Quarterly Report (10-q)

Date : 05/03/2018 @ 6:12AM
Source : Edgar (US Regulatory)
Stock : Nabors Industries Ltd. (NBR)
Quote : 7.28  -0.52 (-6.67%) @ 5:42PM

Quarterly Report (10-q)

 

 

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, 2018

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

 

 

 

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 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 ☒  NO ☐

 

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 ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large Accelerated Filer ☒

 

Accelerated Filer ☐

 

 

 

Non-accelerated Filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐  NO ☒

 

The number of common shares, par value $.001 per share, outstanding as of April 27, 2018 was 317,424,214, excluding 52,800,203 common shares held by our subsidiaries, or 370,224,417 in the aggregate.

 

 

 

 


 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

Item 1.  

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Income (Loss) for the Three Ended March 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2018 and 2017

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.  

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

36

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4.  

Controls and Procedures

43

 

 

 

PART II OTHER INFORMATION  

 

 

 

Item 1.  

Legal Proceedings

43

 

 

 

Item 1A.  

Risk Factors

43

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3.  

Defaults Upon Senior Securities

45

 

 

 

Item 4.  

Mine Safety Disclosures

45

 

 

 

Item 5.  

Other Information

45

 

 

 

Item 6.  

Exhibits

46

 

 

 

Signatures  

47

 

 

 

 

 

 

2


 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

 

 

(In thousands, except per

 

 

 

share amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

367,039

 

$

336,997

 

Short-term investments

 

 

26,548

 

 

28,369

 

Accounts receivable, net

 

 

733,541

 

 

698,477

 

Inventory, net

 

 

174,308

 

 

166,307

 

Assets held for sale

 

 

36,404

 

 

37,052

 

Other current assets

 

 

156,533

 

 

180,134

 

Total current assets

 

 

1,494,373

 

 

1,447,336

 

Property, plant and equipment, net

 

 

5,969,063

 

 

6,109,565

 

Goodwill

 

 

172,982

 

 

173,226

 

Deferred income taxes

 

 

417,781

 

 

419,003

 

Other long-term assets

 

 

245,631

 

 

252,854

 

Total assets (1)

 

$

8,299,830

 

$

8,401,984

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

375

 

$

181

 

Trade accounts payable

 

 

309,883

 

 

363,416

 

Accrued liabilities

 

 

432,294

 

 

533,044

 

Income taxes payable

 

 

24,276

 

 

22,835

 

Total current liabilities

 

 

766,828

 

 

919,476

 

Long-term debt

 

 

4,256,160

 

 

4,027,766

 

Other long-term liabilities

 

 

321,652

 

 

301,633

 

Deferred income taxes

 

 

11,786

 

 

10,338

 

Total liabilities (1)

 

 

5,356,426

 

 

5,259,213

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Redeemable noncontrolling interest in subsidiary (Note 3)

 

 

206,396

 

 

203,998

 

Equity:

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

 

 

Authorized common shares 800,000; issued 370,320 and 367,510, respectively

 

 

370

 

 

368

 

Capital in excess of par value

 

 

2,797,893

 

 

2,791,129

 

Accumulated other comprehensive income (loss)

 

 

(7,151)

 

 

11,185

 

Retained earnings

 

 

1,232,516

 

 

1,423,154

 

Less: treasury shares, at cost, 52,800 and 52,800 common shares, respectively

 

 

(1,314,020)

 

 

(1,314,020)

 

Total shareholders’ equity

 

 

2,709,608

 

 

2,911,816

 

Noncontrolling interest

 

 

27,400

 

 

26,957

 

Total equity

 

 

2,737,008

 

 

2,938,773

 

Total liabilities and equity

 

$

8,299,830

 

$

8,401,984

 

_____________________________

(1)

The condensed consolidated balance sheet as of March 31, 2018 and December 31, 2017 include assets and liabilities of variable interest entities. See Note 3—Joint Ventures for additional information.

