nbr_Current folio_10Q

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2016

 

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   NO 

 

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   NO 

 

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 

 

Accelerated Filer 

 

 

 

Non-accelerated Filer 

 

Smaller Reporting Company 

 

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

 

YES   NO 

 

The number of common shares, par value $.001 per share, outstanding as of April 29, 2016 was 281,909,668, excluding 49,672,636 common shares held by our subsidiaries, or 331,582,304 in the aggregate.

 

 

 

 


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

3

 

 

 

 

Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2016 and 2015

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015

5

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

6

 

 

 

 

Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2016 and 2015

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2. 

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

32

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4. 

Controls and Procedures

43

 

 

 

PART II OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

44

 

 

 

Item 1A. 

Risk Factors

44

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 3. 

Defaults Upon Senior Securities

44

 

 

 

Item 4. 

Mine Safety Disclosures

45

 

 

 

Item 5. 

Other Information

45

 

 

 

Item 6. 

Exhibits

46

 

 

 

Signatures 

47

 

 

 

Exhibit Index 

48

 

 

2


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands, except per

 

 

 

share amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

200,674

 

$

254,530

 

Short-term investments

 

 

20,827

 

 

20,059

 

Assets held for sale

 

 

80,100

 

 

75,678

 

Accounts receivable, net

 

 

594,506

 

 

784,671

 

Inventory

 

 

153,837

 

 

153,824

 

Other current assets

 

 

209,443

 

 

187,135

 

Total current assets

 

 

1,259,387

 

 

1,475,897

 

Property, plant and equipment, net

 

 

6,942,315

 

 

7,027,802

 

Goodwill

 

 

167,217

 

 

166,659

 

Investment in unconsolidated affiliates

 

 

94,657

 

 

415,177

 

Other long-term assets

 

 

486,755

 

 

452,305

 

Total assets

 

$

8,950,331

 

$

9,537,840

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

5,880

 

$

6,508

 

Trade accounts payable

 

 

250,078

 

 

271,984

 

Accrued liabilities

 

 

572,025

 

 

686,613

 

Income taxes payable

 

 

43,285

 

 

41,394

 

Total current liabilities

 

 

871,268

 

 

1,006,499

 

Long-term debt

 

 

3,584,402

 

 

3,655,200

 

Other long-term liabilities

 

 

565,086

 

 

552,947

 

Deferred income taxes

 

 

13,378

 

 

29,326

 

Total liabilities

 

 

5,034,134

 

 

5,243,972

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

 

 

Authorized common shares 800,000; issued 331,675 and 330,526,  respectively

 

 

332

 

 

331

 

Capital in excess of par value

 

 

2,497,283

 

 

2,493,100

 

Accumulated other comprehensive income (loss)

 

 

(13,264)

 

 

(47,593)

 

Retained earnings

 

 

2,715,918

 

 

3,131,134

 

Less: treasury shares, at cost, 49,673 and 49,342 common shares, respectively

 

 

(1,295,949)

 

 

(1,294,262)

 

Total shareholders’ equity

 

 

3,904,320

 

 

4,282,710

 

Noncontrolling interest

 

 

11,877

 

 

11,158

 

Total equity

 

 

3,916,197

 

 

4,293,868

 

Total liabilities and equity

 

$

8,950,331

 

$

9,537,840

 

 

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

 

 

3


 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

    

March 31,

 

 

 

 

2016

 

2015

 

 

 

 

(In thousands, except per share amounts)

 

Revenues and other income:

 

 

 

 

 

 

 

 

Operating revenues

 

$

597,571

 

$

1,414,707

 

 

Earnings (losses) from unconsolidated affiliates

 

 

(167,151)

 

 

6,502

 

 

Investment income (loss)

 

 

343

 

 

969

 

 

Total revenues and other income

 

 

430,763

 

 

1,422,178

 

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

Direct costs

 

 

365,023

 

 

919,610

 

 

General and administrative expenses

 

 

62,334

 

 

115,430

 

 

Research and engineering

 

 

8,162

 

 

11,703

 

 

Depreciation and amortization

 

 

215,818

 

 

281,019

 

 

Interest expense

 

 

45,730

 

 

46,601

 

 

Other, net

 

 

182,404

 

 

(55,842)

 

 

Total costs and other deductions

 

 

879,471

 

 

1,318,521

 

 

Income (loss) from continuing operations before income taxes

 

 

(448,708)

 

 

103,657

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

Current

 

 

14,825

 

 

47,349

 

 

Deferred

 

 

(66,889)

 

 

(68,054)

 

 

Total income tax expense (benefit)

 

 

(52,064)

 

 

(20,705)

 

 

Income (loss) from continuing operations, net of tax

 

 

(396,644)

 

 

124,362

 

