Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2013

 

Commission File Number: 001-32657

 

NABORS INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

Bermuda

 

98-0363970

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

Crown House

Second Floor

4 Par-la-Ville Road

Hamilton, HM08

Bermuda

(441) 292-1510

(Address of principal executive office)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o  NO x

 

The number of common shares, par value $.001 per share, outstanding as of October 29, 2013 was 295,166,266.

 

 

 



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

PART I FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012

3

 

 

 

 

Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)

4

 

 

 

 

Consolidated Statements of Other Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)

6

 

 

 

 

Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2013 and 2012 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

Report of Independent Registered Public Accounting Firm

41

 

 

 

Item 2.

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

42

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

 

 

 

Item 4.

Controls and Procedures

58

 

 

 

PART II OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

59

 

 

 

Item 1A.

Risk Factors

59

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

Item 3.

Defaults Upon Senior Securities

60

 

 

 

Item 4.

Mine Safety Disclosures

60

 

 

 

Item 5.

Other Information

60

 

 

 

Item 6.

Exhibits

61

 

 

 

Signatures

62

 

 

Exhibit Index

63

 

2



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

 

(In thousands, except share amounts)

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

395,923

 

$

524,922

 

Short-term investments

 

96,015

 

253,282

 

Assets held for sale

 

396,201

 

383,857

 

Accounts receivable, net

 

1,362,434

 

1,382,623

 

Inventory

 

229,494

 

251,133

 

Deferred income taxes

 

239,171

 

110,480

 

Other current assets

 

237,217

 

226,560

 

Total current assets

 

2,956,455

 

3,132,857

 

Long-term investments and other receivables

 

3,371

 

4,269

 

Property, plant and equipment, net

 

8,463,804

 

8,712,088

 

Goodwill

 

479,557

 

472,326

 

Investment in unconsolidated affiliates

 

68,907

 

61,690

 

Other long-term assets

 

230,022

 

272,792

 

Total assets

 

$

12,202,116

 

$

12,656,022

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of debt

 

$

11,441

 

$

364

 

Trade accounts payable

 

521,133

 

499,010

 

Accrued liabilities

 

579,476

 

599,380

 

Income taxes payable

 

13,372

 

33,628

 

Total current liabilities

 

1,125,422

 

1,132,382

 

Long-term debt

 

4,036,027

 

4,379,336

 

Other long-term liabilities

 

441,372

 

518,664

 

Deferred income taxes

 

692,514

 

599,335

 

Total liabilities

 

6,295,335

 

6,629,717

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Subsidiary preferred stock (Note 8)

 

69,188

 

69,188

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

Authorized common shares 800,000; issued 323,534 and 318,813, respectively

 

323

 

319

 

Capital in excess of par value

 

2,384,421

 

2,337,244

 

Accumulated other comprehensive income

 

311,631

 

431,595

 

Retained earnings

 

4,074,420

 

4,120,398

 

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

 

(944,627

)

(944,627

)

Total shareholders’ equity

 

5,826,168

 

5,944,929

 

Noncontrolling interest

 

11,425

 

12,188

 

Total equity

 

5,837,593

 

5,957,117

 

Total liabilities and equity

 

$

12,202,116

 

$

12,656,022

 

 

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

 

3



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

(In thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

1,550,819

 

$

1,729,907

 

$

4,544,263

 

$

5,272,499

 

Earnings (losses) from unconsolidated affiliates

 

(2,628

)

(99,527

)

1,627

 

(302,513

)

Investment income (loss)

 

1,229

 

7,224

 

95,471

 

32,844

 

Total revenues and other income

 

1,549,420

 

1,637,604

 

4,641,361

 

5,002,830

 

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

 

Direct costs

 

980,911

 

1,107,032

 

2,948,213

 

3,353,520

 

General and administrative expenses

 

127,943

 

130,681

 

390,023

 

398,534

 

Depreciation and amortization

 

273,444

 

265,637

 

809,019

 

766,441

 

Interest expense

 

56,059

 

63,776

 

176,343

 

190,068

 

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

 

3,266

 

10,216

 

27,245

 

21,777

 

Impairments and other charges

 

242,241

 

 

287,241

 

147,503

 

Total costs and other deductions

 

1,683,864

 

1,577,342

 

4,638,084

 

4,877,843

 

Income (loss) from continuing operations before income taxes

 

(134,444

)

60,262

 

3,277

 

124,987

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

Current

 

(32,316

)

50,979

 

(2,106

)

111,683

 

Deferred

 

(12,368

)

(55,956

)

(26,692

)

(89,562

)

Total income tax expense (benefit)

 

(44,684

)

(4,977

)

(28,798

)

22,121

 

Subsidiary preferred stock dividend

 

750

 

750

 

2,250

 

2,250

 

Income (loss) from continuing operations, net of tax

 

(90,510

)

64,489

 

29,825

 

100,616

 

Income (loss) from discontinued operations, net of tax

 

(14,430

)

12,155

 

(34,292

)

35,888

 

Net income (loss)

 

(104,940

)

76,644

 

(4,467

)

136,504

 

Less: Net (income) loss attributable to noncontrolling interest

 

(441

)

(988

)

(6,154

)

453

 

Net income (loss) attributable to Nabors

 

$

(105,381

)

$

75,656

 

$

(10,621

)

$

136,957

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(0.30

)

$

0.22

 

$

0.08

 

$

0.35

 

Basic from discontinued operations

 

(0.05

)

