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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 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 August 1, 2016 was 283,378,309, excluding 49,672,636 common shares held by our subsidiaries, or 333,050,945 in the aggregate.

 

 

 

 


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

 

Index

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015

5

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2016 and 2015

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2. 

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

35

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4. 

Controls and Procedures

47

 

 

 

PART II OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

48

 

 

 

Item 1A. 

Risk Factors

48

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 3. 

Defaults Upon Senior Securities

48

 

 

 

Item 4. 

Mine Safety Disclosures

49

 

 

 

Item 5. 

Other Information

49

 

 

 

Item 6. 

Exhibits

50

 

 

 

Signatures 

51

 

 

 

Exhibit Index 

52

 

 

2


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands, except per

 

 

 

share amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

233,752

 

$

254,530

 

Short-term investments

 

 

22,104

 

 

20,059

 

Assets held for sale

 

 

86,608

 

 

75,678

 

Accounts receivable, net

 

 

504,099

 

 

784,671

 

Inventory

 

 

151,753

 

 

153,824

 

Other current assets

 

 

192,927

 

 

187,135

 

Total current assets

 

 

1,191,243

 

 

1,475,897

 

Property, plant and equipment, net

 

 

6,765,257

 

 

7,027,802

 

Goodwill

 

 

167,275

 

 

166,659

 

Investment in unconsolidated affiliates

 

 

888

 

 

415,177

 

Other long-term assets

 

 

531,642

 

 

452,305

 

Total assets

 

$

8,656,305

 

$

9,537,840

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

175

 

$

6,508

 

Trade accounts payable

 

 

199,619

 

 

271,984

 

Accrued liabilities

 

 

650,019

 

 

686,613

 

Income taxes payable

 

 

18,362

 

 

41,394

 

Total current liabilities

 

 

868,175

 

 

1,006,499

 

Long-term debt

 

 

3,503,172

 

 

3,655,200

 

Other long-term liabilities

 

 

518,035

 

 

552,947

 

Deferred income taxes

 

 

44,225

 

 

29,326

 

Total liabilities

 

 

4,933,607

 

 

5,243,972

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares, par value $0.001 per share:

 

 

 

 

 

 

 

Authorized common shares 800,000; issued 333,054 and 330,526,  respectively

 

 

333

 

 

331

 

Capital in excess of par value

 

 

2,505,451

 

 

2,493,100

 

Accumulated other comprehensive income (loss)

 

 

(8,250)

 

 

(47,593)

 

Retained earnings

 

 

2,514,265

 

 

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

 

 

3,715,850

 

 

4,282,710

 

Noncontrolling interest

 

 

6,848

 

 

11,158

 

Total equity

 

 

3,722,698

 

 

4,293,868

 

Total liabilities and equity

 

$

8,656,305

 

$

9,537,840

 

 

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

 

 

3


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands, except per share amounts)

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

571,591

 

$

863,305

 

$

1,169,162

 

$

2,278,012

 

Earnings (losses) from unconsolidated affiliates

 

 

(54,769)

 

 

(1,116)

 

 

(221,920)

 

 

5,386

 

Investment income (loss)

 

 

270

 

 

1,181

 

 

613

 

 

2,150

 

Total revenues and other income

 

 

517,092

 

 

863,370

 

 

947,855

 

 

2,285,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs

 

 

341,279

 

 

488,522

 

 

706,302

 

 

1,408,132

 

General and administrative expenses

 

 

56,624

 

 

75,810

 

 

118,958

 

 

191,240

 

Research and engineering

 

 

8,180

 

 

10,480

 

 

16,342

 

 

22,183

 

Depreciation and amortization

 

 

218,913

 

 

218,196

 

 

434,731

 

 

499,215

 

Interest expense

 

 

45,237

 

 

44,469

 

 

90,967

 

 

91,070

 

Other, net

 

 

74,607

 

 

1,338

 

 

257,011

 

 

(54,504)

 

Total costs and other deductions

 

 

744,840

 

 

838,815

 

 

1,624,311

 

 

2,157,336

 

Income (loss) from continuing operations before income taxes

 

 

(227,748)

 

 

24,555

 

 

(676,456)

 

 

128,212

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

15,898

 

 

(14,402)

 

 

30,723

 

 

32,947

 

Deferred

 

 

(57,081)

 

 

80,847

 

 

(123,970)

 

 

12,793

 

Total income tax expense (benefit)

 

 

(41,183)

 

 

66,445

 

