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, 2013

 

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 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.

 

Large Accelerated Filer x

 

Accelerated Filer £

 

 

 

Non-accelerated Filer o

 

Smaller Reporting Company o

 

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 29, 2013 was 294,618,623.

 

 

 



Table of Contents

 

NABORS INDUSTRIES LTD.  AND SUBSIDIARIES

 

Index

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012

3

 

 

 

 

Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2013 and 2012

4

 

 

 

 

Consolidated Statements of Other Comprehensive Income for the Three Months Ended March 31, 2013 and 2012

5

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012

6

 

 

 

 

Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2013 and 2012

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

Report of Independent Registered Public Accounting Firm

35

 

 

 

Item 2.

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

36

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

47

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

48

 

 

 

Item 1A.

Risk Factors

48

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 3.

Defaults Upon Senior Securities

48

 

 

 

Item 4.

Mine Safety Disclosures

49

 

 

 

Item 5.

Other Information

49

 

 

 

Item 6.

Exhibits

50

 

 

 

Signatures

 

51

 

 

 

Exhibit Index

52

 

2



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

(In thousands, except per share amounts)

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

564,888

 

$

524,922

 

Short-term investments

 

125,592

 

253,282

 

Assets held for sale

 

385,133

 

383,857

 

Accounts receivable, net

 

1,434,530

 

1,382,623

 

Inventory

 

245,495

 

251,133

 

Deferred income taxes

 

92,310

 

110,480

 

Other current assets

 

270,750

 

226,560

 

Total current assets

 

3,118,698

 

3,132,857

 

Long-term investments and other receivables

 

3,910

 

4,269

 

Property, plant and equipment, net

 

8,641,947

 

8,712,088

 

Goodwill

 

487,760

 

472,326

 

Investment in unconsolidated affiliates

 

64,598

 

61,690

 

Other long-term assets

 

268,544

 

272,792

 

Total assets

 

$

12,585,457

 

$

12,656,022

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

435

 

$

364

 

Trade accounts payable

 

492,894

 

499,010

 

Accrued liabilities

 

533,218

 

599,380

 

Income taxes payable

 

64,599

 

33,628

 

Total current liabilities

 

1,091,146

 

1,132,382

 

Long-term debt

 

4,379,758

 

4,379,336

 

Other long-term liabilities

 

490,559

 

518,664

 

Deferred income taxes

 

570,121

 

599,335

 

Total liabilities

 

6,531,584

 

6,629,717

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Subsidiary preferred stock (Note 8)

 

69,188

 

69,188

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

Authorized common shares 800,000; issued 323,019 and 318,813, respectively

 

323

 

319

 

Capital in excess of par value

 

2,368,347

 

2,337,244

 

Accumulated other comprehensive income

 

343,143

 

431,595

 

Retained earnings

 

4,206,628

 

4,120,398

 

Less: treasury shares, at cost, 28,414 common shares

 

(944,627

)

(944,627

)

Total shareholders’ equity

 

5,973,814

 

5,944,929

 

Noncontrolling interest

 

10,871

 

12,188

 

Total equity

 

5,984,685

 

5,957,117

 

Total liabilities and equity

 

$

12,585,457

 

$

12,656,022

 

 

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

 

3



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands, except per share amounts)

 

2013

 

2012

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

Operating revenues

 

$

1,578,645

 

$

1,890,426

 

Earnings (losses) from unconsolidated affiliates

 

2,895

 

(68,669

)

Investment income (loss)

 

79,421

 

20,252

 

Total revenues and other income

 

1,660,961

 

1,842,009

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

Direct costs

 

1,026,042

 

1,184,816

 

General and administrative expenses

 

132,545

 

136,346

 

Depreciation and amortization

 

273,365

 

247,621

 

Interest expense

 

60,008

 

62,654

 

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

 

59,807

 

(1,840

)

Total costs and other deductions

 

1,551,767

 

1,629,597

 

Income (loss) from continuing operations before income taxes

 

109,194

 

212,412

 

Income tax expense (benefit):

 

 

 

 

 

Current

 

18,829

 

26,006

 

Deferred

 

(7,557

)

43,038

 

Total income tax expense (benefit)

 

11,272

 

69,044

 

Subsidiary preferred stock dividend

 

750

 

750

 

Income (loss) from continuing operations, net of tax

 

97,172

 

142,618

 

Income (loss) from discontinued operations, net of tax

 

2,046

 

(8,795

)

Net income (loss)

 

99,218

 

133,823

 

Less: Net (income) loss attributable to noncontrolling interest

 

(97

)

267

 

Net income (loss) attributable to Nabors

 

$

99,121

 

$

134,090

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

Basic from continuing operations

 

$

0.33

 

$

0.50

 

Basic from discontinued operations

 

0.01

 

(0.04

)

Total Basic

 

$

0.34

 

$

0.46

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

0.33

 

$

0.49

 

Diluted from discontinued operations

 

 

(0.03

)

Total Diluted

 

$

0.33

 

$

0.46

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

Basic

 

291,687

 

288,538

 

Diluted

 

294,170

 

291,709

 

 

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

 

4



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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

99,121

 

$

134,090

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

Translation adjustment attributable to Nabors

 

(23,265

)

17,266

 

Unrealized gains/(losses) on marketable securities

 

10,139

 

12,223

 

Less: reclassification adjustment for (gains)/losses included in net income (loss) (Note 11)

 

(75,974

)

(12,465

)

Unrealized gains/(losses) on marketable securities

 

(65,835

)

(242

)

Pension liability amortization

 

281

 

260

 

Unrealized gains/(losses) on cash flow hedges

 

153

 

191

 

Other comprehensive income (loss), before tax

 

(88,666

)

17,475

 

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

 

(214

)

(3,724

)

Other comprehensive income (loss), net of tax

 

(88,452

)

21,199

 

Comprehensive income (loss) attributable to Nabors

 

10,669

 

155,289

 

Net income (loss) attributable to noncontrolling interest

 

97

 

(267

)

Translation adjustment attributable to noncontrolling interest

 

(1,414

)

243

 

Comprehensive income (loss) attributable to noncontrolling interest

 

(1,317

)

(24

)

Comprehensive income (loss)

 

$

9,352

 

$

155,265

 

 

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,

 