0.04

 

(0.11

)

0.12

 

Total Basic

 

$

(0.35

)

$

0.26

 

$

(0.03

)

$

0.47

 

 

 

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

(0.30

)

$

0.22

 

$

0.08

 

$

0.35

 

Diluted from discontinued operations

 

(0.05

)

0.04

 

(0.11

)

0.12

 

Total Diluted

 

$

(0.35

)

$

0.26

 

$

(0.03

)

$

0.47

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

295,076

 

290,367

 

293,837

 

289,822

 

Diluted

 

295,076

 

292,501

 

296,208

 

292,290

 

 

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

 

4



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

(In thousands)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

(105,381

)

$

75,656

 

$

(10,621

)

$

136,957

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

15,716

 

31,550

 

(36,853

)

29,157

 

Unrealized gains/(losses) on marketable securities

 

(3,416

)

13,667

 

1,586

 

20,882

 

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

 

(2

)

(1,523

)

(88,159

)

(14,007

)

Unrealized gains/(losses) on marketable securities

 

(3,418

)

12,144

 

(86,573

)

6,875

 

Pension liability amortization

 

280

 

260

 

842

 

780

 

Unrealized gains/(losses) on cash flow hedges

 

153

 

166

 

459

 

548

 

Other comprehensive income (loss), before tax

 

12,731

 

44,120

 

(122,125

)

37,360

 

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

 

116

 

(272

)

(2,161

)

(3,856

)

Other comprehensive income (loss), net of tax

 

12,615

 

44,392

 

(119,964

)

41,216

 

Comprehensive income (loss) attributable to Nabors

 

(92,766

)

120,048

 

(130,585

)

178,173

 

Net income (loss) attributable to noncontrolling interest

 

441

 

988

 

6,154

 

(453

)

Translation adjustment attributable to noncontrolling interest

 

229

 

390

 

(572

)

417

 

Comprehensive income (loss) attributable to noncontrolling interest

 

670

 

1,378

 

5,582

 

(36

)

Comprehensive income (loss)

 

$

(92,096

)

$

121,426

 

$

(125,003

)

$

178,137

 

 

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

 

5



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended September 30,

 

(Unaudited)

 

2013

 

2012

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss) attributable to Nabors

 

$

(10,621

)

$

136,957

 

Adjustments to net income (loss):

 

 

 

 

 

Depreciation and amortization

 

820,898

 

778,393

 

Depletion and other oil and gas expenses

 

22,235

 

223

 

Deferred income tax expense (benefit)

 

(31,535

)

(81,116

)

Losses (gains) on long-lived assets, net

 

12,254

 

7,016

 

Impairments and other charges

 

71,322

 

162,450

 

Loss on debt extinguishment

 

211,981

 

 

 

Losses (gains) on investments, net

 

(90,635

)

(27,773

)

Share-based compensation

 

45,898

 

13,541

 

Foreign currency transaction losses (gains), net

 

7,021

 

5,054

 

Gain on sale of oil and gas operations

 

 

(48,486

)

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

 

(1,263

)

302,512

 

Other

 

4,966

 

6,207

 

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

 

 

 

 

 

Accounts receivable

 

(21,568

)

46,973

 

Inventory

 

20,220

 

10,900

 

Other current assets

 

5,572

 

(47,086

)

Other long-term assets

 

34,435

 

(26,743

)

Trade accounts payable and accrued liabilities

 

11,271

 

(221,252

)

Income taxes payable

 

(53,846

)

10,576

 

Other long-term liabilities

 

(83,890

)

65,699

 

Net cash provided by operating activities

 

974,715

 

1,094,045

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments

 

 

(949

)

Sales and maturities of investments

 

163,944

 

30,111

 

Cash paid for acquisition of businesses, net

 

(37,516

)

 

Capital expenditures

 

(780,711

)

(1,221,769

)

Proceeds from sale of affiliate

 

10,000

 

 

Investment in unconsolidated affiliate

 

(5,967

)

 

Proceeds from sales of assets and insurance claims

 

139,254

 

128,432

 

Other

 

(7

)

 

Net cash used for investing activities

 

(511,003

)

(1,064,175

)

Cash flows from financing activities:

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

(7,497

)

(1,748

)

Dividends to shareholders

 

(35,357

)

 

Debt issuance costs

 

(3,505

)

 

Proceeds from debt

 

710,086

 

 

Proceeds from revolving credit facility

 

 

710,000

 

Proceeds from (payments for) commercial paper, net

 

332,250

 

 

Proceeds from (payments for) issuance of common shares

 

4,375

 

(4,007

)

Reduction in long-term debt

 

(994,181

)

(276,232

)

Reduction in revolving credit facility

 

(590,000

)

(380,000

)

Purchase of restricted stock

 

(3,096

)

(2,071

)

Tax (expense) benefit related to share-based awards

 

 

(54

)

Net cash (used for) provided by financing activities

 

(586,925

)

45,888

 

Effect of exchange rate changes on cash and cash equivalents

 

(5,786

)

(2,771

)

Net increase (decrease) in cash and cash equivalents

 

(128,999

)

72,987

 

Cash and cash equivalents, beginning of period

 

524,922

 

398,575

 

Cash and cash equivalents, end of period

 

$

395,923

 

$

471,562

 

 

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

 

6



Table of Contents

 

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

Capital

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

in Excess

 

Other

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Par

 

of Par

 

Comprehensive

 

Retained

 

