Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2015

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

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 o

 

 

 

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 28, 2015 was 330,357,704.

 

 

 



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

PART I FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (Unaudited)

3

 

 

 

 

Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

6

 

 

 

 

Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

47

 

 

 

PART II OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

49

 

 

 

Item 1A.

Risk Factors

49

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

Item 3.

Defaults Upon Senior Securities

49

 

 

 

Item 4.

Mine Safety Disclosures

49

 

 

 

Item 5.

Other Information

49

 

 

 

Item 6.

Exhibits

50

 

 

 

Signatures

 

51

 

 

 

Exhibit Index

 

 

 

2



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

December 31,

 

(In thousands, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

586,001

 

$

501,149

 

Short-term investments

 

35,170

 

35,020

 

Assets held for sale

 

134,709

 

146,467

 

Accounts receivable, net

 

971,601

 

1,517,503

 

Inventory

 

190,423

 

230,067

 

Deferred income taxes

 

91,050

 

118,230

 

Other current assets

 

161,378

 

193,438

 

Total current assets

 

2,170,332

 

2,741,874

 

Long-term investments and other receivables

 

2,627

 

2,806

 

Property, plant and equipment, net

 

7,333,808

 

8,599,125

 

Goodwill

 

80,947

 

173,928

 

Investment in unconsolidated affiliates

 

730,487

 

58,251

 

Other long-term assets

 

286,397

 

303,958

 

Total assets

 

$

10,604,598

 

$

11,879,942

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of debt

 

$

8,739

 

$

6,190

 

Trade accounts payable

 

403,038

 

780,060

 

Accrued liabilities

 

669,812

 

728,004

 

Income taxes payable

 

75,007

 

53,221

 

Total current liabilities

 

1,156,596

 

1,567,475

 

Long-term debt

 

3,816,717

 

4,348,859

 

Other long-term liabilities

 

604,526

 

601,816

 

Deferred income taxes

 

58,997

 

443,003

 

Total liabilities

 

5,636,836

 

6,961,153

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

Authorized common shares 800,000; issued 329,557 and 328,196, respectively

 

330

 

328

 

Capital in excess of par value

 

2,459,043

 

2,452,261

 

Accumulated other comprehensive income

 

14,768

 

77,522

 

Retained earnings

 

3,679,336

 

3,573,172

 

Less: treasury shares, at cost, 38,788 common shares

 

(1,194,664

)

(1,194,664

)

Total shareholders’ equity

 

4,958,813

 

4,908,619

 

Noncontrolling interest

 

8,949

 

10,170

 

Total equity

 

4,967,762

 

4,918,789

 

Total liabilities and equity

 

$

10,604,598

 

$

11,879,942

 

 

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

 

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)

 

2015

 

2014

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

Operating revenues

 

$

1,414,707

 

$

1,589,618

 

Earnings (losses) from unconsolidated affiliates

 

6,502

 

(2,445

)

Investment income (loss)

 

969

 

980

 

Total revenues and other income

 

1,422,178

 

1,588,153

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

Direct costs

 

919,610

 

1,061,739

 

General and administrative expenses

 

127,133

 

134,266

 

Depreciation and amortization

 

281,019

 

282,127

 

Interest expense

 

46,601

 

44,810

 

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

 

(55,842

)

1,476

 

Total costs and other deductions

 

1,318,521

 

1,524,418

 

Income (loss) from continuing operations before income tax

 

103,657

 

63,735

 

Income tax expense (benefit):

 

 

 

 

 

Current

 

47,349

 

13,658

 

Deferred

 

(68,054

)

350

 

Total income tax expense (benefit)

 

(20,705

)

14,008

 

Subsidiary preferred stock dividend

 

 

750

 

Income (loss) from continuing operations, net of tax

 

124,362

 

48,977

 

Income (loss) from discontinued operations, net of tax

 

(817

)

1,515

 

Net income (loss)

 

123,545

 

50,492

 

Less: Net (income) loss attributable to noncontrolling interest

 

89

 

(573

)

Net income (loss) attributable to Nabors

 

$

123,634

 

$

49,919

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

Basic from continuing operations

 

$

0.43

 

$

0.16

 

Basic from discontinued operations

 

 

0.01

 

Total Basic

 

$

0.43

 

$

0.17

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

0.43

 

$

0.16

 

Diluted from discontinued operations

 

(0.01

)

 

Total Diluted

 

$

0.42

 

$

0.16

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

Basic

 

285,361

 

