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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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
April 29, 2005 was 158,030,887. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 207,030 exchangeable shares outstanding as of April 29, 2005
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 March 31, 2005 and
December 31, 2004........................................................... 2
Consolidated Statements of Income for the Three Months
Ended March 31, 2005 and 2004............................................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004............................................... 4
Consolidated Statements of Changes in Shareholders' Equity for the Three
Months Ended March 31, 2005 and 2004........................................ 5
Notes to Consolidated Financial Statements.................................. 7
Report of Independent Registered Public Accounting Firm..................... 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 29
Item 4. Controls and Procedures..................................................... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 30
Item 6. Exhibits.................................................................... 30
Signatures............................................................................. 32
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 462,925 $ 384,709
Short-term investments 545,556 515,842
Accounts receivable, net 646,598 540,103
Inventory 31,984 28,653
Deferred income taxes 34,093 39,599
Other current assets 71,265 72,068
------------- ------------
Total current assets 1,792,421 1,580,974
Long-term investments 545,975 510,496
Property, plant and equipment, net 3,358,068 3,275,495
Goodwill, net 331,251 327,225
Other long-term assets 160,512 168,419
------------- ------------
Total assets $ 6,188,227 $ 5,862,609
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 809,562 $ 804,550
Trade accounts payable 227,125 211,600
Accrued liabilities 183,904 171,234
Income taxes payable 20,088 11,932
------------- ------------
Total current liabilities 1,240,679 1,199,316
Long-term debt 1,196,389 1,201,686
Other long-term liabilities 141,125 146,337
Deferred income taxes 391,603 385,877
------------- ------------
Total liabilities 2,969,796 2,933,216
------------- ------------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000;
issued and outstanding 157,633 and 149,861, respectively 158 150
Capital in excess of par value 1,536,916 1,358,374
Unearned compensation (16,964) -
Accumulated other comprehensive income 148,267 148,229
Retained earnings 1,550,054 1,422,640
------------- ------------
Total shareholders' equity 3,218,431 2,929,393
------------- ------------
Total liabilities and shareholders' equity $ 6,188,227 $ 5,862,609
------------- ------------
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 MARCH 31,
-----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
------------- -------------
Revenues and other income:
Operating revenues $ 783,728 $ 592,981
Earnings from unconsolidated affiliates 2,003 3,822
Investment income 11,788 12,253
------------- -------------
Total revenues and other income 797,519 609,056
------------- -------------
Costs and other deductions:
Direct costs 474,626 390,040
General and administrative expenses 58,641 45,599
Depreciation and amortization 68,188 60,488
Depletion 12,353 15,610
Interest expense 10,737 15,859
Losses (gains) on sales of long-lived assets,
impairment charges and other expense (income), net 3,871 1,329
------------- -------------
Total costs and other deductions 628,416 528,925
------------- -------------
Income before income taxes 169,103 80,131
------------- -------------
Income tax expense:
Current 12,215 4,205
Deferred 29,474 4,209
------------- -------------
Total income tax expense 41,689 8,414
------------- -------------
Net income $ 127,414 $ 71,717
------------- -------------
Earnings per share:
Basic $ .84 $ .48
Diluted $ .80 $ .46
Weighted-average number of common shares outstanding:
Basic 152,165 147,984
------------- -------------
Diluted 158,777 163,110
------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
(IN THOUSANDS) 2005 2004
------------ -----------
Cash flows from operating activities:
Net income $ 127,414 $ 71,717
Adjustments to net income:
Depreciation and amortization 68,188 60,488
Depletion 12,353 15,610
Deferred income tax expense 29,474 4,209
Deferred financing costs amortization 1,221 1,355
Pension liability amortization 120 214
Discount amortization on long-term debt 5,134 5,022
Amortization of loss on cash flow hedges 38 38
Losses on long-lived assets, net 1,888 26
Gains on investments, net (1,448) (5,748)
(Gains) losses on derivative instruments (928) 2,536
Amortization of unearned compensation 483 -
Foreign currency transaction losses 271 119
Equity in earnings from unconsolidated affiliates, net of dividends (503) (3,797)
Increase (decrease) from changes in:
Accounts receivable (106,471) (63,866)
Inventory (3,140) 3,251
Other current assets 3,558 (194)
Other long-term assets (227) 1,464
Trade accounts payable and accrued liabilities 14,040 18,310
Income taxes payable 9,314 (6,409)
Other long-term liabilities 2,395 (2,267)
------------ -----------
Net cash provided by operating activities 163,174 102,078
------------ -----------
Cash flows from investing activities:
Purchases of investments (179,700) (250,151)
Sales and maturities of investments 120,740 201,933
Cash paid for acquisitions of businesses, net (6,775) -
Capital expenditures (173,780) (112,460)
Proceeds from sales of assets and insurance claims 3,203 164
------------ -----------
Net cash used for investing activities (236,312) (160,514)
------------ -----------
Cash flows from financing activities:
Increase in short-term borrowings 1,684 -
Increase in cash overdrafts 13,376 3,411
Reduction of long-term debt - (1,355)
Proceeds from issuance of common shares 136,938 39,340
------------ -----------
Net cash provided by financing activities 151,998 41,396
------------ -----------
Effect of exchange rate changes on cash and cash equivalents (644) 2,155
------------ -----------
Net increase (decrease) in cash and cash equivalents 78,216 (14,885)
Cash and cash equivalents, beginning of period 384,709 579,737
------------ -----------
Cash and cash equivalents, end of period $ 462,925 $ 564,852
------------ -----------
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)
------------------------------------------------
UNREALIZED
COMMON SHARES GAINS MINIMUM UNREALIZED
------------- CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE TOTAL
PAR EXCESS OF UNEARNED MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED SHAREHOLDERS'
(IN THOUSANDS) SHARES VALUE PAR VALUE COMPENSATION SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS EQUITY
------ ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- -------------
Balances, December
31, 2004 149,861 $ 150 $1,358,374 $ - $ 271 $ (2,419) $ (1,143) $ 151,520 $1,422,640 $ 2,929,393
------- ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- ------------
Comprehensive
income (loss):
Net income 127,414 127,414
Translation
adjustment (4,573) (4,573)
Unrealized gains
on marketable
securities, net
of income taxes
of $643 6,778 6,778
Less:
reclassification
adjustment for
gains included
in net income,
net of income
taxes of $23 (2,281) (2,281)
Pension liability
amortization, net
of income taxes
of $44 76 76
Amortization of
loss on cash
flow hedges 38 38
------- ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- -------------
Total
comprehensive
income (loss) - - - - 4,497 76 38 (4,573) 127,414 127,452
------- ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- ------------
Issuance of common
shares for stock
options exercised 7,761 8 136,930 136,938
Nabors Exchangeco
shares exchanged 11 -
Tax effect of stock
option deductions 24,165 24,165
Grants of
restricted
stock awards 17,447 (17,447) -
Amortization of
unearned
compensation 483 483
------- ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- ------------
Subtotal 7,772 8 178,542 (16,964) - - - - - 161,586
------- ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- ------------
Balances, March 31,
2005 157,633 $ 158 $1,536,916 $ (16,964)$ 4,768 $ (2,343) $ (1,105) $ 146,947 $1,550,054 $ 3,218,431
------- ----- ---------- ------------ ----------- ---------- ---------- ----------- ---------- ------------
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 TOTAL
PAR EXCESS OF ON MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED SHAREHOLDERS'
(IN THOUSANDS) SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS EQUITY
------- ----- ---------- -------------- ---------- ---------- ----------- ---------- ------------
Balances, December 31,
2003 146,656 $ 147 $1,270,362 $ 4,969 $ (2,815) $ (1,294) $ 98,723 $1,120,183 $ 2,490,275
------- ----- ---------- -------- --------- -------- --------- ---------- -------------
Comprehensive income
(loss):
Net income 71,717 71,717
Translation adjustment (6,428) (6,428)
Unrealized gains on
marketable securities,
net of income taxes
of $1,209 2,059 2,059
Less: reclassification
adjustment for gains
included in net
income, net of
income taxes of
$1,100 (1,874) (1,874)
Pension liability
amortization, net of
income taxes of $79 135 135
Amortization of loss on
cash flow hedges 38 38
------- ----- ---------- -------- --------- -------- --------- ---------- -------------
Total comprehensive
income (loss) - - - 185 135 38 (6,428) 71,717 65,647
------- ----- ---------- -------- --------- -------- --------- ---------- -------------
Issuance of common
shares for stock options
exercised 1,777 2 39,338 39,340
Nabors Exchangeco
shares exchanged 87 -
Tax effect of stock option
deductions 15,090 15,090
------- ----- ---------- -------- --------- -------- --------- ---------- -------------
Subtotal 1,864 2 54,428 - - - - - 54,430
------- ----- ---------- -------- --------- -------- --------- ---------- -------------
Balances, March 31,
2004 148,520 $ 149 $1,324,790 $ 5,154 $ (2,680) $ (1,256) $ 92,295 $1,191,900 $ 2,610,352
------- ----- ---------- -------- --------- -------- --------- ---------- -------------
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. We are also one of the
largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 660 land workover and well-servicing rigs in the
United States, primarily in the southwestern and western United States, and
approximately 215 land workover and well-servicing rigs in Canada. Nabors is a
leading provider of offshore platform workover and drilling rigs, and owns 43
platform, 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. We also 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. We time charter
a fleet of 28 marine transportation and supply vessels, which provide
transportation of drilling materials, supplies and crews for offshore
operations. 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 limited oil and gas
exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes. 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.