Treasury

 

controlling

 

Total

 

(In thousands)

 

Shares

 

Value

 

Value

 

Income

 

Earnings

 

Shares

 

Interest

 

Equity

 

As of December 31, 2012

 

318,813

 

$

319

 

$

2,337,244

 

$

431,595

 

$

4,120,398

 

$

(944,627

)

$

12,188

 

$

5,957,117

 

Net income (loss)

 

 

 

 

 

 

 

 

 

(10,621

)

 

 

6,154

 

(4,467

)

Dividends to shareholders ($.04/share)

 

 

 

 

 

 

 

 

 

(35,357

)

 

 

 

 

(35,357

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

(119,964

)

 

 

 

 

(572

)

(120,536

)

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

 

470

 

 

4,375

 

 

 

 

 

 

 

 

 

4,375

 

Sale of non- controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,899

)

(2,899

)

Share-based compensation

 

4,251

 

4

 

45,898

 

 

 

 

 

 

 

 

 

45,902

 

Other

 

 

 

 

 

(3,096

)

 

 

 

 

 

 

(3,446

)

(6,542

)

As of September 30, 2013

 

323,534

 

$

323

 

$

2,384,421

 

$

311,631

 

$

4,074,420

 

$

(944,627

)

$

11,425

 

$

5,837,593

 

 

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

 

7



Table of Contents

 

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

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

 

Drilling & Rig Services

 

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

 

Completion & Production Services

 

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

 

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

 

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

 

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

 

·                  36 platform, 8 jackup and 4 barge rigs actively marketed in the United States, including the Gulf of Mexico, and multiple international markets.

 

·                  Approximately 800,000 hydraulic horsepower for hydraulic fracturing, cementing, nitrogen and acid pressure pumping services in key basins throughout the United States and Canada.

 

In addition to the foregoing:

 

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

 

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

 

·                  We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets 5 rigs in addition to the rigs we lease to the joint venture.

 

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

 

Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The unaudited consolidated financial statements of Nabors are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain reclassifications have been made to the prior period to conform to the current-period

 

8



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presentation, with no effect on our consolidated financial position, results of operations or cash flows.  Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted.  Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2012 (“2012 Annual Report”).  In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2013, as well as the results of our operations and other comprehensive income for the three and nine months ended September 30, 2013 and 2012, and our cash flows and changes in equity for the nine months ended September 30, 2013 and 2012, in accordance with GAAP.  Interim results for the nine months ended September 30, 2013 may not be indicative of results that will be realized for the full year ending December 31, 2013.

 

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

 

Principles of Consolidation

 

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

 

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

 

Inventory

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Raw materials

 

$

149,630

 

$

148,822

 

Work-in-progress

 

29,256

 

45,733

 

Finished goods

 

50,608

 

56,578

 

 

 

$

229,494

 

$

251,133

 

 

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Goodwill

 

The carrying amount and changes in recorded goodwill for our business lines as of and for the nine months ended September 30, 2013 were as follows:

 

 

 

 

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

Balance at

 

Purchase

 

Disposals

 

Cumulative

 

Balance at

 

 

 

December 31,

 

Price

 

and

 

Translation

 

September 30,

 

 

 

2012

 

Adjustments

 

Impairments

 

Adjustment

 

2013

 

 

 

(In thousands)

 

Drilling & Rig Services:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

50,149

 

$

 

$

 

$

 

$

50,149

 

Rig Services

 

32,113

 

15,828

(1)

(8,000

)(2)

(597

)

39,344

 

Subtotal Drilling & Rig Services

 

82,262

 

15,828

 

(8,000

)

(597

)

89,493

 

Completion & Production Services

 

 

 

 

 

 

 

 

 

 

 

Completion

 

334,992

 

 

 

 

334,992

 

Production

 

55,072

 

 

 

 

55,072

 

Subtotal Completion & Production Services

 

390,064

 

 

 

 

390,064

 

Total

 

$

472,326

 

$

15,828

 

$

(8,000

)

$

(597

)

$

479,557

 

 


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

 

(2)         Represents the goodwill related to Peak Oilfield Service Company (“Peak”), a wholly owned subsidiary in Alaska, for which the accounting criteria of assets held for sale was met at September 30, 2013.  Accordingly, we reclassified the goodwill and related carrying value of these assets to assets held for sale at September 30, 2013.  See Note 12 — Assets Held for Sale and Discontinued Operations for additional information.

 

Note 3 Cash and Cash Equivalents and Short-term Investments

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

395,923

 

$

524,922

 

Short-term investments:

 

 

 

 

 

Trading equity securities

 

$

 

$

52,705

 

Available-for-sale equity securities

 

76,469

 

174,610

 

Available-for-sale debt securities

 

19,546

 

25,967

 

Total short-term investments

 

$

96,015

 

$

253,282

 

 

We sold our trading equity securities during the first quarter of 2013.