296,210

 

Diluted

 

286,173

 

299,050

 

 

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

 

4



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

123,634

 

$

49,919

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

Translation adjustment attributable to Nabors:

 

 

 

 

 

Unrealized loss on translation adjustment

 

(68,539

)

(36,594

)

Less: reclassification adjustment for realized loss on translation adjustment

 

5,365

 

 

Translation adjustment attributable to Nabors

 

(63,174

)

(36,594

)

Unrealized gains/(losses) on marketable securities

 

153

 

(19,208

)

Pension liability amortization and adjustment

 

276

 

123

 

Unrealized gains/(losses) and amortization of cash flow hedges

 

153

 

153

 

Other comprehensive income (loss), before tax

 

(62,592

)

(55,526

)

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

 

162

 

148

 

Other comprehensive income (loss), net of tax

 

(62,754

)

(55,674

)

Comprehensive income (loss) attributable to Nabors

 

60,880

 

(5,755

)

Net income (loss) attributable to noncontrolling interest

 

(89

)

573

 

Translation adjustment attributable to noncontrolling interest

 

(880

)

(481

)

Comprehensive income (loss) attributable to noncontrolling interest

 

(969

)

92

 

Comprehensive income (loss)

 

$

59,911

 

$

(5,663

)

 

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

 

5



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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

123,545

 

$

50,492

 

Adjustments to net income (loss):

 

 

 

 

 

Depreciation and amortization

 

281,019

 

282,349

 

Deferred income tax expense (benefit)

 

(68,623

)

451

 

Losses (gains) on long-lived assets, net

 

732

 

3,517

 

Losses (gains) on investments, net

 

 

(7

)

Share-based compensation

 

13,691

 

10,685

 

Foreign currency transaction losses (gains), net

 

(2,345

)

(3,293

)

Gain on merger transaction

 

(52,574

)

 

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

 

(5,737

)

2,445

 

Other

 

3,988

 

910

 

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

 

 

 

 

 

Accounts receivable

 

244,544

 

(57,004

)

Inventory

 

511

 

14,480

 

Other current assets

 

13,145

 

4,742

 

Other long-term assets

 

(1,665

)

1,275

 

Trade accounts payable and accrued liabilities

 

(275,313

)

(28,471

)

Income taxes payable

 

24,927

 

(26,036

)

Other long-term liabilities

 

7,325

 

188,028

 

Net cash provided by operating activities

 

307,170

 

444,563

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments

 

1,710

 

(286

)

Sales and maturities of investments

 

623

 

733

 

Cash paid for acquisition of businesses, net

 

 

(10,200

)

Investment in unconsolidated affiliates

 

(445

)

(1,255

)

Proceeds from merger transaction

 

693,450

 

 

Capital expenditures

 

(364,234

)

(396,465

)

Proceeds from sales of assets and insurance claims

 

8,997

 

21,605

 

Net cash provided by (used for) investing activities

 

340,101

 

(385,868

)

Cash flows from financing activities:

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

(1,017

)

(1,822

)

Proceeds from (payments for) issuance of common shares

 

182

 

4,931

 

Dividends to shareholders

 

(17,470

)

(11,893

)

Proceeds from (payment for) commercial paper, net

 

(282,615

)

(39,594

)

Proceeds from revolving credit facilities

 

 

15,000

 

Reduction in revolving credit facilities

 

(250,000

)

(67,500

)

Proceeds from term loan facility

 

300,000

 

 

Payments on term loan facility

 

(300,000

)

 

Other

 

(4,549

)

(11,585

)

Net cash used for financing activities

 

(555,469

)

(112,463

)

Effect of exchange rate changes on cash and cash equivalents

 

(6,950

)

(9,266

)

Net increase (decrease) in cash and cash equivalents

 

84,852

 

(63,034

)

Cash and cash equivalents, beginning of period

 

501,149

 

389,915

 

Cash and cash equivalents, end of period

 

$

586,001

 

$

326,881

 

 

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

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

Capital

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

in Excess

 

Other

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Par

 

of Par

 

Comprehensive

 

Retained

 

Treasury

 

controlling

 

Total

 

(In thousands)

 

Shares

 

Value

 

Value

 

Income

 

Earnings

 

Shares

 

Interest

 

Equity

 

As of December 31, 2013

 

323,711

 

$

324

 

$

2,392,585

 

$

216,140

 

$

4,304,664

 

$

(944,627

)

$

12,091

 

$

5,981,177

 

