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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 SEPTEMBER 30, 2004
COMMISSION FILE NUMBER: 000-49887
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NABORS INDUSTRIES LTD.
INCORPORATED IN BERMUDA
2ND FL. INTERNATIONAL TRADING CENTRE
WARRENS
PO BOX 905E
ST. MICHAEL, BARBADOS
(246) 421-9471
98-0363970
(I.R.S. Employer Identification No.)
---------------------
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes X No ___
The number of common shares, par value $.001 per share, outstanding as of
October 29, 2004 was 149,511,119. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 245,982 exchangeable shares outstanding as of October 29,
2004 that are exchangeable for Nabors common shares on a one-for-one basis, and
have essentially identical rights as Nabors Industries Ltd. common shares,
including but not limited to voting rights and the right to receive dividends,
if any.
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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003........................................... 2
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2004 and 2003............... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003........................... 4
Consolidated Statements of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 2004 and 2003....... 5
Notes to Consolidated Financial Statements.................. 7
Report of Independent Registered Public Accounting Firm..... 25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 4. Controls and Procedures..................................... 39
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 40
Item 6. Exhibits and Reports on Form 8-K............................ 40
Signatures ............................................................ 41
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 297,137 $ 579,737
Marketable securities..................................... 466,923 339,936
Accounts receivable, net.................................. 480,117 410,487
Inventory................................................. 23,895 23,289
Deferred income taxes..................................... 35,033 36,442
Non-marketable securities................................. 77,000 47,000
Other current assets...................................... 68,432 78,756
---------- ----------
Total current assets................................... 1,448,537 1,515,647
Marketable securities....................................... 430,913 612,417
Property, plant and equipment, net.......................... 3,190,374 2,990,792
Goodwill, net............................................... 321,010 315,627
Other long-term assets...................................... 227,586 168,209
---------- ----------
Total assets........................................... $5,618,420 $5,602,692
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 750 $ 299,385
Trade accounts payable.................................... 161,391 128,840
Accrued liabilities....................................... 163,093 160,745
Income taxes payable...................................... 6,082 9,403
---------- ----------
Total current liabilities.............................. 331,316 598,373
Long-term debt.............................................. 2,002,530 1,985,553
Other long-term liabilities................................. 144,834 155,667
Deferred income taxes....................................... 368,177 372,824
---------- ----------
Total liabilities......................................... 2,846,857 3,112,417
---------- ----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000; issued and
outstanding 149,092 and 146,656, respectively......... 149 147
Capital in excess of par value............................ 1,341,332 1,270,362
Accumulated other comprehensive income.................... 116,208 99,583
Retained earnings......................................... 1,313,874 1,120,183
---------- ----------
Total shareholders' equity............................. 2,771,563 2,490,275
---------- ----------
Total liabilities and shareholders' equity............. $5,618,420 $5,602,692
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
2
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2004 2003 2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- ---------- ----------
Revenues and other income:
Operating revenues............................ $585,652 $473,494 $1,709,348 $1,355,883
Earnings (losses) from unconsolidated
affiliates................................. (292) 2,485 4,683 9,747
Interest and dividend income.................. 6,782 6,442 21,166 21,133
Other income, net............................. 3,953 2,279 15,279 2,326
-------- -------- ---------- ----------
Total revenues and other income............ 596,095 484,700 1,750,476 1,389,089
-------- -------- ---------- ----------
Costs and other deductions:
Direct costs.................................. 378,084 323,296 1,137,065 926,647
General and administrative expenses........... 49,548 41,207 140,588 122,935
Depreciation and amortization................. 64,229 57,394 185,560 166,854
Depletion..................................... 9,408 1,136 34,995 2,254
Interest expense.............................. 10,533 15,991 37,779 54,705
-------- -------- ---------- ----------
Total costs and other deductions........... 511,802 439,024 1,535,987 1,273,395
-------- -------- ---------- ----------
Income before income taxes...................... 84,293 45,676 214,489 115,694
-------- -------- ---------- ----------
Income tax expense (benefit):
Current....................................... 4,976 644 15,572 7,930
Deferred...................................... 3,691 (5,249) 5,226 (19,593)
-------- -------- ---------- ----------
Total income tax expense (benefit)......... 8,667 (4,605) 20,798 (11,663)
-------- -------- ---------- ----------
Net income...................................... $ 75,626 $ 50,281 $ 193,691 $ 127,357
-------- -------- ---------- ----------
Earnings per share:
Basic......................................... $ .51 $ .34 $ 1.30 $ .87
Diluted....................................... $ .48 $ .33 $ 1.24 $ .83
Weighted average number of common shares
outstanding:
Basic......................................... 149,089 146,905 148,646 146,332
-------- -------- ---------- ----------
Diluted....................................... 163,919 153,378 163,584 158,090
-------- -------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
(IN THOUSANDS) --------- -----------
Cash flows from operating activities:
Net income.................................................. $ 193,691 $ 127,357
Adjustments to net income:
Depreciation and amortization............................. 185,560 166,854
Depletion................................................. 34,995 2,254
Deferred income tax expense (benefit)..................... 5,226 (19,593)
Deferred financing costs amortization..................... 3,839 4,098
Pension liability amortization............................ 643 --
Discount amortization on long-term debt................... 15,139 20,530
Amortization of loss on cash flow hedges.................. 114 113
Losses (gains) on long-term assets, net................... 1,380 (3,182)
Gains on marketable and non-marketable securities, net.... (11,940) (2,692)
(Gains) losses on derivative instruments.................. (1,853) 1,659
Sales of marketable securities, trading................... -- 4,484
Foreign currency transaction gains........................ (29) (387)
Loss on early extinguishment of debt...................... -- 908
Equity in earnings from unconsolidated affiliates, net of
dividends............................................... (3,682) (608)
Increase (decrease) from changes in:
Accounts receivable....................................... (74,240) (18,884)
Inventory................................................. (420) (4,639)
Other current assets...................................... 10,697 (9,184)
Other long-term assets.................................... 7,049 (19,627)
Trade accounts payable and accrued liabilities............ 27,007 5,652
Income taxes payable...................................... (9,082) (2,116)
Other long-term liabilities............................... (18,973) (8,902)
--------- -----------
Net cash provided by operating activities................... 365,121 244,095
--------- -----------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale.... (622,860) (1,031,192)
Sales and maturities of marketable securities,
available-for-sale...................................... 682,769 938,129
Purchases of non-marketable securities, net............... (99,843) (20,001)
Sales of non-marketable securities........................ 22,773 --
Capital expenditures...................................... (400,073) (219,468)
Proceeds from sales of assets and insurance claims........ 3,905 11,453
--------- -----------
Net cash used for investing activities...................... (413,329) (321,079)
--------- -----------
Cash flows from financing activities:
Increase (decrease) in cash overdrafts.................... 6,440 (1,904)
(Increase) decrease in restricted cash.................... (24) 2,015
Proceeds from issuance of long-term debt.................. -- 700,000
Reduction of long-term debt............................... (301,659) (543,691)
Debt issuance costs....................................... -- (11,512)
Proceeds from issuance of common shares................... 52,239 24,144
--------- -----------
Net cash (used for) provided by financing activities........ (243,004) 169,052
--------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 8,612 4,410
--------- -----------
Net (decrease) increase in cash and cash equivalents........ (282,600) 96,478
Cash and cash equivalents, beginning of period.............. 579,737 414,051
--------- -----------
Cash and cash equivalents, end of period.................... $ 297,137 $ 510,529
--------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
4
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
COMMON ------------------------------------------------------
SHARES UNREALIZED MINIMUM UNREALIZED
--------------- CAPITAL IN GAINS (LOSSES) PENSION LOSS ON CUMULATIVE
PAR EXCESS OF ON MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS
------- ----- ---------- -------------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Balances, December 31,
2003.................... 146,656 $147 $1,270,362 $4,969 $(2,815) $(1,294) $ 98,723 $1,120,183
------- ---- ---------- ------ ------- ------- -------- ----------
Comprehensive income
(loss):
Net income.............. 193,691
Translation
adjustment............ 19,177
Unrealized gains on
marketable securities,
net of income tax
benefit of $671....... 6,355
Less: reclassification
adjustment for gains
included in net
income, net of
income taxes of
$813................ (9,426)
Pension liability
amortization, net of
income taxes of
$238.................. 405
Amortization of loss on
cash flow hedges...... 114
------- ---- ---------- ------ ------- ------- -------- ----------
Total comprehensive
income (loss)..... -- -- -- (3,071) 405 114 19,177 193,691
------- ---- ---------- ------ ------- ------- -------- ----------
Issuance of common shares
for stock options
exercised............... 2,305 2 52,237
Nabors Exchangeco shares
exchanged............... 131
Tax effect of stock option
deductions.............. 18,733
------- ---- ---------- ------ ------- ------- -------- ----------
Subtotal............ 2,436 2 70,970 -- -- -- -- --
------- ---- ---------- ------ ------- ------- -------- ----------
Balances, September 30,
2004.................... 149,092 $149 $1,341,332 $1,898 $(2,410) $(1,180) $117,900 $1,313,874
------- ---- ---------- ------ ------- ------- -------- ----------
TOTAL
SHAREHOLDERS'
EQUITY
-------------
(IN THOUSANDS)
Balances, December 31,
2003.................... $2,490,275
----------
Comprehensive income
(loss):
Net income.............. 193,691
Translation
adjustment............ 19,177
Unrealized gains on
marketable securities,
net of income tax
benefit of $671....... 6,355
Less: reclassification
adjustment for gains
included in net
income, net of
income taxes of
$813................ (9,426)
Pension liability
amortization, net of
income taxes of
$238.................. 405
Amortization of loss on
cash flow hedges...... 114
----------
Total comprehensive
income (loss)..... 210,316
----------
Issuance of common shares
for stock options
exercised............... 52,239
Nabors Exchangeco shares
exchanged............... --
Tax effect of stock option
deductions.............. 18,733
----------
Subtotal............ 70,972
----------
Balances, September 30,
2004.................... $2,771,563
----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
COMMON ------------------------------------------------------
SHARES UNREALIZED MINIMUM UNREALIZED
--------------- CAPITAL IN GAINS (LOSSES) PENSION LOSS ON CUMULATIVE
PAR EXCESS OF ON MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS
------- ----- ---------- -------------- ---------- ---------- ----------- ----------
Balances, December 31,
2002.................... 144,965 $145 $1,233,598 $5,646 $(2,205) $(1,444) $ (5,240) $ 927,955
------- ---- ---------- ------ ------- ------- -------- ----------
Comprehensive income
(loss):
Net income.............. 127,357
Translation
adjustment............ 79,982
Unrealized gains on
marketable securities,
net of income taxes of
$170.................. 289
Less: reclassification
adjustment for gains
included in net
income, net of
income taxes of
$913................ (1,555)
Amortization of loss on
cash flow hedges...... 113
------- ---- ---------- ------ ------- ------- -------- ----------
Total comprehensive
income (loss)..... -- -- -- (1,266) -- 113 79,982 127,357
------- ---- ---------- ------ ------- ------- -------- ----------
Issuance of common shares
for stock options
exercised............... 1,134 2 18,142
Issuance of common shares
in connection with the
New Prospect warrants
exercised............... 200 6,000
Issuance of common shares
in connection with the
Enserco warrants
exercised............... 66
Nabors Exchangeco shares
exchanged............... 152
Tax effect of stock option
deductions.............. 10,025
------- ---- ---------- ------ ------- ------- -------- ----------
Subtotal............ 1,552 2 34,167 -- -- -- -- --
------- ---- ---------- ------ ------- ------- -------- ----------
Balances, September 30,
2003.................... 146,517 $147 $1,267,765 $4,380 $(2,205) $(1,331) $ 74,742 $1,055,312
------- ---- ---------- ------ ------- ------- -------- ----------
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balances, December 31,
2002.................... $2,158,455
----------
Comprehensive income
(loss):
Net income.............. 127,357
Translation
adjustment............ 79,982
Unrealized gains on
marketable securities,
net of income taxes of
$170.................. 289
Less: reclassification
adjustment for gains
included in net
income, net of
income taxes of
$913................ (1,555)
Amortization of loss on
cash flow hedges...... 113
----------
Total comprehensive
income (loss)..... 206,186
----------
Issuance of common shares
for stock options
exercised............... 18,144
Issuance of common shares
in connection with the
New Prospect warrants
exercised............... 6,000
Issuance of common shares
in connection with the
Enserco warrants
exercised............... --
Nabors Exchangeco shares
exchanged............... --
Tax effect of stock option
deductions.............. 10,025
----------
Subtotal............ 34,169
----------
Balances, September 30,
2003.................... $2,398,810
----------
The accompanying notes are an integral part of these consolidated financial
statements.