 

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

3


 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

    

March 31,

 

 

 

 

2018

 

2017

 

Revenues and other income:

 

 

 

 

 

 

 

 

Operating revenues

 

 

$

734,194

 

$

562,550

 

Earnings (losses) from unconsolidated affiliates

 

 

 

 2

 

 

 2

 

Investment income (loss)

 

 

 

465

 

 

721

 

Total revenues and other income

 

 

 

734,661

 

 

563,273

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

Direct costs

 

 

 

475,403

 

 

387,644

 

General and administrative expenses

 

 

 

74,571

 

 

63,409

 

Research and engineering

 

 

 

15,806

 

 

11,757

 

Depreciation and amortization

 

 

 

213,448

 

 

203,672

 

Interest expense

 

 

 

61,386

 

 

56,518

 

Other, net

 

 

 

14,089

 

 

13,510

 

Total costs and other deductions

 

 

 

854,703

 

 

736,510

 

Income (loss) from continuing operations before income taxes

 

 

 

(120,042)

 

 

(173,237)

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

Current

 

 

 

8,771

 

 

22,689

 

Deferred

 

 

 

14,774

 

 

(48,298)

 

Total income tax expense (benefit)

 

 

 

23,545

 

 

(25,609)

 

Income (loss) from continuing operations, net of tax

 

 

 

(143,587)

 

 

(147,628)

 

Income (loss) from discontinued operations, net of tax

 

 

 

(75)

 

 

(439)

 

Net income (loss)

 

 

 

(143,662)

 

 

(148,067)

 

Less: Net (income) loss attributable to noncontrolling interest

 

 

 

(539)

 

 

(917)

 

Net income (loss) attributable to Nabors

 

 

$

(144,201)

 

$

(148,984)

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Nabors:

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

$

(144,126)

 

$

(148,545)

 

Net income (loss) from discontinued operations

 

 

 

(75)

 

 

(439)

 

Net income (loss) attributable to Nabors

 

 

$

(144,201)

 

$

(148,984)

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

Basic from continuing operations

 

 

$

(0.46)

 

$

(0.52)

 

Basic from discontinued operations

 

 

 

 —

 

 

 —

 

Total Basic

 

 

$

(0.46)

 

$

(0.52)

 

Diluted from continuing operations

 

 

$

(0.46)

 

$

(0.52)

 

Diluted from discontinued operations

 

 

 

 —

 

 

 —

 

Total Diluted

 

 

$

(0.46)

 

$

(0.52)

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

 

308,788

 

 

277,781

 

Diluted

 

 

 

308,788

 

 

277,781

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

 

$

0.06

 

$

0.06

 

 

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

4


 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

    

March 31,

 

 

 

 

 

2018

 

2017

 

 

Net income (loss) attributable to Nabors

 

 

$

(144,201)

 

$

(148,984)

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

 

 

(9,343)

 

 

3,860

 

 

Unrealized gains (losses) on marketable securities

 

 

 

 —

 

 

(3,201)

 

 

Pension liability amortization and adjustment

 

 

 

54

 

 

50

 

 

Unrealized gains (losses) and amortization on cash flow hedges

 

 

 

140

 

 

153

 

 

Adoption of ASU No. 2016-01

 

 

 

(9,144)

 

 

 —

 

 

Other comprehensive income (loss), before tax

 

 

 

(18,293)

 

 

862

 

 

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

 

 

 

43

 

 

79

 

 

Other comprehensive income (loss), net of tax

 

 

 

(18,336)

 

 

783

 

 

Comprehensive income (loss) attributable to Nabors

 

 

 

(162,537)

 

 

(148,201)

 

 

Net income (loss) attributable to noncontrolling interest

 

 

 

539

 

 

917

 

 

Translation adjustment attributable to noncontrolling interest

 

 

 

(96)

 

 

49

 

 

Comprehensive income (loss) attributable to noncontrolling interest

 

 

 

443

 

 

966

 

 

Comprehensive income (loss)

 

 

$

(162,094)

 

$

(147,235)

 

 

 

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

5


 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2018

    

2017

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(143,662)

 

$

(148,067)

 

Adjustments to net income (loss):

 

 

 

 

 

 

 

Depreciation and amortization

 

 

214,008

 

 

204,364

 

Deferred income tax expense (benefit)

 

 

14,361

 

 

(48,469)

 

Deferred financing costs amortization

 

 

1,967

 

 

