 

1,190,000

 

860,000

 

Other

 

463

 

1,712

 

 

 

4,679,285

 

4,623,816

 

Less: current portion

 

389

 

275,326

 

 

 

$

4,678,896

 

$

4,348,490

 

 

5.375% Senior Notes Due August 2012

 

During August 2012, we paid $282.4 million at maturity of our 5.375% senior notes, representing principal of $275.0 million and accrued interest of $7.4 million. We used cash on hand and $270 million from revolving credit facilities to pay this obligation.

 

Revolving Credit Facilities

 

At September 30, 2012, we had $310 million of remaining availability from a combined total of $1.5 billion under our existing revolving credit facilities. In September 2012, Nabors Delaware added a new lender to one of the facilities, which increased borrowing capacity to $1.5 billion. The existing revolving credit facilities mature in September 2014, and can be used for general corporate purposes, including capital expenditures and working capital. The weighted average interest rate on borrowings at September 30, 2012 was 2.08%.  We fully and unconditionally guarantee the obligations under all of these credit facilities.

 

The revolving credit facilities contain various covenants and restrictive provisions that 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 agreements at September 30, 2012 and December 31, 2011. If we should fail to perform our obligations under the covenants, the revolving credit commitments could be terminated and any outstanding borrowings under the relevant facility could be declared immediately due and payable.

 

Note 10 Common Shares

 

During the nine months ended September 30, 2012, our employees exercised vested options and surrendered unexercised vested stock options to acquire 1.1 million of our common shares. We received $17.0 million relating to exercised vested options. We used approximately $21.0 million to repurchase surrendered unexercised vested options and to satisfy related tax withholding obligations pursuant to stock option share settlements and exercises by some of the employees. During the nine months ended September 30, 2011, our employees exercised vested options to acquire 1.0 million of our common shares, resulting in proceeds of $12.2 million.  For each of the nine months ended September 30, 2012 and 2011, we withheld .1 million of our common shares with a fair value of $2.1 million and $2.6 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

 

At December 31, 2011, accrued liabilities included a provision of $100 million for a contingent liability related to the change of our Chief Executive Officer in October 2011. In February 2012, our former Chief Executive Officer elected to forego triggering that payment. In connection with that development, we announced plans to make charitable contributions to benefit the needs of our employees and other community-based causes.  During the first quarter of 2012, we contributed one million of our treasury shares to the Nabors Charitable Foundation, a 501(c)(3) organization, in support of this objective.  We consider our former Chief Executive Officer to be a significant shareholder of the Company and, therefore, have recorded these transactions as equity. We recorded the release of the contingent liability, net of tax, through capital in excess of par as

 

18



 

a forgiveness of liability from a beneficial owner.  We recorded the donation of the treasury shares at their weighted-average cost, net of tax, through capital in excess of par.

 

Shareholder Rights Plan

 

On July 16, 2012, the Board of Directors declared the issuance of one preferred share purchase right (a “Right”) for each Common Share issued and outstanding on July 27, 2012 (the “Record Date”) to the shareholders of record on that date.  Each Right entitles the registered holder to purchase from the Company one one-thousandth of a Series A Junior Participating Preferred Share, par value US$0.001 per share (the “Preferred Shares”), of the Company, at a price of $70.00 per one one-thousandth of a Preferred Share (the “Purchase Price”), subject to adjustment.

 

Until the Distribution Date, the Rights will be evidenced, with respect to any Common Share certificates issued and outstanding as of the Record Date, by such Common Share certificate together with a copy of a summary of rights. The Distribution Date is defined as the earlier to occur of:

 

(i)             10 days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership (including derivative positions) of 10% or more of the issued and outstanding Common Shares (or, in the event an exchange is effected in accordance with Section 24 of the Rights Agreement and the Board of Directors determines that a later date is advisable, then such later date that is not more than 20 days after such public announcement); or

 

(ii)          10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 10% or more of the issued and outstanding Common Shares.