6
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East, the Far East and Africa. Nabors also is one of the
largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 700 land workover and well-servicing rigs in the
United States, primarily in the southwestern and western United States, and
approximately 210 land workover and well-servicing rigs in Canada. Nabors is a
leading provider of offshore platform workover and drilling rigs, and owns 44
platform rigs, 19 jack-up units, and three barge rigs in the United States and
multiple international markets. These rigs provide well-servicing, workover and
drilling services. We have a 50% ownership interest in a joint venture in Saudi
Arabia, which owns 17 rigs.
To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including engineering, transportation,
construction, maintenance, well logging, directional drilling, rig
instrumentation, data collection and other support services, in selected
domestic and international markets. Our land transportation and hauling fleet
includes approximately 240 rig and oilfield equipment hauling tractor-trailers,
cranes, loaders and light-duty vehicles. We maintain approximately 300 fluid
hauling trucks, approximately 820 fluid storage tanks, ten saltwater disposal
wells and other auxiliary equipment used in drilling, workover and
well-servicing operations in the United States. In addition, we time charter a
fleet of 31 marine transportation and supply vessels, which provide
transportation of drilling materials, supplies and crews for offshore operations
primarily in the Gulf of Mexico. We manufacture and lease or sell top drives for
a broad range of drilling applications, directional drilling systems, rig
instrumentation and data collection equipment and rig reporting software. We
have also made selective investments in oil and gas exploration, development and
production activities.
The majority of our business is conducted through our various Contract
Drilling operating segments, which include our drilling, workover and
well-servicing operations, on land and offshore. Our operating segments engaged
in marine transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations are aggregated in a category labeled Other
Operating Segments for segment reporting purposes. Our limited oil and gas
exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes.
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
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 of
America (GAAP). Pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission, 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, 2003. In our
management's opinion, the consolidated financial statements contain all
adjustments necessary to present fairly our financial position as of September
30, 2004, and the results of our operations for the three and nine months ended
September 30, 2004 and 2003, and our cash flows for the nine months ended
September 30, 2004 and 2003, in accordance with GAAP. Interim results
7
for the three and nine months ended September 30, 2004 may not be indicative of
results that will be realized for the full year ending December 31, 2004.
Our independent registered public accounting firm has performed a review
of, 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, this report
should not be considered a part of any registration statement prepared or
certified within the meanings of Sections 7 and 11 of the Securities Act.
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Nabors, all
majority-owned subsidiaries, and all non-majority owned subsidiaries required to
be consolidated under Financial Accounting Standards Board (FASB) Interpretation
No. 46R. All significant intercompany accounts and transactions are eliminated
in consolidation.
Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net income of these
entities is recorded as Earnings from unconsolidated affiliates in our
consolidated statements of income, and our investment in these entities is
carried as a single amount in our consolidated balance sheets. Investments in
net assets of unconsolidated affiliates accounted for using the equity method
totaled $67.6 million and $58.1 million as of September 30, 2004 and December
31, 2003, respectively, and are included in other long-term assets in our
consolidated balance sheets.
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods to conform to the
current period presentation, with no effect on our consolidated financial
position, results of operations or cash flows.
STOCK-BASED COMPENSATION
We account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation expense for stock options
is measured as the excess, if any, of the quoted market price of Nabors common
shares at the date of grant over the amount an employee must pay to acquire the
common shares. We grant options at prices equal to the market price of our
shares on the date of grant and therefore do not record compensation expense
related to these grants. Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123,"
requires companies that continue to account for stock-based compensation in
accordance with APB 25 to disclose certain information using a tabular
presentation. The table presented below illustrates the effect on our net income
and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our
stock-based employee compensation. Under the provisions of SFAS 123,
compensation cost for stock-based compensation is determined based on fair
values as of the dates of grant estimated using an option pricing
8
model such as the Black-Scholes option-pricing model (which we use in our
calculations), and compensation cost is amortized over the applicable option
vesting period.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
Net income, as reported...................... $75,626 $50,281 $193,691 $127,357
Deduct: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net of
related tax effects........................ (5,890) (3,755) (16,142) (10,338)
------- ------- -------- --------
Pro forma net income-basic................... 69,736 46,526 177,549 117,019
Add: Interest expense on assumed conversion
of our zero coupon convertible/exchangeable
senior debentures/notes, net of tax (see
Note 6).................................... 3,119 -- 9,299 3,639
------- ------- -------- --------
Adjusted pro forma net income-diluted........ $72,855 $46,526 $186,848 $120,658
------- ------- -------- --------
Earnings per share:
Basic-as reported.......................... $ .51 $ .34 $ 1.30 $ .87
Basic-pro forma............................ $ .47 $ .32 $ 1.19 $ .80
Diluted-as reported........................ $ .48 $ .33 $ 1.24 $ .83
Diluted-pro forma.......................... $ .44 $ .30 $ 1.14 $ .76
COMPREHENSIVE INCOME
Comprehensive income totaled $115.0 million and $48.3 million for the three
months ended September 30, 2004 and 2003, respectively, and $210.3 million and
$206.2 million for the nine months ended September 30, 2004 and 2003,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. In December 2003 the FASB issued a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of FIN 46, and to exempt certain entities from
its requirements. Application of FIN 46R is required in financial statements of
public entities that have interests in structures that are commonly referred to
as special-purpose entities for periods ending after December 15, 2003.
Application for all other types of VIEs is required in financial statements for
periods ending after March 15, 2004. Our adoption of FIN 46R on March 31, 2004
did not have a material effect on our financial position, results of operations
or cash flows as of and for the three and nine months ended September 30, 2004.
In December 2003 the FASB issued an Exposure Draft, "Earnings per
Share -- an Amendment of FASB Statement No. 128," which would amend the
computational guidance of SFAS No. 128, "Earnings per Share." The proposed
statement would eliminate the provisions of SFAS 128 which permit an entity to
rebut the presumption that instruments with the option of settling in either
cash or shares will be settled in shares. This new statement would be effective
for periods ending after December 15, 2004, but would require prior period
earnings per share amounts presented for comparative purposes to be restated to
conform to the provisions of the new requirements. If adopted, the proposed
statement, in combination with Emerging Issues Task Force (EITF) Issue No. 04-8,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share,"
discussed below, could result in a material dilution of our earnings per
9
share, unless we are able to take action to address the effect of these recently
issued and proposed accounting pronouncements prior to year-end (see discussion
in Note 3).
In October 2004 the FASB ratified the consensus reached by the EITF in EITF
04-8, which addresses the issue of when the dilutive effect of contingently
convertible debt instruments should be included in diluted earnings per share
computations. Based on the concepts described in EITF 04-8, we will be required
to treat our $700 million zero coupon senior exchangeable notes as converted for
purposes of computing diluted earnings per share, regardless of whether any
triggering contingency has been met or is likely to be met. The consensus
reached by the EITF indicates that EITF 04-8 should have the same effective date
as the proposed revision of SFAS 128, which is expected to be effective for
periods ending after December 15, 2004. EITF 04-8 would require our prior period
earnings per share amounts presented for comparative purposes to be restated to
conform to the provisions of the new requirements, unless we are able to take
action to address the effect of these recently issued and proposed accounting
pronouncements prior to year-end (see discussion in Note 3).
NOTE 3 LONG-TERM DEBT
In October 2004 we executed supplemental indentures relating to our $700
million zero coupon senior exchangeable notes and our $1.381 billion zero coupon
convertible senior debentures providing that upon an exchange or conversion of
these convertible debt instruments, we will in all circumstances elect to pay
holders of these debt instruments, in lieu of common shares, cash for the
principal amount of the instruments and, at our option, consideration in the
form of either cash or our common shares for any amount above the principal
amount of the instruments required to be paid pursuant to the terms of the
indentures (as supplemented). Additionally, the supplemental indentures for both
of these instruments provide that if the instruments are put to us at various
dates commencing February 5, 2006 and June 15, 2008 for the $1.381 billion
senior debentures and the $700 million senior notes, respectively, we will in
all circumstances elect to pay holders of these debt instruments cash upon such
repurchase.
The indentures for both of these instruments provide that where we have
elected to pay cash upon an exchange or conversion, and such payment of cash is
not permitted pursuant to the provisions of the indentures or otherwise, or an
event of default under the existing indentures has occurred and is continuing,
we would be required to provide our common shares to the holders of the
instruments upon such exchange or conversion. Although, as a result of the
execution of the supplemental indentures, the issuance of common shares under
the indentures relating to the two series of exchangeable/convertible securities
is now limited to a situation in which we are in default under such indentures,
which we currently view as unlikely, the revision to SFAS 128 would require
inclusion in our diluted earnings per share calculation of the total number of
common shares issuable upon exchange or conversion.
Accordingly, we are considering taking further action to address the effect
of the proposed revision to SFAS 128.
As our $1.381 billion zero coupon convertible senior debentures can be
converted at any time resulting in our payment of cash, these debentures will be
classified in current liabilities in our balance sheet as of December 31, 2004.
These debentures previously would have been classified in current liabilities
beginning in the first quarter of 2005 due to the holders having the option to
put the debentures to us on February 5, 2006. These debentures, totaling
approximately $800 million, are classified in long-term debt in our balance
sheet as of September 30, 2004.
On April 15, 2004, we made a payment of $305.3 million upon maturity of our
6.8% senior notes, representing principal of $295.3 million and accrued interest
of $10.0 million. These senior notes were included in our consolidated balance
sheet as current portion of long-term debt as of December 31, 2003.
NOTE 4 INCOME TAXES
Our effective income tax (benefit) rate was 10% during the three and nine
months ended September 30, 2004, compared to (10%) for the three and nine months
ended September 30, 2003. The
10
change from an income tax benefit in the 2003 periods to an income tax expense
in the 2004 periods resulted from a higher proportion of our taxable income
being generated in the U.S. for the three and nine months ended September 30,
2004 compared to the prior year periods. Income generated in the U.S. is
generally taxed at a higher rate than in international jurisdictions in which we
operate.
NOTE 5 COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
Recent Legislation, Coast Guard Regulations and Actions. Our Sea Mar
operations time charter supply vessels to offshore operators, primarily in U.S.
waters. The vessels which operate in U.S. coastwise trade are owned by one of
our financing company subsidiaries, but are operated and managed by a U.S.
citizen-controlled company pursuant to long-term bareboat charters. Our Sea Mar
operations charter the vessels from this U.S. operating company in connection
with our own offshore activities in the Gulf of Mexico and in support of other
offshore operators.
As a result of recent legislation, beginning in August 2007, Sea Mar will
no longer be able to use this arrangement to qualify vessels for employment in
the U.S. coastwise trade. Accordingly, we will be required to restructure the
arrangement, redeploy the vessels outside the United States, or sell the vessels
by no later than such time. Under the proposed, but not yet final, regulations
issued by the United States Coast Guard on February 4, 2004, Sea Mar's ability
to use its current structure to operate vessels in U.S. coastwise trade would
end on February 4, 2007.
Additionally, on February 4, 2004, the United States Coast Guard notified
us that it is considering an appeal of the United States Coast Guard's original
issuance in June 2002 of the coastwise trade endorsements for the vessels
bareboat chartered to the U.S. citizen qualified company. The coastwise trade
endorsements on the documents of the vessels issued by the United States Coast
Guard authorize the vessels to engage in the U.S. coastwise trade. If the appeal
is decided against us, we could lose the ability to market the vessels for use
in U.S. coastwise trade in accordance with that decision.
As of September 30, 2004, the net assets of Sea Mar totaled approximately
$162.3 million. During the three and nine months ended September 30, 2004, Sea
Mar had income before income taxes totaling $.7 million and $.3 million,
respectively.
LITIGATION
Nabors and its subsidiaries are defendants or otherwise involved in a
number of lawsuits in the ordinary course of their business. In the opinion of
management, our ultimate liability with respect to these pending lawsuits is not
expected to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
GUARANTEES
We enter into various agreements providing 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, other financial
surety instruments such as bonds, and guarantees of residual value in certain of
our operating lease agreements. We have also guaranteed payment of contingent
consideration in conjunction with an acquisition in 2002 which is based on
future operating results of that business. In addition, we have provided
indemnifications to certain third parties which serve as guarantees. These
guarantees include indemnification provided by Nabors to our stock 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.
