NABORS INDUSTRIES LTD - Quarter Report: 2015 March (Form 10-Q)

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 March 31, 2015

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

 

Crown House

Second Floor

4 Par-la-Ville Road

Hamilton, HM08

Bermuda

(441) 292-1510

(Address of principal executive office)

 

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 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.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o  NO x

 

The number of common shares, par value $.001 per share, outstanding as of April 28, 2015 was 330,357,704.

 

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (Unaudited)	3
	Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	6
	Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
Signatures		51
Exhibit Index

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		March 31,			December 31,
(In thousands, except per share amounts)		2015			2014
ASSETS
Current assets:
Cash and cash equivalents		$	586,001		$	501,149
Short-term investments		35,170			35,020
Assets held for sale		134,709			146,467
Accounts receivable, net		971,601			1,517,503
Inventory		190,423			230,067
Deferred income taxes		91,050			118,230
Other current assets		161,378			193,438
Total current assets		2,170,332			2,741,874
Long-term investments and other receivables		2,627			2,806
Property, plant and equipment, net		7,333,808			8,599,125
Goodwill		80,947			173,928
Investment in unconsolidated affiliates		730,487			58,251
Other long-term assets		286,397			303,958
Total assets		$	10,604,598		$	11,879,942
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt		$	8,739		$	6,190
Trade accounts payable		403,038			780,060
Accrued liabilities		669,812			728,004
Income taxes payable		75,007			53,221
Total current liabilities		1,156,596			1,567,475
Long-term debt		3,816,717			4,348,859
Other long-term liabilities		604,526			601,816
Deferred income taxes		58,997			443,003
Total liabilities		5,636,836			6,961,153
Commitments and contingencies (Note 10)
Equity:
Shareholders’ equity:
Common shares, par value $0.001 per share:
Authorized common shares 800,000; issued 329,557 and 328,196, respectively		330			328
Capital in excess of par value		2,459,043			2,452,261
Accumulated other comprehensive income		14,768			77,522
Retained earnings		3,679,336			3,573,172
Less: treasury shares, at cost, 38,788 common shares		(1,194,664		)	(1,194,664		)
Total shareholders’ equity		4,958,813			4,908,619
Noncontrolling interest		8,949			10,170
Total equity		4,967,762			4,918,789
Total liabilities and equity		$	10,604,598		$	11,879,942

 

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

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

		Three Months Ended
		March 31,
(In thousands, except per share amounts)		2015			2014
Revenues and other income:
Operating revenues		$	1,414,707		$	1,589,618
Earnings (losses) from unconsolidated affiliates		6,502			(2,445		)
Investment income (loss)		969			980
Total revenues and other income		1,422,178			1,588,153
Costs and other deductions:
Direct costs		919,610			1,061,739
General and administrative expenses		127,133			134,266
Depreciation and amortization		281,019			282,127
Interest expense		46,601			44,810
Losses (gains) on sales and disposals of long-lived assets and other expense (income), net		(55,842		)	1,476
Total costs and other deductions		1,318,521			1,524,418
Income (loss) from continuing operations before income tax		103,657			63,735
Income tax expense (benefit):
Current		47,349			13,658
Deferred		(68,054		)	350
Total income tax expense (benefit)		(20,705		)	14,008
Subsidiary preferred stock dividend		—			750
Income (loss) from continuing operations, net of tax		124,362			48,977
Income (loss) from discontinued operations, net of tax		(817		)	1,515
Net income (loss)		123,545			50,492
Less: Net (income) loss attributable to noncontrolling interest		89			(573		)
Net income (loss) attributable to Nabors		$	123,634		$	49,919
Earnings (losses) per share:
Basic from continuing operations		$	0.43		$	0.16
Basic from discontinued operations		—			0.01
Total Basic		$	0.43		$	0.17
Diluted from continuing operations		$	0.43		$	0.16
Diluted from discontinued operations		(0.01		)	—
Total Diluted		$	0.42		$	0.16
Weighted-average number of common shares outstanding:
Basic		285,361			296,210
Diluted		286,173			299,050

 