(In thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

99,121

 

$

134,090

 

Adjustments to net income (loss):

 

 

 

 

 

Depreciation and amortization

 

273,423

 

247,661

 

Deferred income tax expense (benefit)

 

(5,371

)

38,802

 

Losses (gains) on investments, net

 

(78,655

)

(19,323

)

Share-based compensation

 

32,853

 

4,454

 

Foreign currency transaction losses (gains), net

 

4,316

 

(435

)

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

 

(2,896

)

68,668

 

Other

 

12,925

 

5,620

 

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

 

 

 

 

 

Accounts receivable

 

(61,399

)

(137,696

)

Inventory

 

5,500

 

7,883

 

Other current assets

 

(33,829

)

(7,191

)

Other long-term assets

 

16,233

 

7,620

 

Trade accounts payable and accrued liabilities

 

(58,924

)

(119,195

)

Income taxes payable

 

11,327

 

7,390

 

Other long-term liabilities

 

(31,123

)

5,835

 

Net cash provided by operating activities

 

183,501

 

244,183

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments

 

 

(791

)

Sales and maturities of investments

 

142,336

 

23,478

 

Investment in unconsolidated affiliate

 

(12

)

 

Cash paid for acquisition of businesses, net

 

(37,516

)

 

Capital expenditures

 

(235,539

)

(473,687

)

Proceeds from sales of assets and insurance claims

 

6,605

 

21,321

 

Net cash used for investing activities

 

(124,126

)

(429,679

)

Cash flows from financing activities:

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

(1,975

)

(2,269

)

Dividends to shareholders

 

(12,891

)

 

Proceeds from revolving credit facility

 

 

150,000

 

Proceeds from (payments for) issuance of common shares

 

1,027

 

(5,320

)

Reduction in long-term debt

 

 

(1,072

)

Purchase of restricted stock

 

(2,773

)

(1,769

)

Tax (expense) benefit related to share-based awards

 

(4

)

(31

)

Other

 

(34

)

 

Net cash (used for) provided by financing activities

 

(16,650

)

139,539

 

Effect of exchange rate changes on cash and cash equivalents

 

(2,759

)

1,404

 

Net increase (decrease) in cash and cash equivalents

 

39,966

 

(44,553

)

Cash and cash equivalents, beginning of period

 

524,922

 

398,575

 

Cash and cash equivalents, end of period

 

$

564,888

 

$

354,022

 

 

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, 2011

 

317,042

 

$

317

 

$

2,287,743

 

$

321,264

 

$

3,956,364

 

$

(977,873

)

$

13,402

 

$

5,601,217

 

Net income (loss)

 

 

 

 

 

 

 

 

 

134,090

 

 

 

(267

)

133,823

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

21,199

 

 

 

 

 

243

 

21,442

 

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

 

972

 

 

 

(5,320

)

 

 

 

 

 

 

 

 

(5,320

)

Capital contribution from forgiveness of liability, net of tax

 

 

 

 

 

62,734

 

 

 

 

 

 

 

 

 

62,734

 

Issuance of treasury shares, net of tax benefit

 

 

 

 

 

(25,496

)

 

 

 

 

33,246

 

 

 

7,750

 

Share-based compensation

 

 

 

 

 

4,454

 

 

 

 

 

 

 

 

 

4,454

 

Other

 

717

 

1

 

(1,800

)

 

 

 

 

 

 

(1,121

)

(2,920

)

As of March 31, 2012

 

318,731

 

$

318

 

$

2,322,315

 

$

342,463

 

$

4,090,454

 

$

(944,627

)

$

12,257

 

$

5,823,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

318,813

 

$

319

 

$

2,337,244

 

$

431,595

 

$

4,120,398

 

$

(944,627

)

$

12,188

 

$

5,957,117

 

Net income (loss)

 

 

 

 

 

 

 

 

 

99,121

 

 

 

97

 

99,218

 

Dividends to shareholders ($.04/share)

 

 

 

 

 

 

 

 

 

(12,891

)

 

 

 

 

(12,891

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

(88,452

)

 

 

 

 

(1,414

)

(89,866

)

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

 

108

 

 

 

1,027

 

 

 

 

 

 

 

 

 

1,027

 

Share-based compensation

 

 

 

 

 

32,853

 

 

 

 

 

 

 

 

 

32,853

 

Other

 

4,098

 

4

 

(2,777

)

 

 

 

 

 

 

 

 

(2,773

)

As of March 31, 2013

 

323,019

 

$

323

 

$

2,368,347

 

$

343,143

 

$

4,206,628

 

$

(944,627

)

$

10,871

 

$

5,984,685

 

 

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

 

7



Table of Contents

 

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

Nabors has grown from a land drilling business centered in the U.S. lower 48 states, Canada and Alaska to a global business aimed at optimizing the entire well life cycle, with operations on land and offshore in most of the major oil and gas markets in the world. The majority of our business is conducted through two business lines:

 

Drilling & Rig Services

 

This business line is comprised of our global drilling rig operations and drilling-related services, consisting of equipment manufacturing, instrumentation optimization software and directional drilling services.

 

Completion & Production Services

 

This business line is comprised of our operations involved in the completion, life-of-well maintenance and eventual plugging and abandonment of a well.  These services include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management.

 

As a global provider of services for oil and natural gas wells, on land and offshore, Nabors’ fleet of rigs and equipment includes:

 

·                  473 actively marketed land drilling rigs for oil and gas land drilling operations in the U.S. Lower 48 states, Alaska, Canada and over 20 other countries throughout the world.

 

·                  442 actively marketed rigs for land well-servicing and workover services in the United States and approximately 104 rigs for land well-servicing and workover services in Canada.

 

We are also a leading provider of offshore platform workover and drilling rigs, and actively market 37 platform, 7 jackup and 4 barge rigs in the United States, including the Gulf of Mexico, and multiple international markets. In addition, we provide completion and production services, including hydraulic fracturing, cementing, nitrogen and acid pressure pumping services with over 800,000 hydraulic horsepower in key basins throughout the United States and Canada.

 

In addition to the foregoing services,

 

·                  We offer a wide range of ancillary well-site services, including engineering, transportation and disposal, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in select U.S. and international markets.

 

·                  We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment and rig reporting software.