11
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 and
performance guarantees issued by Nabors:
MAXIMUM AMOUNT
--------------------------------------------------
REMAINDER
OF 2004 2005 2006 THEREAFTER TOTAL
(IN THOUSANDS) --------- ------- ---- ---------- --------
Financial standby letters of credit and other
financial surety instruments............... $1,143 $95,500 $ 50 $121 $ 96,814
Guarantee of residual value in lease
agreements................................. 194 684 65 -- 943
Contingent consideration in acquisition...... 417 1,666 417 -- 2,500
------ ------- ---- ---- --------
Total........................................ $1,754 $97,850 $532 $121 $100,257
------ ------- ---- ---- --------
NOTE 6 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
Net income (numerator):
Net income - basic................................. $75,626 $50,281 $193,691 $127,357
Add interest expense on assumed conversion of our
zero coupon convertible/exchangeable senior
debentures/notes, net of tax:
$825 million due 2020(1)...................... -- -- -- 3,639
$1.381 billion due 2021(2).................... 3,119 -- 9,299 --
$700 million due 2023(3)...................... -- -- -- --
------- ------- -------- --------
Adjusted net income - diluted................... $78,745 $50,281 $202,990 $130,996
------- ------- -------- --------
Earnings per share:
Basic........................................... $ .51 $ .34 $ 1.30 $ .87
Diluted......................................... $ .48 $ .33 $ 1.24 $ .83
Shares (denominator):
Weighted average number of shares
outstanding-basic(4)............................ 149,089 146,905 148,646 146,332
Net effect of dilutive stock options and warrants
based on the treasury stock method.............. 6,339 6,473 6,447 6,680
Assumed conversion of our zero coupon
convertible/exchangeable senior
debentures/notes:
$825 million due 2020(1)...................... -- -- -- 5,078
$1.381 billion due 2021(2).................... 8,491 -- 8,491 --
$700 million due 2023(3)...................... -- -- -- --
------- ------- -------- --------
Weighted average number of shares
outstanding-diluted............................. 163,919 153,378 163,584 158,090
------- ------- -------- --------
- ---------------
(1) Diluted earnings per share for the nine months ended September 30, 2003
reflects the assumed conversion of our $825 million zero coupon convertible
senior debentures, as the conversion in that period would have been
dilutive. We redeemed for cash the remaining outstanding principal amount of
our $825 million zero coupon convertible senior debentures on June 20, 2003
and therefore these
12
debentures did not impact the calculation of diluted earnings per share for
the three months ended September 30, 2004 and 2003 and the nine months ended
September 30, 2004.
(2) Diluted earnings per share for the three and nine months ended September 30,
2004 reflects the assumed conversion of our $1.381 billion zero coupon
convertible senior debentures, as the conversion in that period would have
been dilutive. For the three and nine months ended September 30, 2003, the
weighted-average number of shares outstanding-diluted excludes 8.5 million
potentially dilutive shares issuable upon the conversion of our $1.381
billion zero coupon convertible senior debentures because the inclusion of
such shares would have been anti-dilutive, given the level of net income for
those periods. Net income for the three and nine months ended September 30,
2003 excludes the related add-back of interest expense, net of tax, of $3.0
million and $9.1 million, respectively, for these debentures. These shares
would have been dilutive and therefore included in the calculation of the
weighted-average number of shares outstanding-diluted had diluted earnings
per share been at or above $.36 and $1.07 for the three and nine months
ended September 30, 2003, respectively.
(3) Diluted earnings per share for the three and nine months ended September 30,
2004 and 2003 excludes approximately 10.0 million potentially dilutive
shares initially issuable upon the exchange of our $700 million zero coupon
exchangeable senior notes. Such shares are contingently exchangeable under
certain circumstances and would only be included in the calculation of the
weighted-average number of shares outstanding-diluted if any of those
criteria were met. Such criteria were not met during the three and nine
months ended September 30, 2004 and 2003. Based on the initial exchange
price per share, these notes would be exchangeable for our common shares if
the closing sale price per share of Nabors' common shares for at least 20
trading days during the period of 30 consecutive trading days ending on the
last trading day of the previous calendar quarter is greater than or equal
to $84.12 for calendar quarters ending on or before September 30, 2008, and
$77.11 for calendar quarters thereafter.
(4) Includes the following weighted-average number of common shares of Nabors
and weighted-average number of exchangeable shares of Nabors Exchangeco,
respectively: 148.8 million and .3 million shares for the three months ended
September 30, 2004; 146.5 million and .4 million shares for the three months
ended September 30, 2003; 148.3 million and .3 million shares for the nine
months ended September 30, 2004; and 145.8 million and .5 million shares for
the nine months ended September 30, 2003. The exchangeable shares of Nabors
Exchangeco are exchangeable for Nabors common shares on a one-for-one basis,
and have essentially identical rights as Nabors Industries Ltd. common
shares, including but not limited to voting rights and the right to receive
dividends, if any.
For all periods presented, the computation of diluted earnings per share
excludes outstanding stock options and warrants with exercise prices greater
than the average market price of Nabors' common shares, because the inclusion of
such options and warrants would be anti-dilutive. The number of options and
warrants that were excluded from diluted earnings per share that would
potentially dilute earnings per share in the future were 8,963,148 and 8,479,677
shares during the three and nine months ended September 30, 2004, respectively,
and 8,885,367 and 8,186,698 shares during the three and nine months ended
September 30, 2003, respectively. In any period during which the average market
price of Nabors' common shares exceeds the exercise prices of these stock
options and warrants, such stock options and warrants will be included in our
diluted earnings per share computation using the treasury stock method of
accounting.
The holders of our $1.381 billion zero coupon convertible senior debentures
and our $700 million zero coupon senior exchangeable notes have the right to
require us to repurchase the debentures/notes at various dates commencing
February 5, 2006 and June 15, 2008, respectively. See a discussion of
modifications made to these convertible debt instruments in October 2004
included in Note 3, Long-term Debt.
13
NOTE 7 SEGMENT INFORMATION
The following tables set forth certain financial information with respect
to our reportable segments:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
2004 2003 2004 2003
(IN THOUSANDS) -------- -------- ---------- ----------
Operating revenues and Earnings from
unconsolidated affiliates:
Contract Drilling:(1)
U.S. Lower 48 Land Drilling................ $202,283 $132,065 $ 527,700 $ 336,272
U.S. Land Well-servicing................... 95,377 78,773 263,018 236,937
U.S. Offshore.............................. 33,929 25,928 96,806 72,322
Alaska..................................... 16,982 20,187 66,020 86,601
Canada..................................... 89,293 71,489 289,964 222,113
International.............................. 111,618 106,228 321,790 290,018
-------- -------- ---------- ----------
Subtotal Contract Drilling(2)............ 549,482 434,670 1,565,298 1,244,263
Oil and Gas(3)................................ 14,216 3,366 49,515 7,452
Other Operating Segments(4)(5)................ 41,408 48,635 150,086 150,396
Other reconciling items(6).................... (19,746) (10,692) (50,868) (36,481)
-------- -------- ---------- ----------
Total.................................... $585,360 $475,979 $1,714,031 $1,365,630
-------- -------- ---------- ----------
Adjusted income (loss) derived from operating
activities:(7)
Contract Drilling:
U.S. Lower 48 Land Drilling................ $ 30,221 $ 8,215 $ 51,760 $ 8,136
U.S. Land Well-servicing................... 18,511 12,925 42,638 35,877
U.S. Offshore.............................. 4,507 658 14,120 (2,782)
Alaska..................................... 2,522 5,584 13,488 31,272
Canada..................................... 13,888 10,931 60,011 35,320
International.............................. 24,713 22,078 62,057 58,808
-------- -------- ---------- ----------
Subtotal Contract Drilling............... 94,362 60,391 244,074 166,631
Oil and Gas................................... 4,018 2,215 9,420 4,876
Other Operating Segments...................... (3,094) (790) (5,631) 4,397
-------- -------- ---------- ----------
Total segment adjusted income derived
from operating activities............. 95,286 61,816 247,863 175,904
-------- -------- ---------- ----------
Other reconciling items(8)...................... (11,195) (8,870) (32,040) (28,964)
Interest expense................................ (10,533) (15,991) (37,779) (54,705)
Interest and dividend income.................... 6,782 6,442 21,166 21,133
Other income, net............................... 3,953 2,279 15,279 2,326
-------- -------- ---------- ----------
Income before income taxes...................... $ 84,293 $ 45,676 $ 214,489 $ 115,694
-------- -------- ---------- ----------
14
SEPTEMBER 30, DECEMBER 31,
2004 2003
(IN THOUSANDS) ------------- ------------
Total assets:
Contract Drilling:
U.S. Lower 48 Land Drilling............................ $1,088,811 $ 987,903
U.S. Land Well-servicing............................... 273,023 246,312
U.S. Offshore.......................................... 425,724 386,196
Alaska................................................. 204,946 218,222
Canada................................................. 848,392 767,400
International.......................................... 1,080,388 1,001,058
---------- ----------
Subtotal Contract Drilling(9)........................ 3,921,284 3,607,091
Oil and Gas............................................... 84,796 67,898
Other Operating Segments(10).............................. 320,605 337,622
Other reconciling items(8)................................ 1,291,735 1,590,081
---------- ----------
Total assets......................................... $5,618,420 $5,602,692
---------- ----------
- ---------------
(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.
(2) Includes Earnings (losses) from unconsolidated affiliates, accounted for by
the equity method, of ($.26) million and $1.0 million for the three months
ended September 30, 2004 and 2003, respectively, and $1.9 million and $2.7
million for the nine months ended September 30, 2004 and 2003,
respectively.
(3) Represents our oil and gas exploration, development and production
operations.
(4) Includes our marine transportation and supply services, drilling technology
and top drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations.
(5) Includes Earnings (losses) from unconsolidated affiliates, accounted for by
the equity method, of ($.03) million and $1.5 million for the three months
ended September 30, 2004 and 2003, respectively, and $2.8 million and $7.0
million for the nine months ended September 30, 2004 and 2003,
respectively.
(6) Represents the elimination of inter-segment transactions.
(7) Adjusted income (loss) derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, depreciation
and amortization, and depletion expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under 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 this
financial measure is an accurate reflection of the ongoing profitability of
our company. A reconciliation of this non-GAAP measure to income before
income taxes, which is a GAAP measure, is provided within the table above.
(8) Represents the elimination of inter-segment transactions and unallocated
corporate expenses and assets.
(9) Includes $34.4 million and $26.5 million of investments in unconsolidated
affiliates accounted for by the equity method as of September 30, 2004 and
December 31, 2003, respectively.
(10) Includes $33.2 million and $31.6 million of investments in unconsolidated
affiliates accounted for by the equity method as of September 30, 2004 and
December 31, 2003, respectively.
15
NOTE 8 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Nabors has fully and unconditionally guaranteed all of the issued public
debt securities of Nabors Industries, Inc. (Nabors Delaware), and Nabors and
Nabors Delaware have fully and unconditionally guaranteed the $225 million
4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect
subsidiary.
The following condensed consolidating financial information is included so
that separate financial statements of Nabors Delaware and Nabors Holdings are
not required to be filed with the U.S. Securities and Exchange Commission. 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 September 30, 2004 and December 31,
2003, statements of income for the three and nine months ended September 30,
2004 and 2003, and statements of cash flows for the nine months ended September
30, 2004 and 2003 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer
of public debt securities guaranteed by Nabors and guarantor of the $225 million
4.875% senior notes issued by Nabors Holdings, (c) Nabors Holdings, issuer of
the $225 million 4.875% senior notes, (d) the non-guarantor subsidiaries, (e)
consolidating adjustments necessary to consolidate Nabors and its subsidiaries
and (f) Nabors on a consolidated basis.