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

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		Three Months Ended
		March 31,
(In thousands)		2015			2014
Net income (loss) attributable to Nabors		$	123,634		$	49,919
Other comprehensive income (loss), before tax:
Translation adjustment attributable to Nabors:
Unrealized loss on translation adjustment		(68,539		)	(36,594		)
Less: reclassification adjustment for realized loss on translation adjustment		5,365			—
Translation adjustment attributable to Nabors		(63,174		)	(36,594		)
Unrealized gains/(losses) on marketable securities		153			(19,208		)
Pension liability amortization and adjustment		276			123
Unrealized gains/(losses) and amortization of cash flow hedges		153			153
Other comprehensive income (loss), before tax		(62,592		)	(55,526		)
Income tax expense (benefit) related to items of other comprehensive income (loss)		162			148
Other comprehensive income (loss), net of tax		(62,754		)	(55,674		)
Comprehensive income (loss) attributable to Nabors		60,880			(5,755		)
Net income (loss) attributable to noncontrolling interest		(89		)	573
Translation adjustment attributable to noncontrolling interest		(880		)	(481		)
Comprehensive income (loss) attributable to noncontrolling interest		(969		)	92
Comprehensive income (loss)		$	59,911		$	(5,663	)

 

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

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
		2015			2014
		(In thousands)
Cash flows from operating activities:
Net income (loss)		$	123,545		$	50,492
Adjustments to net income (loss):
Depreciation and amortization		281,019			282,349
Deferred income tax expense (benefit)		(68,623		)	451
Losses (gains) on long-lived assets, net		732			3,517
Losses (gains) on investments, net		—			(7		)
Share-based compensation		13,691			10,685
Foreign currency transaction losses (gains), net		(2,345		)	(3,293		)
Gain on merger transaction		(52,574		)	—
Equity in (earnings) losses of unconsolidated affiliates, net of dividends		(5,737		)	2,445
Other		3,988			910
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		244,544			(57,004		)
Inventory		511			14,480
Other current assets		13,145			4,742
Other long-term assets		(1,665		)	1,275
Trade accounts payable and accrued liabilities		(275,313		)	(28,471		)
Income taxes payable		24,927			(26,036		)
Other long-term liabilities		7,325			188,028
Net cash provided by operating activities		307,170			444,563
Cash flows from investing activities:
Purchases of investments		1,710			(286		)
Sales and maturities of investments		623			733
Cash paid for acquisition of businesses, net		—			(10,200		)
Investment in unconsolidated affiliates		(445		)	(1,255		)
Proceeds from merger transaction		693,450			—
Capital expenditures		(364,234		)	(396,465		)
Proceeds from sales of assets and insurance claims		8,997			21,605
Net cash provided by (used for) investing activities		340,101			(385,868		)
Cash flows from financing activities:
Increase (decrease) in cash overdrafts		(1,017		)	(1,822		)
Proceeds from (payments for) issuance of common shares		182			4,931
Dividends to shareholders		(17,470		)	(11,893		)
Proceeds from (payment for) commercial paper, net		(282,615		)	(39,594		)
Proceeds from revolving credit facilities		—			15,000
Reduction in revolving credit facilities		(250,000		)	(67,500		)
Proceeds from term loan facility		300,000			—
Payments on term loan facility		(300,000		)	—
Other		(4,549		)	(11,585		)
Net cash used for financing activities		(555,469		)	(112,463		)
Effect of exchange rate changes on cash and cash equivalents		(6,950		)	(9,266		)
Net increase (decrease) in cash and cash equivalents		84,852			(63,034		)
Cash and cash equivalents, beginning of period		501,149			389,915
Cash and cash equivalents, end of period		$	586,001		$	326,881

 

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)

 

							Capital			Accumulated
		Common Shares					in Excess			Other									Non-
				Par			of Par			Comprehensive			Retained			Treasury			controlling			Total
(In thousands)		Shares		Value			Value			Income			Earnings			Shares			Interest			Equity
As of December 31, 2013		323,711		$	324		$	2,392,585		$	216,140		$	4,304,664		$	(944,627	)	$	12,091		$	5,981,177
Net income (loss)													49,919						573			50,492
Dividends to shareholders													(11,893		)							(11,893		)
Other comprehensive income (loss), net of tax										(55,674		)							(481		)	(56,155		)
Issuance of common shares for stock options exercised		517		1			4,930															4,931
Share-based compensation							10,685															10,685
Other		1,544		1			(6,586		)										(1,383		)	(7,968		)
As of March 31, 2014		325,772		$	326		$	2,401,614		$	160,466		$	4,342,690		$	(944,627	)	$	10,800		$	5,971,269
As of December 31, 2014		328,196		$	328		$	2,452,261		$	77,522		$	3,573,172		$	(1,194,664	)	$	10,170		$	4,918,789
Net income (loss)													123,634						(89		)	123,545
Dividends to shareholders													(17,470		)							(17,470		)
Other comprehensive income (loss), net of tax										(62,754		)							(880		)	(63,634		)
Issuance of common shares for stock options exercised		20					182															182
Share-based compensation							13,691															13,691
Other		1,341		2			(7,091		)										(252		)	(7,341		)
As of March 31, 2015		329,557		$	330		$	2,459,043		$	14,768		$	3,679,336		$	(1,194,664	)	$	8,949		$	4,967,762