 

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

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Fair Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair Value

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

395,923

 

$

 

$

 

$

524,922

 

$

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading equity securities

 

 

 

 

52,705

 

46,981

 

 

Available-for-sale equity securities

 

76,469

 

47,922

 

 

174,610

 

137,282

 

(1,030

)

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper and CDs

 

 

 

 

206

 

 

 

Corporate debt securities

 

18,448

 

3,188

 

 

23,399

 

1,870

 

 

Mortgage-backed debt securities

 

213

 

12

 

 

244

 

15

 

 

Mortgage-CMO debt securities

 

60

 

2

 

(2

)

523

 

10

 

(3

)

Asset-backed debt securities

 

825

 

 

(67

)

1,595

 

28

 

(192

)

Total available-for-sale debt securities

 

19,546

 

3,202

 

(69

)

25,967

 

1,923

 

(195

)

Total available-for-sale securities

 

96,015

 

51,124

 

(69

)

200,577

 

139,205

 

(1,225

)

Total short-term investments

 

96,015

 

51,124

 

(69

)

253,282

 

186,186

 

(1,225

)

Total cash, cash equivalents and short-term investments

 

$

491,938

 

$

51,124

 

$

(69

)

$

778,204

 

$

186,186

 

$

(1,225

)

 

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

 

 

 

As of September 30, 2013

 

 

 

Less Than 12 Months

 

More Than 12 Months

 

 

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities: (1)

 

 

 

 

 

 

 

 

 

Mortgage-CMO debt securities

 

$

22

 

$

2

 

$

 

$

 

Asset-backed debt securities

 

 

 

446

 

67

 

Total available-for-sale debt securities

 

22

 

2

 

446

 

67

 

Total

 

$

22

 

$

2

 

$

446

 

$

67

 

 


(1)         Our unrealized losses on available-for-sale debt securities held for more than one year are comprised of various types of securities.  Each of these securities has a rating ranging from “A” to “AAA” from Standard & Poor’s and ranging from “A2” to “Aaa” from Moody’s Investors Service and is considered to be of high credit quality.  In each case, we do not intend to sell these investments, and it is less likely than not that we will be required to sell them to satisfy our own cash flow and working capital requirements.  We believe that we will be able to collect all amounts due according to the contractual terms of each investment and, therefore, do not consider the decline in value of these investments to be other-than-temporary at September 30, 2013.

 

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The estimated fair values of our corporate, mortgage-backed, mortgage-CMO and asset-backed debt securities at September 30, 2013, classified by time to contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties and we may elect to sell the securities prior to the contractual maturity date.

 

 

 

Estimated

 

 

 

Fair Value

 

 

 

September 30, 2013

 

 

 

(In thousands)

 

Debt securities:

 

 

 

Due in one year or less

 

$

 

Due after one year through five years

 

15,113

 

Due in more than five years

 

4,433

 

Total debt securities

 

$

19,546

 

 

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

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Proceeds from sales and maturities

 

$

408

 

$

3,953

 

$

107,361

 

$

23,186

 

Realized gains (losses), net

 

$

2

 

$

1,732

 

$

88,159

 

$

14,007

 

 

Note 4 Fair Value Measurements

 

The following table sets forth, by level within the fair-value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2013.  Our debt securities could transfer into or out of a Level 1 or 2 measure depending on the availability of independent and current pricing at the end of each quarter.  During the three months ended September 30, 2013, there were no transfers of our financial assets between Level 1 and Level 2 measures.  Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value as of September 30, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities from energy industry

 

$

75,607

 

$

862

 

$

 

$

76,469

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

18,448

 

 

18,448

 

Mortgage-backed debt securities

 

 

213

 

 

213

 

Mortgage-CMO debt securities

 

 

60

 

 

60

 

Asset-backed debt securities

 

825

 

 

 

825

 

Total short-term investments

 

$

76,432

 

$

19,583

 

$

 

$

96,015

 

 

Nonrecurring Fair Value Measurements

 

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

 

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Fair Value of Financial Instruments

 

The fair value of our financial instruments has been estimated in accordance with GAAP. The fair value of our debt, revolving credit facility and subsidiary preferred stock is estimated based on quoted market prices or prices quoted from third-party financial institutions and other observable inputs, all of which represent Level 2 fair value measurements. The carrying and fair values of these liabilities were as follows:

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

 

 

(In thousands)

 

2.35% senior notes due September 2016

 

$

349,803

 

$

353,959

 

$

 

$

 

6.15% senior notes due February 2018

 

969,623

 

1,097,743

 

968,708

 

1,164,813

 

9.25% senior notes due January 2019

 

339,607

 

421,952

 

1,125,000

 

1,492,819

 

5.00% senior notes due September 2020

 

697,871

 

732,319

 

697,648

 

770,707

 

4.625% senior notes due September 2021

 

698,087

 

717,374

 

697,907

 

755,517

 

5.10% senior notes due September 2023

 

348,733

 

356,041

 

 

 

Subsidiary preferred stock

 

69,188

 

69,750

 

69,188

 

68,625

 

Revolving credit facility

 

300,000

 

300,000

 

890,000

 

890,000

 

Commercial paper

 

332,250

 

332,250

 

 

 

Other

 

11,494

 

11,494

 

437

 

437

 

 

 

$

4,116,656

 

$

4,392,882

 

$

4,448,888

 

$

5,142,918

 

 

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

 

As of September 30, 2013, our short-term investments were carried at fair market value and classified as available-for-sale.  As of December 31, 2012, our short-term investments were carried at fair market value and included $200.6 million and $52.7 million in securities classified as available-for-sale and trading, respectively.