16
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents... $ 121,450 $ -- $ 18 $ 175,669 $ -- $ 297,137
Marketable securities....... 420,277 -- -- 46,646 -- 466,923
Accounts receivable, net.... -- -- -- 480,117 -- 480,117
Inventory................... -- -- -- 23,895 -- 23,895
Other current assets........ 39,348 1,677 410 139,030 -- 180,465
---------- ---------- -------- ---------- ----------- ----------
Total current assets...... 581,075 1,677 428 865,357 -- 1,448,537
Marketable securities......... 380,078 -- -- 50,835 -- 430,913
Property, plant and equipment,
net......................... -- -- -- 3,190,374 -- 3,190,374
Goodwill, net................. -- -- -- 321,010 -- 321,010
Intercompany receivables...... 1,335,742 840,825 -- 522 (2,177,089) --
Investments in affiliates..... 476,865 2,058,121 251,301 1,148,270 (3,866,952) 67,605
Other long-term assets........ -- 21,458 1,063 137,460 -- 159,981
---------- ---------- -------- ---------- ----------- ----------
Total assets.............. $2,773,760 $2,922,081 $252,792 $5,713,828 $(6,044,041) $5,618,420
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ -- $ 750 $ -- $ -- $ -- $ 750
Trade accounts payable...... -- 23 -- 161,368 -- 161,391
Accrued liabilities......... 740 2,577 1,410 158,366 -- 163,093
Income taxes payable........ 1,425 -- -- 4,657 -- 6,082
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities............. 2,165 3,350 1,410 324,391 -- 331,316
Long-term debt................ -- 1,778,832 223,698 -- -- 2,002,530
Other long-term liabilities... -- 340 -- 144,494 -- 144,834
Deferred income taxes......... 32 49,008 -- 319,137 -- 368,177
Intercompany payable.......... -- -- 2,273 2,174,816 (2,177,089) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities......... 2,197 1,831,530 227,381 2,962,838 (2,177,089) 2,846,857
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity.......... 2,771,563 1,090,551 25,411 2,750,990 (3,866,952) 2,771,563
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.... $2,773,760 $2,922,081 $252,792 $5,713,828 $(6,044,041) $5,618,420
---------- ---------- -------- ---------- ----------- ----------
17
DECEMBER 31, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents... $ 403,693 $ 1 $ 17 $ 176,026 $ -- $ 579,737
Marketable securities....... 285,353 -- -- 54,583 -- 339,936
Accounts receivable, net.... -- -- -- 410,487 -- 410,487
Inventory................... -- -- -- 23,289 -- 23,289
Other current assets........ 6,806 4,229 -- 151,163 -- 162,198
---------- ---------- -------- ---------- ----------- ----------
Total current assets...... 695,852 4,230 17 815,548 -- 1,515,647
Marketable securities......... 571,327 -- -- 41,090 -- 612,417
Property, plant and equipment,
net......................... -- -- -- 2,990,792 -- 2,990,792
Goodwill, net................. -- -- -- 315,627 -- 315,627
Intercompany receivables...... 1,057,260 1,085,944 202 -- (2,143,406) --
Investments in affiliates..... 170,089 2,065,230 236,829 1,095,882 (3,509,930) 58,100
Other long-term assets........ -- 20,359 966 88,784 -- 110,109
---------- ---------- -------- ---------- ----------- ----------
Total assets.............. $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ -- $ 295,267 $ -- $ 4,118 $ -- $ 299,385
Trade accounts payable...... 1 23 -- 128,816 -- 128,840
Accrued liabilities......... 960 10,766 3,901 145,118 -- 160,745
Income taxes payable........ 1,164 (190) (111) 8,540 -- 9,403
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities............. 2,125 305,866 3,790 286,592 -- 598,373
Long-term debt................ -- 1,762,054 223,499 -- -- 1,985,553
Other long-term liabilities... -- 3,738 -- 151,929 -- 155,667
Deferred income taxes......... 79 61,623 82 311,040 -- 372,824
Intercompany payable.......... 2,049 -- -- 2,141,357 (2,143,406) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities......... 4,253 2,133,281 227,371 2,890,918 (2,143,406) 3,112,417
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity.......... 2,490,275 1,042,482 10,643 2,456,805 (3,509,930) 2,490,275
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.... $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692
---------- ---------- -------- ---------- ----------- ----------
18
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues...... $ -- $ -- $ -- $585,652 $ $585,652
------- ------- ------ -------- --------- --------
Earnings (losses) from
unconsolidated
affiliates........... -- -- -- (292) -- (292)
Earnings from
consolidated
affiliates........... 44,989 41,015 3,675 43,315 (132,994) --
Interest and dividend
income............... 3,408 33 -- 3,341 -- 6,782
Intercompany interest
income............... 27,115 18,381 -- -- (45,496) --
Other income (expense),
net.................. 3,933 (1,256) -- 2,120 (844) 3,953
------- ------- ------ -------- --------- --------
Total revenues and
other income....... 79,445 58,173 3,675 634,136 (179,334) 596,095
------- ------- ------ -------- --------- --------
Costs and other
deductions:
Direct costs............ -- -- -- 378,084 -- 378,084
General and
administrative
expenses............. 1,863 4 -- 48,525 (844) 49,548
Depreciation and
amortization......... -- 150 -- 64,079 -- 64,229
Depletion............... -- -- -- 9,408 -- 9,408
Interest expense........ -- 8,330 2,890 (687) -- 10,533
Intercompany interest
expense.............. -- -- -- 45,496 (45,496) --
------- ------- ------ -------- --------- --------
Total costs and other
deductions......... 1,863 8,484 2,890 544,905 (46,340) 511,802
------- ------- ------ -------- --------- --------
Income before income
taxes................... 77,582 49,689 785 89,231 (132,994) 84,293
------- ------- ------ -------- --------- --------
Income tax expense........ 1,956 3,209 275 3,227 -- 8,667
------- ------- ------ -------- --------- --------
Net income................ $75,626 $46,480 $ 510 $ 86,004 $(132,994) $ 75,626
------- ------- ------ -------- --------- --------
19
THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues...... $ -- $ -- $ -- $473,494 $ -- $473,494
Earnings from
unconsolidated
affiliates........... -- -- -- 2,485 -- 2,485
Earnings from
consolidated
affiliates........... 2,836 32,386 2,846 31,977 (70,045) --
Interest income......... 550 5 -- 5,887 -- 6,442
Intercompany interest
income............... 50,789 15,096 -- -- (65,885) --
Other income, net....... 2 2,041 -- 236 -- 2,279
------- ------- ------ -------- --------- --------
Total revenues and
other income....... 54,177 49,528 2,846 514,079 (135,930) 484,700
------- ------- ------ -------- --------- --------
Costs and other
deductions:
Direct costs............ -- -- -- 323,296 -- 323,296
General and
administrative
expenses............. 868 37 3 40,299 -- 41,207
Depreciation and
amortization......... -- -- -- 57,394 -- 57,394
Depletion............... -- -- -- 1,136 -- 1,136
Interest expense........ -- 13,220 2,860 (89) -- 15,991
Intercompany interest
expense.............. -- -- -- 65,885 (65,885) --
------- ------- ------ -------- --------- --------
Total costs and other
deductions......... 868 13,257 2,863 487,921 (65,885) 439,024
------- ------- ------ -------- --------- --------
Income (loss) before
income taxes............ 53,309 36,271 (17) 26,158 (70,045) 45,676
------- ------- ------ -------- --------- --------
Income tax expense
(benefit)............... 3,028 1,437 (6) (9,064) -- (4,605)
------- ------- ------ -------- --------- --------
Net income (loss)......... $50,281 $34,834 $ (11) $ 35,222 $ (70,045) $ 50,281
------- ------- ------ -------- --------- --------
20
NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other
income:
Operating revenues..... $ -- $ -- $ -- $1,709,348 $ -- $1,709,348
--
Earnings from
unconsolidated
affiliates.......... -- -- -- 4,683 -- 4,683
Earnings from
consolidated
affiliates.......... 105,683 106,756 14,474 110,937 (337,850) --
Interest and dividend
income.............. 12,317 1 -- 8,848 -- 21,166
Intercompany interest
income.............. 80,856 53,101 -- 522 (134,479) --
Other income, net...... 4,762 1,833 -- 10,918 (2,234) 15,279
-------- -------- ------- ---------- --------- ----------
Total revenues and
other income...... 203,618 161,691 14,474 1,845,256 (474,563) 1,750,476
-------- -------- ------- ---------- --------- ----------
Costs and other
deductions:
Direct costs........... -- -- -- 1,137,065 -- 1,137,065
General and
administrative
expenses............ 4,309 83 16 138,414 (2,234) 140,588
Depreciation and
amortization........ -- 300 -- 185,260 -- 185,560
Depletion.............. -- -- -- 34,995 -- 34,995
Interest expense....... -- 30,453 8,610 (1,284) -- 37,779
Intercompany interest
expense............. -- 522 -- 133,957 (134,479) --
-------- -------- ------- ---------- --------- ----------
Total costs and
other
deductions........ 4,309 31,358 8,626 1,628,407 (136,713) 1,535,987
-------- -------- ------- ---------- --------- ----------
Income before income
taxes.................. 199,309 130,333 5,848 216,849 (337,850) 214,489
-------- -------- ------- ---------- --------- ----------
Income tax expense....... 5,618 8,723 2,047 4,410 -- 20,798
-------- -------- ------- ---------- --------- ----------
Net income............... $193,691 $121,610 $ 3,801 $ 212,439 $(337,850) $ 193,691
-------- -------- ------- ---------- --------- ----------
21
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Revenues and other income:
Operating revenues........ $ -- $ -- $ -- $1,355,883 $ -- $1,355,883
Earnings from
unconsolidated
affiliates............. -- -- -- 9,747 -- 9,747
Earnings (losses) from
consolidated
affiliates............. (11,101) 85,475 12,496 73,172 (160,042) --
Interest income........... 1,052 22 11 20,048 -- 21,133
Intercompany interest
income................. 156,826 43,548 -- -- (200,374) --
Other income (expense),
net.................... (3,553) (1,660) 15 7,524 -- 2,326
-------- ------- ------- ---------- --------- ----------
Total revenues and
other income......... 143,224 127,385 12,522 1,466,374 (360,416) 1,389,089
-------- ------- ------- ---------- --------- ----------
Costs and other deductions:
Direct costs.............. -- -- -- 926,647 -- 926,647
General and administrative
expenses............... 2,608 (116) 20 120,423 -- 122,935
Depreciation and
amortization........... -- -- -- 166,854 -- 166,854
Depletion................. -- -- -- 2,254 -- 2,254
Interest expense.......... -- 45,571 8,588 546 -- 54,705
Intercompany interest
expense................ -- -- -- 200,374 (200,374) --
-------- ------- ------- ---------- --------- ----------
Total costs and other
deductions........... 2,608 45,455 8,608 1,417,098 (200,374) 1,273,395
-------- ------- ------- ---------- --------- ----------
Income before income
taxes..................... 140,616 81,930 3,914 49,276 (160,042) 115,694
-------- ------- ------- ---------- --------- ----------
Income tax expense
(benefit)................. 13,259 (1,312) 1,488 (25,098) -- (11,663)
-------- ------- ------- ---------- --------- ----------
Net income.................. $127,357 $83,242 $ 2,426 $ 74,374 $(160,042) $ 127,357
-------- ------- ------- ---------- --------- ----------
22
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Net cash (used for)
provided by operating
activities............. $(163,855) $ 304,467 $(10,967) $ 446,938 $(211,462) $ 365,121
--------- --------- -------- --------- --------- ---------
Cash flows from investing
activities:
Purchases of marketable
securities,
available-for-
sale................. (552,374) -- -- (70,486) -- (622,860)
Sales and maturities of
marketable
securities,
available-for-sale... 633,434 -- -- 49,335 -- 682,769
Purchases of non-
marketable
securities, net...... (35,000) -- -- (64,843) -- (99,843)
Sales of non-marketable
securities........... -- -- -- 22,773 -- 22,773
Cash paid for
investments in
consolidated
affiliates........... (218,012) (60,000) -- (170,968) 448,980 --
Capital expenditures... -- -- -- (400,073) -- (400,073)
Proceeds from sales of
assets and insurance
claims............... -- -- -- 3,905 -- 3,905
--------- --------- -------- --------- --------- ---------
Net cash used for
investing activities... (171,952) (60,000) -- (630,357) 448,980 (413,329)
--------- --------- -------- --------- --------- ---------
Cash flows from financing
activities:
Increase in cash
overdrafts........... -- -- -- 6,440 -- 6,440
Increase in restricted
cash................. -- -- -- (24) -- (24)
Reduction of long-term
debt................. -- (297,525) -- (4,134) -- (301,659)
Proceeds from issuance
of common shares..... 52,239 -- -- -- -- 52,239
Retirement of
intercompany loan.... 1,325 -- -- (1,325) -- --
Proceeds from parent
contributions........ -- 160,000 10,968 278,012 (448,980) --
Cash dividends paid.... -- (106,943) -- (104,519) 211,462 --
--------- --------- -------- --------- --------- ---------
Net cash provided by
(used for) financing
activities............. 53,564 (244,468) 10,968 174,450 (237,518) (243,004)
--------- --------- -------- --------- --------- ---------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 8,612 -- 8,612
--------- --------- -------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ (282,243) (1) 1 (357) -- (282,600)
Cash and cash
equivalents, beginning
of period.............. 403,693 1 17 176,026 -- 579,737
--------- --------- -------- --------- --------- ---------
Cash and cash
equivalents, end of
period................. $ 121,450 $ -- $ 18 $ 175,669 $ -- $ 297,137
--------- --------- -------- --------- --------- ---------
23
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------
Net cash provided by (used
for) operating
activities................ $104,446 $ 640,050 $(10,786) $ 318,738 $(808,353) $ 244,095
-------- --------- -------- --------- --------- -----------
Cash flows from investing
activities:
Purchases of marketable
securities,
available-for-sale..... (94,685) -- -- (936,507) -- (1,031,192)
Sales and maturities of
marketable securities,
available-for-sale..... 46,809 -- -- 891,320 -- 938,129
Purchases of
non-marketable
securities, net........ -- -- -- (20,001) -- (20,001)
Cash paid for investments
in consolidated
affiliates............. -- (700,255) -- -- (700,255) --
Capital expenditures...... -- -- -- (219,468) -- (219,468)
Proceeds from sales of
assets and insurance
claims................. -- -- -- 11,453 -- 11,453
-------- --------- -------- --------- --------- -----------
Net cash used for investing
activities................ (47,876) (700,255) -- (273,203) 700,255 (321,079)
-------- --------- -------- --------- --------- -----------
Cash flows from financing
activities:
Decrease in cash
overdrafts............. -- -- -- (1,904) -- (1,904)
Decrease in restricted
cash................... -- -- -- 2,015 -- 2,015
Proceeds from issuance of
long-term debt......... -- 700,000 -- -- -- 700,000
Reduction of long-term
debt................... -- (494,903) -- (48,788) -- (543,691)
Debt issuance costs....... -- (11,353) (159) -- -- (11,512)
Proceeds from issuance of
common shares.......... 24,144 -- -- -- -- 24,144
Proceeds from parent
contributions.......... -- -- 10,755 689,500 (700,255) --
Cash dividends paid....... -- (133,576) -- (674,777) 808,353 --
-------- --------- -------- --------- --------- -----------
Net cash provided by (used
for) financing
activities................ 24,144 60,168 10,596 (33,954) 108,098 169,052
-------- --------- -------- --------- --------- -----------
Effect of exchange rate
changes on cash and cash
equivalents............... -- -- -- 4,410 -- 4,410
-------- --------- -------- --------- --------- -----------
Net increase (decrease) in
cash and cash
equivalents............... 80,714 (37) (190) 15,991 -- 96,478
Cash and cash equivalents,
beginning of period....... 40,127 38 207 373,679 -- 414,051
-------- --------- -------- --------- --------- -----------
Cash and cash equivalents,
end of period............. $120,841 $ 1 $ 17 $ 389,670 $ -- $ 510,529
-------- --------- -------- --------- --------- -----------
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Nabors Industries Ltd.:
We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of September 30, 2004, and the related
consolidated statements of income for each of the three-month and nine-month
periods ended September 30, 2004 and 2003, and the consolidated statements of
cash flows and of changes in shareholders' equity for each of the nine-month
periods ended September 30, 2004 and 2003. This interim financial information is
the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial information
for it to be in conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2003, and the related consolidated statements of
income, of cash flows, and of changes in shareholders' equity for the year then
ended (not presented herein), and in our report dated March 5, 2004, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the accompanying consolidated balance sheet information as of
December 31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PRICEWATERHOUSE COOPERS LLP
Houston, Texas
November 3, 2004
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion includes various forward-looking statements about our
markets, demand for our products and services and our future results.