 

Income (loss) from discontinued operations, net of tax

 

 

(926)

 

 

(817)

 

 

Net income (loss)

 

 

(397,570)

 

 

123,545

 

 

Less: Net (income) loss attributable to noncontrolling interest

 

 

(724)

 

 

89

 

 

Net income (loss) attributable to Nabors

 

$

(398,294)

 

$

123,634

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(1.41)

 

$

0.43

 

 

Basic from discontinued operations

 

 

 —

 

 

 —

 

 

Total Basic

 

$

(1.41)

 

$

0.43

 

 

Diluted from continuing operations

 

$

(1.41)

 

$

0.43

 

 

Diluted from discontinued operations

 

 

 —

 

 

(0.01)

 

 

Total Diluted

 

$

(1.41)

 

$

0.42

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

275,851

 

 

285,361

 

 

Diluted

 

 

275,851

 

 

286,173

 

 

 

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

 

 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

    

March 31,

 

 

 

 

2016

 

2015

 

 

 

 

(In thousands)

 

Net income (loss) attributable to Nabors

 

$

(398,294)

 

$

123,634

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

 

 

 

 

 

 

 

Unrealized gain (loss) on translation adjustment

 

 

33,362

 

 

(68,539)

 

 

Less: reclassification adjustment for realized loss on translation adjustment

 

 

 —

 

 

5,365

 

 

Translation adjustment attributable to Nabors

 

 

33,362

 

 

(63,174)

 

 

Unrealized gains (losses) on marketable securities:

 

 

 

 

 

 

 

 

Unrealized gains (losses) on marketable securities

 

 

769

 

 

153

 

 

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

 

 

 —

 

 

 —

 

 

Unrealized gains (losses) on marketable securities

 

 

769

 

 

153

 

 

Pension liability amortization and adjustment

 

 

174

 

 

276

 

 

Unrealized gains (losses) and amortization on cash flow hedges

 

 

153

 

 

153

 

 

Other comprehensive income (loss), before tax

 

 

34,458

 

 

(62,592)

 

 

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

 

 

129

 

 

162

 

 

Other comprehensive income (loss), net of tax

 

 

34,329

 

 

(62,754)

 

 

Comprehensive income (loss) attributable to Nabors

 

 

(363,965)

 

 

60,880

 

 

Net income (loss) attributable to noncontrolling interest

 

 

724

 

 

(89)

 

 

Translation adjustment attributable to noncontrolling interest

 

 

419

 

 

(880)

 

 

Comprehensive income (loss) attributable to noncontrolling interest

 

 

1,143

 

 

(969)

 

 

Comprehensive income (loss)

 

$

(362,822)

 

$

59,911

 

 

 

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

 

 

5


 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(397,570)

 

$

123,545

 

Adjustments to net income (loss):

 

 

 

 

 

 

 

Depreciation and amortization

 

 

216,669

 

 

281,019

 

Deferred income tax expense (benefit)

 

 

(67,289)

 

 

(68,623)

 

Impairments and other charges

 

 

2,735

 

 

 —

 

Losses (gains) on debt buyback

 

 

(6,027)

 

 

 —

 

Losses (gains) on long-lived assets, net

 

 

2,563

 

 

732

 

Impairments on equity method holdings

 

 

177,242

 

 

 —

 

Losses (gains) on merger and acquisitions

 

 

 —

 

 

(52,574)

 

Share-based compensation

 

 

7,374

 

 

13,691

 

Foreign currency transaction losses (gains), net

 

 

4,213

 

 

(2,345)

 

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

 

 

167,151

 

 

(5,737)

 

Other

 

 

1,258

 

 

3,988

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

166,074

 

 

244,544

 

Inventory

 

 

2,057

 

 

511

 

Other current assets

 

 

(18,651)

 

 

13,145

 

Other long-term assets

 

 

13,214

 

 

(1,665)

 

Trade accounts payable and accrued liabilities

 

 

(120,757)

 

 

(275,313)

 

Income taxes payable

 

 

966

 

 

24,927

 

Other long-term liabilities

 

 

10,284

 

 

7,325

 

Net cash provided by operating activities

 

 

161,506

 

 

307,170

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Sales and maturities of investments

 

 

41

 

 

623

 

Investment in unconsolidated affiliates

 

 

 —

 

 

(445)

 

Capital expenditures

 

 

(129,875)

 

 

(364,234)

 

Proceeds from sales of assets and insurance claims

 

 

5,448

 

 

8,997

 

Proceeds from merger transaction

 

 

 —

 

 

693,450

 

Other

 

 

(4,439)

 

 

1,710

 

Net cash (used for) provided by investing activities

 

 

(128,825)

 

 

340,101

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

 

1,642

 

 

(1,017)

 