 

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

 

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Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

We own and operate the world’s largest land-based drilling rig fleet and are a leading provider of offshore platform workover and drilling rigs in the United States and numerous international markets.

 

As a global provider of services for land-based and offshore oil and natural gas wells, our fleet of rigs and drilling-related equipment as of March 31, 2015 includes:

 

·                  468 actively marketed rigs for land-based drilling operations in the United States, Canada and over 20 other countries throughout the world; and

 

·                  42 actively marketed rigs for offshore drilling operations in the United States and numerous international markets.

 

We also provide innovative drilling technology and equipment and comprehensive well-site services in many of the most significant oil and gas markets in the world, including engineering, transportation and disposal, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services. In addition, we manufacture and lease or sell top drives and other rig equipment. We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets five rigs in addition to the rigs we lease to the joint venture.

 

The majority of our business for the three month period ended March 31, 2015 was conducted through two business lines:

 

Drilling & Rig Services

 

Our Drilling & Rig Services business line is comprised of our global land-based and offshore drilling rig operations and other rig services, consisting of equipment manufacturing, rig instrumentation, optimization software and directional drilling services. This business line consists of four operating segments: U.S., Canada, International and Rig Services.

 

Completion & Production Services

 

Our Completion & Production Services business line for the majority of the quarter was comprised of our operations involved in the completion, life-of-well maintenance and plugging and abandonment of a well in the United States and Canada. These services include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management. This business line consists of two operating segments: Completion Services and Production Services. On March 24, 2015, we completed the previously-announced merger of this business line with C&J Energy Services, Inc. (“C&J Energy”). See further discussion in Note 3 — Merger.

 

Unless the context requires otherwise, references in this report 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”), our wholly owned subsidiary.

 

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, 2014 (“2014 Annual Report”).  In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2015, as well as the results of our operations, other comprehensive income, our cash flows and changes in equity for the three months ended March 31, 2015 and 2014, in accordance with GAAP.  Interim results for the three months ended March 31, 2015 may not be indicative of results that will be realized for the full year ending December 31, 2015.

 

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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.  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).  The investments in these entities are included in investment in unconsolidated affiliates in our consolidated balance sheets.

 

Inventory

 

Inventory is stated at the lower of cost or market. 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:

 

		March 31,			December 31,
		2015			2014
		(In thousands)
Raw materials		$	142,948		$	133,797
Work-in-progress		30,996			39,617
Finished goods		16,479			56,653
		$	190,423		$	230,067

 

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 exceed their fair value.  We initially assess goodwill for impairment based on qualitative factors to determine whether to perform the two-step annual goodwill impairment test, a Level 3 fair value measurement.  After our qualitative assessment, step one of 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.  The 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 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 oil and natural gas prices, a variance in results of operations from forecasts, a change in operating strategy of assets 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 compare the sum of our reporting units’ estimated fair value, which includes the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assess 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.

 

Recent Accounting Pronouncements

 

In February 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) relating to consolidation, which eliminates the presumption that a general partner should consolidate a limited partnership. It also modifies the evaluation of whether limited partnerships are variable interest entities or voting interest entities and adds requirements that limited partnerships must meet to qualify as voting interest entities. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In May 2014, the FASB issued an ASU relating to the revenue recognition from contracts with customers that creates a common revenue standard for GAAP and IFRS. The core principle will require recognition of revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration, including costs incurred, to which the entity expects to be entitled in exchange for those goods or services. On April 1, 2015, the FASB proposed deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the

 

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standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In April 2015, the FASB issued an ASU relating to the presentation of debt issuance costs on the balance sheet.  This standard amends existing guidance to require the presentation of debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge.  This guidance is effective for fiscal years beginning after December 15, 2015.  Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

Note 3 Merger

 

On March 24, 2015, we completed the previously-announced merger of our Completion & Production Services business line with C&J Energy.  We received total consideration comprised of approximately $693.5 million in cash and approximately 62.5 million common shares in the combined company, C&J Energy Services, Ltd. (“CJES”), representing approximately 53% of the outstanding and issued common shares of CJES.  Because we have significant influence over CJES, but not a fully controlling financial interest, we account for our investment in CJES under the equity method of accounting.