Statements, such as these, that are not historical facts are "forward-looking
statements" within the meaning of the safe harbor provisions of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These
forward-looking statements are based upon our analysis of currently available
competitive, financial and economic data and our operating plans. They are
inherently uncertain and investors should recognize that events and actual
results could turn out to be significantly different from our expectations. By
way of illustration, when used in this document, words such as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "should,"
"could," "may," "predict" and similar expressions are intended to identify
forward-looking statements.
You should consider the following key factors when evaluating these
forward-looking statements:
- fluctuations in worldwide prices of and demand for natural gas and oil;
- fluctuations in levels of natural gas and oil exploration and development
activities;
- fluctuations in the demand for our services;
- the existence of competitors, technological changes and developments in
the oilfield services industry;
- the existence of operating risks inherent in the oilfield services
industry;
- the existence of regulatory and legislative uncertainties;
- the possibility of political instability, war or acts of terrorism in any
of the countries in which we do business; and
- general economic conditions.
Our businesses depend, to a large degree, on the level of spending by oil
and gas companies for exploration, development and production activities.
Therefore, a sustained increase or decrease in the price of natural gas or oil,
which could have a material impact on exploration, development and production
activities, could also materially affect our financial position, results of
operations and cash flows.
The above description of risks and uncertainties is by no means
all-inclusive, but is designed to highlight what we believe are important
factors to consider. For a more detailed description of risk factors, please
refer to our Annual Report on Form 10-K for the year ended December 31, 2003
filed with the U.S. Securities and Exchange Commission under Part 1, Item I,
"Risk Factors."
RESULTS OF OPERATIONS
A discussion of our results of operations for the three and nine months
ended September 30, 2004 and 2003 is included below. This discussion should be
read in conjunction with our accompanying consolidated financial statements and
notes thereto and our Annual Report on Form 10-K for the year ended December 31,
2003.
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
26
The following table sets forth certain information with respect to our
reportable segments and rig activity:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ------------------------------------------
INCREASE INCREASE
2004 2003 (DECREASE) 2004 2003 (DECREASE)
-------- -------- ---------------- ---------- ---------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RIG ACTIVITY)
Reportable segments:
Operating revenues and Earnings
from unconsolidated affiliates:
Contract Drilling:(1)
U.S. Lower 48 Land
Drilling................... $202,283 $132,065 $ 70,218 53% $ 527,700 $ 336,272 $191,428 57%
U.S. Land Well-servicing..... 95,377 78,773 16,604 21% 263,018 236,937 26,081 11%
U.S. Offshore................ 33,929 25,928 8,001 31% 96,806 72,322 24,484 34%
Alaska....................... 16,982 20,187 (3,205) (16%) 66,020 86,601 (20,581) (24%)
Canada....................... 89,293 71,489 17,804 25% 289,964 222,113 67,851 31%
International................ 111,618 106,228 5,390 5% 321,790 290,018 31,772 11%
-------- -------- -------- ---------- ---------- --------
Subtotal Contract
Drilling(2)................ 549,482 434,670 114,812 26% 1,565,298 1,244,263 321,035 26%
Oil and Gas(3)................. 14,216 3,366 10,850 322% 49,515 7,452 42,063 564%
Other Operating
Segments(4)(5)............... 41,408 48,635 (7,227) (15%) 150,086 150,396 (310) 0%
Other reconciling items(6)..... (19,746) (10,692) (9,054) (85%) (50,868) (36,481) (14,387) (39%)
-------- -------- -------- ---------- ---------- --------
Total........................ $585,360 $475,979 $109,381 23% $1,714,031 $1,365,630 $348,401 26%
-------- -------- -------- ----- ---------- ---------- -------- -----
Adjusted income (loss) derived
from operating activities:(7)
Contract Drilling:
U.S. Lower 48 Land
Drilling................... $ 30,221 $ 8,215 $ 22,006 268% $ 51,760 $ 8,136 $ 43,624 536%
U.S. Land Well-servicing..... 18,511 12,925 5,586 43% 42,638 35,877 6,761 19%
U.S. Offshore................ 4,507 658 3,849 585% 14,120 (2,782) 16,902 N/M(8)
Alaska....................... 2,522 5,584 (3,062) (55%) 13,488 31,272 (17,784) (57%)
Canada....................... 13,888 10,931 2,957 27% 60,011 35,320 24,691 70%
International................ 24,713 22,078 2,635 12% 62,057 58,808 3,249 6%
-------- -------- -------- ---------- ---------- --------
Subtotal Contract Drilling... 94,362 60,391 33,971 56% 244,074 166,631 77,443 46%
Oil and Gas.................... 4,018 2,215 1,803 81% 9,420 4,876 4,544 93%
Other Operating Segments....... (3,094) (790) (2,304) (292%) (5,631) 4,397 (10,028) (228%)
Other reconciling items(9)..... (11,195) (8,870) (2,325) (26%) (32,040) (28,964) (3,076) (11%)
-------- -------- -------- ---------- ---------- --------
Total........................ 84,091 52,946 31,145 59% 215,823 146,940 68,883 47%
Interest expense................. (10,533) (15,991) 5,458 34% (37,779) (54,705) 16,926 31%
Interest and dividend income..... 6,782 6,442 340 5% 21,166 21,133 33 0%
Other income, net................ 3,953 2,279 1,674 73% 15,279 2,326 12,953 557%
-------- -------- -------- ---------- ---------- --------
Income before income taxes....... $ 84,293 $ 45,676 $ 38,617 85% $ 214,489 $ 115,694 $ 98,795 85%
-------- -------- -------- ---------- ---------- --------
Rig activity:
Rig years:(10)
U.S. Lower 48 Land Drilling.... 207.9 157.4 50.5 32% 192.2 134.6 57.6 43%
U.S. Offshore.................. 14.0 14.1 (.1) (1%) 14.4 14.2 .2 1%
Alaska......................... 6.4 6.3 .1 2% 6.9 8.0 (1.1) (14%)
Canada......................... 41.9 39.1 2.8 7% 43.6 40.4 3.2 8%
International(11).............. 66.3 63.3 3.0 5% 65.6 60.1 5.5 9%
-------- -------- -------- ---------- ---------- --------
Total rig years.............. 336.5 280.2 56.3 20% 322.7 257.3 65.4 25%
-------- -------- -------- ---------- ---------- --------
Rig hours:(12)
U.S. Land Well-servicing....... 289,312 275,610 13,702 5% 851,810 830,933 20,877 3%
Canada Well-servicing.......... 86,676 90,233 (3,557) (4%) 272,145 229,393 42,752 19%
-------- -------- -------- ---------- ---------- --------
Total rig hours.............. 375,988 365,843 10,145 3% 1,123,955 1,060,326 63,629 6%
-------- -------- -------- ---------- ---------- --------
27
- ---------------
(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.
(2) Includes Earnings (losses) from unconsolidated affiliates, accounted for by
the equity method, of ($.26) million and $1.0 million for the three months
ended September 30, 2004 and 2003, respectively, and $1.9 million and $2.7
million for the nine months ended September 30, 2004 and 2003,
respectively.
(3) Represents our oil and gas exploration, development and production
operations.
(4) Includes our marine transportation and supply services, drilling technology
and top drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations.
(5) Includes Earnings (losses) from unconsolidated affiliates, accounted for by
the equity method, of ($.03) million and $1.5 million for the three months
ended September 30, 2004 and 2003, respectively, and $2.8 million and $7.0
million for the nine months ended September 30, 2004 and 2003,
respectively.
(6) Represents the elimination of inter-segment transactions.
(7) Adjusted income (loss) derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, depreciation
and amortization, and depletion expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under accounting principles
generally accepted in the United States of America (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 this
financial measure is an accurate reflection of the ongoing profitability of
our company. A reconciliation of this non-GAAP measure to income before
income taxes, which is a GAAP measure, is provided within the table set
forth immediately following the heading Results of Operations above.
(8) The percentage is so large that it is not meaningful.
(9) Represents the elimination of inter-segment transactions and unallocated
corporate expenses.
(10) Excludes well-servicing rigs, which are measured in rig hours. Rig years
represents a measure of the number of equivalent rigs operating during a
given period. For example, one rig operating 182.5 days during a 365-day
period represents 0.5 rig years.
(11) International rig years include our equivalent percentage ownership of rigs
owned by unconsolidated affiliates which totaled 4.0 during the three and
nine months ended September 30, 2004, and 3.7 years during the three and
nine months ended September 30, 2003.
(12) Rig hours represents the number of hours that our well-servicing rig fleet
operated during the period.
28
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2003
Operating revenues and Earnings from unconsolidated affiliates for the
three months ended September 30, 2004 totaled $585.4 million, representing an
increase of $109.4 million, or 23%, compared to the prior year quarter. Adjusted
income derived from operating activities and net income for the three months
ended September 30, 2004 totaled $84.1 million and $75.6 million ($.48 per
diluted share), respectively, representing increases of 59% and 50% compared to
the prior year quarter. Operating revenues and Earnings from unconsolidated
affiliates for the nine months ended September 30, 2004 totaled $1.714 billion,
representing an increase of $348.4 million, or 26%, compared to the prior year
period. Adjusted income derived from operating activities and net income for the
nine months ended September 30, 2004 totaled $215.8 million and $193.7 million
($1.24 per diluted share), respectively, representing increases of 47% and 52%
compared to the prior year period.