Proceeds from revolving credit facilities

 

 

150,000

 

 

 —

 

Reduction in revolving credit facilities

 

 

(70,000)

 

 

(250,000)

 

Proceeds from (payments for) issuance of common shares

 

 

 —

 

 

182

 

Repurchase of common shares

 

 

(1,687)

 

 

 —

 

Reduction in long-term debt

 

 

(148,045)

 

 

 —

 

Dividends to shareholders

 

 

(16,922)

 

 

(17,470)

 

Proceeds from (payment for) commercial paper, net

 

 

1,325

 

 

(282,615)

 

Proceeds from term loan

 

 

 —

 

 

300,000

 

Payments on term loan

 

 

 —

 

 

(300,000)

 

Other

 

 

(3,818)

 

 

(4,549)

 

Net cash (used for) provided by financing activities

 

 

(87,505)

 

 

(555,469)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

968

 

 

(6,950)

 

Net increase (decrease) in cash and cash equivalents

 

 

(53,856)

 

 

84,852

 

Cash and cash equivalents, beginning of period

 

 

254,530

 

 

501,149

 

Cash and cash equivalents, end of period

 

$

200,674

 

$

586,001

 

 

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

 

 

6


 

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

in Excess

 

Other

 

 

 

 

 

 

 

Non-

 

 

 

 

 

    

 

    

Par

    

of Par

    

Comprehensive

    

Retained

    

Treasury

    

controlling

    

Total

 

(In thousands)

 

Shares

 

Value

 

Value

 

Income

 

Earnings

 

Shares

 

Interest

 

Equity

 

As of December 31, 2014

 

328,196

 

$

328

 

$

2,452,261

 

$

77,522

 

$

3,573,172

 

$

(1,194,664)

 

$

10,170

 

$

4,918,789

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

123,634

 

 

 —

 

 

(89)

 

 

123,545

 

Dividends to shareholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,470)

 

 

 —

 

 

 —

 

 

(17,470)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

(62,754)

 

 

 —

 

 

 —

 

 

(880)

 

 

(63,634)

 

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

 

20

 

 

 —

 

 

182

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

182

 

Share-based compensation

 

 —

 

 

 —

 

 

13,691

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,691

 

Other

 

1,341

 

 

2

 

 

(7,091)

 

 

 —

 

 

 —

 

 

 —

 

 

(252)

 

 

(7,341)

 

As of March 31, 2015

 

329,557

 

$

330

 

$

2,459,043

 

$

14,768

 

$

3,679,336

 

$

(1,194,664)

 

$

8,949

 

$

4,967,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

330,526

 

$

331

 

$

2,493,100

 

$

(47,593)

 

$

3,131,134

 

$

(1,294,262)

 

$

11,158

 

$

4,293,868

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(398,294)

 

 

 —

 

 

724

 

 

(397,570)

 

Dividends to shareholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16,922)

 

 

 —

 

 

 —

 

 

(16,922)

 

Repurchase of treasury shares

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,687)

 

 

 —

 

 

(1,687)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

34,329

 

 

 —

 

 

 —

 

 

419

 

 

34,748

 

Share-based compensation

 

 —

 

 

 —

 

 

7,374

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,374

 

Other

 

1,149

 

 

1

 

 

(3,191)

 

 

 —

 

 

 —

 

 

 —

 

 

(424)

 

 

(3,614)

 

As of March 31, 2016

 

331,675

 

$

332

 

$

2,497,283

 

$

(13,264)

 

$

2,715,918

 

$

(1,295,949)

 

$

11,877

 

$

3,916,197

 

 

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

 

 

7


 

Table of Contents

Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations

 

We own and operate the world’s largest land-based drilling rig fleet and are a leading provider of offshore platform workover and drilling rigs in the United States and numerous international markets. As a global provider of services for land-based and offshore oil and natural gas wells, our fleet of rigs and drilling-related equipment as of March 31, 2016 includes:

 

·

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

 

·

43 actively marketed rigs for offshore drilling operations in the United States and multiple international markets.

 

We also provide innovative drilling technology and equipment and comprehensive well-site services including engineering, transportation and disposal, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in many of the most significant oil and gas markets in the world. In addition, we manufacture and lease or sell top drives and other rig equipment.

 

On March 24, 2015, we completed the merger (the “Merger”) of our Completion & Production Services business with C&J Energy Services, Inc. (“C&J Energy”). In the Merger and related transactions, our wholly-owned interest in our Completion & Production Services business was exchanged for cash and an equity interest in the combined entity, C&J Energy Services Ltd. (“CJES”), and has been accounted for as an unconsolidated affiliate as of the acquisition date. As a result of the Merger, we report our share of the earnings (losses) of CJES through earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss). See further discussion in Note 3 — Investments in Unconsolidated Affiliates. Prior to the Merger, our Completion & Production Services business conducted our operations involved in the completion, life-of-well maintenance and plugging and abandonment of wells in the United States and Canada. These services include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management. As we no longer consolidate the results of operations from our historical Completion & Production Services business, our results of operations for the three months ended March 31, 2015 are not directly comparable to the three months ended March 31, 2016.