1,728

 

Discount amortization on long-term debt

 

 

5,335

 

 

4,505

 

Losses (gains) on debt buyback

 

 

 —

 

 

8,596

 

Losses (gains) on long-lived assets, net

 

 

2,257

 

 

2,875

 

Losses (gains) on investments, net

 

 

723

 

 

 —

 

Provisions for bad debt

 

 

(3,400)

 

 

62

 

Share-based compensation

 

 

8,628

 

 

10,280

 

Foreign currency transaction losses (gains), net

 

 

2,522

 

 

877

 

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

 

 

(2)

 

 

(2)

 

Other

 

 

(372)

 

 

(751)

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(34,381)

 

 

(19,260)

 

Inventory

 

 

(7,835)

 

 

(5,301)

 

Other current assets

 

 

22,600

 

 

(10,725)

 

Other long-term assets

 

 

6,011

 

 

15,294

 

Trade accounts payable and accrued liabilities

 

 

(143,050)

 

 

(38,659)

 

Income taxes payable

 

 

836

 

 

17,929

 

Other long-term liabilities

 

 

(28,229)

 

 

(53,267)

 

Net cash (used for) provided by operating activities

 

 

(81,683)

 

 

(57,991)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

 

(676)

 

 

(4)

 

Sales and maturities of investments

 

 

1,148

 

 

91

 

Capital expenditures

 

 

(94,026)

 

 

(183,427)

 

Proceeds from sales of assets and insurance claims

 

 

3,076

 

 

3,253

 

Other

 

 

1,034

 

 

(106)

 

Net cash (used for) provided by investing activities

 

 

(89,444)

 

 

(180,193)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

 

(383)

 

 

(469)

 

Proceeds from issuance of long-term debt

 

 

800,000

 

 

411,200

 

Debt issuance costs

 

 

(12,928)

 

 

(10,439)

 

Proceeds from revolving credit facilities

 

 

615,000

 

 

 —

 

Reduction in revolving credit facilities

 

 

(680,000)

 

 

 —

 

Proceeds from (payments for) issuance of common shares

 

 

 —

 

 

8,300

 

Reduction in long-term debt

 

 

(460,837)

 

 

(170,491)

 

Dividends to shareholders

 

 

(17,148)

 

 

(17,040)

 

Payment for commercial paper

 

 

(40,000)

 

 

 —

 

Cash proceeds from equity component of exchangeable debt

 

 

 —

 

 

159,952

 

Payments on term loan

 

 

 —

 

 

(162,500)

 

Proceeds from (payments for) short-term borrowings

 

 

194

 

 

16

 

Purchase of capped call hedge transactions

 

 

 —

 

 

(40,250)

 

Other

 

 

(1,862)

 

 

(5,341)

 

Net cash (used for) provided by financing activities

 

 

202,036

 

 

172,938

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(867)

 

 

1,841

 

Net increase (decrease) in cash and cash equivalents

 

 

30,042

 

 

(63,405)

 

Cash and cash equivalents, beginning of period

 

 

336,997

 

 

264,093

 

Cash and cash equivalents, end of period

 

$

367,039

 

$

200,688

 

 

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

6


 

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED 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, 2016

 

333,598

 

 

334

 

 

2,521,332

 

 

(12,119)

 

 

2,033,427

 

 

(1,295,949)

 

 

7,770

 

 

3,254,795

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(148,984)

 

 

 —

 

 

917

 

 

(148,067)

 

Dividends to shareholders ($0.06 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,153)

 

 

 —

 

 

 —

 

 

(17,153)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

783

 

 

 —

 

 

 —

 

 

49

 

 

832

 

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

 

843

 

 

 1

 

 

8,299

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,300

 

Share-based compensation

 

 —

 

 

 —

 

 

10,280

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,280

 

Equity component of exchangeable debt

 

 —

 

 

 —

 

 

116,195

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

116,195

 

Capped call transactions

 

 —

 

 

 —

 

 

(40,250)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(40,250)

 

Adoption of ASU No. 2016-09

 

 —

 

 

 —

 

 

1,943

 

 

 —

 

 

5,150

 

 

 —

 

 

 —

 

 

7,093

 