 

The Rights are not exercisable until the Distribution Date. The Rights will expire on July 16, 2013 (the “Final Expiration Date”), unless the Final Expiration Date is extended or the Rights are earlier redeemed by the Company, in each case.

 

Note 11 Subsidiary Preferred Stock

 

During the three months ended September 30, 2012, dividends of $0.75 million on outstanding shares of preferred stock were declared and paid in full.

 

Note 12 Commitments and Contingencies

 

Commitments

 

Employment Contract

 

The employment agreement for our CEO, Mr. Anthony G. Petrello, provides for a term through March 30, 2015, with automatic one-year extensions each April 1, unless either party gives notice of nonrenewal.  In the event of Mr. Petrello’s termination without cause or constructive termination without cause, he would be entitled to receive three times the average of his base salary and annual bonus during the three fiscal years preceding the termination.  If, by way of example, Mr. Petrello were terminated without cause subsequent to September 30, 2012, his payment would be approximately $31.1 million.  The formula will be reduced to two times the average stated above after April 1, 2015.  In the event of his death or disability, either he or his estate would be entitled to receive within 30 days thereafter a payment of $50 million.

 

We do not have insurance to cover, and we have not recorded an expense or accrued a liability relating to, this potential obligation.  See Note 18 Commitments and Contingencies to our 2011 Annual Report for additional discussion and description of Mr. Petrello’s employment agreement.

 

19



 

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 13 — Income Taxes to our 2011 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.  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 Nabors and its tax advisors previously concluded that the deductions were appropriate for each of these years, 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.

 

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.

 

Effective April 1, 2012, our workers’ compensation claims are subject to a $2.0 million per-occurrence deductible, and our automobile claims are subject to a $1.0 million per-occurrence deductible.

 

Litigation

 

Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. For matters where an unfavorable outcome is reasonably possible and significant, we disclose the nature of the matter and a range of potential exposure, unless an estimate cannot be made at the time of disclosure. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.

 

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Table of Contents

 

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.  The inquiry focused on transactions in Kazakhstan, Saudi Arabia, Algeria and Nigeria.  The Audit Committee of our Board of Directors engaged outside counsel to review some of our transactions with this vendor, received periodic updates at its regularly scheduled meetings, and the Chairman of the Audit Committee received updates between meetings as circumstances warranted.  The investigation included 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 the results of our investigation. The SEC has advised us in April 2012 that it concluded its review of this matter and does not intend to recommend any enforcement action against us. Although the Department of Justice has not concluded its inquiry, we do not anticipate that its final determination will have an adverse effect on the Company.

 

In 2009, the Court of Ouargla (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 was excessive in any case.  We asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court.  On May 31, 2012, that court reversed the lower court and remanded the case to the Ouargla Court of Appeals for treatment consistent with the Supreme Court’s ruling. Based upon our understanding of applicable law and precedent, we continue to believe that we will prevail. We do not believe that a loss is probable and have not accrued any amounts related to this matter.  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 March 2011, the Court of Ouargla entered a judgment of approximately $39.1 million against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue, 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, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $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.

 

The previously disclosed purported shareholder derivative lawsuits filed in 2011 and 2012 against Nabors Industries Ltd. and its Board of Directors relating to certain compensation arrangements have been dismissed.  The allegations of each lawsuit were substantially similar, alleging that the members of the Board breached their fiduciary duties, wasted corporate assets and committed oppressive conduct against shareholders by agreeing to certain compensation arrangements with two senior officers of the Company, Eugene M. Isenberg and Anthony G. Petrello.  The lawsuits sought an award of monetary damages in an unspecified amount, disgorgement by Messrs. Isenberg and Petrello of allegedly excessive compensation in an unspecified amount of at least $90 million, and reformation of Nabors’ compensation practices.  The cases were filed, respectively, before Judges Gray Miller and Ewing Werlein in the United States Southern District of Texas, Houston Division, and Judge Mike Miller of the 11th Judicial District Court of Harris County, Texas.  The case pending before Judge Gray Miller was voluntarily dismissed on January 31, 2012.  Judge Werlein entered a final judgment on July 30, 2012 dismissing the case pending in the United States Southern District of Texas, finding that plaintiffs lacked standing to sue and failed to state a claim for which relief could be