The increase in our operating results during the three and nine months
ended September 30, 2004 primarily resulted from higher revenues realized by our
U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, U.S. Offshore (Gulf of
Mexico) and Canadian operations. Revenues increased for these business units as
a result of higher activity levels (except for U.S. Offshore where activity
levels were flat) and higher average dayrates during the three and nine months
ended September 30, 2004 compared to the prior year periods. This increase in
activity reflects an increase in demand for our services in these markets during
2003 and 2004, which resulted from continuing higher price levels for natural
gas and oil during 2003 and 2004. Our operating results for the fourth quarter
of 2004 are expected to increase from levels realized during the third quarter
of 2004 primarily as a result of improved operating conditions in Canada, where
operations typically improve in the fourth quarter of 2004 as a result of
seasonality and where our results were impacted by poor weather during the third
quarter of 2004, and a continued improvement in margins for our U.S. Lower 48
Land Drilling operations.
Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore operations, while oil prices are the
primary driver of our Alaskan, International and U.S. Land Well-servicing
operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $5.58
per million cubic feet (mcf) during the period from October 1, 2003 through
September 30, 2004, up from a $5.29 per mcf average during the period from
October 1, 2002 through September 30, 2003. West Texas intermediate spot oil
prices (per Bloomberg) averaged $37.24 per barrel during the period from October
1, 2003 through September 30, 2004, up from a $30.34 per barrel average during
the period from October 1, 2002 through September 30, 2003.
Contract Drilling. Our Contract Drilling operating segments contain one or
more of the following operations: drilling, workover and well-servicing, on land
and offshore. Operating revenues and Earnings from unconsolidated affiliates for
our Contract Drilling operating segments totaled $549.5 million and adjusted
income derived from operating activities totaled $94.4 million during the three
months ended September 30, 2004, representing increases of 26% and 56%,
respectively, compared to the prior year quarter. Operating revenues and
Earnings from unconsolidated affiliates for these operating segments totaled
$1.565 billion and adjusted income derived from operating activities totaled
$244.1 million during the nine months ended September 30, 2004, representing
increases of 26% and 46%, respectively, compared to the prior year period. Rig
years (excluding well-servicing rigs) increased to 336.5 years and 322.7 years
during the three and nine months ended September 30, 2004, respectively, from
280.2 years and 257.3 years during the three and nine months ended September 30,
2003, respectively, as a result of increased capital spending by our customers,
which resulted from the improvement in commodity prices discussed above.
U.S. Lower 48 Land Drilling Operating revenues and adjusted income derived
from operating activities totaled $202.3 million and $30.2 million,
respectively, during the three months ended September 30, 2004, representing
increases of 53% and 268%, respectively, compared to the prior year quarter.
Operating revenues and adjusted income derived from operating activities totaled
$527.7 million and $51.8 million, respectively, during the nine months ended
September 30, 2004, compared to
29
$336.3 million and $8.1 million, respectively, during the nine months ended
September 30, 2003. The increase in operating results during the 2004 periods
primarily resulted from increased drilling activity, which was driven by higher
natural gas prices and is reflected in the increase in rig years to 207.9 years
and 192.2 years during the three and nine months ended September 30, 2004,
respectively, compared to 157.4 years and 134.6 years during the three and nine
months ended September 30, 2003, respectively, and higher average dayrates
compared to the prior year periods.
U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $95.4 million and $18.5 million, respectively,
during the three months ended September 30, 2004, representing increases of 21%
and 43%, respectively, compared to the prior year quarter. Operating revenues
and adjusted income derived from operating activities totaled $263.0 million and
$42.6 million, respectively, during the nine months ended September 30, 2004,
representing increases of 11% and 19%, respectively, compared to the prior year
period. The increase in operating results during the 2004 periods primarily
resulted from an increase in average dayrates compared to the prior year periods
and a slight increased in well-servicing activity, which was driven by higher
oil prices and is reflected in the increase in well-servicing hours to 289,312
hours and 851,810 hours during the three and nine months ended September 30,
2004, respectively, compared to 275,610 hours and 830,933 hours during the three
and nine months ended September 30, 2003, respectively.
U.S. Offshore Operating revenues totaled $33.9 million during the three
months ended September 30, 2004, representing an increase of 31% compared to the
prior year quarter, while adjusted income derived from operating activities
totaled $4.5 million during the three months ended September 30, 2004 compared
to $0.7 million during the prior year quarter. Operating revenues totaled $96.8
million during the nine months ended September 30, 2004, representing an
increase of 34% compared to the prior year period, while adjusted income derived
from operating activities totaled $14.1 million during the nine months ended
September 30, 2004 compared to an adjusted loss derived from operating
activities totaling $2.8 million during the prior year period. The increase in
operating results during the 2004 periods primarily resulted from higher average
dayrates for most rigs. The increase in average dayrates was most significant
for our platform drilling and workover rigs for which there was also a
substantial increase in operating days compared to the prior year periods, and
for our jack-up drilling and workover rigs. Rig years for our U.S. Offshore
operations were relatively flat during the 2004 periods compared to the prior
year periods, totaling 14.0 years and 14.4 years for the three and nine months
ended September 30, 2004, respectively, compared to 14.1 years and 14.2 years
during the three and nine months ended September 30, 2003, respectively.
Activity for our U.S. Offshore operations was positively impacted by the
addition of three new platform rigs for deepwater development projects, one of
which commenced operations in the first quarter of 2004, and two of which
commenced operations late in the second quarter of 2004, which was offset by
decreased activity for other rigs in more shallow regions of the Gulf of Mexico.
The significant damage to one of our MODS deepwater platform rigs during
Hurricane Ivan is not expected to have any negative financial effect.
Alaskan Operating revenues and adjusted income derived from operating
activities totaled $17.0 million and $2.5 million, respectively, during the
three months ended September 30, 2004, representing decreases of 16% and 55%,
respectively, compared to the prior year quarter. These decreases primarily
resulted from one time occurrences during the three months ended September 30,
2003 that did not recur during the current year quarter including: deferred
revenue recognized on one of our rigs and a receipt of a significant lump sum
demobilization fee. Rig years for our Alaskan operations remained relatively
flat, totaling 6.4 years during the three months ended September 30, 2004
compared to 6.3 years during the prior year quarter. Operating revenues and
adjusted income derived from operating activities totaled $66.0 million and
$13.5 million, respectively, during the nine months ended September 30, 2004,
representing decreases of 24% and 57%, respectively, compared to the prior year
period. These decreases primarily resulted from lower drilling activity and an
incremental $5.7 million of Operating revenues recorded in the first quarter of
2003, representing business interruption insurance proceeds related to the
damage incurred on one of our land drilling rigs in 2001. The decrease in
drilling activity during the nine months ended September 30, 2004 primarily
resulted from the completion of a significant long-term
30
contract in late 2003 that has not yet been renewed or replaced and is reflected
in the decrease in rig years to 6.9 years during the nine months ended September
30, 2004 from 8.0 years during the prior year period.
Canadian Operating revenues and adjusted income derived from operating
activities totaled $89.3 million and $13.9 million, respectively, during the
three months ended September 30, 2004, representing increases of 25% and 27%,
respectively, compared to the prior year quarter. These increases primarily
resulted from an increase in drilling revenues, resulting from an overall
increase in drilling activity (which was driven by increased natural gas
prices), and an increase in average dayrates compared to the prior year quarter.
Operating revenues and adjusted income derived from operating activities totaled
$290.0 million and $60.0 million, respectively, during the nine months ended
September 30, 2004, representing increases of 31% and 70%, respectively,
compared to the prior year period. These increases resulted from an increase in
drilling and well-servicing revenues, resulting from an overall increase in
drilling and well-servicing activity (which was driven by increased natural gas
prices), and an increase in average dayrates compared to the prior year period.
The improvement in operating results during the three and nine months ended
September 30, 2004 was partially offset by the impact of poor weather in the
third quarter of 2004, which had the largest impact on our well-servicing
operations and resulted in a decrease in well-servicing activity during the
three months ended September 30, 2004 compared to the prior year quarter. Rig
years in Canada increased to 41.9 years and 43.6 years during the three and nine
months ended September 30, 2004, respectively, from 39.1 years and 40.4 years
during the three and nine months ended September 30, 2003, respectively.
Well-servicing hours decreased to 86,676 hours and increased to 272,145 hours
during the three and nine months ended September 30, 2004, respectively, from
90,233 hours and 229,393 hours during the three and nine months ended September
30, 2003, respectively.
International Operating revenues and Earnings from unconsolidated
affiliates and adjusted income derived from operating activities totaled $111.6
million and $24.7 million, respectively, during the three months ended September
30, 2004, respectively, representing increases of 5% and 12%, respectively,
compared to the prior year periods. The increase in operating results during the
three months ended September 30, 2004 primarily resulted from an increase in
operations in Saudi Arabia and from the addition of operations in Indonesia,
which began in the fourth quarter of 2003, partially offset by a decrease in
operations in Trinidad, Kazakhstan, Yemen and Colombia compared to the prior
year quarter, and an incremental $1.6 million of Operating revenues recorded in
the third quarter of 2003, representing business interruption insurance proceeds
related to the damage incurred on one of our rigs in the United Arab Emirates.
Operating revenues and Earnings from unconsolidated affiliates and adjusted
income derived from operating activities totaled $321.8 million and $62.1
million, respectively, during the nine months ended September 30, 2004,
representing increases of 11% and 6%, respectively, compared to the prior year
period. The increase in operating results during the nine months ended September
30, 2004 primarily resulted from an increase in operations in Mexico and Saudi
Arabia and from the addition of operations in India and Indonesia, which began
in the fourth quarter of 2003, partially offset by a decrease in operations in
Trinidad, Yemen, Colombia and Algeria compared to the prior year period.
International rig years increased to 66.3 years and 65.6 years during the three
and nine months ended September 30, 2004, respectively, from 63.3 years and 60.1
years during the three and nine months ended September 30, 2003, respectively.
On June 22, 2004, we acquired two jack-up accommodation units and one self-
propelled jack-up work platform/accommodation unit for a total purchase price of
approximately $58 million that are currently operating offshore Saudi Arabia
under contracts that will continue through at least December 2004, with customer
options to extend through March 2005. The accommodation units and work
platform/accommodation unit contributed to the increase in our results in Saudi
Arabia during the three and nine months ended September 30, 2004.
Oil and Gas. This operating segment represents our oil and gas
exploration, development and production operations. Oil and Gas Operating
revenues increased to $14.2 million during the three months ended September 30,
2004 from $3.4 million during the prior year quarter, and increased to $49.5
million during the nine months ended September 30, 2004 from $7.5 million during
the prior year period. Adjusted income derived from operating activities
increased to $4.0 million during the three months ended September 30, 2004 from
$2.2 million during the prior year quarter, and increased to $9.4 million during
31
the nine months ended September 30, 2004 from $4.9 million during the prior year
period. Operating results increased during the 2004 periods as a result of the
agreements executed with El Paso Corporation in the fourth quarter of 2003. The
increase in adjusted income derived from operating activities for the nine
months ended September 30, 2004 was partially offset by $2.4 million in expense
recognized during the second quarter of 2004 as a result of a dry hole offshore
in the Gulf of Mexico.
On May 25, 2004, we entered into an agreement with Ecopetrol S.A. under
which we will contribute between 30% and 50% of an estimated $45 million total
cost to drill exploration wells in five prospects in Colombia and the same
percentage share of costs of any additional exploration and developmental wells
in those prospects and four optional prospects in Colombia in exchange for a 25%
to 45% interest in production from the wells. On June 14, 2004, we also entered
into an agreement with Solana Petroleum Exploration Colombia Limited under which
Solana is obligated to pay 96% of our costs through the casing point on the
exploration wells in Colombia, and 75% of our other costs under the Ecopetrol
agreement, in exchange for 75% of our interest in production from those wells.
The net effect of these two agreements is that we will pay 2% of all costs to
casing point on the exploratory wells and approximately 12.5% of all other
costs, in exchange for an overall interest of 11.25% in each of the prospects.
Those numbers are reduced proportionately on two of the firm prospects that have
a lower cost-interest ratio than the other firm and optional prospects.
Other Operating Segments. These operations include our marine
transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations. Operating revenues and Earnings from
unconsolidated affiliates for our Other Operating Segments totaled $41.4 million
during the three months ended September 30, 2004 representing a decrease of 15%
compared to the prior year quarter, and totaled $150.1 million during the nine
months ended September 30, 2004 remaining flat compared to the prior year
period. The decrease during the three months ended September 30, 2004 primarily
resulted from the consolidation of our marine transportation and supply services
business unit in our statements of income in the current year quarter, and lower
average dayrates for our marine transportation and supply services operations
compared to the prior year quarter. Our marine transportation and supply
services business unit was accounted for using the equity method of accounting
in the prior year quarter. Adjusted loss derived from operating activities
totaled $3.1 million during the three months ended September 30, 2004 compared
to $0.8 million during the prior year quarter, and totaled $5.6 million during
the nine months ended September 30, 2004 compared to adjusted income derived
from operating activities totaling $4.4 million during the prior year period.