 

Note 5 Share-Based Compensation

 

Our share-based employee and director compensation plans are more fully described in Note 8 — Share-Based Compensation in our 2012 Annual Report. Total share-based compensation expense, which includes stock options and restricted stock, totaled $7.1 million and $4.8 million for the three months ended September 30, 2013 and 2012, respectively, and $45.9 million and $13.5 million for the nine months ended September 30, 2013 and 2012, respectively. Total share-based compensation expense for the nine months ended September 30, 2013 included a one-time stock grant valued at $27.0 million, which vested immediately, in connection with the termination of the 2009 employment agreement with Anthony Petrello, our Chairman, President and Chief Executive Officer. This share-based compensation expense has been recognized in (Losses) gains on sales and disposals of long-lived assets and other expense (income), net in our consolidated statement of income (loss).  See discussion of Mr. Petrello’s 2013 employment agreement at Note 9 — Commitments and Contingencies. All other share-based compensation expense is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Share-based compensation expense has been allocated to our various operating segments.  See Note 13 — Segment Information.

 

During the nine months ended September 30, 2013 and 2012, we awarded 4,729,193 and 934,648 shares of restricted stock, respectively, vesting over periods of up to four years, to our employees and directors.  Some of the restricted stock awards made during the nine months ended September 30, 2013 contain provisions relating to market conditions or performance measures, which may affect the grant date or vesting of such awards. All of these awards had an aggregate value at their grant date of $76.8 million and $19.4 million, respectively.  The fair value of restricted stock that vested during the nine months ended September 30, 2013 and 2012 was $36.6 million and $9.4 million, respectively.

 

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During the nine months ended September 30, 2013 and 2012, we awarded options vesting over periods up to four years to purchase 53,672 and 653,699 of our common shares, respectively, to our employees and directors.  The fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was calculated using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

 

 

Nine Months

 

 

 

Ended September 30,

 

 

 

2013

 

2012

 

Weighted average fair value of options granted

 

$

6.21

 

$

9.42

 

Weighted average risk free interest rate

 

0.71

%

0.63

%

Dividend yield

 

.82

%

0.00

%

Volatility (1)

 

51.01

%

55.77

%

Expected life

 

4.0 years

 

4.0 years

 

 


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

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2013 and 2012 was $3.2 million and $5.7 million, respectively.  Additionally, the intrinsic value of stock options surrendered during the nine months ended September 30, 2012 was $17.9 million.  The total fair value of stock options that vested during the nine months ended September 30, 2013 and 2012 was $4.0 million and $7.6 million, respectively.

 

Note 6 Debt

 

Debt consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

2.35% senior notes due September 2016

 

$

349,803

 

$

 

6.15% senior notes due February 2018

 

969,623

 

968,708

 

9.25% senior notes due January 2019

 

339,607

 

1,125,000

 

5.00% senior notes due September 2020

 

697,871

 

697,648

 

4.625% senior notes due September 2021

 

698,087

 

697,907

 

5.10% senior notes due September 2023

 

348,733

 

 

Revolving credit facility

 

300,000

 

890,000

 

Commercial paper

 

332,250

 

 

Other

 

11,494

 

437

 

 

 

$

4,047,468

 

$

4,379,700

 

Less: current portion of debt

 

11,441

 

364

 

 

 

$

4,036,027

 

$

4,379,336

 

 

2.35% and 5.10% Senior Notes

 

On September 12, 2013, Nabors Delaware completed a private placement of $700 million aggregate principal amount of senior notes, comprised of $350 million principal amount of 2.35% senior notes due 2016 and $350 million principal amount of 5.10% senior notes due 2023, which are unsecured and fully and unconditionally guaranteed by us.  The notes are subject to registration rights.  The notes were sold by the initial purchasers to qualified institutional buyers pursuant to Rule 144A and to certain investors outside of the United States under Regulation S under the Securities Act. The notes pay interest semiannually on March 15 and September 15, beginning on March 15, 2014. The 2.35% senior notes will mature on September 15, 2016, and the 5.10% senior notes will mature on September 15, 2023.

 

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The notes rank equal in right of payment to all of Nabors Delaware’s existing and future senior unsubordinated debt. The notes rank senior in right of payment to all of our existing and future senior subordinated and subordinated debt. Our guarantee of the notes is unsecured and ranks equal in right of payment to all of our unsecured and unsubordinated indebtedness from time to time outstanding. The indenture includes covenants customary for transactions of this type that, subject to significant exceptions, limit our subsidiaries’ ability to, among other things, incur certain liens or enter into sale and leaseback transactions. In the event of a Change of Control Trigger Event, as defined in the indenture, with respect to a series of the notes, the holders of that series of notes may require Nabors Delaware to purchase all or a portion of each senior note in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. The notes are redeemable in whole or in part at any time at the option of Nabors Delaware at the redemption prices specified in the indenture, plus accrued and unpaid interest.  Nabors Delaware used the proceeds to redeem a portion of its 9.25% senior notes due 2019, as discussed below.

 

9.25% Senior Notes due 2019

 

On September 4, 2013, Nabors Delaware commenced a cash tender offer for any and all of its outstanding 9.25% senior notes due 2019, which expired on September 11, 2013.  On September 12, 2013, Nabors Delaware accepted for redemption all of the notes that were validly tendered and not validly withdrawn prior to the expiration of the tender offer, totaling $785.4 million (including $14 million held by a consolidated affiliate) in principal amount.  Nabors Delaware paid the holders an aggregate of approximately $1.0 billion in cash, reflecting principal, accrued and unpaid interest and a premium of $211.9 million (including related fees), from the proceeds of the 2.35% senior notes and 5.10% senior notes issued on September 12, 2013, discussed above, borrowings under its commercial paper program and cash on hand.  Following the redemption, $339.6 million in principal amount remains outstanding.