 

Our Drilling & Rig Services business is comprised of our global land-based and offshore drilling rig operations and other rig services, consisting of equipment manufacturing, rig instrumentation, optimization software and directional drilling services. Our Drilling & Rig Services business consists of four reportable operating segments: U.S., Canada, International and Rig Services. Through our investment in CJES, we remain engaged in the completion and production services business. CJES provides well construction, well completions, well support and other complementary oilfield services to oil and gas exploration and production companies primarily in North America.

 

On May 24, 2015, we paid $106.0 million in cash to acquire the remaining 49% equity interest in Nabors Arabia Company Limited (“Nabors Arabia”), our joint venture in Saudi Arabia, making it a wholly owned subsidiary. The effects of the acquisition and the operating results of Nabors Arabia are included in the accompanying unaudited consolidated financial statements beginning on the acquisition date, and are reflected in our International drilling segment.

 

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

 

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Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying unaudited consolidated financial statements of Nabors have been prepared in conformity with the generally accepted accounting principles in the United States (“GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2015, as amended (“2015 Annual Report”). In management’s opinion, the unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2016 and the results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented herein. Interim results for the three months ended March 31, 2016 may not be indicative of results that will be realized for the full year ending December 31, 2016.

 

Principles of Consolidation

 

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

 

Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method.  Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss). The investments in these entities are included in investment in unconsolidated affiliates in our consolidated balance sheets. We record our share of the net income (loss) of our equity method investment in CJES on a one-quarter lag, as we are not able to obtain the financial information of CJES on a timely basis. See Note 3 — Investments in Unconsolidated Affiliates.

 

Inventory

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

Raw materials

 

$

110,166

 

$

105,217

 

Work-in-progress

 

 

26,343

 

 

29,710

 

Finished goods

 

 

17,328

 

 

18,897

 

 

 

$

153,837

 

$

153,824

 

 

Goodwill

 

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

 

Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management. Potential factors requiring assessment include a further or sustained decline in our stock price, declines in oil and natural gas prices, a variance in results of operations from forecasts, a change in operating strategy of assets and additional transactions in the oil and gas industry. Another factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. As part of our annual review, we compare the sum of

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our reporting units’ estimated fair value, which includes the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assess the reasonableness of our estimated fair value. Any of the above-mentioned factors may cause us to re-evaluate goodwill during any quarter throughout the year.

 

Recent Accounting Pronouncements

 

In February 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) relating to consolidation, which eliminates the presumption that a general partner should consolidate a limited partnership. It also modifies the evaluation of whether limited partnerships are variable interest entities or voting interest entities and adds requirements that limited partnerships must meet to qualify as voting interest entities. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued an ASU relating to the revenue recognition from contracts with customers that creates a common revenue standard for GAAP and IFRS. The core principle will require recognition of revenue to represent the transfer of promised goods or services to customers in an amount that reflects the consideration, including costs incurred, to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In July 2015, the FASB issued an ASU to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory. Subsequent measurement is unchanged for inventory measured using the last-in, first-out or the retail inventory method. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In September 2015, the FASB issued an ASU to simplify the accounting for measurement-period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In January 2016, the FASB issued an ASU relating to the recognition and measurement of financial assets and liabilities. This standard enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. This guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In March 2016, the FASB issued an ASU to simplify the transition to the equity method of accounting. This standard eliminates the requirement to retroactively adopt the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. Instead, the equity method investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for the equity method of accounting. This guidance is effective for public companies for fiscal years beginning after December 15, 2016. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

In March 2016, the FASB issued an ASU to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for public companies for fiscal years beginning after December 15, 2016. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

 

Note 3 Investments in Unconsolidated Affiliates

 

On March 24, 2015, we completed the Merger of our Completion & Production Services business with C&J Energy.  We received total consideration comprised of approximately $693.5 million in cash ($650.1 million after settlement of working capital requirements) and approximately 62.5 million common shares in the combined company, CJES, representing approximately 53% of the outstanding and issued common shares of CJES as of the closing date. Because

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we have significant influence over CJES, but not a controlling financial interest, we account for our investment in CJES under the equity method of accounting. 