 

·                  We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets five rigs in addition to the rigs we lease to the joint venture.

 

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.

 

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Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain reclassifications have been made to the prior period to conform to the current-period presentation, with no effect on our consolidated financial position, results of operations or cash flows. Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted.  Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2012 (“2012 Annual Report”).  In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2013, as well as the results of our operations, other comprehensive income, cash flows and changes in equity for the three months ended March 31, 2013 and 2012, in accordance with GAAP.  Interim results for the three months ended March 31, 2013 may not be indicative of results that will be realized for the full year ending December 31, 2013.

 

Our independent registered public accounting firm has reviewed and issued a report on these consolidated interim financial statements in accordance with standards established by the Public Company Accounting Oversight Board.  Pursuant to Rule 436(c) under the Securities Act of 1933, as amended (the “Securities Act”), this report should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of such Act.

 

Principles of Consolidation

 

Our consolidated financial statements include the accounts of Nabors, as well as all majority-owned and nonmajority-owned subsidiaries required to be consolidated under GAAP.  All significant intercompany accounts and transactions are eliminated in consolidation.

 

Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method.  Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss).  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 method and includes the cost of materials, labor and manufacturing overhead.  Inventory included the following:

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Raw materials

 

$

138,380

 

$

148,822

 

Work-in-progress

 

42,590

 

45,733

 

Finished goods

 

64,525

 

56,578

 

 

 

$

245,495

 

$

251,133

 

 

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Table of Contents

 

Goodwill

 

The carrying amount and changes in recorded goodwill for our business lines as of and for the three months ended March 31, 2013 were as follows:

 

 

 

 

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

Balance at

 

Purchase

 

Disposals

 

Cumulative

 

Balance at

 

 

 

December 31,

 

Price

 

and

 

Translation

 

March 31,

 

 

 

2012

 

Adjustments

 

Impairments

 

Adjustment

 

2013

 

 

 

(In thousands)

 

Drilling & Rig Services:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

50,149

 

$

 

$

 

$

 

$

50,149

 

International

 

 

 

 

 

 

Rig Services

 

32,113

 

15,828

(1)

 

(394

)

47,547

 

Subtotal Drilling & Rig Services

 

82,262

 

15,828

 

 

(394

)

97,696

 

Completion & Production Services

 

390,064

 

 

 

 

390,064

 

Total

 

$

472,326

 

$

15,828

 

$

 

$

(394

)

$

487,760

 

 


(1)         Represents the goodwill recorded in connection with our acquisition of Navigate Energy Services, Inc. (“NES”). See Note 11 - Supplemental Information for additional discussion.

 

Recent Accounting Pronouncements

 

In February 2013, we adopted the revised provisions from the Financial Accounting Standards Board relating to presentation of other comprehensive income.  Companies are required to report the effect and details of significant reclassifications out of accumulated other comprehensive income on the specific components of net income. The provisions are effective for reporting periods beginning after December 15, 2012.  The presentation of these amounts did not have an impact on our consolidated financial statements.

 

Note 3 Cash and Cash Equivalents and Short-term Investments

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

564,888

 

$

524,922

 

Short-term investments:

 

 

 

 

 

Trading equity securities

 

$

 

$

52,705

 

Available-for-sale equity securities

 

97,118

 

174,610

 

Available-for-sale debt securities

 

28,474

 

25,967

 

Total short-term investments

 

$

125,592

 

$

253,282

 

 

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

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

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

 

$

564,888

 

$

 

$

 

$

524,922

 

$

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading equity securities

 

 

 

 

52,705

 

46,981

 

 

Available-for-sale equity securities

 

97,118

 

69,849

 

(2,272

)

174,610

 

137,282

 

(1,030

)

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper and CDs

 

88

 

 

 

206

 

 

 

Corporate debt securities

 

26,550

 

4,642

 

 

23,399

 

1,870

 

 

Mortgage-backed debt securities

 

218

 

14

 

 

244

 

15

 

 

Mortgage-CMO debt securities

 

253

 

6

 

(3

)

523

 

10

 

(3

)

Asset-backed debt securities

 

1,365

 

 

(91

)

1,595

 

28

 

(192

)

Total available-for-sale debt securities

 

28,474

 

4,662

 

(94

)

25,967

 

1,923

 

(195

)

Total available-for-sale securities

 

125,592

 

74,511

 

(2,366

)

200,577

 

139,205

 

(1,225

)

Total short-term investments

 

125,592

 

74,511

 

(2,366

)

253,282

 

186,186

 

(1,225

)

Total cash, cash equivalents and short-term investments

 

$

690,480

 

$

74,511

 

$

(2,366

)

$

778,204

 

$

186,186

 

$

(1,225

)

 

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

 

 

 

As of March 31, 2013

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

 

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

 

 

(In thousands)

 

Available-for-sale equity securities

 

$

16,622

 

$

2,272

 

$

 

$

 

Available-for-sale debt securities: (1)

 

 

 

 

 

 

 

 

 

Mortgage-CMO debt securities

 

109

 

3

 

 

 

Asset-backed debt securities

 

819

 

1

 

546

 

90

 

Total available-for-sale debt securities

 

928

 

4

 

546

 

90

 

Total

 

$

17,550

 

$

2,276

 

$

546

 

$

90

 

 


(1)         Our unrealized losses on available-for-sale debt securities held for more than one year are comprised of various types of securities.  Each of these securities has a rating ranging from “A” to “AAA” from Standard & Poor’s and ranging from “A2” to “Aaa” from Moody’s Investors Service and is considered to be of high credit quality.  In each case, we do not intend to sell these investments, and it is less likely than not that we will be required to sell them to satisfy our own cash flow and working capital requirements.  We believe that we will be able to collect all amounts due according to the contractual terms of each investment and, therefore, do not consider the decline in value of these investments to be other-than-temporary at March 31, 2013.

 

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The estimated fair values of our corporate, mortgage-backed, mortgage-CMO and asset-backed debt securities at March 31, 2013, classified by time to contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties and we may elect to sell the securities prior to the contractual maturity date.