 

Commercial Paper Program

 

During April 2013, Nabors Delaware established a commercial paper program. This program allows the issuance from time to time of up to an aggregate amount of $1.5 billion in commercial paper with a maturity of no more than 397 days. Our commercial paper borrowings are classified as long-term debt because the borrowings are fully supported by availability under our revolving credit facility, which matures in November 2017, more than one year from now.  As of September 30, 2013, we had approximately $332.3 million of commercial paper outstanding; we used the proceeds to reduce borrowings under our revolving credit facility and redeem debt.  The weighted average interest rate on borrowings at September 30, 2013 was 0.358%.

 

Revolving Credit Facility

 

At September 30, 2013, we had $1.2 billion of remaining availability from a total of $1.5 billion under our existing revolving credit facility. The weighted average interest rate on borrowings at September 30, 2013 was 1.49%.  The revolving credit facility contains various covenants and restrictive provisions that limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain a net funded indebtedness to total capitalization ratio, as defined in each agreement. We were in compliance with all covenants under the agreement at September 30, 2013 and December 31, 2012. If we fail to perform our obligations under the covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facility could be declared immediately due and payable.

 

Note 7 Common Shares

 

During the nine months ended September 30, 2013, our employees exercised vested options to acquire .5 million of our common shares, resulting in proceeds of $4.4 million. During the nine months ended September 30, 2012, our employees exercised vested options and surrendered unexercised vested stock options to acquire 1.1 million of our common shares. We received $17.0 million relating to exercised options. We used approximately $21.0 million to repurchase surrendered unexercised vested options and to satisfy related tax withholding obligations pursuant to stock option share settlements and exercises by some employees. For the nine months ended September 30, 2013 and 2012, we withheld .2 million and .1 million, respectively, of our common shares with a fair value of $3.1 million and $2.1 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

 

During the three months ended September 30, 2013, our Board declared a cash dividend of $0.04 per common share to our shareholders.  This quarterly cash dividend was paid on September 27, 2013 to shareholders of record on September 6, 2013.  During the nine months ended September 30, 2013, we paid cash dividends totaling $35.4 million.

 

Note 8 Subsidiary Preferred Stock

 

As of September 30, 2013, dividends on outstanding shares of preferred stock had been declared and paid in full with respect to each quarter since their issuance.

 

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Note 9 Commitments and Contingencies

 

Commitments

 

Employment Contracts

 

During the first quarter of 2013, the Compensation Committee authorized a new employment agreement for Mr. Petrello effective January 1, 2013 that significantly restructured his compensation arrangements. The new employment agreement provides for an initial term of five years, with automatic one-year extensions at the end of each term, subject to a 90-day notice of termination provided within the agreement.

 

·                  The new employment agreement provides for an annual cash bonus targeted at base salary, with a cap of twice that amount, based on the achievement of certain financial and operational performance metrics and defined performance criteria.

 

·                  The new employment agreement provides for long-term equity incentive awards.  Mr. Petrello may receive restricted stock that may or may not vest depending upon the Company’s performance relative to a Performance Peer Group (as defined) over a three-year period (“TSR Shares”). The agreement provides that the target number of TSR Shares that will vest is valued at 150% of base salary, with a maximum number of TSR Shares valued at twice that amount.

 

·                  The employment agreement provides for long-term equity incentive awards in the form of restricted stock based upon the achievement of specific financial or operational objectives (“Performance Shares”).  Once earned, Performance Shares are then subject to three-year vesting requirements.  Performance Shares are targeted at 200% of base salary, with a maximum award of twice that amount, and are also subject to a minimum threshold before any amount can be earned.

 

·                  In the event of Mr. Petrello’s Termination Without Cause (including in the event of a change of control), or his death or disability, either he or his estate would be entitled to receive, within 30 days thereafter, 2.99 times the average of his base salary and annual cash bonus during the three fiscal years preceding the termination.

 

We do not have insurance to cover, and we have not recorded an expense or accrued a liability relating to any potential termination obligation.

 

Contingencies

 

Income Tax Contingencies

 

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

 

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

 

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

 

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recorded in accordance with GAAP. If we ultimately do not prevail, we would be required to recognize additional tax for any amount in excess of the current reserve.

 

Self-Insurance

 

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

 

We self-insure for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Some workers’ compensation claims, employers’ liability and marine employers’ liability claims are subject to a $2.0 million per-occurrence deductible.  Some automobile liability claims are subject to a $1.0 million deductible.  General liability claims are subject to a $5.0 million per-occurrence deductible.

 

Litigation

 

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

 

In 2009, the Court of Ouargla entered a judgment of approximately $17.7 million (at current exchange rates) against us relating to alleged customs infractions in Algeria.  We do not believe we received proper notice of the judicial proceedings, and believe the amount of the judgment was excessive in any case.  We appealed to the Algeria Supreme Court, which reversed the lower court in 2012 and remanded the case to the Ouargla Court of Appeals for treatment consistent with the Supreme Court’s ruling. Nevertheless, in January 2013, the Ouargla Court of Appeals reinstated the judgment.  We have again appealed to the Algeria Supreme Court, asserting the same challenges as before. Based upon our understanding of applicable law and precedent, we continue to believe that we will prevail. Although the appeal remains ongoing, the Hassi Messaoud customs office recently initiated efforts to collect the judgment prior to the Supreme Court’s decision.  As a result, we paid approximately $3.1 million and posted security of approximately $1.33 million to suspend those collection efforts and to enter into formal negotiations with the customs authority.  We have recorded a reserve in the amount of the posted security.  If we are ultimately required to pay a fine or judgment related to this matter, the resulting loss could be up to $13.3 million in excess of amounts accrued.