The decrease for the three months ended September 30, 2004 primarily resulted
from decreased sales of rig instrumentation systems and a decrease in results
for our Alaskan construction and logistics operations compared to the prior year
quarter, while the decrease for the nine months ended September 30, 2004
primarily resulted from a similar decrease in results for our Alaskan
construction and logistics operations and decreased margins from our marine
transportation and supply services, which was driven by lower average dayrates
compared to the prior year period.
Other Financial Information. General and administrative expenses totaled
$49.6 million during the three months ended September 30, 2004, representing an
increase of $8.4 million, or 20%, compared to the prior year quarter, and
totaled $140.6 million during the nine months ended September 30, 2004,
representing an increase of $17.7 million, or 14%, compared to the prior year
period. These increases primarily resulted from increased activity in a number
of our operating segments including our U.S. Lower 48 Land Drilling, U.S. Land
Well-servicing and Canadian operations, and from increased expenses at our
corporate level. As a percentage of operating revenues, general and
administrative expenses decreased (8.5% vs. 8.7%) during the three months ended
September 30, 2004 compared to the prior year quarter, and decreased (8.2% vs.
9.1%) during the nine months ended September 30, 2004 compared to the prior year
period, as these expenses were spread over a larger revenue base.
Depreciation and amortization expense totaled $64.2 million during the
three months ended September 30, 2004, representing an increase of $6.8 million,
or 12%, compared to the prior year quarter, and totaled $185.6 million during
the nine months ended September 30, 2004, representing an increase of $18.7
million, or 11%, compared to the prior year period. These increases primarily
resulted from an
32
increase in average rig years for our U.S. Lower 48 Land Drilling, Canadian land
drilling and International operations compared to the prior year periods, and
depreciation on capital expenditures made during the fourth quarter of 2003 and
the first nine months of 2004.
Depletion expense totaled $9.4 million during the three months ended
September 30, 2004 compared to $1.1 million during the prior year quarter, and
totaled $35.0 million during the nine months ended September 30, 2004 compared
to $2.3 million during the prior year period. These increases resulted from
depletion on oil and gas properties added through our agreements with El Paso
Corporation in the fourth quarter of 2003.
Interest expense totaled $10.5 million during the three months ended
September 30, 2004, representing a decrease of $5.5 million, or 34%, compared to
the prior year quarter, and totaled $37.8 million during the nine months ended
September 30, 2004, representing a decrease of $16.9 million, or 31%, compared
to the prior year period. These decreases resulted from the payment upon
maturity of our 6.8% senior notes in April 2004 and the redemption of our $825
million zero coupon convertible senior debentures in June 2003. In June 2003 we
issued $700 million in zero coupon senior exchangeable notes; the proceeds of
which were used to redeem our $825 million senior debentures. The $700 million
notes will not accrue interest unless we become obligated to pay contingent
interest, while our $825 million senior debentures had an effective interest
rate of 2.5%. The amount of contingent interest payable per note in respect to
any six-month period will equal 0.185% of the principal amount of a note
commencing on or after June 15, 2008 only if certain conditions are met.
Interest and dividend income remained relatively flat during the 2004
periods, totaling $6.8 million during the three months ended September 30, 2004
compared to the $6.4 million during the prior year quarter, and totaling $21.2
million during the nine months ended September 30, 2004 compared to $21.1
million during the prior year period.
Other income, net for the three and nine months ended September 30, 2004
and 2003 includes the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
(IN THOUSANDS) -------- ------- ------- -------
Gains on marketable and non-marketable
securities, net............................... $ 5,440 $ 65 $11,940 $ 2,692
Foreign currency transaction gains.............. 135 36 29 387
(Losses) gains on derivative instruments........ (1,234) 2,042 1,853 (1,659)
Other........................................... (388) 136 1,457 906
------- ------ ------- -------
$ 3,953 $2,279 $15,279 $ 2,326
------- ------ ------- -------
(Losses) gains on derivative instruments for the three and nine months
ended September 30, 2004 and 2003 consists of mark-to-market losses recorded on
our range cap and floor derivative instrument during those periods. The loss on
extinguishment of debt for the nine months ended September 30, 2003 consists of
a loss of $.9 million resulting from the redemption of our 8.625% senior
subordinated notes due April 2008 at prices higher than their carrying value on
April 1, 2003.
Our effective income tax (benefit) rate was 10% during the three and nine
months ended September 30, 2004, compared to (10%) for the three and nine months
ended September 30, 2003. The change from an income tax benefit in the 2003
periods to an income tax expense in the 2004 periods resulted from a higher
proportion of our taxable income being generated in the U.S. for the three and
nine months ended September 30, 2004 compared to the prior year periods. Income
generated in the U.S. is generally taxed at a higher rate than in international
jurisdictions in which we operate. In October 2004 the U.S. Congress passed and
the President signed into law the American Jobs Creation Act of 2004. The Act
did not impact the corporate reorganization completed by Nabors effective June
24, 2002, that made us a foreign entity. It is possible that future changes to
tax laws (including tax treaties) could have an
33
impact on our ability to realize the tax savings recorded to date as well as
future tax savings as a result of our corporate reorganization, depending on any
responsive action taken by Nabors.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Our cash flows primarily depend on the level of spending by our primary
customers, oil and gas companies, for exploration, development and production
activities. Sustained increases or decreases in the price of natural gas or oil
could have a material impact on these activities, and could also materially
affect our cash flows. Certain sources and uses of cash, such as the level of
non-sustaining capital expenditures, purchases and sales of marketable
securities, issuances and repurchases of debt, and repurchases of our common
shares are within our control and are adjusted as necessary based on market
conditions. The following is a discussion of our cash flows for the nine months
ended September 30, 2004 and 2003.
Operating Activities. Net cash provided by operating activities totaled
$365.1 million during the nine months ended September 30, 2004, compared to net
cash provided by operating activities totaling $244.1 million during the prior
year period. During the nine months ended September 30, 2004 and 2003, net
income was increased for non-cash items such as depreciation and amortization,
and depletion, and was reduced for changes in our working capital and other
balance sheet accounts.
Investing Activities. Net cash used for investing activities totaled
$413.3 million during the nine months ended September 30, 2004, compared to net
cash used for investing activities totaling $321.1 million during the prior year
period. During the nine months ended September 30, 2004 and 2003, cash was used
for capital expenditures and purchases, net of sales, of marketable and
non-marketable securities.
Financing Activities. Net cash used for financing activities totaled
$243.0 million during the nine months ended September 30, 2004, compared to net
cash provided by financing activities of $169.1 million during the prior year
period. During the nine months ended September 30, 2004, cash was used for the
reduction of long-term debt of $301.7 million (including the payment upon
maturity of our 6.8% senior notes in April 2004 totaling $295.3 million) and was
provided by our receipt of proceeds totaling $52.2 million from the exercise of
options to acquire our common shares by our employees. During the nine months
ended September 30, 2003, cash was provided by $689.5 million in net proceeds
from our issuance of $700 million zero coupon senior exchangeable notes due 2023
and our receipt of proceeds totaling $18.1 million from the exercise of options
to acquire our common shares by our employees, and was used for the reduction of
long-term debt of $543.7 million. The reduction in long-term debt during the
nine months ended September 30, 2003 primarily consisted of our redemption of
the remaining outstanding principal amount of our $825 million zero coupon
convertible senior debentures due 2020 on June 20, 2003 and our 8.625% senior
subordinated notes due April 2008 on April 1, 2003 for aggregate redemption
prices of $494.9 million and $45.2 million, respectively.
FUTURE CASH REQUIREMENTS
As of September 30, 2004, we had long-term debt, including current
maturities, of $2.0 billion and cash and cash equivalents and investments in
marketable and non-marketable securities of $1.3 billion.
In October 2004 we executed supplemental indentures to each of our $700
million zero coupon senior exchangeable notes and our $1.381 billion zero coupon
convertible senior debentures providing that upon an exchange or conversion of
these convertible debt instruments, we will in all circumstances elect to pay
holders of these debt instruments, in lieu of common shares, cash for the
principal amount of the instruments and, at our option, consideration in the
form of either cash or our common shares for any amount above the principal
amount of the instruments required to be paid pursuant to the terms of the
indentures (as supplemented). As our $1.381 billion zero coupon convertible
senior debentures can be converted at any time resulting in our payment of cash,
these debentures will be included in current liabilities in our balance sheet as
of December 31, 2004. These debentures previously would have been
34
classified in current liabilities beginning in the first quarter of 2005 due to
the holders having the option to put the debentures to us on February 5, 2006.
These debentures, totaling approximately $800 million, are classified in
long-term debt in our balance sheet as of September 30, 2004. If the debentures
were converted, our cash obligation would be equal to 8.5 million of our common
shares times the average of the daily volume weighted average price of our
common shares for each of the ten consecutive trading days beginning on the
second trading day immediately following the day the debentures are converted or
the principal amount of the debentures on the date of conversion.
Additionally, our $1.381 billion zero coupon convertible senior debentures
can be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for
a purchase price equal to the issue price plus accrued original issue discount
to the date of repurchase. The amount of the purchase price would total $826.8
million, $936.2 million and $1.1 billion if the debentures were put to us on
February 5, 2006, February 5, 2011 or February 5, 2016, respectively. Our $700
million zero coupon senior exchangeable notes can be put to us on June 15, 2008,
June 15, 2013 and June 15, 2018, for a purchase price equal to 100% of the
principal amount of the notes plus contingent interest and additional amounts,
if any. In accordance with the supplemental indentures executed in October 2004,
we will in all circumstances elect to pay the purchase price up to the principal
amount of our $1.381 billion zero coupon convertible senior debentures and our
$700 million zero coupon senior exchangeable notes in cash. In accordance with
the indentures with respect to these convertible debt instruments, we cannot
redeem the $1.381 billion zero coupon convertible senior debentures before
February 5, 2006 and the $700 million zero coupon senior exchangeable notes
before June 15, 2008. After those dates, we may redeem all or a portion of these
convertible debt instruments for cash at any time at their accreted value.
As of September 30, 2004, we had outstanding capital expenditure purchase
commitments of approximately $74.2 million, primarily for rig-related enhancing
and sustaining capital expenditures. In addition, during the remainder of 2004
and during 2005, we estimate that we will contribute approximately $5.9 million
and $.9 million, respectively, in conjunction with our agreements with El Paso
Corporation.
We have historically completed a number of acquisitions and will continue
to evaluate opportunities to acquire assets or businesses to enhance our
operations. Several of our previous acquisitions were funded through issuances
of our common shares. Future acquisitions may be paid for using existing cash or
issuance of debt or Nabors' shares. Such capital expenditures and acquisitions
will depend on our view of market conditions and other factors.
See our discussion of guarantees issued by Nabors that could have a
potential impact on our financial position, results of operations or cash flows
in future periods included in Note 5 to our accompanying consolidated financial
statements.
FINANCIAL CONDITION AND SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash and cash equivalents, marketable
and non-marketable securities and cash generated from operations. As of
September 30, 2004, we had cash and cash equivalents and investments in
marketable and non-marketable securities of $1.3 billion (including $480.8
million of long-term marketable and non-marketable securities) and working
capital of $1.1 billion. This compares to cash and cash equivalents and
investments in marketable and non-marketable securities of $1.6 billion
(including $612.4 million of long-term marketable securities) and working
capital of $917.3 million as of December 31, 2003.
Our funded debt to capital ratio was 0.42:1 as of September 30, 2004 and
0.48:1 as of December 31, 2003. Our net funded debt to capital ratio was 0.20:1
as of September 30, 2004 and 0.22:1 as of December 31, 2003. The funded debt to
capital ratio is calculated by dividing funded debt by funded debt plus capital.
Funded debt is defined as the sum of (1) short-term borrowings, (2) current
portion of long-term debt and (3) long-term debt. Capital is defined as
shareholders' equity. The net funded debt to capital ratio nets cash and cash
equivalents and marketable and non-marketable securities against funded debt.
This ratio is calculated by dividing net funded debt by net funded debt plus
capital. Both of these ratios are a method for calculating the amount of
leverage a company has in relation to its capital. Non-
35
marketable securities consist of investments in overseas funds investing
primarily in a variety of public and private U.S. and non-U.S. securities
(including asset-backed securities and mortgage-backed securities, global
structured asset securitizations, whole loan mortgages, and participations in
whole loans and whole loan mortgages). These investments are classified as
non-marketable, because they do not have published fair values, and are recorded
at cost in our consolidated balance sheets (the current portion is classified as
non-marketable securities under current assets and the long-term portion is
included as a component of other long-term assets). Our interest coverage ratio
was 11.4:1 as of September 30, 2004, compared to 6.8:1 as of December 31, 2003.