Net income (loss)

 

 

 

 

 

 

 

 

 

49,919

 

 

 

573

 

50,492

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

(11,893

)

 

 

 

 

(11,893

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

(55,674

)

 

 

 

 

(481

)

(56,155

)

Issuance of common shares for stock options exercised

 

517

 

1

 

4,930

 

 

 

 

 

 

 

 

 

4,931

 

Share-based compensation

 

 

 

 

 

10,685

 

 

 

 

 

 

 

 

 

10,685

 

Other

 

1,544

 

1

 

(6,586

)

 

 

 

 

 

 

(1,383

)

(7,968

)

As of March 31, 2014

 

325,772

 

$

326

 

$

2,401,614

 

$

160,466

 

$

4,342,690

 

$

(944,627

)

$

10,800

 

$

5,971,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

328,196

 

$

328

 

$

2,452,261

 

$

77,522

 

$

3,573,172

 

$

(1,194,664

)

$

10,170

 

$

4,918,789

 

Net income (loss)

 

 

 

 

 

 

 

 

 

123,634

 

 

 

(89

)

123,545

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

(17,470

)

 

 

 

 

(17,470

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

(62,754

)

 

 

 

 

(880

)

(63,634

)

Issuance of common shares for stock options exercised

 

20

 

 

 

182

 

 

 

 

 

 

 

 

 

182

 

Share-based compensation

 

 

 

 

 

13,691

 

 

 

 

 

 

 

 

 

13,691

 

Other

 

1,341

 

2

 

(7,091

)

 

 

 

 

 

 

(252

)

(7,341

)

As of March 31, 2015

 

329,557

 

$

330

 

$

2,459,043

 

$

14,768

 

$

3,679,336

 

$

(1,194,664

)

$

8,949

 

$

4,967,762

 

 

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

 

7



Table of Contents

 

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

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

 

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

 

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

 

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

 

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

 

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

 

Drilling & Rig Services

 

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

 

Completion & Production Services

 

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

 

Unless the context requires otherwise, references in this report to “we,” “us,” “our,” “the Company,” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires, including Nabors Industries, Inc., a Delaware corporation (“Nabors Delaware”), our wholly owned subsidiary.

 

Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted.  Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2014 (“2014 Annual Report”).  In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2015, as well as the results of our operations, other comprehensive income, our cash flows and changes in equity for the three months ended March 31, 2015 and 2014, in accordance with GAAP.  Interim results for the three months ended March 31, 2015 may not be indicative of results that will be realized for the full year ending December 31, 2015.

 

8



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Principles of Consolidation

 

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

 

Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method.  Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss).  The investments in these entities are included in investment in unconsolidated affiliates in our consolidated balance sheets.

 

Inventory

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Raw materials

 

$

142,948

 

$

133,797

 

Work-in-progress

 

30,996

 

39,617

 

Finished goods

 

16,479

 

56,653

 

 

 

$

190,423

 

$

230,067

 

 

Goodwill

 

We review goodwill for impairment annually during the second quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying amount of such goodwill and intangible assets exceed their fair value.  We initially assess goodwill for impairment based on qualitative factors to determine whether to perform the two-step annual goodwill impairment test, a Level 3 fair value measurement.  After our qualitative assessment, step one of the impairment test compares the estimated fair value of the reporting unit to its carrying amount.  If the carrying amount exceeds the fair value, a second step is required to measure the goodwill impairment loss.  The second step compares the implied fair value of the reporting unit’s goodwill to its carrying amount.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to the excess.

 

Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management.  Potential factors requiring assessment include a further or sustained decline in our stock price, declines in oil and natural gas prices, a variance in results of operations from forecasts, a change in operating strategy of assets and additional transactions in the oil and gas industry.  Another factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. As part of our annual review, we compare the sum of our reporting units’ estimated fair value, which includes the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assess the reasonableness of our estimated fair value. Any of the above-mentioned factors may cause us to re-evaluate goodwill during any quarter throughout the year.