 

Our consolidated statement of income (loss) for the three months ended March 31, 2015 consolidates the operating results of our Completion & Production Services business through the closing date of the Merger. As a result of the Merger, CJES became an unconsolidated affiliate and we no longer consolidate the operating results of our Completion & Production Services business. Therefore, subsequent to the closing date of the Merger, our share of the net income (loss), as adjusted for our basis difference, of our equity method investment in CJES is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss). Our policy is to record our share of the net income (loss) of CJES on a one-quarter lag as we are not able to obtain the financial information of CJES on a timely basis. Accordingly, the equity in earnings from CJES, which is reflected in earnings (losses) from unconsolidated affiliates in our consolidated statement of income (loss) for the three months ended March 31, 2016 is related to the period from October 1, 2015 through December 31, 2015.

 

We record our investment in the equity of CJES in the Investment in unconsolidated affiliates line in our consolidated balance sheet. We review our equity method investments for impairment whenever certain impairment indicators exist including the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. A loss in value of an investment that is other than a temporary decline should be recognized. During the quarter, we determined the carrying value of our investment was other than temporarily impaired, which resulted in an impairment charge of $153.4 million to reduce our carrying value to its estimated fair value determined principally based on the average share price over a specified period. Additionally, we recognized a $23.8 million charge to reserve certain other amounts associated with our CJES holdings including affiliate receivables. These charges are reflected in other expense (income), net in our consolidated statement of income (loss) for the three months ended March 31, 2016. See Note 10 – Supplemental Balance Sheet, Income Statement and Cash Flow Information.

 

During the first quarter of 2015, we recognized an estimated gross gain of $102.2 million in connection with the Merger based on the difference between the consideration received and the carrying value of the assets and liabilities of our Completion & Production Services business. This gain was partially offset by $49.6 million in transaction costs related to the Merger.

 

The following table presents summarized income statement (loss) information for CJES for the three months ended December 31, 2015, which is reflected in earnings (losses) from unconsolidated affiliates in our consolidated statement of income (loss) for the three months ended March 31, 2016:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

    

2015

 

 

 

(In thousands)

Gross revenues

 

$

409,011

 

Gross margin

 

 

37,417

 

Net income (loss)

 

 

(321,742)

 

Nabors' share of equity method earnings (losses)

 

 

(167,145)

 

 

 

 

 

 

Note 4 Fair Value Measurements

 

Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2016 consist of available-for-sale equity and debt securities. Our debt securities could transfer into or out of a Level 1 or 2 measure depending on the availability of independent and current pricing at the end of each quarter. During the three months ended March 31, 2016, 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. The majority of our short-term investments are categorized as Level 1 and had a fair value of $20.8 million as of March 31, 2016.

 

 

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Nonrecurring Fair Value Measurements

 

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

 

Fair Value of Financial Instruments

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair  

 

 

    

Value

    

Value

    

Value

    

Value

 

 

 

(In thousands)

 

(In thousands)

 

2.35% senior notes due September 2016

 

$

338,532

 

$

336,867

 

$

347,955

 

$

347,708

 

6.15% senior notes due February 2018

 

 

827,561

 

 

828,667

 

 

921,162

 

 

935,962

 

9.25% senior notes due January 2019

 

 

303,489

 

 

308,421

 

 

339,607

 

 

342,575

 

5.00% senior notes due September 2020

 

 

669,310

 

 

578,457

 

 

683,839

 

 

617,409

 

4.625% senior notes due September 2021

 

 

698,688

 

 

592,375

 

 

698,628

 

 

581,630

 

5.10% senior notes due September 2023

 

 

349,053

 

 

269,721

 

 

349,021

 

 

280,907

 

Term loan facility

 

 

325,000

 

 

325,000

 

 

325,000

 

 

325,000

 

Revolving credit facility

 

 

80,000

 

 

80,000

 

 

 —

 

 

 —

 

Commercial paper

 

 

9,325

 

 

9,325

 

 

8,000

 

 

8,000

 

Other

 

 

5,880

 

 

5,880

 

 

6,508

 

 

6,508

 

 

 

 

3,606,838

 

 

3,334,713

 

 

3,679,720

 

 

3,445,699

 

Less: Deferred financing costs

 

 

16,556

 

 

 

 

 

18,012

 

 

 

 

 

 

$

3,590,282

 

 

 

 

$

3,661,708

 

 

 

 

 

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.

 

Note 5 Share-Based Compensation

 

We have several share-based employee and director compensation plans, which are more fully described in Note 7 — Share-Based Compensation in our 2015 Annual Report. Total share-based compensation expense, which includes stock options and restricted shares, totaled $7.4 million and $13.9 million for the three months ended March 31, 2016 and 2015, respectively, which 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 12 — Segment Information.

 

Stock Options

 

The total intrinsic value of options exercised during three months ended March 31, 2015 was $0.1 million. No options were exercised during the three months ended March 31, 2016. The total fair value of options that vested during the three months ended March 31, 2016 and 2015 was $1.6 million and $1.5 million, respectively.