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). Certain reclassifications have been made to the prior period to
conform to the current period presentation, with no effect on our consolidated
financial position, results of operations or cash flows. Pursuant to the rules
and regulations of the 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, 2004. In our management's opinion, the
consolidated financial statements contain all adjustments necessary to present
fairly our financial position as of March 31, 2005, and the results of our
operations and our cash flows for the three months ended March 31, 2005 and
2004, in accordance with GAAP. Interim results for the three months ended March
31, 2005 may not be indicative of results that will be realized for the full
year ending December 31, 2005.
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, which are not material to our financial position, results of operations
or cash flows. All significant intercompany accounts and transactions are
eliminated in consolidation.
7
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 $67.9 million and $67.1 million as of March 31, 2005 and December 31,
2004, respectively, and are included in other long-term assets in our
consolidated balance sheets.
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
and restricted stock awards 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. For restricted stock
awards, we record unearned compensation in shareholders' equity equal to the
market value of the restricted shares on the date of grant with an offset to
capital in excess of par value. Unearned compensation is charged to expense over
the vesting period of the restricted stock awards. As the restrictions on the
restricted stock awards are removed, which occurs as the restricted stock awards
vest, shares are issued and the par value of the shares are reclassified from
capital in excess of par value to common shares. 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. For stock options, fair value is estimated
using an option pricing 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
MARCH 31,
---------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
------------ -----------
Net income, as reported $ 127,414 $ 71,717
Add: Stock-based compensation expense, relating
to restricted stock awards, included in reported
net income, net of related tax effects 304 -
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (9,077) (3,838)
------------ ----------
Pro forma net income - basic 118,641 67,879
------------ ----------
Add: Interest expense on assumed conversion of
our zero coupon senior convertible/exchangeable
debentures/notes, net of tax - 3,081
------------ ----------
Adjusted pro forma net income - diluted $ 118,641 $ 70,960
------------ ----------
Earnings per share:
Basic - as reported $ .84 $ .48
Basic - pro forma $ .78 $ .46
Diluted - as reported $ .80 $ .46
Diluted - pro forma $ .75 $ .44
RECENT ACCOUNTING PRONOUNCEMENTS
As discussed under Stock-Based Compensation above, we currently account
for stock-based compensation as prescribed by APB 25, and because we grant
options at prices equal to the market price of our shares on the date of the
8
grant we do not record compensation expense related to these grants in our
consolidated statements of income. On December 16, 2004, the FASB issued a
revision to SFAS No. 123, "Share-Based Payment," which will 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 being recorded in our
consolidated statements of income. The statement will be effective for stock
options granted, modified, or settled in cash in annual periods beginning after
June 15, 2005 (2006 for Nabors). Additionally, for stock options granted or
modified after December 15, 1994 that have not vested as of the effective date
of the statement, compensation cost will be measured and recorded in our
consolidated statements of income 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 above. The statement may have a material
adverse effect on our results of operations during the periods of adoption and
annual and interim periods thereafter. The impact that the adoption of this
statement in its current form on January 1, 2005 or 2004 would have had on our
net income and basic and diluted earnings per share for the three months ended
March 31, 2005 and 2004 is presented in the table above.
NOTE 3 INCOME TAXES
Our effective income tax rate was 24.7% during the three months ended
March 31, 2005 compared to 10.5% during the prior year quarter. The increase in
our effective income tax rate resulted from a higher proportion of our taxable
income being generated in the U.S. during the three months ended March 31, 2005
compared to the prior year quarter. Income generated in the U.S. is generally
taxed at a higher rate than in international jurisdictions in which we operate.
NOTE 4 COMMON SHARES
In February 2005, the Compensation Committee of our Board of Directors
granted restricted stock awards to certain of our executive officers and other
key employees. In conjunction with this grant, we awarded 302,971 restricted
shares at a market price of $57.65 to these individuals. We recorded unearned
compensation totaling $17.5 million in shareholders' equity, equal to the market
value of the restricted shares on the date of grant, and will charge the
unearned compensation to expense over the vesting period of the restricted stock
awards (which ranges from 3 to 4 years). During the three months ended March 31,
2005, $.5 million was charged to compensation expense and is included in general
and administrative expenses in our consolidated statement of income.
NOTE 5 COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
Self-Insurance Accruals. We are self-insured for certain losses relating
to workers' compensation, employers' liability, general liability, automobile
liability and property damage. Effective April 1, 2005, with our insurance
renewal, certain changes have been made to our insurance coverage resulting in
additional loss exposure. In addition to the insurance retentions that we are
responsible for relating to rig, equipment, property and business interruption
risk, we are now responsible for 30% of all losses in excess of those
retentions.
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 and obligations 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 two separate acquisitions completed
during 2002 and the first quarter of 2005, which is based on future operating
results of those businesses. 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.