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

 

Note 3 Merger

 

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

 

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

 

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

 

Note 4 Cash and Cash Equivalents and Short-term Investments

 

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

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Fair Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

586,001

 

$

 

$

 

$

501,149

 

$

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

35,152

 

14,799

 

 

35,002

 

14,648

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-CMO debt securities

 

18

 

 

(1

)

18

 

 

(1

)

Total short-term investments

 

35,170

 

14,799

 

(1

)

35,020

 

14,648

 

(1

)

Total cash, cash equivalents and short-term investments

 

$

621,171

 

$

14,799

 

$

(1

)

$

536,169

 

$

14,648

 

$

(1

)

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Available-for-sale

 

 

 

 

 

Proceeds from sales and maturities

 

$

 

$

135

 

Realized gains (losses), net

 

$

 

$

 

 

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Note 5 Fair Value Measurements

 

The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2015.  Our debt securities could transfer into or out of a Level 1 or 2 measures depending on the availability of independent and current pricing at the end of each quarter.  During the three months ended March 31, 2015, there were no transfers of our financial assets between Level 1 and Level 2 measures.  Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value as of March 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities (energy industry)

 

$

35,152

 

$

 

$

 

$

35,152

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Mortgage-CMO debt securities

 

 

18

 

 

18

 

Total short-term investments

 

$

35,152

 

$

18

 

$

 

$

35,170

 

 

Nonrecurring Fair Value Measurements

 

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily to assets held-for-sale, goodwill, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination and our pipeline contractual commitment.

 

Fair Value of Financial Instruments

 

The fair value of our financial instruments has been estimated in accordance with GAAP.  The fair value of our long-term debt, revolving credit facility, commercial paper and subsidiary preferred stock is estimated based on quoted market prices or prices quoted from third-party financial institutions. The carrying and fair values of these liabilities were as follows:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

(In thousands)

 

2.35% senior notes due September 2016

 

$

349,904

 

$

349,213

 

$

349,887

 

$

346,980

 

6.15% senior notes due February 2018

 

931,000

 

997,517

 

930,693

 

991,920

 

9.25% senior notes due January 2019

 

339,607

 

400,118

 

339,607

 

403,531

 

5.00% senior notes due September 2020

 

698,329

 

697,669

 

698,253

 

687,953

 

4.625% senior notes due September 2021

 

698,448

 

680,008

 

698,388

 

661,619

 

5.10% senior notes due September 2023

 

348,925

 

335,129

 

348,893

 

332,759

 

Revolving credit facility

 

200,000

 

200,000

 

450,000

 

450,000

 

Commercial paper

 

250,504

 

250,504

 

533,119

 

533,119

 

Other

 

8,739

 

8,739

 

6,209

 

6,209

 

Total

 

$

3,825,456

 

$

3,918,897

 

$

4,355,049

 

$

4,414,090

 

 

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

 

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Note 6 Share-Based Compensation

 

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

 

Stock Options

 

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

 

Restricted Stock

 

During the three months ended March 31, 2015 and 2014, we awarded 1,514,934 and 1,106,919 shares of restricted stock, respectively, vesting over periods of up to four years, to our employees and directors.  These awards had an aggregate value at their date of grant of $19.3 million and $25.2 million, respectively.  The fair value of restricted stock that vested during the three months ended March 31, 2015 and 2014 was $15.7 million and $16.5 million, respectively.  The fair value of these awards is based on the closing price of Nabors stock on the date the awards are granted.

 

Restricted Stock Based on Performance

 

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

 

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

 

Restricted Stock Based on Market Conditions

 

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

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Risk free interest rate

 

1.18

%

0.80

%

Expected Volatility

 

50.00

%

40.00

%

Closing stock price at grant date

 

$

12.98

 

$

18.19

 

Expected term (in years)

 

3.0 years

 

2.97 years

 

 

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Note 7 Debt

 

Debt consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

2.35% senior notes due September 2016

 

$

349,904

 

$

349,887

 

6.15% senior notes due February 2018

 

931,000

 

930,693

 

9.25% senior notes due January 2019

 

339,607

 

339,607

 

5.00% senior notes due September 2020

 

698,329

 

698,253

 

4.625% senior notes due September 2021

 

698,448

 

698,388

 

5.10% senior notes due September 2023

 

348,925

 

348,893

 

Revolving credit facility

 

200,000

 

450,000

 

Commercial paper

 

250,504

 

533,119

 

Other

 

8,739

 

6,209

 

 

 

$

3,825,456

 

$

4,355,049

 

Less: current portion

 

8,739

 

6,190

 

 

 

$

3,816,717

 

$

4,348,859

 

 

Commercial Paper Program

 

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

 

Revolving Credit Facility

 

During the quarter, we exercised the accordian feature under our revolving credit facility to increase the borrowing capacity by $225.0 million, bringing our total capacity under the revolving credit facility to $1.725 billion.  As of March 31, 2015, we had approximately $200.0 million of borrowings outstanding under this facility.  The weighted average interest rate on borrowings at March 31, 2015 was 1.47%.  The revolving credit facility contains various covenants and restrictive provisions that limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain a net funded indebtedness to total capitalization ratio, as defined in each agreement. We were in compliance with all covenants under the agreement at March 31, 2015. If we fail to perform our obligations under the covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facility could be declared immediately due and payable.