 

In March 2011, the Court of Ouargla entered a judgment of approximately $34.8 million (at current exchange rates) against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals has upheld the lower court’s ruling, and we have appealed the matter to the Algeria Supreme Court.  While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $26.8 million in excess of amounts accrued.

 

On March 9, 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company.  When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3 million escrow deposit. ERG filed suit the following day in the 61st Judicial

 

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District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”).  The lawsuit also seeks monetary damages of up to $100 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. Nabors successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012.  Nabors completed the sale of Ramshorn’s Class A shares to a Parex affiliate on April 12, 2012, which mooted ERG’s application for a temporary injunction that was scheduled for hearing by the Texas court on April 13, 2012.  ERG retains its causes of action for monetary damages, but Nabors believes the claims are foreclosed by the terms of the agreement and are without factual or legal merit.  Although we are vigorously defending the lawsuit, its ultimate outcome cannot be determined at this time.

 

Off-Balance Sheet Arrangements (Including Guarantees)

 

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

 

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

 

 

 

Maximum Amount

 

 

 

Remainder
of 2013

 

2014

 

2015

 

Thereafter

 

Total

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby letters of credit and other financial surety instruments

 

$

4,765

 

59,482

 

 

11,933

 

$

76,180

 

 

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Note 10 Earnings (Losses) Per Share

 

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

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (numerator):

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

(90,510

)

$

64,489

 

$

29,825

 

$

100,616

 

Less: net (income) loss attributable to noncontrolling interest

 

(441

)

(988

)

(6,154

)

453

 

Less: (earnings) losses allocated to unvested shareholders

 

1,411

 

 

671

 

 

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

 

$

(89,540

)

$

63,501

 

$

24,342

 

$

101,069

 

Income (loss) from discontinued operations, net of tax

 

$

(14,430

)

$

12,155

 

$

(34,292

)

$

35,888

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(0.30

)

$

0.22

 

$

0.08

 

$

0.35

 

Basic from discontinued operations

 

(0.05

)

0.04

 

(0.11

)

0.12

 

Total Basic

 

$

(0.35

)

$

0.26

 

$

(0.03

)

$

0.47

 

 

 

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

(0.30

)

$

0.22

 

$

0.08

 

$

0.35

 

Diluted from discontinued operations

 

(0.05

)

0.04

 

(0.11

)

0.12

 

Total Diluted

 

$

(0.35

)

$

0.26

 

$

(0.03

)

$

0.47

 

 

 

 

 

 

 

 

 

 

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding - basic

 

295,076

 

290,367

 

293,837

 

289,822

 

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

 

 

2,134

 

2,371

 

2,468

 

Weighted-average number of shares outstanding - diluted

 

295,076

 

292,501

 

296,208

 

292,290

 

 

For all periods presented, the computation of diluted earnings (losses) per share excludes outstanding stock options and warrants with exercise prices greater than the average market price of our common shares, because their inclusion would be anti-dilutive and because they are not considered participating securities. In periods of net loss from continuing operations, outstanding stock options, warrants and restricted stock are excluded because they are anti-dilutive when using the if-converted method, as reflected for the three months ended September 30, 2013.

 

The average number of options and warrants that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share were 18,786,837 and 15,010,906 shares during the three months ended September 30, 2013 and 2012, respectively, and 11,887,169 and 13,934,259 shares during the nine months ended September 30, 2013 and 2012, respectively.  In any period during which the average market price of our common shares exceeds the exercise prices of these stock options and warrants, such stock options and warrants will be included in our diluted earnings (losses) per share computation using the if-converted method of accounting. Restricted stock is included in our basic and diluted earnings (losses) per share computation using the two-class method of accounting in all periods because such stock is considered participating securities.

 

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Note 11 Supplemental Information

 

Accrued liabilities include the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In thousands)

 

Accrued compensation

 

$

165,022

 

$

158,095

 

Deferred revenue

 

183,049

 

148,165

 

Other taxes payable

 

63,504

 

58,590

 

Workers’ compensation liabilities

 

22,645

 

22,645

 

Interest payable

 

19,012

 

90,878

 

Warranty accrual

 

6,172

 

6,436

 

Litigation reserves

 

28,597

 

26,782

 

Current liability to discontinued operations

 

64,278

 

68,961

 

Professional fees

 

3,228

 

2,989

 

Current deferred tax liability

 

12,105

 

10,721

 

Other accrued liabilities

 

11,864

 

5,118

 

 

 

$

579,476

 

$

599,380

 

 

Investment income (loss) includes the following:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

1,107

 

$

1,160

 

$

4,225

 

$

6,110

 

Gains (losses) on investments, net

 

122

 

6,064

(1)

91,246

(2)

26,734

(1)(3)

 

 

$

1,229

 

$

7,224

 

$

95,471

 

$

32,844

 

 


(1)  Includes net unrealized gains of $4.2 million and $11.6 million from our trading securities during the three and nine months ended September 30, 2012, respectively.

 

(2)  Includes realized gains of $88.2 million from available-for-sale debt and equity securities and net realized gains of $2.5 million from our trading securities.

 

(3)  Includes $14.0 million realized gain related to debt securities in addition to unrealized gains discussed above.