9
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
(IN THOUSANDS) OF 2005 2006 2007 THEREAFTER TOTAL
--------- ---------- ------- ---------- ---------
Financial standby letters of
credit and other financial
surety instruments $ 70,078 $ 12,264 $ - $ 1,185 $ 83,527
Guarantee of residual value in
lease agreements 540 65 - - 605
Contingent consideration in
acquisitions 1,875 1,333 708 2,834 6,750
--------- ---------- ------- ---------- ---------
Total $ 72,493 $ 13,662 $ 708 $ 4,019 $ 90,882
--------- ---------- ------- ---------- ---------
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
MARCH 31,
-------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
-------- --------
Net income (numerator):
Net income - basic $127,414 $ 71,717
Add interest expense on assumed
conversion of our zero coupon
convertible/exchangeable senior
debentures/notes, net
of tax:
$1.381 billion due 2021 (1) - 3,081
$700 million due 2023 (2) - -
-------- --------
Adjusted net income - diluted $127,414 $ 74,798
-------- --------
Earnings per share:
Basic $ .84 $ .48
Diluted $ .80 $ .46
Shares (denominator):
Weighted-average number of shares
outstanding - basic (3) 152,165 147,984
Net effect of dilutive stock options and
warrants based on the treasury stock
method 6,612 6,635
Assumed conversion of our zero
coupon convertible/exchangeable senior
debentures/notes:
$1.381 billion due 2021 (1) - 8,491
$700 million due 2023 (2) - -
-------- --------
Weighted-average number of shares
outstanding - diluted 158,777 163,110
-------- --------
(1) Diluted earnings per share for the three months ended March 31, 2004
reflects the assumed conversion of our $1.381 billion zero coupon
convertible senior debentures due 2021, as the conversion in that quarter
would have
10
been dilutive. Diluted earnings per share for the three months ended March
31, 2005 excludes approximately 8.5 million potentially dilutive shares
initially issuable upon the conversion of these debentures. Such shares
did not impact our calculation of diluted earnings per share for the
quarter as we are required to pay cash up to the principal amount of any
debentures converted resulting from the issuance of a supplemental
indenture relating to the debentures in October 2004. We would only issue
an incremental number of shares upon conversion of these debentures, and
such shares would only be included in the calculation of the
weighted-average number of shares outstanding in our diluted earnings per
share calculation, if the price of our shares exceeded approximately $95.
(2) Diluted earnings per share for the three months ended March 31, 2005 and
2004 excludes approximately 10.0 million potentially dilutive shares
initially issuable upon the exchange of our $700 million zero coupon
senior exchangeable notes due 2023. Such shares did not impact our
calculation of diluted earnings per share for these periods as we are
required to pay cash up to the principal amount of any notes exchanged. We
would only issue an incremental number of shares upon exchange of these
notes, and such shares would only be included in the calculation of the
weighted-average number of shares outstanding in our diluted earnings per
share calculation, if the price of our shares exceeded $70.10.
(3) Includes the following weighted-average number of common shares of Nabors
and weighted-average number of exchangeable shares of Nabors Exchangeco,
respectively: 152.0 million and .2 million shares for the three months
ended March 31, 2005; and 147.6 million and .4 million shares for the
three months ended March 31, 2004. 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,
warrants and restricted stock awards that were excluded from diluted earnings
per share that would potentially dilute earnings per share in the future were
642,251 shares during the three months ended March 31, 2005 and 7,558,025 shares
during the three months ended March 31, 2004. 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. Restricted stock will similarly be included in our diluted
earnings per share computation using the treasury stock method of accounting in
any period where the amount of restricted stock to be issued in future periods
exceeds the number of shares assumed repurchased in those periods.
NOTE 7 SUPPLEMENTAL BALANCE SHEET INFORMATION
Short-term investments include the following:
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2005 2004
--------- ------------
Marketable securities $445,556 $428,342
Non-marketable securities 100,000 87,500
-------- --------
$545,556 $515,842
-------- --------
Long-term investments include the following:
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2005 2004
--------- ------------
Marketable securities $472,207 $439,462
Non-marketable securities 73,768 71,034
-------- --------
$545,975 $510,496
-------- --------
11
NOTE 8 SEGMENT INFORMATION
The following tables set forth certain financial information with respect
to our reportable segments:
THREE MONTHS ENDED
MARCH 31,
-----------------------
(IN THOUSANDS) 2005 2004
---------- ----------
Operating revenues and Earnings from unconsolidated
affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land Drilling $ 258,990 $ 153,368
U.S. Land Well-servicing 106,113 79,479
U.S. Offshore 38,067 31,321
Alaska 24,768 29,337
Canada 173,402 138,766
International 124,030 102,987
--------- ---------
Subtotal Contract Drilling (2) 725,370 535,258
Oil and Gas (3) 15,299 21,126
Other Operating Segments (4) (5) 68,916 55,938
Other reconciling items (6) (23,854) (15,519)
--------- ---------
Total $ 785,731 $ 596,803
--------- ---------
Adjusted income (loss) derived from operating activities: (7)
Contract Drilling:
U.S. Lower 48 Land Drilling $ 73,459 $ 8,568
U.S. Land Well-servicing 19,428 9,733
U.S. Offshore 7,011 4,817
Alaska 5,972 7,210
Canada 47,280 43,272
International 29,767 18,591
--------- ---------
Subtotal Contract Drilling 182,917 92,191
Oil and Gas 874 4,506
Other Operating Segments 3,550 (431)
--------- ---------
Total segment adjusted income derived from operating $ 187,341 $ 96,266
activities
Other reconciling items (8) (15,418) (11,200)
Interest expense (10,737) (15,859)
Investment income 11,788 12,253
Gains (losses) on sales of long-lived assets, impairment charges
and other income (expense), net (3,871) (1,329)
--------- ---------
Income before income taxes $ 169,103 $ 80,131
--------- ---------
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2005 2004
---------- -----------
Total assets:
Contract Drilling:
U.S. Lower 48 Land Drilling $1,156,538 $1,119,280
U.S. Land Well-servicing 297,603 274,734
U.S. Offshore 412,573 409,687
Alaska 204,652 204,614
Canada 982,140 945,226
International 1,201,794 1,121,749
---------- ----------
Subtotal Contract Drilling (9) 4,255,300 4,075,290
Oil and Gas 94,604 93,169
Other Operating Segments (10) 321,967 321,979
Other reconciling items (8) 1,516,356 1,372,171
---------- ----------
Total assets $6,188,227 $5,862,609
---------- ----------
12
(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $.7 million and $1.2 million for the three months ended
March 31, 2005 and 2004, 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 from unconsolidated affiliates, accounted for by the
equity method, of $1.3 million and $2.6 million for the three months ended
March 31, 2005 and 2004, 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, and
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 $36.2 million and $35.2 million of investments in unconsolidated
affiliates accounted for by the equity method as of March 31, 2005 and
December 31, 2004, respectively.
(10) Includes $31.7 million and $31.9 million of investments in unconsolidated
affiliates accounted for by the equity method as of March 31, 2005 and
December 31, 2004, respectively.
NOTE 9 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 March 31, 2005 and December 31,
2004, statements of income and cash flows for each of the three months ended
March 31, 2005 and 2004 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.