 

Term Loan Facility

 

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

 

Note 8 Common Shares

 

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

 

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

 

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Table of Contents

 

Note 9 Subsidiary Preferred Stock

 

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

 

Note 10 Commitments and Contingencies

 

Contingencies

 

Income Tax

 

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

 

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

 

Self-Insurance

 

We estimate the level of our liability related to insurance and record reserves for these amounts in our consolidated financial statements. Our estimates are based on the facts and circumstances specific to existing claims and our past experience with similar claims. These loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid and are actuarially supported.  Although we believe our insurance coverage and reserve estimates are reasonable, a significant accident or other event that is not fully covered by insurance or contractual indemnity could occur and could materially affect our financial position and results of operations for a particular period.

 

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

 

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

 

Litigation

 

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

 

In 2009, the Court of Ouargla entered a judgment of approximately $14.7 million (at March 31, 2015 exchange rates) against us relating to alleged customs infractions in Algeria. We believe we did not receive proper notice of the judicial proceedings, and that the amount of the judgment was excessive in any case. We asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court (the “Supreme Court”). In May 2012, that court reversed the lower court and remanded the case to the Ouargla Court of Appeals for treatment consistent with the Supreme Court’s ruling. In January 2013, the Ouargla Court of Appeals reinstated the judgment. We again lodged an appeal to the Supreme Court, asserting the same challenges as

 

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

 

In March 2011, the Court of Ouargla entered a judgment of approximately $29.0 million (at March 31, 2015 exchange rates) against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals upheld the lower court’s ruling, and we appealed the matter to the Supreme Court. On September 25, 2014, the Supreme Court overturned the verdict against us, and the case was reheard by the Ouargla Court of Appeals on March 22, 2015 in light of the Supreme Court’s opinion. On March 29, 2015, the Ouargla Court of Appeals reinstated the initial judgment against us.  We plan to appeal this decision again to the Supreme Court.  While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $21.0 million in excess of amounts accrued.

 

In 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company. When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3.0 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”). The lawsuit also seeks monetary damages of up to $750.0 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. We successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012. We completed the sale of Ramshorn’s Class A shares to a Parex affiliate in April 2012, which mooted ERG’s application for a temporary injunction. The lawsuit is staid, pending further court actions, including appeals of the jurisdictional decisions. ERG retains its causes of action for monetary damages, but we believe the claims are foreclosed by the terms of the agreement and are without factual or legal merit. Although we are vigorously defending the lawsuit, its ultimate outcome cannot be determined at this time.

 

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

 

Off-Balance Sheet Arrangements (Including Guarantees)

 

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

 

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

 

 

 

Maximum Amount

 

 

 

Remainder of 
2015

 

2016

 

2017

 

Thereafter

 

Total

 

 

 

(In thousands)

 

Financial standby letters of credit and other financial surety instruments

 

$

128,843

 

$

73,528

 

$

19

 

$

1

 

$

202,391

 

 

Note 11 Earnings (Losses) Per Share

 

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

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands, except per share amounts)

 

BASIC EPS:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (numerator):

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

124,362

 

$

48,977

 

Less: net (income) loss attributable to noncontrolling interest

 

89

 

(573

)

Less: (earnings) losses allocated to unvested shareholders

 

(2,031

)

(733

)

Numerator for basic earnings per share:

 

 

 

 

 

Adjusted income (loss) from continuing operations

 

$

122,420

 

$

47,671

 

Income (loss) from discontinued operations

 

$

(817

)

$

1,515

 

 

 

 

 

 

 

Weighted-average number of shares outstanding - basic

 

285,361

 

296,210

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

Basic from continuing operations

 

$

0.43

 

$

0.16

 

Basic from discontinued operations

 

 

0.01

 

Total Basic

 

$

0.43

 

$

0.17

 

 

 

 

 

 

 

DILUTED EPS:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributed to common shareholders

 

$

122,420

 

$

47,671

 

Add: effect of reallocating undistributed earnings of unvested shareholders

 

5

 

 