 

Our consolidated statement of income (loss) for the three months ended March 31, 2015 includes the operating results of our Completion & Production Services business line through the closing date of the transaction.  For the remainder of the period, our share of the net income (loss) of our equity method investment is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statement of income (loss).

 

We recorded our investment in the equity of CJES in the Investment in unconsolidated affiliates line in our consolidated balance sheet, with an initial valuation of approximately $676.2 million, based on the fair value of shares received on the closing date of the transaction.  Additionally, we recognized an estimated gross gain of $102.2 million in connection with the merger based on the difference between the consideration received and the carrying value of the assets and liabilities of our Completion & Production Services business line.  This gain was partially offset by $49.6 million in transaction costs related to the merger.  The merger is subject to customary post-closing adjustments for levels of working capital at closing which may impact the ultimate amount of gain recognized on the transaction.

 

Note 4 Cash and Cash Equivalents and Short-term Investments

 

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

 

		March 31, 2015									December 31, 2014
		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		$	586,001		$	—		$	—		$	501,149		$	—		$	—
Short-term investments:
Available-for-sale equity securities		35,152			14,799			—			35,002			14,648			—
Available-for-sale debt securities:
Mortgage-CMO debt securities		18			—			(1		)	18			—			(1		)
Total short-term investments		35,170			14,799			(1		)	35,020			14,648			(1		)
Total cash, cash equivalents and short-term investments		$	621,171		$	14,799		$	(1	)	$	536,169		$	14,648		$	(1	)

 

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

 

		Three Months Ended
		March 31,
		2015			2014
		(In thousands)
Available-for-sale
Proceeds from sales and maturities		$	—		$	135
Realized gains (losses), net		$	—		$	—

 

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Note 5 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 March 31, 2015.  Our debt securities could transfer into or out of a Level 1 or 2 measures depending on the availability of independent and current pricing at the end of each quarter.  During the three months ended March 31, 2015, there were no transfers of our financial assets between Level 1 and Level 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.

 

		Fair Value as of March 31, 2015
		Level 1			Level 2			Level 3			Total
		(In thousands)
Assets:
Short-term investments:
Available-for-sale equity securities (energy industry)		$	35,152		$	—		$	—		$	35,152
Available-for-sale debt securities:
Mortgage-CMO debt securities		—			18			—			18
Total short-term investments		$	35,152		$	18		$	—		$	35,170

 

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 assets held-for-sale, goodwill, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination and our pipeline contractual commitment.

 

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, revolving credit facility, commercial paper 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:

 

		March 31, 2015						December 31, 2014
		Carrying Value			Fair Value			Carrying Value			Fair Value
		(In thousands)
2.35% senior notes due September 2016		$	349,904		$	349,213		$	349,887		$	346,980
6.15% senior notes due February 2018		931,000			997,517			930,693			991,920
9.25% senior notes due January 2019		339,607			400,118			339,607			403,531
5.00% senior notes due September 2020		698,329			697,669			698,253			687,953
4.625% senior notes due September 2021		698,448			680,008			698,388			661,619
5.10% senior notes due September 2023		348,925			335,129			348,893			332,759
Revolving credit facility		200,000			200,000			450,000			450,000
Commercial paper		250,504			250,504			533,119			533,119
Other		8,739			8,739			6,209			6,209
Total		$	3,825,456		$	3,918,897		$	4,355,049		$	4,414,090

 

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.

 

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Note 6 Share-Based Compensation

 

We have several share-based employee and director compensation plans, which are more fully described in Note 9 — Share-Based Compensation in our 2014 Annual Report. Total share-based compensation expense, which includes stock options and restricted stock, totaled $13.9 million and $10.7 million for the three months ended March 31, 2015 and 2014, respectively. Share-based compensation expense has been allocated to our various operating segments.  See Note 14 — Segment Information.

 

Stock Options

 

The total intrinsic value of stock options exercised during the three months ended March 31, 2015 and 2014 was $0.1 million and $6.0 million, respectively.  The total fair value of stock options that vested during the three months ended March 31, 2015 and 2014 was $1.5 million and $1.5 million, respectively.