13
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2005
----------------------------------------------------------------------------------
NABORS
NABORS DELAWARE NABORS OTHER
(PARENT/ (ISSUER/ HOLDINGS SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(IN THOUSANDS) GUARANTOR) GUARANTOR) (ISSUER) (NON-GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ---------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,950 $ - $ 18 $ 458,957 $ - $ 462,925
Short-term investments 67,618 - - 477,938 - 545,556
Accounts receivable, net - - - 646,598 - 646,598
Inventory - - - 31,984 - 31,984
Deferred income taxes - - - 34,093 - 34,093
Other current assets 194 1,344 376 69,351 - 71,265
---------- ---------- -------- ---------- ----------- ----------
Total current assets 71,762 1,344 394 1,718,921 - 1,792,421
Long-term investments - - - 545,975 - 545,975
Property, plant and
equipment, net - - - 3,358,068 - 3,358,068
Goodwill, net - - - 331,251 - 331,251
Intercompany receivables 560,564 820,213 - 522 (1,381,299) -
Investments in affiliates 2,587,855 2,204,741 259,451 1,281,576 (6,265,727) 67,896
Other long-term assets - 14,105 957 77,554 - 92,616
---------- ---------- -------- ---------- ----------- ----------
Total assets $3,220,181 $3,040,403 $260,802 $7,313,867 $(7,647,026) $6,188,227
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt $ - $ 809,562 $ - $ - $ - $ 809,562
Trade accounts payable - 23 - 227,102 - 227,125
Accrued liabilities 1,196 2,692 1,409 178,607 - 183,904
Income taxes payable 503 149 550 18,886 - 20,088
---------- ---------- -------- ---------- ----------- ----------
Total current liabilities 1,699 812,426 1,959 424,595 - 1,240,679
Long-term debt - 972,558 223,831 - - 1,196,389
Other long-term liabilities - - - 141,125 - 141,125
Deferred income taxes 51 36,265 - 355,287 - 391,603
Intercompany payable - - 2,521 1,378,778 (1,381,299) -
---------- ---------- -------- ---------- ----------- ----------
Total liabilities 1,750 1,821,249 228,311 2,299,785 (1,381,299) 2,969,796
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity 3,218,431 1,219,154 32,491 5,014,082 (6,265,727) 3,218,431
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity $3,220,181 $3,040,403 $260,802 $7,313,867 $(7,647,026) $6,188,227
---------- ---------- -------- ---------- ----------- ----------
14
DECEMBER 31, 2004
--------------------------------------------------------------------------------------------
NABORS
NABORS DELAWARE NABORS OTHER
(PARENT/ (ISSUER/ HOLDINGS SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(IN THOUSANDS) GUARANTOR) GUARANTOR) (ISSUER) (NON-GUARANTORS) ADJUSTMENTS TOTAL
------------ ------------ ------------ ---------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 67,584 $ - $ 18 $ 317,107 $ - $ 384,709
Short-term investments 421,393 - - 94,449 - 515,842
Accounts receivable, net - - - 540,103 - 540,103
Inventory - - - 28,653 - 28,653
Deferred income taxes - - - 39,599 - 39,599
Other current assets 3,952 4,031 376 63,709 - 72,068
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 492,929 4,031 394 1,083,620 - 1,580,974
Long-term investments 388,380 - - 122,116 - 510,496
Property, plant and equipment, net - - - 3,275,495 - 3,275,495
Goodwill, net - - - 327,225 - 327,225
Intercompany receivables 488,101 806,293 - 522 (1,294,916) -
Investments in affiliates 1,561,019 2,138,488 254,974 1,181,632 (5,069,024) 67,089
Other long-term assets - 19,080 1,009 81,241 - 101,330
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 2,930,429 $ 2,967,892 $ 256,377 $ 6,071,851 $ (6,363,940) $ 5,862,609
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 804,550 $ - $ - $ - $ 804,550
Trade accounts payable - 23 - 211,577 - 211,600
Accrued liabilities 524 6,354 4,152 160,204 - 171,234
Income taxes payable 480 - - 11,452 - 11,932
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 1,004 810,927 4,152 383,233 - 1,199,316
Long-term debt - 977,922 223,764 - - 1,201,686
Other long-term liabilities - - - 146,337 - 146,337
Deferred income taxes 32 56,952 - 328,893 - 385,877
Intercompany payable - - 2,522 1,292,394 (1,294,916) -
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 1,036 1,845,801 230,438 2,150,857 (1,294,916) 2,933,216
------------ ------------ ------------ ------------ ------------ ------------
Shareholders' equity 2,929,393 1,122,091 25,939 3,920,994 (5,069,024) 2,929,393
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 2,930,429 $ 2,967,892 $ 256,377 $ 6,071,851 $ (6,363,940) $ 5,862,609
------------ ------------ ------------ ------------ ------------ ------------
15
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2005
--------------------------------------------------------------------------------------------
NABORS
NABORS DELAWARE NABORS OTHER
(PARENT/ (ISSUER/ HOLDINGS SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(IN THOUSANDS) GUARANTOR) GUARANTOR) (ISSUER) (NON-GUARANTORS) ADJUSTMENTS TOTAL
------------ ------------ ------------ ---------------- ------------- ------------
Revenues and other income:
Operating revenues $ - $ - $ - $ 783,728 $ - $ 783,728
Earnings from unconsolidated
affiliates - - - 2,003 - 2,003
Earnings from consolidated
affiliates 124,308 71,775 4,477 78,495 (279,055) -
Investment income 4,826 - - 6,962 - 11,788
Intercompany interest income 986 18,695 - - (19,681) -
----------- ----------- ----------- ----------- ----------- -----------
Total revenues and other income 130,120 90,470 4,477 871,188 (298,736) 797,519
----------- ----------- ----------- ----------- ----------- -----------
Costs and other deductions:
Direct costs - - - 474,626 - 474,626
General and administrative
expenses 2,331 121 - 56,873 (684) 58,641
Depreciation and amortization - 150 - 68,038 - 68,188
Depletion - - - 12,353 - 12,353
Interest expense - 8,865 2,860 (988) - 10,737
Intercompany interest expense - - - 19,681 (19,681) -
Losses (gains) on sales of
long-lived assets, impairment
charges and other expense
(income), net 344 (929) - 3,772 684 3,871
----------- ----------- ----------- ----------- ----------- -----------
Total costs and other
deductions 2,675 8,207 2,860 634,355 (19,681) 628,416
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 127,445 82,263 1,617 236,833 (279,055) 169,103
----------- ----------- ----------- ----------- ----------- -----------
Income tax expense 31 3,881 550 37,227 - 41,689
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 127,414 $ 78,382 $ 1,067 $ 199,606 $ (279,055) $ 127,414
----------- ----------- ----------- ----------- ----------- -----------
16
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------------------------
NABORS
NABORS DELAWARE NABORS OTHER
(PARENT/ (ISSUER/ HOLDINGS SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(IN THOUSANDS) GUARANTOR) GUARANTOR) (ISSUER) (NON-GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- ---------- ---------------- ------------- ------------
Revenues and other income:
Operating revenues $ - $ - $ - $ 592,981 $ - $ 592,981
Earnings from unconsolidated affiliates - - - 3,822 - 3,822
Earnings from consolidated affiliates 42,365 58,329 7,160 54,653 (162,507) -
Investment income 5,335 - - 6,918 - 12,253
Intercompany interest income 26,449 16,908 - - (43,357) -
---------- ---------- ---------- ---------- --------- ----------
Total revenues and other income 74,149 75,237 7,160 658,374 (205,864) 609,056
---------- ---------- ---------- ---------- --------- ----------
Costs and other deductions:
Direct costs - - - 390,040 - 390,040
General and administrative expenses 558 23 16 45,086 (84) 45,599
Depreciation and amortization - - - 60,488 - 60,488
Depletion - - - 15,610 - 15,610
Interest expense - 13,239 2,860 (240) - 15,859
Intercompany interest expense - - - 43,357 (43,357) -
Losses (gains) on sales of long-lived
assets, impairment charges and other
expense (income), net - 2,536 - (1,291) 84 1,329
---------- ---------- ---------- ---------- --------- ----------
Total costs and other deductions 558 15,798 2,876 553,050 (43,357) 528,925
---------- ---------- ---------- ---------- --------- ----------
Income before income taxes 73,591 59,439 4,284 105,324 (162,507) 80,131
---------- ---------- ---------- ---------- --------- ----------
Income tax expense 1,874 411 1,499 4,630 - 8,414
---------- ---------- ---------- ---------- --------- ----------
Net income $ 71,717 $ 59,028 $ 2,785 $ 100,694 $(162,507) $ 71,717
---------- ---------- ---------- ---------- --------- ----------
17
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------------------------------------
NABORS
NABORS DELAWARE NABORS OTHER
(PARENT/ (ISSUER/ HOLDINGS SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(IN THOUSANDS) GUARANTOR) GUARANTOR) (ISSUER) (NON-GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- ---------- ---------------- ------------- ------------
Net cash (used for) provided by operating
activities $ (82,207) $ 5,484 $ (5,484) $ 250,865 $ (5,484) $ 163,174
---------- ---------- ---------- ---------- -------- ----------
Cash flows from investing activities:
Purchases of investments (60,892) - - (118,808) - (179,700)
Sales and maturities of investments 27,889 - - 92,851 - 120,740
Cash paid for investments in
consolidated affiliates (85,362) (5,484) - (5,484) 96,330 -
Cash paid for acquisitions of
businesses, net - - - (6,775) - (6,775)
Capital expenditures - - - (173,780) - (173,780)
Proceeds from sales of assets and
insurance claims - - - 3,203 - 3,203
---------- ---------- ---------- ---------- -------- ----------
Net cash used for investing activities (118,365) (5,484) - (208,793) 96,330 (236,312)
---------- ---------- ---------- ---------- -------- ----------
Cash flows from financing activities:
Increase in short-term borrowings - - - 1,684 - 1,684
Increase in cash overdrafts - - - 13,376 - 13,376
Proceeds from issuance of common shares 136,938 - - - - 136,938
Retirement of intercompany loan - - - - - -
Proceeds from parent contributions - - 5,484 90,846 (96,330) -
Cash dividends paid - - - (5,484) 5,484 -
---------- ---------- ---------- ---------- -------- ----------
Net cash provided by (used for)
financing activities 136,938 - 5,484 100,422 (90,846) 151,998
---------- ---------- ---------- ---------- -------- ----------
Effect of exchange rate changes on cash
and cash equivalents - - - (644) - (644)
---------- ---------- ---------- ---------- -------- ----------
Net (decrease) increase in cash and cash
equivalents (63,634) - - 141,850 - 78,216
Cash and cash equivalents, beginning of
period 67,584 - 18 317,107 - 384,709
---------- ---------- ---------- ---------- -------- ----------
Cash and cash equivalents, end of period $ 3,950 $ - $ 18 $ 458,957 $ - $ 462,925
---------- ---------- ---------- ---------- -------- ----------
18
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------------------------
NABORS
NABORS DELAWARE NABORS OTHER
(PARENT/ (ISSUER/ HOLDINGS SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(IN THOUSANDS) GUARANTOR) GUARANTOR) (ISSUER) (NON-GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- ---------- ---------------- ------------- ------------
Net cash (used for) provided by operating
activities $ (42,795) $ 44,491 $ (5,483) $ 230,580 $ (124,715) $ 102,078
---------- ---------- ---------- ---------- -------- ----------
Cash flows from investing activities:
Purchases of investments (197,158) - - (52,993) - (250,151)
Sales and maturities of investments 180,455 - - 21,478 - 201,933
Cash paid for investments in
consolidated affiliates (20,000) (20,000) - (25,484) 65,484 -
Capital expenditures - - - (112,460) - (112,460)
Proceeds from sales of assets and
insurance claims - - - 164 - 164
---------- ---------- ---------- ---------- -------- ----------
Net cash used for investing activities (36,703) (20,000) - (169,295) 65,484 (160,514)
---------- ---------- ---------- ---------- -------- ----------
Cash flows from financing activities:
Increase in cash overdrafts - - - 3,411 - 3,411
Reduction of long-term debt - (750) - (605) - (1,355)
Proceeds from issuance of common shares 39,340 - - - - 39,340
Retirement of intercompany loan 1,325 - - (1,325) - -
Proceeds from parent contributions - 20,000 5,484 40,000 (65,484) -
Cash dividends paid - (42,764) - (81,951) 124,715 -
---------- ---------- ---------- ---------- -------- ----------
Net cash provided by (used for) financing
activities 40,665 (23,514) 5,484 (40,470) 59,231 41,396
---------- ---------- ---------- ---------- -------- ----------
Effect of exchange rate changes on cash
and cash equivalents - - - 2,155 - 2,155
---------- ---------- ---------- ---------- -------- ----------
Net (decrease) increase in cash and cash
equivalents (38,833) 977 1 22,970 - (14,885)
Cash and cash equivalents, beginning of
period 403,693 1 17 176,026 - 579,737
---------- ---------- ---------- ---------- -------- ----------
Cash and cash equivalents, end of period $ 364,860 $ 978 $ 18 $ 198,996 $ - $ 564,852
---------- ---------- ---------- ---------- -------- ----------
19
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 March 31, 2005, and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity for each of the three-month periods ended March 31, 2005 and 2004. 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, 2004, and the related consolidated statements of
income, of cash flows, and of changes in shareholders' equity for the year then
ended, management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 and the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004; and in our report dated March 7, 2005, we expressed unqualified opinions
thereon. The consolidated financial statements and management's assessment of
the effectiveness of internal control over financial reporting referred to above
are not presented herein. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 2004, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
May 6, 2005
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We often discuss expectations regarding our future markets, demand for our
products and services, and our performance in our annual and quarterly reports,
press releases, and other written and oral statements. Statements that relate to
matters 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 Exchange Act of 1934. These
"forward-looking statements" are based on an 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 changes in tax laws;
- 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, 2004
filed with the Securities and Exchange Commission under Part 1, Item I,
"Business - Risk Factors."
Unless the context requires otherwise, references in this Quarterly Report
on Form 10-Q to "we," "us," "our" and "Nabors" means Nabors Industries Ltd. and,
where the context requires, includes our subsidiaries.
RESULTS OF OPERATIONS
A discussion of our results of operations for the three months ended March
31, 2005 and 2004 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, 2004.