Adjusted income (loss) from continuing operations attributed to common shareholders

 

$

122,425

 

$

47,671

 

Income (loss) from discontinued operations

 

$

(817

)

$

1,515

 

 

 

 

 

 

 

Weighted-average number of shares outstanding - basic

 

285,361

 

296,210

 

Add: dilutive effect of potential common shares

 

812

 

2,840

 

Weighted-average number of diluted shares outstanding

 

286,173

 

299,050

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

Diluted from continuing operations

 

$

0.43

 

$

0.16

 

Diluted from discontinued operations

 

(0.01

)

 

Total Diluted

 

$

0.42

 

$

0.16

 

 

For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options with exercise prices greater than the average market price of our common shares, because their inclusion would be anti-dilutive and because they are not considered participating securities. The average number of options that were excluded from diluted earnings (losses) per share that would potentially dilute earnings (losses) per share were 6,621,688 and 7,853,509 shares during the three months ended March 31, 2015 and 2014, respectively. In any period during which the average market price of our common shares exceeds the exercise prices of these stock options, such stock options will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting.

 

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Note 12 Supplemental Balance Sheet, Income Statement and Cash Flow Information

 

Accrued liabilities include the following:

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Accrued compensation

 

$

118,586

 

$

177,707

 

Deferred revenue

 

318,890

 

298,345

 

Other taxes payable

 

19,443

 

58,445

 

Workers’ compensation liabilities

 

37,459

 

37,459

 

Interest payable

 

17,806

 

63,532

 

Warranty accrual

 

5,805

 

5,799

 

Litigation reserves

 

24,657

 

23,681

 

Current liability to discontinued operations

 

8,354

 

19,602

 

Professional fees

 

2,521

 

2,550

 

Current deferred tax liability

 

3,677

 

3,677

 

Current liability to acquisition of KVS

 

22,278

 

22,278

 

Merger transaction accrual

 

77,696

 

 

Other accrued liabilities

 

12,640

 

14,929

 

 

 

$

669,812

 

$

728,004

 

 

Investment income (loss) includes the following:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

 

 

 

 

 

 

Interest and dividend income

 

$

534

 

$

970

 

Gains (losses) on investments, net

 

435

 

10

 

 

 

$

969

 

$

980

 

 

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

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

 

 

 

 

 

 

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

 

$

3,474

 

$

2,432

 

Net gain on merger (1)

 

(52,574

)

 

Litigation expenses

 

(4,077

)

3,060

 

Foreign currency transaction losses (gains)

 

(2,345

)

(3,293

)

Other losses (gains)

 

(320

)

(723

)

 

 

$

(55,842

)

$

1,476

 

 


(1)         Includes an estimated gain of $102.2 million, reduced by $49.6 million in transaction costs related to the merger with C&J Energy.  See Note 3 — Merger.

 

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Table of Contents

 

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

 

 

 

Gains
(losses) on
cash flow
hedges

 

Unrealized
gains (losses)
on available-
for-sale
securities

 

Defined
benefit
pension plan
items

 

Foreign
currency
items

 

Total

 

 

 

(In thousands)

 

As of January 1, 2014

 

$

(2,419

)

$

71,742

 

$

(4,075

)

$

150,892

 

$

216,140

 

Other comprehensive income (loss) before reclassifications

 

 

(19,248

)

 

(36,594

)

(55,842

)

Amounts reclassified from accumulated other comprehensive income (loss) (1)

 

93

 

 

75

 

 

168

 

Net other comprehensive income (loss)

 

93

 

(19,248

)

75

 

(36,594

)

(55,674

)

As of March 31, 2014

 

$

(2,326

)

$

52,494

 

$

(4,000

)

$

114,298

 

$

160,466

 

 


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

 

 

 

Gains
(losses) on
cash flow
hedges

 

Unrealized
gains (losses)
on available-
for-sale
securities

 

Defined
benefit
pension plan
items

 

Foreign
currency
items

 

Total

 

 

 

(In thousands)

 

As of January 1, 2015

 

$

(2,044

)

$

14,996

 

$

(7,263

)

$

71,833

 

$

77,522

 

Other comprehensive income (loss) before reclassifications

 

 

153

 

 

(68,539

)

(68,386

)

Amounts reclassified from accumulated other comprehensive income (loss) (1)

 

93

 

 

174

 

5,365

 

5,632

 

Net other comprehensive income (loss)

 

93

 

153

 

174

 

(63,174

)

(62,754

)