Other

 

1,126

 

 

 1

 

 

(5,342)

 

 

 —

 

 

 —

 

 

 —

 

 

(290)

 

 

(5,631)

 

As of March 31, 2017

 

335,567

 

$

336

 

$

2,612,457

 

$

(11,336)

 

$

1,872,440

 

$

(1,295,949)

 

$

8,446

 

$

3,186,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

367,510

 

 

368

 

 

2,791,129

 

 

11,185

 

 

1,423,154

 

 

(1,314,020)

 

 

26,957

 

 

2,938,773

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(144,201)

 

 

 —

 

 

539

 

 

(143,662)

 

Dividends to shareholders ($0.06 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(19,050)

 

 

 —

 

 

 —

 

 

(19,050)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

(18,336)

 

 

 —

 

 

 —

 

 

(96)

 

 

(18,432)

 

Share-based compensation

 

 —

 

 

 —

 

 

8,628

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,628

 

Adoption of ASU No. 2016-01

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,144

 

 

 —

 

 

 —

 

 

9,144

 

Adoption of ASU No. 2016-16

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(34,132)

 

 

 —

 

 

 —

 

 

(34,132)

 

Accrued distribution on redeemable noncontrolling interest in subsidiary

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,399)

 

 

 —

 

 

 —

 

 

(2,399)

 

Other

 

2,810

 

 

 2

 

 

(1,864)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,862)

 

As of March 31, 2018

 

370,320

 

$

370

 

$

2,797,893

 

$

(7,151)

 

$

1,232,516

 

$

(1,314,020)

 

$

27,400

 

$

2,737,008

 

 

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

7


 

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

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. References in this report to “Nabors Delaware” mean Nabors Industries, Inc., a wholly owned subsidiary of Nabors.

 

With operations in over 25 countries, Nabors is a global provider of drilling and drilling-related services for land-based and offshore oil and natural gas wells, with a fleet of rigs and drilling-related equipment as of March 31, 2018 which included:

 

·

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

 

·

38 actively marketed rigs for offshore drilling operations in the United States and multiple international markets.

 

Our business consists of five reportable segments:  U.S. Drilling, Canada Drilling, International Drilling, Drilling Solutions and Rig Technologies.

 

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, 2017 (“2017 Annual Report”). In management’s opinion, the unaudited condensed consolidated financial statements contain all adjustments necessary to state fairly our financial position as of March 31, 2018 and the results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented herein. Interim results for the three months ended March 31, 2018 may not be indicative of results that will be realized for the full year ending December 31, 2018.

 

Principles of Consolidation

 

Our condensed consolidated financial statements include the accounts of Nabors, as well as all majority owned and non-majority owned subsidiaries required to be consolidated under 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 (“VIEs”) 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 determination of the primary beneficiary of a VIE considers all relationships between us and the VIE. During 2016, we entered into an agreement with Saudi Aramco, to form a new joint venture, SANAD, to own, manage and operate onshore drilling rigs in the Kingdom of Saudi Arabia. SANAD, which is equally owned by Saudi Aramco and Nabors, began operations during the fourth quarter of 2017. 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 and accordingly consolidate the joint venture. See Note 3—Joint Ventures.

 

8


 

Revenue Recognition

 

We recognize revenues and costs on daywork contracts daily as the work progresses over the contract term. For certain contracts, we receive lump sum payments for the mobilization of rigs and other drilling equipment. We defer revenue related to mobilization periods and recognize the revenue over the term of the related drilling contract.

 

Costs incurred related to a mobilization period for which a contract is secured are deferred and recognized over the term of the related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. We defer recognition of revenue on amounts received from customers for prepayment of services until those services are provided.

 

We recognize revenue for top drives and other capital equipment we manufacture upon transfer of control, which generally occurs when the product has been shipped to the customer.

 

We recognize, as operating revenue, proceeds from business interruption insurance claims in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in other, net in our condensed consolidated statement of income (loss) in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements that are expected to be less than the carrying value of damaged assets are recognized at the time the loss is incurred and recorded in other, net in our condensed consolidated statement of income (loss).

 

We recognize reimbursements received for out of pocket expenses incurred as revenues and account for out of pocket expenses as direct costs.