 

Restricted Stock

 

During the three months ended March 31, 2015 and 2014, we awarded 1,514,934 and 1,106,919 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 date of grant of $19.3 million and $25.2 million, respectively.  The fair value of restricted stock that vested during the three months ended March 31, 2015 and 2014 was $15.7 million and $16.5 million, respectively.  The fair value of these awards is based on the closing price of Nabors stock on the date the awards are granted.

 

Restricted Stock Based on Performance

 

During the three months ended March 31, 2015 and 2014, we awarded 438,307 and 362,311 shares of restricted stock, respectively, vesting over a period of three years to some of our executives.  The performance awards granted were based upon achievement of specific financial or operational objectives. The number of shares granted was determined by the number of performance goals achieved during the period beginning January 1, 2014 through December 31, 2014.

 

Our performance awards based on performance conditions are liability-classified awards until shares are granted, of which our accrued liabilities included $0.6 million at March 31, 2015 for the performance period beginning January 1, 2015 through December 31, 2015. The fair value of these awards that vested during the three months ended March 31, 2015 and 2014 was $6.8 million and $5.9 million, respectively. The fair value of these awards are estimated at each reporting period, based on internal metrics and marked to market.

 

Restricted Stock Based on Market Conditions

 

During the three months ended March 31, 2015 and 2014, we awarded 544,925 and 395,550 shares of restricted stock, respectively, which will vest based on our performance compared to our peer group over a three-year period. These awards had an aggregate value at their date of grant of $4.7 million and $4.5 million, respectively, after consideration of all assumptions.

 

The grant date fair value of these awards was based on a Monte Carlo model, using the following assumptions:

 

		Three Months Ended
		March 31,
		2015			2014
Risk free interest rate		1.18		%	0.80		%
Expected Volatility		50.00		%	40.00		%
Closing stock price at grant date		$	12.98		$	18.19
Expected term (in years)		3.0 years			2.97 years

 

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Note 7 Debt

 

Debt consisted of the following:

 

		March 31,			December 31,
		2015			2014
		(In thousands)
2.35% senior notes due September 2016		$	349,904		$	349,887
6.15% senior notes due February 2018		931,000			930,693
9.25% senior notes due January 2019		339,607			339,607
5.00% senior notes due September 2020		698,329			698,253
4.625% senior notes due September 2021		698,448			698,388
5.10% senior notes due September 2023		348,925			348,893
Revolving credit facility		200,000			450,000
Commercial paper		250,504			533,119
Other		8,739			6,209
		$	3,825,456		$	4,355,049
Less: current portion		8,739			6,190
		$	3,816,717		$	4,348,859

 

Commercial Paper Program

 

As of March 31, 2015, we had approximately $250.5 million of commercial paper outstanding.  The weighted average interest rate on borrowings at March 31, 2015 was 0.664%.  Our commercial paper borrowings are classified as long-term debt because the borrowings are fully supported by availability under our revolving credit facility, which matures as currently structured in November 2017, more than one year from now.

 

Revolving Credit Facility

 

During the quarter, we exercised the accordian feature under our revolving credit facility to increase the borrowing capacity by $225.0 million, bringing our total capacity under the revolving credit facility to $1.725 billion.  As of March 31, 2015, we had approximately $200.0 million of borrowings outstanding under this facility.  The weighted average interest rate on borrowings at March 31, 2015 was 1.47%.  The revolving credit facility contains 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 agreement at March 31, 2015. If we 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.

 

Term Loan Facility

 

On February 6, 2015, Nabors Industries, Inc., our wholly owned subsidiary, entered into a new unsecured term loan facility for $300.0 million with a three-year maturity, which is fully and unconditionally guaranteed by us. Under the new term loan facility, we were required to prepay the loan upon the closing of the merger with C&J Energy, or if we otherwise dispose of assets, issue term debt, or issue equity with net proceeds of more than $70.0 million, subject to certain exceptions. The term loan agreement contained customary representations and warranties, covenants, and events of default for loan facilities of this type.  On March 27, 2015, we repaid the $300.0 million term loan and the facility was terminated according to the terms of the agreement using a portion of the cash consideration received in connection with the merger with C&J Energy.