 

 

 

Estimated

 

 

 

Fair Value

 

 

 

March 31, 2013

 

 

 

(In thousands)

 

Debt securities:

 

 

 

Due in one year or less

 

$

88

 

Due after one year through five years

 

20,150

 

Due in more than five years

 

8,236

 

Total debt securities

 

$

28,474

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Available-for-sale

 

 

 

 

 

Proceeds from sales and maturities

 

$

86,601

 

$

18,437

 

Realized gains (losses), net

 

$

75,974

 

$

12,465

 

 

Note 4 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, 2013.  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, 2013, 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, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities from energy industry

 

$

96,256

 

$

862

 

$

 

$

97,118

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Commercial paper and CDs

 

88

 

 

 

88

 

Corporate debt securities

 

 

26,550

 

 

26,550

 

Mortgage-backed debt securities

 

 

218

 

 

218

 

Mortgage-CMO debt securities

 

 

253

 

 

253

 

Asset-backed debt securities

 

1,365

 

 

 

1,365

 

Total short-term investments

 

$

97,709

 

$

27,883

 

$

 

$

125,592

 

 

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, asset retirement obligations and our contractual pipeline commitment.

 

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Table of Contents

 

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 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, 2013

 

December 31, 2012

 

 

 

Carrying
 Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

 

 

(In thousands)

 

6.15% senior notes due February 2018

 

$

969,012

 

$

1,114,620

 

$

968,708

 

$

1,164,813

 

9.25% senior notes due January 2019

 

1,125,000

 

1,451,846

 

1,125,000

 

1,492,819

 

5.00% senior notes due September 2020

 

697,724

 

744,198

 

697,648

 

770,707

 

4.625% senior notes due September 2021

 

697,967

 

705,810

 

697,907

 

755,517

 

Subsidiary preferred stock

 

69,188

 

68,625

 

69,188

 

68,625

 

Revolving credit facility

 

890,000

 

890,000

 

890,000

 

890,000

 

Other

 

490

 

490

 

437

 

437

 

 

 

$

4,449,381

 

$

4,975,589

 

$

4,448,888

 

$

5,142,918

 

 

The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying values due to the short-term nature of these instruments.

 

As of March 31, 2013, our short-term investments were carried at fair market value and included $125.6 million in securities classified as available-for-sale.  As of December 31, 2012, our short-term investments were carried at fair market value and included $200.6 million and $52.7 million in securities classified as available-for-sale and trading, respectively.

 

Note 5 Share-Based Compensation

 

We have several share-based employee and director compensation plans, which are more fully described in Note 8 — Share-Based Compensation in our 2012 Annual Report. Total share-based compensation expense, which includes stock options and restricted stock, totaled $32.9 million and $4.5 million for the three months ended March 31, 2013 and 2012, respectively. Total share-based compensation expense for the three months ended March 31, 2013 included a one-time stock grant valued at $27.0 million, which vested immediately, in connection with the termination of the 2009 employment agreement with Anthony Petrello, our Chairman, President and Chief Executive Officer. This compensation expense has been recognized in other (losses) gains on sales and disposals of long-lived assets and other expense (income), net in our consolidated statement of income (loss).  See Note 9 — Commitments and Contingencies for additional discussion. All other share-based compensation expense is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Share-based compensation expense has been allocated to our various operating segments.  See Note 13 — Segment Information.

 

During the three months ended March 31, 2013 and 2012, we awarded 4,414,960 and 907,786 shares of restricted stock, respectively, vesting over periods of up to four years, to our employees and directors.  Some of the restricted stock awards made during the three months ended March 31, 2013 contain provisions relating to market conditions or performance measures, which may affect the grant date or vesting of such awards. These awards had an aggregate value at their grant date of $71.9 million and $19.0 million, respectively.  The fair value of restricted stock that vested during the three months ended March 31, 2013 and 2012 was $35.5 million and $8.2 million, respectively.

 

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During the three months ended March 31, 2013 and 2012, we awarded options vesting over periods up to four years to purchase 37,825 and 621,000 of our common shares, respectively, to our employees and directors.  The fair value of stock options granted during the three months ended March 31, 2013 and 2012 was calculated using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Weighted average fair value of options granted

 

$

15.96

 

$

22.20

 

Weighted average risk free interest rate

 

0.57

%

0.64

%

Dividend yield

 

0.74

%

0.00

%

Volatility (1)

 

51.01

%

56.02

%

Expected life

 

4.0 years

 

4.0 years

 

 


(1)                                                         Expected volatilities are based on implied volatilities from publicly traded options to purchase Nabors’ common shares, historical volatility of Nabors’ common shares and other factors.

 

The total intrinsic value of stock options exercised during the three months ended March 31, 2013 and 2012 was $.7 million and $4.9 million, respectively.  Additionally, the intrinsic value of stock options surrendered during the three months ended March 31, 2012 was $17.9 million.  The total fair value of stock options that vested during the three months ended March 31, 2013 and 2012 was $3.8 million and $7.5 million, respectively.

 

Note 6 Debt

 

Long-term debt consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

6.15% senior notes due February 2018

 

$

969,012

 

$

968,708

 

9.25% senior notes due January 2019

 

1,125,000

 

1,125,000

 

5.00% senior notes due September 2020

 

697,724

 

697,648

 

4.625% senior notes due September 2021

 

697,967

 

697,907

 

Revolving credit facility

 

890,000

 

890,000

 

Other

 

490

 

437

 

 

 

$

4,380,193

 

$

4,379,700

 

Less: current portion

 

435

 

364

 

 

 

$

4,379,758

 

$

4,379,336

 

 

Revolving Credit Facility

 

At March 31, 2013, we had $610 million of remaining availability from a total of $1.5 billion under our existing revolving credit facility. The weighted average interest rate on borrowings at March 31, 2013 was 1.51%.  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, 2013 and December 31, 2012. If we should 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.

 

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Table of Contents

 

Note 7 Common Shares

 

During the three months ended March 31, 2013, our employees exercised vested options and surrendered unexercised vested stock options to acquire .1 million of our common shares, resulting in proceeds of $1.0 million. During the three months ended March 31, 2012, our employees exercised vested options and surrendered unexercised vested stock options to acquire 1.0 million of our common shares. We received $15.7 million relating to exercised options. We used approximately $21.0 million to repurchase surrendered unexercised vested options and to satisfy related tax withholding obligations pursuant to stock option share settlements and exercises by some employees. For the three months ended March 31, 2013 and 2012, we withheld .2 million and .1 million, respectively, of our common shares with a fair value of $2.8 million and $1.8 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

 

On February 27, 2013, a cash dividend of $0.04 per share was declared for shareholders of record on March 11, 2013. The dividend was paid on March 28, 2013 in the amount of $12.9 million and was charged to retained earnings in our consolidated statement of changes in equity for the three months ended March 31, 2013.

