Service & Supply | Quarterly / Earnings Reports | Oilfield Services | Third Quarter (3Q) Update

Nabors Details Q3 2018 Results, Financials

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Nabors Industries Ltd. reported third quarter 2018 operating revenues of $779 million, compared to operating revenues of $762 million in the second quarter, a 2% increase.

Net income from continuing operations attributable to Nabors common shareholders for the quarter was a loss of $105 million, or $0.31 per share, compared to a loss of $202 million, or $0.61 per share, in the prior quarter. Results for the third quarter included a loss of $10 million, or $0.02 per share in premiums paid to redeem the Company's 9.25% notes due early next year. The second quarter included charges of $69.6 million or $0.22 per share principally from the sale of three Middle East jackups, and other minor transaction charges.

Anthony Petrello, Nabors Chairman, CEO and President, commented, "The U.S. Drilling segment was the highlight of the third quarter, primarily attributable to the strong performance of the Lower 48 drilling operation. Average daily rig margins in that operation exceeded $8,700 – a $1,300 per day sequential increase – due to the combination of increasing rates and a decline in operating costs. In our other drilling segments, results improved seasonally in Canada, but declined in the International segment due primarily to the divestiture of our jackups and higher operational and reactivation expenses.

"During the quarter, we redeemed the $303 million outstanding of our 9.25% notes, which were due in early 2019. Our next debt maturity is not until late 2020. After the quarter ended, we amended our existing revolving credit facility, and added a new $1.27 billion revolving five-year facility providing us with good long-term liquidity.

"We also signed contracts for nine incremental rigs globally and received another four awards in the U.S. Lower 48. Four of the signed contracts are for upgraded rigs for multiple operators in the U.S., deploying by the end of 2018. The four new awards are for M750 upgrades and will deploy in the first half of 2019. The other five contracts are for incremental rigs in our International operations where we are also negotiating with customers for additional rigs. Demand for high-performance rigs is increasing across most of our global operations. We are encouraged by the positive reception of our rig upgrade configuration and the number of prospects for additional upgraded rigs with multiple operators, particularly in the Lower 48. We believe we are well positioned to secure a disproportionate share of future awards.

"Effective September 1, 2018, SANAD, our joint venture with Saudi Aramco, contracted 25 existing rigs with Aramco for four-year terms at improved rates. The renewal of the rigs will lead to a considerable increase in free cash flow. Twenty of these rigs are being leased from Nabors, while the other five represent the second tranche of Nabors rigs contributed to SANAD".

Consolidated and Segment Results

Adjusted operating income for the Company was a loss of $8 million during the quarter, compared to a loss of $31 million in the second quarter. Third quarter consolidated adjusted EBITDA increased to $201 million compared to $188 million in the previous quarter, a 7% increase. During the third quarter, the Company averaged 226 rigs operating at an average gross margin of $12,028 per rig day. This compares to 215 rigs at $12,262 per rig day in the second quarter. The increase in rig count primarily reflects the usual seasonal improvement in activity in Canada as well as three additional rigs in the International segment.

The U.S. Drilling segment reported a 14% sequential increase in adjusted EBITDA, to $99 million. All of the increase is attributable to the Lower 48 operation. A sequential increment of $1,300 in average daily gross margin reflected both higher dayrates and lower costs. Although the rig count was only up fractionally, it should increase meaningfully in the near future as multiple upgraded rigs commence operations.

International Drilling adjusted EBITDA decreased sequentially by $5.8 million, to $117 million. The quarterly rig count increased by three to 96. Additional operating rigs in Latin America and Russia more than offset the impact on the rig count from the sale of three jackup rigs in the Middle East in early June. The average margin per day decreased from approximately $16,350 to $15,000 due to the loss of contribution from some higher margin land rigs and the jackup sale, as well as incremental costs in Saudi Arabia and Mexico

Canada Drilling operations posted a seasonal increase with adjusted EBITDA of $7.3 million, up from $5.0 million in the second quarter. Daily gross margin declined to $5,352 due primarily to the addition of lower-specification rigs as activity increased.

In Drilling Solutions, adjusted EBITDA of $16.1 million represents an increase of 9% from $14.8 million in the prior quarter. The improved results were spread across the Tubular Services and Performance Software service lines. During the quarter, this operation continued to make good progress on its post-acquisition Tesco integration. The Company expects all Drilling Solutions lines to contribute towards continued strong growth in the fourth quarter. Nonetheless, given operational challenges in wellbore placement, Nabors now expects Drilling Solutions to close the year by generating adjusted EBITDA in the low $20 million range during the fourth quarter.

In the Rig Technologies segment, third-quarter adjusted EBITDA of $0.1 million was essentially flat with the second quarter, despite a significant decline in revenue. The segment benefited from a favorable revenue mix. Costs also improved due to ongoing capture of Tesco synergies.

Capital Expenditures and Liquidity

During the quarter, the Company restructured its credit facilities to provide it with a $1.27 billion new revolving credit facility expiring in October 2023, while the existing revolver, which expires in July 2020, was amended to reduce commitments to $666 million. The new five-year facility incorporates enhanced credit protection for lenders including subsidiary guarantees and an additional covenant. The original facility is essentially unchanged except for the reduced amount.

Net debt increased by $167 million in the third quarter. This deficit was expected to be offset by a net payment from Saudi Aramco of $157 million in late September, which was not received until October 4, 2018. The net payment related to the contribution in the third quarter of five rigs to SANAD from Nabors and one from Aramco. The increase in net debt also resulted in part from semiannual interest payments on the debt and the premium incurred with the redemption of the 2019 notes in July. In addition, the Company consumed some $60 million more than anticipated in working capital due mainly to a reduction in previously accrued payables largely consisting of incremental payments that are not expected to recur in the fourth quarter.

Capital expenditures for the third quarter totaled $120 million. The Company anticipates total capital expenditures for 2018 to be approximately $500 million, which implies fourth quarter expenditures of $170 million. The majority of this capex is expected to occur late in the quarter with actual payments slipping into 2019.

William Restrepo, Nabors Chief Financial Officer, stated, "Our recently restructured credit facilities, following our equity issue in the second quarter, provide us with significant liquidity over the next five years, in an amount more in accordance with our potential requirements. At the beginning of the quarter, we redeemed the remaining $303 million of our 9.25% senior notes outstanding. We now have no additional senior notes maturing until September 2020. For the balance of 2018, we expect that operating results, limited interest expenses, low capex payments and the Aramco cash inflow should help us meet our target of stable net debt for the year, excluding the impact of our equity issuance last May."

Mr. Petrello concluded, "As illustrated by its results, our U.S. Drilling business is unlocking the value held in its operations. We are optimistic that demand in this market will continue to strengthen, providing opportunities to employ additional upgraded assets. Beyond the U.S., momentum is beginning to pick up, as shown by our rig deployments. We expect utilization of our global fleet to increase significantly over the next several quarters. We continue to make steady progress on our initiatives to integrate selected services and implement rig automation. This should drive continued growth in our Drilling Solutions and Rig Technologies segments."