 

Note 8 Common Shares

 

During the three months ended March 31, 2015 and 2014, our employees exercised vested options to acquire 0.02 million and 0.5 million of our common shares, respectively, resulting in proceeds of $0.2 million and $4.9 million, respectively. During the three months ended March 31, 2015 and 2014, we withheld 0.6 million and 0.3 million, respectively, of our common shares with a fair value of $7.1 million and $6.6 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

 

On February 20, 2015, a cash dividend of $0.06 per share was declared for shareholders of record on March 10, 2015. The dividend was paid on March 31, 2015 in the amount of $17.5 million and was charged to retained earnings in our consolidated statement of changes in equity for the three months ended March 31, 2015.

 

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Note 9 Subsidiary Preferred Stock

 

During 2014, we paid $70.9 million to redeem the 75,000 shares of Series A Preferred Stock outstanding of our subsidiary and paid all dividends due on such shares.

 

Note 10 Commitments and Contingencies

 

Contingencies

 

Income Tax

 

Income tax returns that we file are subject to review and examination. We do not recognize the benefit of income tax positions we believe are more likely than not to be disallowed upon challenge by a tax authority. If any tax authority successfully challenges our operational structure, intercompany pricing policies or the taxable presence of our subsidiaries in certain countries, if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure, or if we lose a material tax dispute in any country, our effective tax rate on our worldwide earnings could change substantially.

 

We have received an assessment from the Mexican federal tax authority in connection with 2007. The assessment was related to the denial of depreciation expense deductions related to drilling rigs. Similar deductions were taken in 2008 - 2010. Although Nabors and its tax advisors believe these deductions continue to be defendable, a partial reserve has been recorded. The total amounts assessed or expected to be assessed range from $30 million to $35 million. The Mexican Supreme Court recently reached an unfavorable decision related to depreciation for another taxpayer. We have not changed our position to defend this issue, as we are confident that we will prevail in court. If we ultimately do not prevail, we would be required to recognize additional tax for any 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 and are actuarially supported.  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.

 

We self-insure for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Effective April 1, 2015, some of our workers’ compensation claims, employers’ liability and marine employers’ liability claims are subject to a $3.0 million per-occurrence deductible; additionally, some of our automobile liability claims are subject to a $2.5 million deductible.  General liability claims remain subject to a $5.0 million per-occurrence deductible.

 

In addition, we are subject to a $5.0 million deductible for land rigs and for offshore rigs.  This applies to all kinds of risks of physical damage except for named windstorms in the U.S. Gulf of Mexico for which we are self-insured.

 

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.

 

In 2009, the Court of Ouargla entered a judgment of approximately $14.7 million (at March 31, 2015 exchange rates) against us relating to alleged customs infractions in Algeria. 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 (the “Supreme Court”). In May 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. In January 2013, the Ouargla Court of Appeals reinstated the judgment. We again lodged an appeal to the Supreme Court, asserting the same challenges as

 

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before. While the appeal was pending, the Hassi Messaoud customs office initiated efforts to collect the judgment prior to the Supreme Court’s decision in the case. As a result, we paid approximately $3.1 million and posted security of approximately $1.33 million to suspend those collection efforts and to enter into a formal negotiations process with the customs authority. We have recorded a reserve in the amount of the posted security. The customs authority demanded 50% of the total fine as a final settlement and seized additional funds of approximately $4.425 million. The matter was heard by the Supreme Court on February 26, 2015, and on March 26, 2015, that court set aside the judgment of the Ouargla Court of Appeals and remanded the case to that court for further proceedings.  We have filed an appeal at the Conseil d’Etat in an effort to recover amounts previously paid by us.  Based upon our understanding of applicable law and precedent, we continue to believe that we will prevail.  If we are ultimately required to pay a fine or judgment related to this matter, the resulting loss could be up to $10.3 million in excess of amounts accrued.

 

In March 2011, the Court of Ouargla entered a judgment of approximately $29.0 million (at March 31, 2015 exchange rates) 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. 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 upheld the lower court’s ruling, and we appealed the matter to the Supreme Court. On September 25, 2014, the Supreme Court overturned the verdict against us, and the case was reheard by the Ouargla Court of Appeals on March 22, 2015 in light of the Supreme Court’s opinion. On March 29, 2015, the Ouargla Court of Appeals reinstated the initial judgment against us.  We plan to appeal this decision again to the 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 $21.0 million in excess of amounts accrued.