 

Note 8 Subsidiary Preferred Stock

 

As of March 31, 2013, dividends on outstanding shares of preferred stock had been declared and paid in full with respect to each quarter since their issuance.

 

Note 9 Commitments and Contingencies

 

Commitments

 

Employment Contracts

 

Mr. Petrello’s compensation during 2012 was governed by his employment agreement that was amended in 2009.  During the first quarter of 2013, the Compensation Committee terminated that agreement and authorized a new agreement effective January 1, 2013 that significantly restructured Mr. Petrello’s compensation arrangements.

 

The new employment agreement provides for an initial term of five years, with automatic one-year extensions at the end of each term, subject to a 90-day notice of termination provided within the agreement. Mr. Petrello’s base salary was set at $1.7 million. In addition, the new employment agreement provides for an annual cash bonus targeted at base salary, with a cap of twice that amount, based on the achievement of certain financial and operational performance metrics and defined performance criteria.

 

The new employment agreement also provides for long-term equity incentive awards.  Mr. Petrello may receive restricted stock that may or may not vest depending upon the Company’s performance relative to a Performance Peer Group (as defined) over a three-year period (“TSR Shares”).  The agreement provides that the target number of TSR Shares that will vest is valued at 150% of base salary, with a maximum number of TSR Shares valued at twice that amount.  In addition, Mr. Petrello’s employment agreement provides for long-term equity incentive awards in the form of restricted stock based upon the achievement of specific financial or operational objectives (“Performance Shares”).  Once earned, Performance Shares are then subject to three-year vesting requirements.  Performance Shares are targeted at 200% of base salary, with a maximum award of twice that amount, and are also subject to a minimum threshold before any amount can be earned.

 

In connection with the termination of his old employment agreement, and because the long-term incentives subject to TSR shares do not begin to vest until 2016, Mr. Petrello received incentives in the form of a one-time stock grant valued at $27 million, which vested immediately, $18 million in cash, and a one-time award of restricted shares valued at $15 million and scheduled to vest through 2016.  The one-time stock grant and cash payment is included in Losses (gains) on sales and disposals of long-lived assets and other expense (income), net in our consolidated statement of income (loss) for the three months ended March 31, 2013.

 

Mr. Petrello participates in the Company’s Executive Deferred Compensation Plan (“Executive Plan”).  For each quarter during 2010 through 2012, Nabors credited $250,000 to his account under the plan. Effective January 1, 2013, for each quarter Mr. Petrello remains employed through the first quarter of 2019, Nabors will credit $300,000 to his account under the plan.

 

Mr. Petrello may also participate in pension and welfare plans on the same basis as other executives, and may receive special bonuses from time to time as determined by the Board.

 

Termination in the event of death, disability, or termination without cause (including in the event of a change in control). Mr. Petrello’s new employment agreement provides for severance payments in the event the agreement is terminated (i) by Nabors prior to the expiration date of the agreement for any reason other than for cause, or (ii) by Mr. Petrello for constructive termination without

 

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Table of Contents

 

cause, each as defined in the employment agreement. Termination in the event of a change in control (as defined in the employment agreement) is considered a constructive termination without cause. Mr. Petrello would have the right to receive within 30 days of a termination without cause or constructive termination without cause, 2.99 times the average of his base salary and annual cash bonus during the three fiscal years preceding the termination.

 

Mr. Petrello’s new employment agreement continues to provide that, upon death, disability, termination without cause, or constructive termination without cause, he would receive (a) any unvested restricted stock outstanding (except for TSR Shares), which will immediately and fully vest; (b) any unvested outstanding stock options, which will immediately and fully vest; (c) any amounts earned, accrued or owing to him but not yet paid (including executive benefits, life insurance, disability benefits and reimbursement of expenses and perquisites), which will be continued through the later of the expiration date or three years after the termination date; (d) continued participation in medical, dental and life insurance coverage until he receives equivalent benefits or coverage through a subsequent employer or until his death or the death of his spouse, whichever is later; and (e) certain perquisites and any other or additional benefits in accordance with applicable plans and programs of Nabors, including distribution of account balances under the Company’s Executive Plan. In addition, under the new agreement, any unvested TSR Shares at the time of termination for these reasons will vest at target levels; and any unearned Performance Shares will be deemed earned at the maximum level (in the case of death or disability, on a pro rata basis). The Compensation Committee provided for the vesting of outstanding restricted stock, including Performance Shares, and outstanding stock options because in each instance those awards have already been earned based upon performance at the time of grant.

 

Other Obligations. In addition to salary and bonus, Mr. Petrello receives group life insurance at an amount at least equal to three times his base salary, various split-dollar life insurance policies, reimbursement of expenses and various perquisites. Premiums payable under the split-dollar life insurance policies were suspended in 2002 as a result of the adoption of the Sarbanes-Oxley Act.

 

Contingencies

 

Income Tax Contingencies

 

We are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly audited by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than what is reflected in income tax provisions and accruals. An audit or litigation could materially affect our financial position, income tax provision, net income, or cash flows in the period or periods challenged.

 

It is possible that future changes to tax laws (including tax treaties) could impact our ability to realize the tax savings recorded to date, as well as future tax savings resulting from our 2002 corporate reorganization.  See Note 13 — Income Taxes to our 2012 Annual Report for additional discussion.