21
The following table sets forth certain information with respect to our
reportable segments and rig activity:
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES INCREASE
AND RIG ACTIVITY) 2005 2004 (DECREASE)
---- ---- -----------------------
Reportable segments:
Operating revenues and
Earnings from
unconsolidated affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land Drilling $ 258,990 $ 153,368 $ 105,622 69%
U.S. Land Well-servicing 106,113 79,479 26,634 34%
U.S. Offshore 38,067 31,321 6,746 22%
Alaska 24,768 29,337 (4,569) (16%)
Canada 173,402 138,766 34,636 25%
International 124,030 102,987 21,043 20%
---------- ----------- ------------
Subtotal Contract Drilling (2) 725,370 535,258 190,112 36%
Oil and Gas (3) 15,299 21,126 (5,827) (28%)
Other Operating Segments (4)(5) 68,916 55,938 12,978 23%
Other reconciling items (6) (23,854) (15,519) (8,335) (54%)
---------- ----------- ------------
Total $ 785,731 $ 596,803 $ 188,928 32%
---------- ----------- ------------
Adjusted income (loss) derived
from operating activities: (7)
Contract Drilling:
U.S. Lower 48 Land Drilling $ 73,459 $ 8,568 $ 64,891 N/M(8)
U.S. Land Well-servicing 19,428 9,733 9,695 100%
U.S. Offshore 7,011 4,817 2,194 46%
Alaska 5,972 7,210 (1,238) (17%)
Canada 47,280 43,272 4,008 9%
International 29,767 18,591 11,176 60%
---------- ----------- ------------
Subtotal Contract Drilling 182,917 92,191 90,726 98%
Oil and Gas 874 4,506 (3,632) (81%)
Other Operating Segments 3,550 (431) 3,981 N/M(8)
Other reconciling items (9) (15,418) (11,200) (4,218) (38%)
---------- ----------- ------------
Total $ 171,923 $ 85,066 $ 86,857 102%
Interest expense (10,737) (15,859) 5,122 32%
Investment income 11,788 12,253 (465) (4%)
Gains (losses) on sales of long-lived
assets, impairment charges and other
income (expense), net (3,871) (1,329) (2,542) (191%)
---------- ----------- ------------
Income before income taxes $ 169,103 $ 80,131 $ 88,972 111%
---------- ----------- ------------
Rig activity:
Rig years: (10)
U.S. Lower 48 Land Drilling 222.4 175.2 47.2 27%
U.S. Offshore 15.6 13.8 1.8 13%
Alaska 6.7 7.8 (1.1) (14%)
Canada 66.2 63.2 3.0 5%
International (11) 75.2 65.0 10.2 16%
---------- ----------- ------------
Total rig years 386.1 325.0 61.1 19%
---------- ----------- ------------
Rig hours: (12)
U.S. Land Well-servicing 296,611 275,148 21,463 8%
Canadian Well-servicing 114,336 117,596 (3,260) (3%)
---------- ----------- ------------
Total rig hours 410,947 392,744 18,203 5%
---------- ----------- ------------
22
(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $.7 million and $1.2 million for the three months ended
March 31, 2005 and 2004, 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 from unconsolidated affiliates, accounted for by the
equity method, of $1.3 million and $2.6 million for the three months ended
March 31, 2005 and 2004, 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, and
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 3.7 years and 4.0
years during the three months ended March 31, 2005 and 2004, respectively.
(12) Rig hours represents the number of hours that our well-servicing rig fleet
operated during the quarter.
23
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Operating revenues and Earnings from unconsolidated affiliates for the
three months ended March 31, 2005 totaled $785.7 million, representing an
increase of $188.9 million, or 32%, compared to the prior year quarter. Adjusted
income derived from operating activities and net income for the three months
ended March 31, 2005 totaled $171.9 million and $127.4 million ($.80 per diluted
share), respectively, representing increases of 102% and 78% compared to the
prior year quarter.
The increase in our operating results during the three months ended March
31, 2005 resulted from higher revenues realized by the majority of our operating
segments. Revenues increased as a result of higher activity levels and average
dayrates during the three months ended March 31, 2005 compared to the prior year
quarter. This increase in activity reflects an increase in demand for our
services in these markets during the three months ended March 31, 2005, which
resulted from continuing higher price levels for natural gas and oil during 2004
and the first quarter of 2005.
Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore (Gulf of Mexico) 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 $6.10 per million cubic feet (mcf) during the period from April 1, 2004
through March 31, 2005, up from a $5.31 per mcf average during the period from
April 1, 2003 through March 31, 2004. West Texas intermediate spot oil prices
(per Bloomberg) averaged $45.06 per barrel during the period from April 1, 2004
through March 31, 2005, up from a $31.40 per barrel average during the period
from April 1, 2003 through March 31, 2004.
Our operating results for 2005 are expected to increase from levels
realized during 2004 given our current expectation of the continuation of high
commodity prices during 2005 and the related impact on drilling and
well-servicing activity and dayrates. The expected increase in drilling activity
and dayrates should have the largest impact on our U.S. Lower 48 Land Drilling
and Canadian operations. Canadian drilling activity is subject to substantial
levels of seasonality, as activity levels typically peak in the first quarter,
decline substantially in the second quarter, and then generally increase over
the last half of the year. We also expect an improvement in operating results
for our U.S. Offshore operations during 2005 primarily as a result of higher
dayrates and a continuing improvement in the utilization of our workover jack-up
rigs. We expect results from our International operations during 2005 to
increase compared to 2004 as a result of new rigs operating under contract in
Saudi Arabia and our expectations of opportunities in various regions of the
world, with the largest impact expected from our operations in North Africa, the
Middle East and Mexico. Our U.S. Land Well-servicing operations are expected to
improve given our expectations of higher prices and activity during 2005. We
expect results from our operations in Alaska to be reduced overall in 2005
compared to 2004, resulting from the lack of demand for drilling services by
major operators in that market.
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 $725.4 million and adjusted
income derived from operating activities totaled $182.9 million during the three
months ended March 31, 2005, representing increases of 36% and 98%,
respectively, compared to the prior year quarter. Rig years (excluding
well-servicing rigs) increased to 386.1 years during the three months ended
March 31, 2005 from 325.0 years during the prior year quarter 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 totaled $259.0 million
during the three months ended March 31, 2005, representing an increase of 69%
compared to the prior year quarter. Adjusted income derived from operating
activities totaled $73.5 million during the three months ended March 31, 2005
compared to $8.6 million during the prior year quarter. The increase in
operating results during the three months ended March 31, 2005 primarily
resulted from the increase in drilling activity driven by higher natural gas
prices, which is reflected in the increase in rig years to 222.4 years during
the three months ended March 31, 2005 compared to 175.2 years during the prior
year quarter, and higher average dayrates.
U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $106.1 million and $19.4 million,
respectively, during the three months ended March 31, 2005, representing
increases of 34% and 100%, respectively, compared to the prior year quarter.
These increases primarily resulted from an increase in average dayrates compared
to the prior year quarter and from higher well-servicing hours, which totaled
296,611 hours during the three months ended March 31, 2005 compared to 275,148
hours during the prior year quarter. This increase in dayrates and activity
resulted from higher customer demand for our services in a number of markets in
which we operate,
24
which was driven by a sustained level of higher oil prices.
U.S. Offshore Operating revenues and adjusted income derived from
operating activities totaled $38.1 million and $7.0 million, respectively,
during the three months ended March 31, 2005, representing increases of 22% and
46%, respectively, compared to the prior year quarter. These increases primarily
resulted from the addition of two new platform rigs for deepwater development
projects, which commenced operations late in the second quarter of 2004, and an
increase in average dayrates for our jack-up rigs during the three months ended
March 31, 2005 compared to the prior year quarter. These increases were
partially offset by the significant damage to one of our MODS deepwater platform
rigs during Hurricane Ivan in September 2004, as this rig has not worked since
that date. Rig years for our U.S. Offshore operations totaled 15.6 years during
the three months ended March 31, 2005 compared to 13.8 years during the prior
year quarter.
Alaskan Operating revenues and adjusted income derived from operating
activities totaled $24.8 million and $6.0 million, respectively, during the
three months ended March 31, 2005, representing decreases of 16% and 17%,
respectively, compared to the prior year quarter. These decreases primarily
resulted from lower drilling activity and lower average dayrates during the
three months ended March 31, 2005 compared to the prior year quarter, which
resulted from decreased demand for drilling services by major operators in that
market despite the increase in oil prices discussed above. This decrease in
demand has resulted from the major operators in Alaska concentrating their
capital spending in other regions of the world where fields are less mature than
those in Alaska. The decrease in drilling activity is reflected in the decrease
in rig years to 6.7 years during the three months ended March 31, 2005 from 7.8
years during the prior year quarter.