 

In 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 $3.0 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 $750.0 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. We successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012. We completed the sale of Ramshorn’s Class A shares to a Parex affiliate in April 2012, which mooted ERG’s application for a temporary injunction. The lawsuit is staid, pending further court actions, including appeals of the jurisdictional decisions. ERG retains its causes of action for monetary damages, but we believe the claims are foreclosed by the terms of the agreement and are without factual or legal merit. Although we are vigorously defending the lawsuit, its ultimate outcome cannot be determined at this time.

 

On July 30, 2014, we and Red Lion, along with C&J Energy and its board of directors, were sued in a putative shareholder class action filed in the Court of Chancery of the State of Delaware (the “Court of Chancery”). The plaintiff alleges that the members of the C&J Energy board of directors breached their fiduciary duties in connection with the Merger, and that Red Lion and C&J Energy aided and abetted these alleged breaches. The plaintiff sought to enjoin the defendants from proceeding with or consummating the Merger and the C&J Energy stockholder meeting for approval of the Merger and, to the extent that the Merger was completed before any relief was granted, to have the Merger rescinded. On November 10, 2014, the plaintiff filed a motion for a preliminary injunction, and, on November 24, 2014, the Court of Chancery entered a bench ruling, followed by a written order on November 25, 2014, that (i) ordered certain members of the C&J Energy board of directors to solicit for a 30 day period alternative proposals to purchase C&J Energy (or a controlling stake in C&J Energy) that were superior to the Merger, and (ii) preliminarily enjoined C&J Energy from holding its stockholder meeting until it complied with the foregoing. C&J Energy complied with the order while it simultaneously pursued an expedited appeal of the Court of Chancery’s order to the Supreme Court of the State of Delaware (the “Delaware Supreme Court”). On December 19, 2014, the Delaware Supreme Court overturned the Court of Chancery’s judgment and vacated the order. This case remains pending.

 

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.

 

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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  2015			2016			2017			Thereafter			Total
		(In thousands)
Financial standby letters of credit and other financial surety instruments		$	128,843		$	73,528		$	19		$	1		$	202,391

 

Note 11 Earnings (Losses) Per Share

 

ASC 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings (losses) per share. We have granted and expect to continue to grant to employees restricted stock grants that contain non-forfeitable rights to dividends. Such grants are considered participating securities under ASC 260. As such, we are required to include these grants in the calculation of our basic earnings (losses) per share and calculate basic earnings (losses) per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Basic earnings (losses) per share is computed utilizing the two-class method and is calculated based on the weighted-average number of common shares outstanding during the periods presented. Diluted earnings (losses) per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options and unvested restricted stock.

 

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A reconciliation of the numerators and denominators of the basic and diluted earnings (losses) per share computations is as follows:

 

		Three Months Ended
		March 31,
		2015			2014
		(In thousands, except per share amounts)
BASIC EPS:
Net income (loss) (numerator):
Income (loss) from continuing operations, net of tax		$	124,362		$	48,977
Less: net (income) loss attributable to noncontrolling interest		89			(573		)
Less: (earnings) losses allocated to unvested shareholders		(2,031		)	(733		)
Numerator for basic earnings per share:
Adjusted income (loss) from continuing operations		$	122,420		$	47,671
Income (loss) from discontinued operations		$	(817	)	$	1,515
Weighted-average number of shares outstanding - basic		285,361			296,210
Earnings (losses) per share:
Basic from continuing operations		$	0.43		$	0.16
Basic from discontinued operations		—			0.01
Total Basic		$	0.43		$	0.17
DILUTED EPS:
Income (loss) from continuing operations attributed to common shareholders		$	122,420		$	47,671
Add: effect of reallocating undistributed earnings of unvested shareholders		5			—
Adjusted income (loss) from continuing operations attributed to common shareholders		$	122,425		$	47,671
Income (loss) from discontinued operations		$	(817	)	$	1,515
Weighted-average number of shares outstanding - basic		285,361			296,210
Add: dilutive effect of potential common shares		812			2,840
Weighted-average number of diluted shares outstanding		286,173			299,050
Earnings (losses) per share:
Diluted from continuing operations		$	0.43		$	0.16
Diluted from discontinued operations		(0.01		)	—
Total Diluted		$	0.42		$	0.16

 

For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options 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 that were excluded from diluted earnings (losses) per share that would potentially dilute earnings (losses) per share were 6,621,688 and 7,853,509 shares during the three months ended March 31, 2015 and 2014, respectively. In any period during which the average market price of our common shares exceeds the exercise prices of these stock options, such stock options will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting.

 

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