Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2020

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 2 Summary of Significant Accounting Policies

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements of Nabors have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. 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 U.S. GAAP have been omitted. Therefore, these financial statements should be read together with our annual report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”). In management’s opinion, the unaudited condensed consolidated financial statements contain

all adjustments necessary to state fairly our financial position as of June 30, 2020 and the results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented herein. Interim results for the six months ended June 30, 2020 may not be indicative of results that will be realized for the full year ending December 31, 2020.

Principles of Consolidation

Our condensed consolidated financial statements include the accounts of Nabors, as well as all majority owned and non-majority owned subsidiaries consolidated in accordance with U.S. GAAP. All significant intercompany accounts and transactions are eliminated in consolidation.

In addition to the consolidation of our majority owned subsidiaries, we also consolidate variable interest entities (“VIE”) when we are determined to be the primary beneficiary of a VIE. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our joint venture, SANAD, which is equally owned by Saudi Aramco and Nabors, has been consolidated. As we have the power to direct activities that most significantly impact SANAD’s economic performance, including operations, maintenance and certain sourcing and procurement, we have determined Nabors to be the primary beneficiary. See Note 3—Joint Ventures.

Industry Condition, Liquidity, Management’s Plans and Going Concern

During the first half of 2020, the oil markets have experienced unprecedented volatility. The outbreak of COVID-19, and its development into a pandemic, along with policies and actions taken by governments and companies and behaviors of customers around the world, have had a significant negative impact on demand for oil. Additionally, decisions by large oil and natural gas producing countries around the start of the pandemic led to increased oil production and supply. This combination of oversupply and demand weakness has had a negative impact on the energy markets and has led to a significant drop in oil prices with West Texas Intermediate crude oil reaching negative prices during the second quarter. Crude oil prices have continued to be impacted by oversupply fears, as considerable uncertainty remains as to timing of a resumption of normal levels of economic activity following the COVID-19 related restrictions. This has led many of our customers to make significant cuts in their activity, which has negatively affected our operating results and cash flow. Given the current trends, we expect drilling activity will continue to fall in the U.S. in the coming months and that measures implemented by foreign jurisdictions and actions taken by national oil companies will also have a negative impact. We are uncertain as to the extent of the impact that these events will have on the energy industry and on our business.

Our 2018 Revolving Credit Facility contains certain covenants, including a financial covenant requiring Nabors to maintain net funded debt at no greater than 5.5 times our EBITDA over the trailing twelve months (the leverage ratio). Throughout 2019 and through the first six months of 2020, we have been in compliance with all covenants. However, the current drilling and drilling related services environment detailed above, and the impact it has had on our operations and cash flows, has made our ability to continue to comply with the leverage ratio increasingly uncertain if these conditions continue into 2021. Based on our current forecasts, which are highly uncertain given current market conditions, it is possible we will be in violation of this covenant in 2021, if conditions do not improve meaningfully. Failure to comply with this covenant, if not amended or waived, would result in an event of default under the 2018 Revolving Credit Facility and the potential acceleration of the outstanding balance, which raises substantial doubt about the Company’s ability to continue as a going concern throughout the twelve month period following the issuance of these financial statements.

We are currently in discussions with our lenders to amend the 2018 Revolving Credit Facility in a way that would provide sufficient relief from this covenant to avoid an event of default over the next twelve months. We are also actively pursuing and executing a variety of transactions and cost-cutting measures, including but not limited to, reductions in our workforce, discretionary expenditures, capital expenditures and dividends, along with refinancing transactions, asset divestitures and operational improvements. We are optimistic that we will be able to successfully negotiate an amendment to avoid the failure to comply with the leverage ratio covenant. However, we cannot predict with certainty the extent to which these measures will be successful, if at all. The Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might result if the Company is unable to continue as a going concern.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out or weighted-average cost methods and includes the cost of materials, labor and manufacturing overhead. Inventory included the following:

	June 30,		December 31,
	2020		2019
	(In thousands)
Raw materials	$	133,563	$	130,414
Work-in-progress		7,777		5,498
Finished goods		25,197		40,429
	$	166,537	$	176,341

Goodwill

We review goodwill for impairment annually during the second quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying amount of such goodwill and intangible assets may exceed their fair value. We initially assess goodwill for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management. We primarily calculate fair value in these impairment tests using discounted cash flow models, which require the use of significant unobservable inputs, representative of a Level 3 fair value measurement. Our cash flow models involve 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 fair value estimates of these reporting units are sensitive to varying dayrates, utilization and costs. A significantly prolonged period of lower oil and natural gas prices, other than those assumed in developing our forecasts, or changes in laws and regulations, could adversely affect the demand for and prices of our services. 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 approximately 2%. The fair value of certain of our reporting units utilizes a market approach based on comparing the assets and liabilities of companies within our same industry. The market approach involves significant judgment in the selection of the appropriate peer group companies and valuation multiples.

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 change in the carrying amount of goodwill for our segments for the six months ended June 30, 2020 was as follows:

			Acquisitions
			and
	Balance at		Purchase		Disposals			Cumulative		Balance at
	December 31,		Price		and			Translation		June 30,
	2019		Adjustments		Impairments			Adjustment		2020
	(In thousands)
Drilling Solutions	$	11,436	$	—	$	(11,436)	(1)	$	—	$	—
Rig Technologies		16,944		—		(16,362)	(1)		(582)		—
Total	$	28,380	$	—	$	(27,798)		$	(582)	$	—

(1) Due to industry conditions that existed at March 31, 2020 such as the drop in commodity prices and the corresponding impact on future expectations of demand for our products and services, including the effect on our stock price, we performed a quantitative impairment assessment of our goodwill as of March 31, 2020. Based on the results of our goodwill test, we recognized a goodwill impairment of $27.8 million. See Note 10—Impairments and Other Charges.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes accounting requirements for the recognition of credit losses from an incurred or probable impairment methodology to a current expected credit losses (CECL) methodology. The guidance is effective for interim and annual periods beginning after December 15, 2019. The guidance has been applied using the modified retrospective method with a cumulative effect adjustment to beginning retained earnings. Trade receivables (including the allowance for credit losses) are the only financial instrument in scope for ASU 2016-13 currently held by the Company. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.