 

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

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,806

 

$

2,592

 

$

8,150

 

$

6,773

 

Litigation expenses

 

1,983

 

3,255

 

7,642

 

8,791

 

Foreign currency transaction losses (gains)

 

(290

)

2,766

 

7,017

 

5,021

 

Other losses (gains)

 

(1,233

)

1,603

 

4,436

 

1,192

 

 

 

$

3,266

 

$

10,216

 

$

27,245

 

$

21,777

 

 

Impairments and other charges include the following:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Termination of employment contract

 

$

 

$

 

$

45,000

(1)

$

 

Loss on tendered notes

 

208,197

 

 

208,197

(2)

 

Provision for retirement of assets

 

14,044

 

 

14,044

(3)

46,264

(5)

Impairment of long-lived assets

 

20,000

 

 

20,000

(4)

 

Intangible asset impairment

 

 

 

 

74,960

(6)

Goodwill impairment

 

 

 

 

26,279

(7)

 

 

$

242,241

 

$

 

$

287,241

 

$

147,503

 


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

 

(2)         Represents the loss related to the extinguishment of debt in connection with the tender offer on the 9.25% senior notes. See Note 6 — Debt for additional discussion.

 

(3)         Represents provision for retirement of long-lived assets in our International operations totaling $14.0 million, which reduced the carrying value of some assets to their salvage value. The retirements were related to assets in Saudi Arabia and included obsolete top-drives, nonworking trucks, generators, engines and other miscellaneous equipment. A continued period of lower oil prices and its potential impact on our utilization and dayrates could result in the recognition of future impairment charges to additional assets if future cash flow estimates, based upon information then available to management, indicate that the carrying value of those assets may not be recoverable.

 

(4)         Represents impairment of $20.0 million to our fleet of coil-tubing units in our Completion & Production Services operating segment.  Intense competition and oversupply of equipment has led to lower utilization and margins for this product line, and we have recently decided to suspend the majority of our operations for these assets. When these factors were considered as part of our annual impairment tests on long-lived assets, the sum of the estimated future cash flows, on an undiscounted basis, was less than the carrying amount of these assets.  The estimated fair values of these assets were calculated using discounted cash flow models involving assumptions based on our utilization of the assets, revenues as well as direct costs, capital expenditures and working capital requirements.  We believe

 

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the fair value estimated for purposes of these tests represents a Level 3 fair value measurement.  A prolonged period of slow economic recovery could continue to adversely affect the demand for and prices of our services, which could result in future impairment charges for other reporting units due to the potential impact on our estimate of our future operating results.

 

(5)         Represents a provision for retirement of long-lived assets totaling $46.3 million in multiple operating segments, which reduced the carrying value of some assets to their salvage value. The retirements in our Canada operations included functionally inoperable rigs and other drilling equipment.  In our Completion & Production operations, the retirements related to rigs and vehicles that would require significant repair to return to work and other non-core assets.  A prolonged period of lower natural gas and oil prices and its potential impact on our utilization and dayrates could result in the recognition of future impairment charges to additional assets if future cash flow estimates, based upon information then available to management, indicate that the carrying value of those assets may not be recoverable.

 

(6)         Represents impairment of the Superior trade name. The Superior trade name was initially classified as a ten-year intangible asset at the date of acquisition in September 2010. The impairment is a result of the decision to cease using the Superior trade name to reduce confusion in the marketplace and enhance the Nabors brand.

 

(7)         Represents the impairment of goodwill associated with our U.S. Offshore and International reporting units. The impairments were deemed necessary due to the prolonged uncertainty of utilization of some of our rigs as a result of changes in our customers’ plans for future drilling operations in the Gulf of Mexico as well as our international markets. A prolonged period of lower natural gas prices or changes in laws and regulations could continue to adversely affect the demand for and prices of our services, which could result in future goodwill impairment charges for other reporting units due to the potential impact on our estimate of future operating results.

 

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

 

 

 

Gains (losses)
on cash flow
hedges

 

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

 

Defined benefit
pension plan
items

 

Foreign
currency items

 

Total

 

 

 

(In thousands (a))

 

As of January 1, 2013

 

$

(2,793

)

$

134,229

 

$

(7,632

)

$

307,791

 

$

431,595

 

Other comprehensive income (loss) before reclassifications

 

 

1,549

 

 

(36,853

)

(35,304

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

280

 

(85,456

)

516

 

 

(84,660

)

Net other comprehensive income (loss)

 

280

 

(83,907

)

516

 

(36,853

)

(119,964

)

As of September 30, 2013

 

$

(2,513

)

$

50,322

 

$

(7,116

)

$

270,938

 

$

311,631

 

 


 

(a)

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

 

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

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Line item in consolidated statement of income (loss)

 

2013

 

2012

 

2013

 

2012

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Investment income (loss)

 

$

2

 

$

1,523

 

$

88,159

 

$

14,007

 

Interest expense

 

153

 

166

 

459

 

548

 

General and administrative expenses

 

280

 

260

 

842

 

780

 

Total before tax

 

$

(431

)

$

1,097

 

$

86,858

 

$

12,679

 

Tax expense (benefit)

 

(168

)

272

 

2,198

 

3,856

 

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

 

$

(263

)

$

825

 

$

84,660

 

$

8,823

 

 

Other

 

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

 

Note 12 Assets Held-for-Sale and Discontinued Operations

 

Assets Held-for-Sale