 

Inventory, net

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2018

    

2017

 

 

 

(In thousands)

 

Raw materials

 

$

127,273

 

$

124,635

 

Work-in-progress

 

 

21,972

 

 

19,113

 

Finished goods

 

 

25,063

 

 

22,559

 

 

 

$

174,308

 

$

166,307

 

 

9


 

Property, Plant and Equipment

 

We review our assets for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the estimated undiscounted future cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to the extent the carrying amount of the long-lived asset exceeds its estimated fair value. Management considers a number of factors such as estimated future cash flows from the assets, appraisals and current market value analysis in determining fair value. The determination of future cash flows requires the estimation of utilization, dayrates, operating margins, sustaining capital and remaining economic life. Such estimates can change based on market conditions, technological advances in the industry or changes in regulations governing the industry. Significant and unanticipated changes to the assumptions could result in future impairments. In December 2017, we signed a Purchase and Sale Agreement (“PSA”) to sell certain of our jackups for a combination of cash and equity. The PSA included several conditions to closing that must be reached before the deal proceeds to close. We are uncertain at this time whether these conditions may be achieved within the requisite time period in which the parties have the election to terminate, as well as what the ultimate consideration value may be at closing. However, if the conditions are met and the deal proceeds to close, we could record a loss on the sale in the range of up to $50 million - $70 million. If the deal does not close, we intend to continue operating these rigs under the current renegotiated contracts. A significantly prolonged period of lower oil and natural gas prices could continue to adversely affect the demand for and prices of our services, which could result in future impairment charges. As the determination of whether impairment charges should be recorded on our long-lived assets is subject to significant management judgment, and an impairment of these assets could result in a material charge on our consolidated statements of income (loss), management believes that accounting estimates related to impairment of long-lived assets are critical.

 

For an asset classified as held for sale, we consider the asset impaired when its carrying amount exceeds fair value less its cost to sell. Fair value is determined in the same manner as a long lived asset that is held and used.

 

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. 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%.

 

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.

 

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, relating to the revenue recognition from contracts with customers that creates a common revenue standard for U.S. GAAP and IFRS. The core principle requires the 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. The standard also requires significantly

10


 

expanded disclosures containing qualitative and quantitative information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB approved a one year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. Throughout 2017 we, along with our third party consultants, identified and reviewed our revenue streams, identified a subset of contracts to represent these revenue streams and performed a detailed analysis of such contracts. We adopted this guidance under the modified retrospective approach as of January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements. See Note 12—Revenue Recognition.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall, relating to the recognition and measurement of financial assets and liabilities. This standard enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. This new standard became effective for us on January 1, 2018. Upon adoption, we recorded an adjustment to retained earnings of $9.1 million to eliminate the net unrealized gain balance in accumulated other comprehensive income (loss) related to the marketable securities. If we do have a material amount of investments in marketable securities in the future, we expect that the impact to our consolidated statements of income (loss) and other comprehensive income (loss) from this update could be material. Furthermore, depending on trends in the stock market, we may see increased volatility in our consolidated statements of income (loss) and other comprehensive income (loss).

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes, which simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. We adopted this standard during the first quarter of 2018 using the modified retrospective method, through a cumulative-effect adjustment directly to retained earnings. Upon adoption, we reduced deferred tax assets by approximately $34.1 million and recognized an offsetting decrease to retained earnings.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, to provide guidance on the classification of restricted cash in the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. The amendments in the ASU should be adopted on a retrospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business and provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. The standard provides a test to determine whether a set of assets and activities acquired is a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation, to reduce diversity in practice and provide clarity regarding existing guidance in ASC 718, “Stock Compensation”. The standard provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, relating to leases to increase transparency and comparability among companies. This standard requires that all leases with an initial term greater than one year be

11


 

recorded on the balance sheet as an asset and a lease liability. Additionally, this standard will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. A modified retrospective approach is currently required for the adoption of this guidance, which is effective for our reporting period beginning January 1, 2019. Early adoption is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. In addition, the standard requires certain disclosures regarding stranded tax effects. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact this will have on our consolidated financial statements.