 

In 2006, Nabors Drilling International Limited, one of our wholly owned Bermuda subsidiaries (“NDIL”), received a Notice of Assessment from Mexico’s federal tax authorities in connection with the audit of NDIL’s Mexico branch for 2003. The notice proposed to deny depreciation expense deductions relating to drilling rigs operating in Mexico in 2003.  The notice also proposed to deny a deduction for payments made to an affiliated company for the procurement of labor services in Mexico. NDIL’s Mexico branch took similar deductions for depreciation and labor expenses from 2004 to 2008.  In 2009, the government proposed similar assessments against the Mexico branch of another wholly owned Bermuda subsidiary, Nabors Drilling International II Ltd. (“NDIL II”) for 2006.  We anticipate that a similar assessment will eventually be proposed against NDIL through 2008 and against NDIL II for 2007 to 2010.  Although Nabors and its tax advisors previously concluded that the deductions were appropriate for each of the years, a reserve has been recorded in accordance with GAAP.  During 2013, we reached a negotiated settlement for NDIL’s 2003, 2005 and 2006 tax years (the statute of limitations had previously expired on the 2004 year) and NDIL II’s 2006 tax year. Accordingly, the corresponding reserves have been reduced by approximately $20 million during the first quarter of 2013. After this settlement, the remaining amounts assessed or expected to be assessed in the aggregate, range from $30 million to $35 million, for which reserves are recorded in accordance with GAAP. 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 self-insured claims, 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

 

16



Table of Contents

 

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. Some workers’ compensation claims, employers’ liability and marine employers’ liability claims are subject to a $2.0 million per-occurrence deductible.  Some automobile liability claims are subject to a $1.0 million deductible.  General liability claims are subject to a $5.0 million per-occurrence deductible.

 

Litigation

 

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

 

In 2009, the Court of Ouargla (in Algeria) entered a judgment of approximately $19.7 million against us relating to alleged customs infractions in 2009.  We believe we did not receive proper notice of the judicial proceedings, and that the amount of the judgment was excessive in any case.  We asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court.  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 have again lodged an appeal to the Algeria Supreme Court, asserting the same challenges as before. Based upon our understanding of applicable law and precedent, we continue to believe that we will prevail. We do not believe that a loss is probable and have not accrued any amounts related to this matter.  If we are ultimately required to pay a fine or judgment related to this matter, the amount of the loss could range from approximately $140,000 to $19.7 million.

 

In March 2011, the Court of Ouargla entered a judgment of approximately $39.1 million against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue, and is not payable pending appeal. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals has upheld the lower court’s ruling, and we have appealed the matter to the Algeria Supreme Court.  While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $31.1 million in excess of amounts accrued.

 

On September 21, 2011, we received an informal inquiry from the SEC related to perquisites and personal benefits received by the officers and directors of Nabors, including their use of non-commercial aircraft.  Our Audit Committee and Board of Directors have been apprised of this inquiry and we are cooperating with the SEC.  The ultimate outcome of this process cannot be determined at this time.

 

On March 9, 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company.  When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”).  The lawsuit also seeks monetary damages of up to $100 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. Nabors successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012.  Nabors completed the sale of Ramshorn’s Class A shares to a Parex affiliate on April 12, 2012, which mooted ERG’s application for a temporary injunction that was scheduled for hearing by the Texas court on April 13, 2012.  ERG retains its causes of action for

 

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monetary damages, but Nabors believes 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.

 

Off-Balance Sheet Arrangements (Including Guarantees)

 

We are a party to some transactions, agreements or other contractual arrangements defined as “off-balance sheet arrangements” that could have a material future effect on our financial position, results of operations, liquidity and capital resources.  The most significant of these off-balance sheet arrangements involve agreements and obligations under which we provide financial or performance assurance to third parties. Certain of these agreements serve as guarantees, including standby letters of credit issued on behalf of insurance carriers in conjunction with our workers’ compensation insurance program and other financial surety instruments such as bonds. In addition, we have provided indemnifications, which serve as guarantees, to some third parties. These guarantees include indemnification provided by Nabors to our share transfer agent and our insurance carriers. We are not able to estimate the potential future maximum payments that might be due under our indemnification guarantees.

 

Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial guarantees issued by Nabors:

 

 

 

Maximum Amount

 

 

 

Remainder
of 2013

 

2014

 

2015

 

Thereafter

 

Total

 

 

 

(In thousands)

 

Financial standby letters of credit and other financial surety instruments

 

$

68,312

 

7,126

 

 

97

 

$

75,535

 

 

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Note 10 Earnings (Losses) Per Share

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

Net income (loss) (numerator):

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

97,172

 

$

142,618

 

Less: net (income) loss attributable noncontrolling interest

 

(97

)

267

 

Less: earnings allocated to unvested shareholders

 

(814

)

 

Adjusted income (loss) from continuing operations - basic and diluted

 

$

96,261

 

$

142,885

 

Income (loss) from discontinued operations, net of tax

 

$

2,046

 

$

(8,795

)

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

Basic from continuing operations

 

$

0.33

 

$

0.50

 

Basic from discontinued operations

 

0.01

 

(0.04

)

Total Basic

 

$

0.34

 

$

0.46

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

0.33

 

$

0.49

 

Diluted from discontinued operations

 

 

(0.03

)

Total Diluted

 

$

0.33

 

$

0.46

 

 

 

 

 

 

 

Shares (denominator):

 

 

 

 

 

Weighted-average number of shares outstanding - basic

 

291,687

 

288,538

 

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

 

2,483

 

3,171

 

Weighted-average number of shares outstanding - diluted

 

294,170

 

291,709

 

 

For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options and warrants 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 and warrants that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share were 12,452,263 and 11,763,048 shares during the three months ended March 31, 2013 and 2012, respectively.  In any period during which the average market price of our common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting. Restricted stock is included in our basic and diluted earnings (losses) per share computation using the two-class method of accounting in all periods because such stock is considered participating securities.

 

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Note 11 Supplemental Information

 

Accrued liabilities include the following:

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Accrued compensation

 

$

153,828

 

$

158,095

 

Deferred revenue

 

164,146

 

148,165

 

Other taxes payable

 

42,325

 

58,590

 

Workers’ compensation liabilities

 

22,645

 

22,645

 

Interest payable

 

33,109

 

90,878

 

Warranty accrual

 

6,745

 

6,436

 

Litigation reserves

 

28,421

 

26,782

 

Current liability to discontinued operations

 

60,291

 

68,961

 

Professional fees

 

3,146

 

2,989

 

Current deferred tax liability

 

12,172

 

10,721

 

Other accrued liabilities

 

6,390

 

5,118

 

 

 

$

533,218

 

$

599,380

 

 

Investment income (loss) includes the following:

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

Interest and dividend income

 

$

776

 

$

1,355

 

Gains (losses) on investments, net

 

78,645

(1)

18,897

(2)

 

 

$

79,421

 

$

20,252

 

 


(1)  Includes realized gains of $76.2 million from short-term and other long-term investments and net realized gains of $2.4 million from our trading securities.