 

Restricted Stock

 

During the three months ended March 31, 2016 and 2015, we awarded 1,011,737 and 1,514,934 restricted shares, respectively, to our employees and directors.  These awards had an aggregate value at their date of grant of $7.8 million and $19.3 million, respectively, and were scheduled to vest over a period of up to four years.  The fair value of restricted shares that vested during the three months ended March 31, 2016 and 2015 was $8.0 million and $15.7 million, respectively. The fair value of these awards is based on the closing price of Nabors stock on the date the awards are granted.

 

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Restricted Stock Based on Performance

 

During the three months ended March 31, 2015, we awarded 438,307 restricted shares vesting over a period of three years to some of our executives.  The performance awards granted were based upon achievement of specific financial or operational objectives. The number of shares granted was determined by the number of performance goals achieved during fiscal year 2014.

 

Until shares are issued, our awards that are earned based on performance conditions are liability-classified awards. Our accrued liabilities included $3.7 million for such awards at March 31, 2016 for the performance period beginning on January 1, 2015 through December 31, 2015 and $0.6 million for such awards at March 31, 2016 for the performance period beginning January 1, 2016 through December 31, 2016. The fair value of these awards that vested during the three months ended March 31, 2016 and 2015 was $1.5 million and $6.8 million, respectively. The fair value of these awards are estimated at each reporting period, based on internal metrics and marked to market.

 

Restricted Stock Based on Market Conditions

 

During the three months ended March 31, 2016 and 2015, we awarded 749,427 and 544,925 restricted shares, respectively, which are equity classified awards and will vest based on our performance compared to our peer group over a three-year period. These awards had an aggregate value at their date of grant of $4.2 million and $4.7 million, respectively, after consideration of all assumptions.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

 

 

    

2016

    

2015

 

Risk free interest rate

 

 

1.41%

 

 

1.18%

 

Expected volatility

 

 

52.00%

 

 

50.00%

 

Closing stock price at grant date

 

$

8.64

 

$

12.98

 

Expected term (in years)

 

 

3.0

 

 

3.0

 

 

 

Note 6 Debt

 

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

2.35% senior notes due September 2016 (1)

 

$

338,532

 

$

347,955

 

6.15% senior notes due February 2018

 

 

827,561

 

 

921,162

 

9.25% senior notes due January 2019

 

 

303,489

 

 

339,607

 

5.00% senior notes due September 2020

 

 

669,310

 

 

683,839

 

4.625% senior notes due September 2021

 

 

698,688

 

 

698,628

 

5.10% senior notes due September 2023

 

 

349,053

 

 

349,021

 

Term loan facility

 

 

325,000

 

 

325,000

 

Revolving credit facility

 

 

80,000

 

 

 —

 

Commercial paper

 

 

9,325

 

 

8,000

 

Other

 

 

5,880

 

 

6,508

 

 

 

 

3,606,838

 

 

3,679,720

 

Less: current portion

 

 

5,880

 

 

6,508

 

Less: deferred financing costs

 

 

16,556

 

 

18,012

 

 

 

$

3,584,402

 

$

3,655,200

 


(1)

The 2.35% senior notes due September 2016 have been classified as long-term as we have the ability and intent to repay this obligation utilizing our revolving credit facility.

 

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During the three months ended March 31, 2016, we repurchased $154.1 million aggregate principal amount of our senior notes (all of which is now held by a consolidated affiliate) at various maturities for approximately $150.4 million in cash, reflecting principal and approximately $2.9 million of accrued and unpaid interest. The discount represents the gain on the debt buybacks and is included in other expense (income), net in our consolidated statement of income (loss) for the three months ended March 31, 2016.

 

Commercial Paper Program

 

As of March 31, 2016, we had approximately $9.3 million of commercial paper outstanding.  The weighted average interest rate on borrowings at March 31, 2016 was 1.07%.  Our commercial paper borrowings are classified as long-term debt because the borrowings are fully supported by availability under our revolving credit facility, which matures as currently structured in July 2020, more than one year from now.

 

Revolving Credit Facility

 

As of March 31, 2016, we had $80.0 million of borrowings outstanding under this facility, which matures in July 2020. The weighted average interest rate on borrowings at March 31, 2016 was 1.75%. 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 the agreement. We were in compliance with all covenants under the agreement at March 31, 2016. If we fail to perform our obligations under the covenants, the revolving credit commitment could be terminated, and any outstanding borrowings under the facility could be declared immediately due and payable.