 

 

Note 3 Joint Ventures

 

During 2016, we entered into an agreement with Saudi Aramco to form SANAD, a new joint venture, to own, manage and operate onshore drilling rigs in the Kingdom of Saudi Arabia. SANAD, which is equally owned by Saudi Aramco and Nabors, began operations during the fourth quarter of 2017.

 

During 2017, Nabors and Saudi Aramco each contributed $20 million in cash for the purpose of capitalizing the joint venture upon formation. In addition, during 2017 Nabors and Saudi Aramco each contributed a combination of drilling rigs, drilling rig equipment and other assets, including cash, each with a value of approximately $204 million to the joint venture in exchange for redeemable ownership interests which accrue interest annually, have a twenty-five year maturity and are required to be converted to authorized capital should certain events occur, including the accumulation of specified losses. In the accompanying consolidated balance sheet Nabors has reported Saudi Aramco’s share of authorized capital as a component of noncontrolling interest in equity and Saudi Aramco’s share of the redeemable ownership interests as redeemable noncontrolling interest in subsidiary, classified as mezzanine equity. The accrued interest on the redeemable ownership interest is a non-cash financing activity and is reported as an increase in the redeemable noncontrolling interest in subsidiary line in our condensed consolidated balance sheet.

 

The condensed balance sheet of SANAD, as included in our consolidated balance sheet, is presented below.

 

 

 

 

 

 

 

 

 

    

March 31,

 

December 31,

(In thousands)

 

2018

    

2017

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

120,051

 

$

94,496

Accounts receivable

 

 

19,819

 

 

10,580

Other current assets

 

 

10,046

 

 

10,834

Property, plant and equipment, net

 

 

121,408

 

 

130,218

Other long-term assets

 

 

21,921

 

 

23,091

Total assets

 

$

293,245

 

$

269,219

Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

56,906

 

$

7,236

Accrued liabilities

 

 

5,808

 

 

2,592

Total liabilities

 

$

62,714

 

$

9,828

 

The assets of SANAD cannot be used by Nabors for general corporate purposes. Additionally, creditors of SANAD do not have recourse to other assets of Nabors

 

 

 

Note 4 Fair Value Measurements

 

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market‑corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best information available. Accordingly, we employ valuation techniques that maximize the use of observable inputs and

12


 

minimize the use of unobservable inputs. The use of unobservable inputs is intended to allow for fair value determinations in situations where there is little, if any, market activity for the asset or liability at the measurement date. We are able to classify fair value balances utilizing a fair value hierarchy based on the observability of those inputs. Under the fair value hierarchy:

 

·

Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market;

 

·

Level 2 measurements include quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and

 

·

Level 3 measurements include those that are unobservable and of a subjective nature.

 

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 March 31, 2018, 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, 2018

 

 

    

Level 1

    

Level 2

    

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

$

22,762

 

$

3,776

 

$

 —

 

Mortgage-CMO debt securities

 

 

 —

 

 

10

 

 

 —

 

Total short-term investments

 

$

22,762

 

$

3,786

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of December 31, 2017

 

 

    

Level 1

    

Level 2

    

Level 3

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

$

22,909

 

$

5,450

 

$

 —

 

Mortgage-CMO debt securities

 

 

 —

 

 

10

 

 

 —

 

Total short-term investments

 

$

22,909

 

$

5,460

 

$

 —

 

 

Nonrecurring Fair Value Measurements

 

We applied fair value measurements to our nonfinancial assets and liabilities measured on a nonrecurring basis, which consist of measurements primarily to assets held for sale, goodwill, equity method investments, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination and our pipeline contractual commitment. Based upon our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.

 

 

13


 

Fair Value of Financial Instruments

 

We estimate the fair value of our financial instruments in accordance with U.S. GAAP. The fair value of our long-term debt, revolving credit facility and commercial paper is estimated based on quoted market prices or prices quoted from third-party financial institutions. The fair value of our debt instruments is determined using Level 2 measurements. The carrying and fair values of these liabilities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair  

 

    

Value

    

Value

    

Value

    

Value

 

 

(In thousands)

 

(In thousands)

6.15% senior notes due February 2018

 

$

 —

 

$

 —

 

$