As of March 31, 2015

 

$

(1,951

)

$

15,149

 

$

(7,089

)

$

8,659

 

$

14,768

 

 


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

 

The line items that were reclassified to net income include the following:

 

 

 

Three Months Ended

 

 

 

March 31,

 

Line item in consolidated statement of income (loss)

 

2015

 

2014

 

 

 

(In thousands)

 

 

 

 

 

 

 

Investment income (loss)

 

$

 

$

 

Interest expense

 

153

 

153

 

General and administrative expenses

 

276

 

123

 

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

 

(5,365

)

 

Total before tax

 

$

(5,794

)

$

(276

)

Tax expense (benefit)

 

(162

)

(108

)

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

 

$

(5,632

)

$

(168

)

 

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Note 13 Assets Held-for-Sale and Discontinued Operations

 

Assets held for sale of $134.7 million and $146.5 million as of March 31, 2015 and December 31, 2014, respectively, consisted solely of our oil and gas holdings in the Horn River basin in western Canada.

 

We have contracts with pipeline companies to pay specified fees based on committed volumes for gas transport and processing.  At March 31, 2015, our undiscounted contractual commitments for these contracts approximated $65.3 million and we had liabilities of $25.9 million, $8.4 million of which were classified as current and were included in accrued liabilities.  At December 31, 2014, we had liabilities of $40.2 million, $19.6 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 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.

 

Discontinued Operations

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Operating revenues

 

 

 

 

 

Oil and Gas

 

$

1,450

 

$

5,057

 

 

 

 

 

 

 

Income (loss) from Oil and Gas discontinued operations:

 

 

 

 

 

Income (loss) from discontinued operations

 

$

(1,386

)

$

2,618

 

Less: Impairment charges or other (gains) and losses on sale of wholly owned assets and obligations

 

 

1,002

 

Less: Income tax expense (benefit)

 

(569

)

101

 

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

 

$

(817

)

$

1,515

 

 

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Table of Contents

 

Note 14 Segment Information

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Operating revenues and Earnings (losses) from unconsolidated affiliates: (1)

 

 

 

 

 

 

 

 

 

 

 

Drilling & Rig Services:

 

 

 

 

 

U.S.

 

$

453,821

 

$

510,476

 

Canada

 

57,840

 

111,621

 

International

 

445,400

 

375,069

 

Rig Services (2)

 

144,084

 

143,726

 

Subtotal Drilling & Rig Services (3)

 

1,101,145

 

1,140,892

 

Completion & Production Services:

 

 

 

 

 

Completion Services

 

208,123

 

227,899

 

Production Services

 

158,512

 

275,400

 

Subtotal Completion & Production Services (4)

 

366,635

 

503,299

 

 

 

 

 

 

 

Other reconciling items (5)

 

(46,571

)

(57,018

)

Total

 

$

1,421,209

 

$

1,587,173

 

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Adjusted income (loss) derived from operating activities: (1) (6)

 

 

 

 

 

 

 

 

 

 

 

Drilling & Rig Services:

 

 

 

 

 

U.S.

 

$

77,038

 

$

72,494

 

Canada

 

6,358

 

26,160

 

International

 

105,041

 

48,119

 

Rig Services (2)

 

12,873

 

8,728

 

Subtotal Drilling & Rig Services (3)

 

201,310

 

155,501

 

Completion & Production Services:

 

 

 

 

 

Completion Services

 

(55,243

)

(33,635

)

Production Services

 

(3,296

)

30,591

 

Subtotal Completion & Production Services (4)

 

(58,539

)

(3,044

)

Other reconciling items (7)

 

(49,324

)

(43,416

)

Total adjusted income (loss) derived from operating activities

 

$

93,447

 

$

109,041

 

 

 

 

 

 

 

Interest expense

 

(46,601

)

(44,810

)

Investment income (loss)

 

969

 

980

 

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

 

55,842

 

(1,476

)

Income (loss) from continuing operations before income taxes

 

103,657

 

63,735

 

 

 

 

 

 

 

Income tax expense (benefit)

 

(20,705

)

14,008

 

Subsidiary preferred stock dividend

 

 

750

 

Income (loss) from continuing operations, net of tax

 

124,362

 

48,977

 

Income (loss) from discontinued operations, net of tax

 

(817

)

1,515

 

Net income (loss)

 

123,545

 

50,492

 

Less: Net (income) loss attributable to noncontrolling interest

 

89

 

(573

)

Net income (loss) attributable to Nabors

 

$

123,634

 

$

49,919

 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Total assets:

 

 

 

 

 

Drilling & Rig Services:

 

 

 

 

 

U.S.