 

Term Loan Facility

 

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

 

On September 29, 2015, Nabors Industries, Inc., our wholly owned subsidiary, entered into a new five-year unsecured term loan facility for $325.0 million, which is fully and unconditionally guaranteed by us. The term loan facility contains a mandatory prepayment of $162.5 million due in September 2018. As of March 31, 2016, we had $325.0 million of borrowings outstanding under this facility.  Borrowings under this facility will bear interest for periods of one, two, three or six months, at an annual rate equal to LIBOR, plus the applicable interest margin. The interest margin is based on our long-term unsecured credit rating for debt as in effect from time to time.

 

Note 7 Common Shares

 

During the three months ended March 31, 2015, our employees exercised vested options to acquire 0.02 million of our common shares resulting in proceeds of $0.2 million. No options were exercised during the three months ended March 31, 2016. During the three months ended March 31, 2016 and 2015, we withheld 0.2 million and 0.6 million, respectively, of our common shares with a fair value of $1.9 million and $7.1 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

 

During the three months ended March 31, 2016, we repurchased 0.3 million of our common shares in the open market for $1.7 million, all of which are held in treasury.

 

On February 19, 2016, a cash dividend of $0.06 per share was declared for shareholders of record on March 10, 2016. The dividend was paid on March 31, 2016 in the amount of $16.9 million and was charged to retained earnings in our consolidated statement of changes in equity for the three months ended March 31, 2016.

 

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Note 8 Commitments and Contingencies

 

Contingencies

 

Income Tax

 

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

 

We have received an assessment from the Mexico federal tax authority in connection with our 2007 income tax return. The assessment relates to the denial of depreciation expense deductions related to drilling rigs. Similar deductions were taken for tax years 2008 through 2010. Although Nabors and its tax advisors believe these deductions are defensible, a partial reserve has been recorded. The total amounts assessed or expected to be assessed range from $25 million to $30 million. We have not changed our position to defend this issue, as we are confident that we will prevail in court. If we ultimately do not prevail, we would be required to recognize additional tax expense for any amount in excess of the current reserve.

 

Self-Insurance

 

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

 

We self-insure for certain losses relating to workers’ compensation, employers’ liability, general liability, automobile liability and property damage. Effective April 1, 2016, some of our workers’ compensation claims, employers’ liability and marine employers’ liability claims are subject to a $3.0 million per-occurrence deductible; additionally, some of our automobile liability claims are subject to a $2.5 million deductible.  General liability claims remain subject to a $5.0 million per-occurrence deductible.

 

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

 

Litigation

 

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

 

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In 2009, the Court of Ouargla entered a judgment of approximately $13.1 million (at March 31, 2016 exchange rates) against us relating to alleged customs infractions in Algeria.  We believe we did not receive proper notice of the judicial proceedings, and that the amount of the judgment was excessive in any case. We asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court (the “Supreme Court”). In May 2012, that court reversed the lower court and remanded the case to the Ouargla Court of Appeals for treatment consistent with the Supreme Court’s ruling. In January 2013, the Ouargla Court of Appeals reinstated the judgment. We again lodged an appeal to the Supreme Court, asserting the same challenges as before. While the appeal was pending, the Hassi Messaoud customs office initiated efforts to collect the judgment prior to the Supreme Court’s decision in the case. As a result, we paid approximately $3.1 million and posted security of approximately $1.33 million to suspend those collection efforts and to enter into a formal negotiations process with the customs authority. The customs authority demanded 50% of the total fine as a final settlement and seized additional funds of approximately $3.6 million. We have recorded a reserve in the amount of the posted security. The matter was heard by the Supreme Court on February 26, 2015, and on March 26, 2015, that court set aside the judgment of the Ouargla Court of Appeals and remanded the case to that court for further proceedings. A hearing was held on October 28, 2015 in the Ouargla Court of Appeals and on November 4, 2015, the court affirmed the Supreme Court’s decision that we were not guilty. We have filed an application to the Conseil d’Etat in an effort to recover amounts previously paid by us. A portion of those amounts has been returned, and our efforts to recover the additional $4.4 million continue.

 

In March 2011, the Court of Ouargla entered a judgment of approximately $25.8 million (at March 31, 2016 exchange rates) against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals upheld the lower court’s ruling, and we appealed the matter to the Supreme Court. On September 25, 2014, the Supreme Court overturned the verdict against us, and the case was reheard by the Ouargla Court of Appeals on March 22, 2015 in light of the Supreme Court’s opinion. On March 29, 2015, the Ouargla Court of Appeals reinstated the initial judgment against us. We have appealed this decision again to the Supreme Court. While our payments were consistent with our historical operations in the country, and, we believe, those of other multinational corporations there, as well as interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $17.8 million in excess of amounts accrued.