Canadian Operating revenues and adjusted income derived from operating
activities totaled $173.4 million and $47.3 million, respectively, during the
three months ended March 31, 2005, representing increases of 25% and 9%,
respectively, compared to the prior year quarter. These increases reflect an
increase in drilling revenues, resulting from an overall increase in drilling
activity (driven by increased natural gas prices), and an increase in average
dayrates for drilling and well-servicing operations compared to the prior year
quarter, partially offset by a decrease in well-servicing hours. Rig years in
Canada increased to 66.2 years during the three months ended March 31, 2005 from
63.2 years during the prior year quarter. Well-servicing hours in Canada
decreased to 114,336 hours during the three months ended March 31, 2005 from
117,596 hours during the prior year quarter, resulting from warm weather in
March 2005 leading to an earlier end to the winter season.
International Operating revenues and Earnings from unconsolidated
affiliates and adjusted income derived from operating activities totaled $124.0
and $29.8 million, respectively, during the three months ended March 31, 2005,
representing increases of 20% and 60%, respectively, compared to the prior year
quarter. The improved results during the three months ended March 31, 2005
primarily resulted from an increase in operations in Mexico, Colombia, Saudi
Arabia and Algeria. International rig years increased to 75.2 years during the
three months ended March 31, 2005 from 65.0 years during the prior year quarter.
Oil and Gas. This operating segment represents our oil and gas
exploration, development and production operations. Oil and Gas Operating
revenues and adjusted income derived from operating activities totaled $15.3
million and $.9 million, respectively, during the three months ended March 31,
2005, representing decreases of 28% and 81%, respectively, compared to the prior
year quarter. These decreases primarily resulted from the decline of normal
production coinciding with the expected decrease in drilling activity under our
agreements executed with El Paso Corporation in the fourth quarter of 2003.
Additionally, during the three months ended March 31, 2005, we recognized $.8
million in additional expense as a result of a dry hole in South Texas and $1.6
million in additional depletion expense on a producing well in South Texas where
further drilling was determined to be uneconomical.
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 $68.9 million
during the three months ended March 31, 2005 representing an increase of 23%
compared to the prior year quarter. This increase primarily resulted from
increased sales of top drives and directional drilling and rig instrumentation
systems compared to the prior year quarter. Adjusted income derived from
operating activities totaled $3.6 million during the three months ended March
31, 2005 compared to adjusted loss derived from operating activities totaling
$.4 million during the prior year quarter. This increase primarily resulted from
the increased Operating revenues during the three months ended March 31, 2005
and from increased margins from our marine transportation and supply services,
which was driven by higher average dayrates compared to prior year quarter.
25
Other Financial Information. General and administrative expenses totaled
$58.6 million during the three months ended March 31, 2005, representing an
increase of $13.0 million, or 29%, compared to the prior year quarter. This
increase primarily resulted from increased activity for a majority of our
operating segments including our U.S. Lower 48 Land Drilling, Canadian, U.S.
Land Well-servicing, International and U.S. Offshore operations, and from
increased corporate expenses. As a percentage of operating revenues, general and
administrative expenses decreased (7.5% vs. 7.7%) during the three months ended
March 31, 2005 compared to the prior year quarter as these expenses were spread
over a larger revenue base.
Depreciation and amortization expense totaled $68.2 million during the
three months ended March 31, 2005, representing an increase of $7.7 million, or
13%, compared to the prior year quarter. Depreciation and amortization expense
increased primarily as a result of an increase in average rig years for our U.S.
Lower 48 Land Drilling, Canadian land drilling and International operations, and
depreciation on capital expenditures made during the last three quarters of 2004
and the first quarter of 2005.
Depletion expense totaled $12.4 million during the three months ended
March 31, 2005, representing a decrease of $3.3 million, or 21%, compared to the
prior year quarter. Depletion expense decreased as a result of the decline of
normal production coinciding with a decrease in drilling activity under our
agreements executed with El Paso Corporation in the fourth quarter of 2003. This
decrease was only partially offset by additional depletion expense of $1.6
million recognized during the three months ended March 31, 2005 as a result of
the casing collapse on a producing well in South Texas (discussed above).
Interest expense totaled $10.7 million during the three months ended March
31, 2005, representing a decrease of $5.1 million, or 32%, compared to the prior
year quarter resulting from the payment upon maturity of our 6.8% senior notes
in April 2004.
Investment income totaled $11.8 million during the three months ended
March 31, 2005, representing a decrease of $.5 million, or 4%, compared to the
prior year quarter. This decrease resulted from a decrease in gains realized on
sales of investments during the three months ended March 31, 2005 compared to
the prior year quarter. This decrease was partially offset by an increase in
earnings received on our investments in non-marketable securities and an
increase in interest income resulting from higher average cash and marketable
securities balances during the three months ended March 31, 2005 compared to the
prior year quarter and from higher average yields on our investments driven by
an overall improving interest rate environment.
Gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net decreased to a loss of ($3.9) million during the three
months ended March 31, 2005 from a loss of ($1.3) million during the prior year
quarter. The amounts for the three months ended March 31, 2005 include losses on
long-lived assets of approximately $1.1 million and minority interest of
approximately $1.1 million related to non-majority owned subsidiaries required
to be consolidated under Financial Accounting Standards Board (FASB)
Interpretation No. 46R. The amounts for the prior year quarter include
mark-to-market losses recorded on our range cap and floor derivative instrument
of approximately $2.5 million.
Our effective income tax rate was 24.7% during the three months ended
March 31, 2005 compared to 10.5% during the prior year quarter. The increase in
our effective income tax rate resulted from a higher proportion of our taxable
income being generated in the U.S. during the three months ended March 31, 2005
compared to the prior year quarter. 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 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. We expect
our effective tax rate during 2005 to be in the 24%-27% range because we expect
a higher proportion of our income to be generated in the U.S.
26
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Our cash flows depend, to a large degree, on the level of spending by 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 discretionary
capital expenditures, purchases and sales of marketable securities, issuances
and repurchases of debt and 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 three months ended March 31, 2005 and 2004.
Operating Activities. Net cash provided by operating activities totaled
$163.2 million during the three months ended March 31, 2005, compared to net
cash provided by operating activities of $102.1 million during the prior year
quarter. During the three months ended March 31, 2005 and 2004, net income was
increased for non-cash items such as depreciation and amortization, and
depletion, and was reduced for changes in our working capital (primarily
accounts receivable) and other balance sheet accounts.
Investing Activities. Net cash used for investing activities totaled
$236.3 million during the three months ended March 31, 2005, compared to net
cash used for investing activities of $160.5 million during the prior year
quarter. During each of the three months ended March 31, 2005 and 2004, cash was
used for purchases, net of sales, of investments and for capital expenditures.
Financing Activities. Net cash provided by financing activities totaled
$152.0 million during the three months ended March 31, 2005 compared to net cash
provided by financing activities of $41.4 million during the prior year quarter.
During each of the three months ended March 31, 2005 and 2004, cash was provided
by our receipt of proceeds totaling $136.9 million and $39.3 million,
respectively, from the exercise of options to acquire our common shares by our
employees.