 

(2)  Includes net unrealized gains of $6.0 million from our trading securities and $12.5 million realized gains from short-term and other long-term investments.

 

Losses (gains) on sales and disposals of long-lived assets and other expense (income), net includes the following:

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

Losses (gains) on sales, disposals and involuntary conversions of long-lived assets

 

$

3,459

 

$

(1,782

)

Termination of employment contract

 

45,000

(1)

 

Litigation expenses

 

6,161

 

540

 

Foreign currency transaction losses (gains)

 

4,317

 

(455

)

Losses (gains) on derivative instruments

 

 

(462

)

Other losses (gains)

 

870

 

319

 

 

 

$

59,807

 

$

(1,840

)

 


(1)         Represents a one-time stock grant valued at $27 million, which vested immediately and $18 million in cash awarded and paid to Mr. Petrello in connection with the termination of his prior employment agreement. See Note 9 — Commitments and Contingencies for additional discussion.

 

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The changes in accumulated other comprehensive income (loss), by component, include the following:

 

 

 

Gains (losses)
on cash flow
hedges

 

Unrealized
gains (losses)
on available-
for-sale

 

Defined
benefit
pension plan
items

 

Foreign
currency items

 

Total

 

 

 

(In thousands (a))

 

As of January 1, 2012

 

$

(3,254

)

$

45,179

 

$

(7,378

)

$

286,717

 

$

321,264

 

Other comprehensive income (loss) before reclassifications

 

 

12,198

 

 

17,266

 

29,464

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

131

 

(8,555

)

159

 

 

(8,265

)

Net other comprehensive income (loss)

 

131

 

3,643

 

159

 

17,266

 

21,199

 

As of March 31, 2012

 

$

(3,123

)

$

48,822

 

$

(7,219

)

$

303,983

 

$

342,463

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2013

 

$

(2,793

)

$

134,229

 

$

(7,632

)

$

307,791

 

$

431,595

 

Other comprehensive income (loss) before reclassifications

 

 

10,069

 

 

(23,265

)

(13,196

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

94

 

(75,523

)

173

 

 

(75,256

)

Net other comprehensive income (loss)

 

94

 

(65,454

)

173

 

(23,265

)

(88,452

)

As of March 31, 2013

 

$

(2,699

)

$

68,775

 

$

(7,459

)

$

284,526

 

$

343,143

 

 


(a)           All amounts are net of tax. Amounts in parentheses indicate debits.

 

Unrealized (gains) losses on our available-for-sale securities that were reclassified from net income include the following:

 

 

 

Three Months Ended March 31,

 

Line item in consolidated statement of income (loss)

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

Investment income (loss)

 

$

(75,974

)

$

(12,465

)

Interest expense

 

(153

)

(191

)

General and administrative expenses

 

(281

)

(260

)

Total before tax

 

$

(75,540

)

$

(12,014

)

Tax expense (benefit)

 

284

 

3,749

 

Reclassification adjustment for (gains)/losses included in net income (loss)

 

$

(75,256

)

$

(8,265

)

 

In January 2013, we purchased the business of NES for a total cash price of approximately $37.5 million.  This business expands our technology and development capability for drilling and measurement tools and services, and is included in our Rig Services operating segment.  The purchase price was allocated to the net tangible and intangible assets acquired based on their preliminary fair value estimates as of January 18, 2013.  The excess of the purchase price over the fair values of the assets acquired was recorded as goodwill in the amount of $15.8 million.

 

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Note 12 Assets Held-for-Sale and Discontinued Operations

 

Assets Held-for-Sale

 

Assets held-for-sale included the following: 

 

 

 

March 31,

 

December 31,

 

Assets Held-for-Sale

 

2013

 

2012

 

 

 

(In thousands)

 

Oil and Gas (1)

 

$

378,864

 

$

377,625

 

Rig Services

 

6,269

(2)

6,232

 

 

 

$

385,133

 

$

383,857

 

 


(1)         Oil and Gas represents a former operating segment of the Company.  We began marketing efforts during 2010 to sell the oil and gas investments.  As of December 2012, all remaining assets relating to oil and gas are classified as held-for-sale.

 

(2)         On April 1, 2013, we sold our business that provides logistics services for onshore drilling using helicopter and fixed-wing aircraft for a price of $9.3 million.

 

Discontinued Operations

 

Our condensed statements of income (loss) from discontinued operations for each operating segment were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Operating revenues and Earnings (losses) from unconsolidated affiliates

 

 

 

 

 

Oil and Gas

 

$

9,989

 

$

3,301

 

Rig Services

 

$

4,037

 

$

4,862

 

 

 

 

 

 

 

Income (loss) from Oil and Gas discontinued operations:

 

 

 

 

 

Income (loss) from discontinued operations

 

$

2,070

 

$

(5,488

)

Impairment charges or other gains and losses on sale of wholly owned assets

 

(2,000

)

(5,129

)

Less: income tax expense (benefit)

 

23

 

(2,815

)

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

 

$

47

 

$

(7,802

)

 

 

 

 

 

 

Income (loss) from Rig Services discontinued operations:

 

 

 

 

 

Income (loss) from discontinued operations

 

$

2,918

 

$

(1,356

)

Impairment charges or other gains and losses on sale of long-lived assets

 

(253

)

27

 

Less: income tax expense (benefit)

 

666

 

(336

)

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

 

$

1,999

 

$

(993

)

 

We have contracts with pipeline companies to pay specified fees based on committed volumes for gas transport and processing.  At March 31, 2013, our undiscounted contractual commitments for these contracts approximated $321.9 million,and we had liabilities of $192.6 million, $60.3 million of which were classified as current and are included in accrued liabilities.  At December 31, 2012, we had liabilities of $206 million, $69 million of which were classified as current and were included in accrued liabilities. These amounts represent our best estimate of the fair value of the excess capacity of the pipeline commitments calculated using a discounted cash flow model, when considering our disposal plan, current production levels, natural gas prices and expected

 

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utilization of the pipeline over the remaining contractual term.  Decreases in actual production or natural gas prices could result in future charges related to excess pipeline commitments.