 

$

4,146,988

 

$

4,184,854

 

Canada

 

593,436

 

615,269

 

International

 

3,901,424

 

3,815,051

 

Rig Services

 

512,545

 

549,622

 

Subtotal Drilling & Rig Services (8)

 

9,154,393

 

9,164,796

 

Completion & Production Services (9) (10)

 

 

1,933,387

 

Other reconciling items (7) (11)

 

1,450,205

 

781,759

 

Total assets:

 

$

10,604,598

 

$

11,879,942

 

 


(1)              All periods present the operating activities of most of our wholly owned oil and gas businesses, our previously held equity interests in oil and gas joint ventures in Canada and Colombia, aircraft logistics operations and construction services as discontinued operations.

 

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Table of Contents

 

(2)              Includes our other services comprised of our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software services.

 

(3)              Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $6.2 million and ($2.5) million for the three months ended March 31, 2015 and 2014, respectively.

 

(4)              Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $0.3 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

(5)              Represents the elimination of inter-segment transactions.

 

(6)              Adjusted income (loss) derived from operating activities is computed by subtracting the sum of direct costs, general and administrative expenses, depreciation and amortization 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.

 

(7)              Represents the elimination of inter-segment transactions, unallocated corporate expenses and earnings (losses), net from unconsolidated affiliates related to our investment in CJES.

 

(8)              Includes $54.4 million and $48.1 million of investments in unconsolidated affiliates accounted for using the equity method as of March 31, 2015 and December 31, 2014, respectively.

 

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

 

(10)       Includes $10.2 million of investments in unconsolidated affiliates accounted for using the equity method as of December 31, 2014.  These investments were sold as part of the merger with C&J Energy in March 2015.

 

(11)       Includes $676.1 million of investments in unconsolidated affiliates accounted for using the equity method as of March 31, 2015, inclusive of our investment in CJES.

 

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Table of Contents

 

Note 15 Condensed Consolidating Financial Information

 

Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware, a 100% owned subsidiary. 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, 2015 and December 31, 2014 and statements of income (loss), statements of other comprehensive income (loss) and statements of cash flows for the three months ended March 31, 2015 and 2014 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.

 

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Table of Contents

 

Condensed Consolidating Balance Sheets

 

 

 

March 31, 2015

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Nabors

 

Nabors

 

Subsidiaries

 

 

 

 

 

 

 

(Parent/

 

Delaware

 

(Non-

 

Consolidating

 

 

 

 

 

Guarantor)

 

(Issuer)

 

Guarantors)

 

Adjustments

 

Total

 

 

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,370

 

$

18

 

$

581,613

 

$

 

$

586,001

 

Short-term investments

 

 

 

35,170

 

 

35,170

 

Assets held for sale

 

 

 

134,709

 

 

134,709

 

Accounts receivable, net

 

 

 

971,601

 

 

971,601

 

Inventory

 

 

 

190,423

 

 

190,423

 

Deferred income taxes

 

 

 

91,050

 

 

91,050

 

Other current assets

 

50

 

18,394

 

142,934

 

 

161,378

 

Total current assets

 

4,420

 

18,412

 

2,147,500

 

 

2,170,332

 

Long-term investments

 

 

 

2,627

 

 

2,627

 

Property, plant and equipment, net

 

 

 

7,333,808

 

 

7,333,808

 

Goodwill

 

 

 

80,947

 

 

80,947

 

Intercompany receivables

 

136,729

 

150,058

 

1,030,444

 

(1,317,231

)

 

Investment in consolidated affiliates

 

4,848,785

 

4,968,528

 

1,370,331

 

(11,187,644

)

 

Investment in unconsolidated affiliates

 

 

 

730,487

 

 

730,487

 

Other long-term assets

 

 

29,578

 

256,819

 

 

286,397

 

Total assets

 

$

4,989,934

 

$

5,166,576

 

$

12,952,963

 

$

(12,504,875

)

$

10,604,598

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current debt

 

$

 

$

 

8,739

 

$

 

$

8,739

 

Trade accounts payable

 

117

 

5

 

402,916

 

 

403,038

 

Accrued liabilities

 

17,004

 

18,202

 

634,606

 

 

669,812

 

Income taxes payable

 

 

 

75,007

 

 

75,007

 

Total current liabilities

 <