 

In 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company.  When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3.0 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”). The lawsuit also seeks monetary damages of up to $750.0 million based on an alleged breach of contract by NGH2L and alleged tortious interference with contractual relations by Parex. We successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012. We completed the sale of Ramshorn’s Class A shares to a Parex affiliate in April 2012, which mooted ERG’s application for a temporary injunction. The defendants made numerous jurisdictional challenges and on April 30, 2015, ERG filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Accordingly, the civil actions are currently subject to the bankruptcy stay and the claims in the suit are assets of the estate. Nabors is monitoring the bankruptcy proceeding closely to determine how it will affect the pending litigation. The lawsuit is stayed, pending further court actions, including appeals of the jurisdictional decisions. ERG retains its causes of action for monetary damages, but we believe the claims are foreclosed by the terms of the agreement and are without factual or legal merit. Although we are vigorously defending the lawsuit, its ultimate outcome cannot be determined at this time.

 

On July 30, 2014, we and Red Lion, along with C&J Energy and its board of directors, were sued in a putative shareholder class action filed in the Court of Chancery of the State of Delaware (the “Court of Chancery”). The plaintiff alleges that the members of the C&J Energy board of directors breached their fiduciary duties in connection with the Merger, and that Red Lion and C&J Energy aided and abetted these alleged breaches. The plaintiff sought to enjoin the defendants from proceeding with or consummating the Merger and the C&J Energy stockholder meeting for approval of

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the Merger and, to the extent that the Merger was completed before any relief was granted, to have the Merger rescinded. On November 10, 2014, the plaintiff filed a motion for a preliminary injunction, and, on November 24, 2014, the Court of Chancery entered a bench ruling, followed by a written order on November 25, 2014, that (i) ordered certain members of the C&J Energy board of directors to solicit for a 30 day period alternative proposals to purchase C&J Energy (or a controlling stake in C&J Energy) that were superior to the Merger, and (ii) preliminarily enjoined C&J Energy from holding its stockholder meeting until it complied with the foregoing. C&J Energy complied with the order while it simultaneously pursued an expedited appeal of the Court of Chancery’s order to the Supreme Court of the State of Delaware (the “Delaware Supreme Court”). On December 19, 2014, the Delaware Supreme Court overturned the Court of Chancery’s judgment and vacated the order. This case remains pending.

 

Off-Balance Sheet Arrangements (Including Guarantees)

 

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

 

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

 

 

    

2016

    

2017

    

2018

    

Thereafter

    

Total

 

 

 

(In thousands)

 

Financial standby letters of credit and other financial surety instruments

 

$

211,006

 

31,496

 

 —

 

 —

 

$

242,502

 

 

 

Note 9 Earnings (Losses) Per Share

 

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

 

Basic earnings (losses) per share is computed utilizing the two-class method and is calculated based on the weighted-average number of common shares outstanding during the periods presented.

 

Diluted earnings (losses) per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options and unvested restricted stock.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

    

March 31,

 

 

 

    

2016

    

2015

    

 

 

 

(In thousands, except per share amounts)

 

BASIC EPS:

 

 

 

 

 

 

 

 

Net income (loss) (numerator):

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

(396,644)

 

$

124,362

 

 

Less: net (income) loss attributable to noncontrolling interest

 

 

(724)

 

 

89

 

 

Less: (earnings) losses allocated to unvested shareholders

 

 

8,199

 

 

(2,031)

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

Adjusted income (loss) from continuing operations, net of tax - basic

 

$

(389,169)

 

$

122,420

 

 

Income (loss) from discontinued operations, net of tax

 

$

(926)

 

$

(817)

 

 

Weighted-average number of shares outstanding - basic

 

 

275,851

 

 

285,361

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(1.41)

 

$

0.43

 

 

Basic from discontinued operations

 

 

 —

 

 

 —

 

 

Total Basic

 

$

(1.41)

 

$

0.43

 

 

DILUTED EPS:

 

 

 

 

 

 

 

 

Adjusted income (loss) from continuing operations, net of tax - basic

 

$

(389,169)

 

$

122,420

 

 

Add: effect of reallocating undistributed earnings of unvested shareholders

 

 

 —

 

 

5

 

 

Adjusted income (loss) from continuing operations, net of tax - diluted

 

$

(389,169)

 

$

122,425

 

 

Income (loss) from discontinued operations, net of tax

 

$

(926)

 

$

(817)

 

 

Weighted-average number of shares outstanding - basic

 

 

275,851

 

 

285,361

 

 

Add: dilutive effect of potential common shares

 

 

 —

 

 

812

 

 

Weighted-average number of shares outstanding - diluted

 

 

275,851

 

 

286,173

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

Diluted from continuing operations

 

$

(1.41)

 

$

0.43

 

 

Diluted from discontinued operations

 

 

 —

 

 

(0.01)

 

 

Total Diluted

 

$

(1.41)

 

$

0.42