 

Note 13 Segment Information

 

The following table sets forth financial information with respect to our operating segments:

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Operating revenues and Earnings (losses) from unconsolidated affiliates from continuing operations:

 

 

 

 

 

Drilling & Rig Services:

 

 

 

 

 

U.S.

 

$

484,773

 

$

627,105

 

Canada

 

126,867

 

144,735

 

International

 

321,516

 

306,465

 

Rig Services (1)

 

179,310

 

241,758

 

Subtotal Drilling & Rig Services (2)

 

1,112,466

 

1,320,063

 

Completion & Production Services:

 

 

 

 

 

Production Services

 

251,571

 

257,259

 

Completion Services

 

262,138

 

398,036

 

Subtotal Completion & Production Services (3)

 

513,709

 

655,295

 

 

 

 

 

 

 

Other reconciling items (4)

 

(44,635

)

(153,601

)

Total

 

$

1,581,540

 

$

1,821,757

 

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Adjusted income (loss) derived from operating activities from continuing operations:(5)

 

 

 

 

 

Drilling & Rig Services:

 

 

 

 

 

U.S.

 

$

77,595

 

$

166,733

 

Canada

 

30,518

 

43,146

 

International

 

21,469

 

21,138

 

Rig Services (1)

 

7,737

 

29,846

 

Subtotal Drilling & Rig Services (2)

 

137,319

 

260,863

 

Completion & Production Services:

 

 

 

 

 

Production Services

 

26,014

 

28,029

 

Completion Services

 

17,756

 

64,860

 

Subtotal Completion & Production Services (3)

 

43,770

 

92,889

 

Other reconciling items (6)

 

(31,501

)

(38,216

)

Total adjusted income (loss) derived from operating activities

 

$

149,588

 

$

315,536

 

 

 

 

 

 

 

U.S. oil and gas joint venture earnings (losses)

 

 

(62,562

)

Interest expense

 

(60,008

)

(62,654

)

Investment income (loss)

 

79,421

 

20,252

 

Gains (losses) on sales and disposals of long-lived assets and other income (expense), net

 

(59,807

)

1,840

 

Income (loss) from continuing operations before income taxes

 

$

109,194

 

$

212,412

 

 

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Table of Contents

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Total assets:

 

 

 

 

 

Drilling & Rig Services:

 

 

 

 

 

U.S.

 

$

4,191,963

 

$

4,157,470

 

Canada

 

666,708

 

699,699

 

International

 

3,600,919

 

3,626,307

 

Rig Services

 

679,494

 

644,350

 

Subtotal Drilling & Rig Services (8)

 

9,139,084

 

9,127,826

 

Completion & Production Services (7) (9)

 

2,316,294

 

2,301,802

 

Other reconciling items (6) (10)

 

1,130,079

 

1,226,394

 

Total assets:

 

$

12,585,457

 

$

12,656,022

 

 


(1)         Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction services. These services represent our other businesses that are not aggregated into a reportable operating segment.

 

(2)         Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $2.8 million and $(6.1) million for the three months ended March 31, 2013 and 2012, respectively.

 

(3)         Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $.1 million for the three months ended March 31, 2013.

 

(4)         Represents the elimination of inter-segment transactions and earnings (losses), net from our former U.S. unconsolidated oil and gas joint venture, accounted for using the equity method, of $(62.6) million for the three months ended March 31, 2012.  In December 2012, we sold our equity interest in the oil and gas joint venture.

 

(5)         Adjusted income (loss) derived from operating activities is computed by subtracting the sum of direct costs, general and administrative expenses, depreciation and amortization, and earnings (losses) from our former U.S. oil and gas joint venture from the sum of Operating revenues and Earnings (losses) from unconsolidated affiliates. These amounts should not be used as a substitute for the amounts reported in accordance with GAAP. However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that these financial measures accurately reflect our ongoing profitability. A reconciliation of this non-GAAP measure to income (loss) from continuing operations before income taxes, which is a GAAP measure, is provided in the above table.

 

(6)         Represents the elimination of inter-segment transactions and unallocated corporate expenses, assets and capital expenditures.

 

(7)         Reflects assets allocated to the line of business to conduct its operations. Further allocation to individual operating segments of Completion and Production Services is not available.

 

(8)         Includes $62.7 million and $59.9 million of investments in unconsolidated affiliates accounted for using the equity method as of March 31, 2013 and December 31, 2012,  respectively.

 

(9)         Includes $1.9 million and $1.8 million of investments in unconsolidated affiliates accounted for using the equity method as of March 31, 2013 and December 31, 2012, respectively.

 

(10)  Includes assets of $378.9 million and $377.6 million from oil and gas businesses classified as assets held-for-sale as of March 31, 2013 and December 31, 2012, respectively.

 

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Note 14 Condensed Consolidating Financial Information

 

Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware. The following condensed consolidating financial information is included so that separate financial statements of Nabors Delaware are not required to be filed with the SEC. The condensed consolidating financial statements present investments in both consolidated and unconsolidated affiliates using the equity method of accounting.

 

The following condensed consolidating financial information presents condensed consolidating balance sheets as of March 31, 2013 and December 31, 2012, statements of income (loss), statements of other comprehensive income (loss) and the statements of cash flows for the three months ended March 31, 2013 and 2012 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt securities guaranteed by Nabors, (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (e) Nabors on a consolidated basis.

 

We corrected our condensed consolidating statement of cash flows for classification of changes in inter-company balances between Nabors Delaware (Issuer) and Other Subsidiaries (Non-Guarantors) for the three months ended March 31, 2012 to present them as cash flows from investing activities rather than cash flows from operating activities.  For Nabors Delaware (Issuer), cash used for operating activities decreased $59.8 million and cash used for investing activities increased by the same amount for the three months ended March 31, 2012.  For Other Subsidiaries (Non-Guarantors), cash provided by operating activities decreased $59.8 million and cash used for investing activities decreased by the same amount for the three months ended March 31, 2012.  The impact of these revisions is not material to the related financial statements taken as a whole. Certain reclassifications to inter-company payable and receivable balances in the condensed consolidating balance sheet have been made to the prior period to conform to current period presentation, with no effect on our consolidated financial position, results of operations or cash flows.

 

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C