The interest coverage ratio is computed by calculating the sum of income before
income taxes, interest expense, and depreciation and amortization, and depletion
expense and then dividing by interest expense. This ratio is a method for
calculating the amount of cash flows available to cover interest expense.
We have three letter of credit facilities and a Canadian line of credit
facility with various banks as of September 30, 2004. Availability and
borrowings under our credit facilities as of September 30, 2004 are as follows:
(IN THOUSANDS)
Credit available............................................ $110,113
Letters of credit outstanding............................... (78,101)
--------
Remaining availability...................................... $ 32,012
--------
We have a shelf registration statement on file with the U.S. Securities and
Exchange Commission to allow us to offer, from time to time, up to $700 million
in debt securities, guarantees of debt securities, preferred shares, depository
shares, common shares, share purchase contracts, share purchase units and
warrants. We currently have not issued any securities registered under this
registration statement.
Our current cash and cash equivalents, investments in marketable and
non-marketable securities and projected cash flow generated from current
operations are expected to more than adequately finance our sustaining capital
expenditures, our debt service requirements, and all other expected cash
requirements for the next twelve months.
See our discussion of the impact of changes in market conditions on our
derivative financial instruments discussed under Item 3. Quantitative and
Qualitative Disclosures About Market Risk below.
OTHER MATTERS
RECENT LEGISLATION, COAST GUARD REGULATIONS AND ACTIONS
Our Sea Mar operations time charter supply vessels to offshore operators,
primarily in U.S. waters. The vessels which operate in U.S. coastwise trade are
owned by one of our financing company subsidiaries, but are operated and managed
by a U.S. citizen-controlled company pursuant to long-term bareboat charters.
Our Sea Mar operations time charter the vessels from this U.S. operating company
in connection with our own offshore activities in the Gulf of Mexico and in
support of other offshore operators.
As a result of recent legislation, beginning in August 2007, Sea Mar will
no longer be able to use this arrangement to qualify vessels for employment in
the U.S. coastwise trade. Accordingly, we will be required to restructure the
arrangement, redeploy the vessels outside the United States, or sell the vessels
by no later than such time. Under the proposed, but not yet final, regulations
issued by the United States Coast Guard on February 4, 2004, Sea Mar's ability
to use its current structure to operate vessels in U.S. coastwise trade would
end on February 4, 2007.
Additionally, on February 4, 2004, the United States Coast Guard notified
us that it is considering an appeal of the United States Coast Guard's original
issuance in June 2002 of the coastwise trade endorsements for the vessels
bareboat chartered to the U.S. citizen qualified company. The coastwise trade
endorsements on the documents of the vessels issued by the United States Coast
Guard authorize the
36
vessels to engage in the U.S. coastwise trade. If the appeal is decided against
us, we could lose the ability to market the vessels for use in U.S. coastwise
trade in accordance with that decision.
As of September 30, 2004, the net assets of Sea Mar totaled approximately
$162.3 million. During the three and nine months ended September 30, 2004, Sea
Mar had income before income taxes totaling $.7 million and $.3 million,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities,"
which addresses the consolidation of variable interest entities (VIEs) by
business enterprises that are the primary beneficiaries. A VIE is an entity that
does not have sufficient equity investment at risk to permit it to finance its
activities without additional subordinated financial support, or whose equity
investors lack the characteristics of a controlling financial interest. The
primary beneficiary of a VIE is the enterprise that has the majority of the
risks or rewards associated with the VIE. In December 2003 the FASB issued a
revision to FIN 46, Interpretation No. 46R (FIN 46R), to clarify some of the
provisions of FIN 46, and to exempt certain entities from its requirements.
Application of FIN 46R is required in financial statements of public entities
that have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. Application
for all other types of VIEs is required in financial statements for periods
ending after March 15, 2004. Our adoption of FIN 46R on March 31, 2004 did not
have a material effect on our financial position, results of operations or cash
flows as of and for the three and nine months ended September 30, 2004.
In December 2003 the FASB issued an Exposure Draft, "Earnings per
Share -- an Amendment of FASB Statement No. 128," which would amend the
computational guidance of Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share." The proposed statement would eliminate the provisions
of SFAS 128 which permit an entity to rebut the presumption that instruments
with the option of settling in either cash or shares will be settled in shares.
This new statement would be effective for periods ending after December 15,
2004, but would require prior period earnings per share amounts presented for
comparative purposes to be restated to conform to the provisions of the new
requirements. If adopted, the proposed statement, in combination with Emerging
Issues Task Force (EITF) Issue No. 04-8, "The Effect of Contingently Convertible
Debt on Diluted Earnings per Share," discussed below, could result in a material
dilution of our earnings per share, unless we are able to take action to address
the effect of these recently issued and proposed accounting pronouncements prior
to year-end (see discussion in Note 3 to our accompanying consolidated financial
statements).
In October 2004 the FASB ratified the consensus reached by the EITF in EITF
04-8, which addresses the issue of when the dilutive effect of contingently
convertible debt instruments should be included in diluted earnings per share
computations. Based on the concepts described in EITF 04-8, we will be required
to treat our $700 million zero coupon senior exchangeable notes as converted for
purposes of computing diluted earnings per share, regardless of whether any
triggering contingency has been met or is likely to be met. The consensus
reached by the EITF indicates that EITF 04-8 should have the same effective date
as the proposed revision of SFAS 128, which is expected to be effective for
periods ending after December 15, 2004. EITF 04-8 would require our prior period
earnings per share amounts presented for comparative purposes to be restated to
conform to the provisions of the new requirements, unless we are able to take
action to address the effect of these recently issued and proposed accounting
pronouncements prior to year-end (see discussion in Note 3 to our accompanying
consolidated financial statements).
37
RECENTLY PROPOSED ACCOUNTING PRONOUNCEMENTS
We currently account for stock-based compensation as prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and because we grant options at prices equal to the market price
of our shares on the date of the grant we do not record compensation expense
related to these grants. On March 31, 2004, the FASB issued an Exposure Draft,
"Share-Based Payment," which, if enacted in its current form, would eliminate
our ability to account for stock-based compensation using APB 25 and instead
would require us to account for stock option awards using a fair-value based
method resulting in compensation expense for stock option awards. The proposed
statement would be effective for stock options granted, modified, or settled in
cash in interim and annual periods beginning after June 15, 2005. Additionally,
for stock options granted or modified after December 15, 1994 that have not
vested as of the effective date of the proposed statement, compensation cost
will be measured and recorded based on the same estimates of fair value
calculated as of the date of grant as currently disclosed within the table
required by SFAS No. 148, "Accounting for Stock-Based Compensation -- an
Amendment to FAS 123," presented in Note 2 to our accompanying consolidated
financial statements. If enacted in its proposed form, the proposed statement
may have a material adverse effect on our results of operations in future
periods.
CRITICAL ACCOUNTING POLICIES
We disclosed our critical accounting policies in our 2003 Annual Report on
Form 10-K. No significant changes have occurred to those policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to market risk through changes in interest rates and
foreign currency risk due to our operations in international markets as
discussed in our 2003 Annual Report on Form 10-K. Material changes in our
exposure to market risk from that disclosed in our 2003 Annual Report on Form
10-K are discussed below.
On October 21, 2002, we entered into an interest rate swap transaction with
a third-party financial institution to hedge our exposure to changes in the fair
value of $200 million of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Additionally, on October 21,
2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the form of a
cashless collar, with the same third-party financial institution with the
intention of mitigating and managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting
treatment under SFAS 133 and any change in the cumulative fair value of this
transaction is reflected as a gain or loss in our consolidated statements of
income.
The fair value of our interest rate swap agreement recorded as a derivative
asset and included in other long-term assets totaled approximately $6.0 million
and $4.2 million as of September 30, 2004 and December 31, 2003, respectively.
The carrying value of our 5.375% senior notes has been increased by the same
amount as of September 30, 2004 and December 31, 2003.
The fair value of our range cap and floor transaction recorded as a
derivative liability and included in other long-term liabilities totaled
approximately $3.7 million as of December 31, 2003. In June 2004 we unwound $100
million of the $200 million range cap and floor derivative instrument. The fair
value of our range cap and floor transaction recorded as a derivative liability
and included in other long-term liabilities totaled $.3 million as of September
30, 2004. We recorded mark-to-market losses of approximately $1.2 million for
the three months ended September 30, 2004 and mark-to-market gains of
approximately $1.9 million for the nine months ended September 30, 2004,
resulting from the change in cumulative fair value of this derivative instrument
during those periods.
38
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. We maintain a set of disclosure
controls and procedures that are designed to provide reasonable assurance that
information required to be disclosed in our reports filed under the Securities
and Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms. We have investments in certain unconsolidated
entities that we do not control or manage. As we do not control or manage these
entities, our disclosure controls and procedures with respect to such entities
are necessarily more limited than those we maintain with respect to our
consolidated subsidiaries.
We evaluated the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) of the
Exchange Act) under the supervision and with the participation of management,
including our Chairman and Chief Executive Officer and Chief Financial Officer,
as of the end of this period covered by this report. Based on that evaluation,
our Chairman and Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective, at the reasonable
assurance level, in timely making known to them material information relating to
Nabors and its consolidated subsidiaries required to be disclosed in our reports
filed or submitted under the Exchange Act.
(b) Internal Control Over Financial Reporting. There has been no change in
our internal control over financial reporting during the quarter ended September
30, 2004 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
39
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nabors and its subsidiaries are defendants or otherwise involved in a
number of lawsuits in the ordinary course of their business. In the opinion of
management, our ultimate liability with respect to these pending lawsuits is not
expected to have a significant or material adverse effect on our consolidated
financial position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Second Supplemental Indenture, dated as of October 25, 2004,
by and among Nabors Industries, Inc., as issuer ("Nabors
Delaware"), Nabors Industries Ltd., as guarantor (the
"Company"), and J.P. Morgan Trust Company, National
Association (as successor to Bank One, N.A.), as trustee
(the "Trustee"), to the Indenture, dated as of February 5,
2001, as amended, with respect to Nabors Delaware's Zero
Coupon Convertible Senior Debentures due 2021 (incorporated
by reference to Exhibit 4.1 to Nabors' Current Report on
Form 8-K, File No. 000-49887, filed October 27, 2004).
4.2 First Supplemental Indenture, dated as of October 25, 2004,
by and among Nabors Delaware, as issuer, the Company, as
guarantor, and the Trustee, to the Indenture, dated as of
June 10, 2003, with respect to Nabors Delaware's Zero Coupon
Senior Exchangeable Notes due 2023 (incorporated by
reference to Exhibit 4.2 to Nabors' Current Report on Form
8-K, File No. 000-49887, filed October 27, 2004).
15 Awareness Letter of Independent Registered Public Accounting
Firm.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
- Report on Form 8-K furnished to the U.S. Securities and Exchange
Commission on July 27, 2004, with respect to Nabors' press release
announcing results for the second quarter ended June 30, 2004.
- Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on September 20, 2004, with respect to Nabors' press
release announcing that one of our offshore platform rigs sustained
extensive damage during hurricane Ivan.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NABORS INDUSTRIES LTD.
/s/ Anthony G. Petrello
--------------------------------------
Anthony G. Petrello
Deputy Chairman, President and Chief
Operating Officer
/s/ Bruce P. Koch
--------------------------------------
Bruce P. Koch
Vice President and Chief Financial
Officer
Dated: November 3, 2004
41
INDEX OF EXHIBITS
4.1 Second Supplemental Indenture, dated as of October 25, 2004,
by and among Nabors Industries, Inc., as issuer ("Nabors
Delaware"), Nabors Industries Ltd., as guarantor (the
"Company"), and J.P. Morgan Trust Company, National
Association (as successor to Bank One, N.A.), as trustee
(the "Trustee"), to the Indenture, dated as of February 5,
2001, as amended, with respect to Nabors Delaware's Zero
Coupon Convertible Senior Debentures due 2021 (incorporated
by reference to Exhibit 4.1 to Nabors' Current Report on
Form 8-K, File No. 000-49887, filed October 27, 2004).
4.2 First Supplemental Indenture, dated as of October 25, 2004,
by and among Nabors Delaware, as issuer, the Company, as
guarantor, and the Trustee, to the Indenture, dated as of
June 10, 2003, with respect to Nabors Delaware's Zero Coupon
Senior Exchangeable Notes due 2023 (incorporated by
reference to Exhibit 4.2 to Nabors' Current Report on Form
8-K, File No. 000-49887, filed October 27, 2004).
15 Awareness Letter of Independent Registered Public Accounting
Firm.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.