 

21



Table of Contents

 

granted.  Plaintiffs initially appealed Judge Werlein’s ruling to the United States Fifth Circuit Court of Appeals, but voluntarily dismissed the appeal on October 22, 2012.  Plaintiffs in the remaining state court case filed an agreed motion to dismiss with prejudice on October 22, 2012.  The Company does not anticipate any further material activity in connection with these lawsuits.

 

On March 9, 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company.  When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”).  The lawsuit also seeks monetary damages of up to $100 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. Nabors successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012.  On March 23, 2012, ERG filed and obtained an ex parte stay from the Supreme Court of Bermuda (Commercial Court), in a case styled as ERG Resources LLC v. Nabors Global Holdings II Limited, Case No. 2012: No. 110.  Nabors challenged the stay and, following a series of oral hearings on the matter, the Bermuda court discharged the stay by a ruling dated April 5, 2012.  Nabors completed the sale of Ramshorn’s Class A shares to a Parex affiliate on April 12, 2012, which mooted ERG’s application for a temporary injunction that was scheduled for hearing by the Texas court on April 13, 2012.  ERG retains its causes of action for monetary damages, but Nabors believes the claims are foreclosed by the terms of the agreement and are without factual or legal merit.  While Nabors intends to vigorously defend the lawsuit, the ultimate outcome of the lawsuit cannot be determined at this time.

 

Off-Balance Sheet Arrangements (Including Guarantees)

 

We are a party to some transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources.  The most significant of these off-balance sheet arrangements 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

2012

 

2013

 

2014

 

Thereafter

 

Total

 

 

 

 

 

(In thousands)

 

 

 

Financial standby letters of credit and other financial surety instruments

 

$

31,469

 

$

56,657

 

$

105

 

$

 

$

88,231

 

 

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Table of Contents

 

Note 13 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) (numerator):

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

65,818

 

$

87,190

 

$

109,783

 

$

252,629

 

Less: net (income) loss attributable to noncontrolling interest

 

(988

)

(708

)

453

 

355

 

Adjusted income (loss) from continuing operations, net of tax — basic

 

64,830

 

86,482

 

110,236

 

252,984

 

Add: interest expense on assumed conversion of our 0.94% senior exchangeable notes, net of tax (1)

 

 

 

 

 

Adjusted net income (loss) from continuing operations, net of tax — diluted

 

64,830

 

86,482

 

110,236

 

252,984

 

Income (loss) from discontinued operations, net of tax

 

10,826

 

(12,226

)

26,721

 

96,545

 

Adjusted net income (loss) attributable to Nabors

 

75,656

 

74,256

 

136,957

 

349,529

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

.22

 

$

.30

 

$

.38

 

$

.88

 

Basic from discontinued operations

 

.04

 

(.04

)

.09

 

.34

 

Total Basic

 

$

.26

 

$

.26

 

$

.47

 

$

1.22

 

 

 

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

.22

 

$

.30

 

$

.38

 

$

.86

 

Diluted from discontinued operations

 

.04

 

(.05

)

.09

 

.33

 

Total Diluted

 

$

.26

 

$

.25

 

$

.47

 

$

1.19

 

 

 

 

 

 

 

 

 

 

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding — basic

 

290,367

 

287,487

 

289,822

 

286,971

 

Net effect of dilutive stock options, warrants and restricted stock awards based on the if-converted method

 

2,134

 

4,499

 

2,468

 

6,020

 

Assumed conversion of our 0.94% senior exchangeable notes due 2011 (1)