FUTURE CASH REQUIREMENTS
As of March 31, 2005, we had long-term debt, including current maturities,
of $2.0 billion and cash and cash equivalents and investments of $1.6 billion.
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. As our $1.381 billion
zero coupon convertible senior debentures can be put to us on February 5, 2006,
the outstanding principal amount of these debentures of $809.6 million is
included in current liabilities in our balance sheet as of March 31, 2005.
Additionally, each of our $700 million zero coupon senior exchangeable
notes and our $1.381 billion zero coupon convertible senior debentures provide
that upon an exchange or conversion, as applicable, of these convertible debt
instruments, we will be required to pay holders of these debt instruments, in
lieu of common shares, cash up to 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. If the $1.381 billion debentures were
converted, our cash obligation would be an amount equal to the lesser of 8.5
million multiplied by the sale price of our common shares on the trading day
immediately prior to the related conversion date or the principal amount of the
debentures on the date of conversion. If these debentures had been converted on
March 31, 2005, we would have been required to pay cash totaling approximately
$486.5 million to the holders of the debentures (based on the closing price for
our common shares on March 30, 2005 of $57.30). As this amount is substantially
lower than the $826.8 million that the holders of the debentures will receive if
they put the debentures to us on the first put date of February 5, 2006 or if
they sold the debentures in the open market, we do not currently expect the
debentures to be converted and any payment to be required prior to February 5,
2006 (when the holders have the option to put the debentures back to us), unless
the price for our shares were to exceed approximately $95. Our $700 million zero
coupon senior exchangeable notes cannot be exchanged until the price for our
shares exceeds approximately $84 or in various other circumstances as described
in the note indenture.
As of March 31, 2005, we had outstanding purchase commitments of
approximately $132.1 million, primarily for
27
rig-related enhancing, construction and sustaining capital expenditures. Total
capital expenditures for the last three quarters of 2005 are currently expected
to be approximately $495 million, including currently planned rig-related
enhancing, construction and sustaining capital expenditures. This amount could
change significantly based on market conditions and new business opportunities.
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.
During 2002 our Board of Directors authorized the continuation of a share
repurchase program under which we may repurchase our common shares in the open
market. Under this program we are authorized to purchase up to $400 million of
our common shares. Through March 31, 2005, approximately $2.5 million of our
common shares have been repurchased under this program.
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 March
31, 2005, we had cash and cash equivalents and investments of $1.6 billion
(including $546.0 million of long-term investments) and working capital of
$551.7 million. This compares to cash and cash equivalents and investments of
$1.4 billion (including $510.5 million of long-term investments) and working
capital of $381.7 million as of December 31, 2004.
Our funded debt to capital ratio was 0.38:1 as of March 31, 2005 and
0.41:1 as of December 31, 2004. Our net funded debt to capital ratio was 0.12:1
as of March 31, 2005 and 0.17:1 as of December 31, 2004. 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-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 17.8:1 as
of March 31, 2005, compared to 14.1:1 as of December 31, 2004. The interest
coverage ratio is computed by calculating the sum of income before income taxes,
interest expense, 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 with various banks as of March
31, 2005. Availability and borrowings under our credit facilities as of March
31, 2005 are as follows:
(IN THOUSANDS)
Credit available $ 125,000
Letters of credit outstanding (78,134)
----------
Remaining availability $ 46,866
----------
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
28
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 ACCOUNTING PRONOUNCEMENTS
As discussed under Stock-Based Compensation in Note 2 to our accompanying
consolidated financial statements, we currently account for stock-based
compensation as prescribed by Accounting Principals Board (APB) Opinion No. 25,
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 in our consolidated statements of income. On December 16, 2004, the
Financial Accounting Standards Board (FASB) issued a revision to Statement of
Financial Accounting Standards (SFAS) No. 123, "Share-Based Payment," which will
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 being
recorded in our consolidated statements of income. The statement will be
effective for stock options granted, modified, or settled in cash in annual
periods beginning after June 15, 2005 (2006 for Nabors). Additionally, for stock
options granted or modified after December 15, 1994 that have not vested as of
the effective date of the statement, compensation cost will be measured and
recorded in our consolidated statements of income 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. The statement may have a material adverse effect on our
results of operations during the periods of adoption and annual and interim
periods thereafter. The impact that the adoption of this statement in its
current form on January 1, 2005 or 2004 would have had on our net income and
basic and diluted earnings per share for the three months ended March 31, 2005
and 2004 is presented in the table included in Note 2 to our accompanying
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We disclosed our critical accounting policies in our 2004 Annual Report on
Form 10-K. No significant changes have occurred to those policies.
SELF-INSURANCE ACCRUALS
Effective April 1, 2005, with our insurance renewal, certain changes have
been made to our insurance coverage resulting in additional exposure to
obligations from claims that might arise in the ordinary course of business. In
addition to the insurance retentions that we are responsible for relating to
rig, equipment, property and business interruption risk, we are now responsible
for 30% of all losses in excess of those retentions.
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 2004 Annual Report on Form 10-K. Material changes in our
exposure to market risk from that disclosed in our 2004 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. In June 2004 we unwound $100 million of the $200 million range cap and
floor derivative instrument.
The fair value of our interest rate swap agreement recorded as a
derivative liability and included in other
29
long-term liabilities totaled approximately $.8 million as of March 31, 2005,
and recorded as a derivative asset and included in other long-term assets
totaled approximately $4.6 million as of December 31, 2004. The carrying value
of our 5.375% senior notes has been increased by the same amount as of March 31,
2005 and December 31, 2004.
The fair value of our range cap and floor transaction recorded as a
derivative asset and included in other long-term assets totaled approximately
$1.3 million and $.3 million as of March 31, 2005 and December 31, 2004,
respectively. We recorded mark-to-market gains, included in losses (gains) on
sales of long-lived assets, impairment charges and other expense (income), net
of approximately $.9 million during the three months ended March 31, 2005
resulting from the change in cumulative fair value of this derivative instrument
during the three months ended March 31, 2005.
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 Exchange
Act, 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.
The Company's management, with the participation of the Company's Chairman
and Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chairman and Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective, at the reasonable assurance level, in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act and are effective, at the reasonable assurance level, in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the
Company's management, including the Company's Chairman and Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the most recently completed fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
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
(a) Exhibits
15 Awareness Letter of Independent Accountants.
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
30
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 filed with the U.S. Securities and Exchange
Commission on March 2, 2005, with respect to Nabors'
Compensation Committee of the Board of Directors grant of
restricted stock awards and options to purchase Nabors' common
shares to certain of Nabors' executive officers on February
24, 2005.
- Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on March 2, 2005, with respect to Nabors' press
release announcing that Jack Wexler retired as an active
member of Nabors' Board of Directors effective February 24,
2005.
- Report on Form 8-K furnished to the U.S. Securities and
Exchange Commission on February 1, 2005, with respect to
Nabors' press release announcing results for the fourth
quarter and full year ended December 31, 2004.
- Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on January 31, 2005, with respect to Nabors' press
release announcing that James C. Flores was appointed to
Nabors' Board of Directors effective January 25, 2005.
31
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.
Date: May 6, 2005 /s/ Anthony G. Petrello
-----------------------------------
Anthony G. Petrello
Deputy Chairman, President and Chief
Operating Officer
Date: May 6, 2005 /s/ Bruce P. Koch
------------------------------------
Bruce P. Koch
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
32
INDEX TO EXHIBITS
Exhibits
15 Awareness Letter of Independent Accountants.
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