 

(93,247)

 

 

45,740

 

Income (loss) from continuing operations, net of tax

 

 

(186,565)

 

 

(41,890)

 

 

(583,209)

 

 

82,472

 

Income (loss) from discontinued operations, net of tax

 

 

(984)

 

 

5,025

 

 

(1,910)

 

 

4,208

 

Net income (loss)

 

 

(187,549)

 

 

(36,865)

 

 

(585,119)

 

 

86,680

 

Less: Net (income) loss attributable to noncontrolling interest

 

 

2,899

 

 

44

 

 

2,175

 

 

133

 

Net income (loss) attributable to Nabors

 

$

(184,650)

 

$

(36,821)

 

$

(582,944)

 

$

86,813

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(0.65)

 

$

(0.14)

 

$

(2.06)

 

$

0.28

 

Basic from discontinued operations

 

 

 —

 

 

0.01

 

 

(0.01)

 

 

0.02

 

Total Basic

 

$

(0.65)

 

$

(0.13)

 

$

(2.07)

 

$

0.30

 

Diluted from continuing operations

 

$

(0.65)

 

$

(0.14)

 

$

(2.06)

 

$

0.28

 

Diluted from discontinued operations

 

 

 —

 

 

0.01

 

 

(0.01)

 

 

0.02

 

Total Diluted

 

$

(0.65)

 

$

(0.13)

 

$

(2.07)

 

$

0.30

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

276,550

 

 

286,085

 

 

276,201

 

 

285,723

 

Diluted

 

 

276,550

 

 

286,085

 

 

276,201

 

 

286,701

 

 

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

 

 

4


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Net income (loss) attributable to Nabors

 

$

(184,650)

 

$

(36,821)

 

$

(582,944)

 

$

86,813

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on translation adjustment

 

 

3,458

 

 

12,273

 

 

36,820

 

 

(56,266)

 

Less: reclassification adjustment for realized loss on translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

5,365

 

Translation adjustment attributable to Nabors

 

 

3,458

 

 

12,273

 

 

36,820

 

 

(50,901)

 

Unrealized gains (losses) on marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on marketable securities

 

 

1,280

 

 

(2,153)

 

 

2,049

 

 

(2,000)

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Unrealized gains (losses) on marketable securities

 

 

1,280

 

 

(2,153)

 

 

2,049

 

 

(2,000)

 

Pension liability amortization and adjustment

 

 

294

 

 

276

 

 

468

 

 

552

 

Unrealized gains (losses) and amortization on cash flow hedges

 

 

153

 

 

153

 

 

306

 

 

306

 

Other comprehensive income (loss), before tax

 

 

5,185

 

 

10,549

 

 

39,643

 

 

(52,043)

 

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

 

 

171

 

 

161

 

 

300

 

 

323

 

Other comprehensive income (loss), net of tax

 

 

5,014

 

 

10,388

 

 

39,343

 

 

(52,366)

 

Comprehensive income (loss) attributable to Nabors

 

 

(179,636)

 

 

(26,433)

 

 

(543,601)

 

 

34,447

 

Net income (loss) attributable to noncontrolling interest

 

 

(2,899)

 

 

(44)

 

 

(2,175)

 

 

(133)

 

Translation adjustment attributable to noncontrolling interest

 

 

42

 

 

162

 

 

461

 

 

(718)

 

Comprehensive income (loss) attributable to noncontrolling interest

 

 

(2,857)

 

 

118

 

 

(1,714)

 

 

(851)

 

Comprehensive income (loss)

 

$

(182,493)

 

$

(26,315)

 

$

(545,315)

 

$

33,596

 

 

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

 

 

5


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(585,119)

 

$

86,680

 

Adjustments to net income (loss):

 

 

 

 

 

 

 

Depreciation and amortization

 

 

436,164

 

 

501,085

 

Deferred income tax expense (benefit)

 

 

(124,721)

 

 

5,039

 

Impairments and other charges

 

 

26,246

 

 

 —

 

Losses (gains) on debt buyback

 

 

(6,027)

 

 

 —

 

Losses (gains) on long-lived assets, net

 

 

7,735

 

 

2,725

 

Impairments on equity method holdings

 

 

216,242

 

 

 —

 

Losses (gains) on merger and acquisitions

 

 

 —

 

 

(54,882)

 

Share-based compensation

 

 

16,596

 

 

30,102

 

Foreign currency transaction losses (gains), net

 

 

7,018

 

 

(548)

 

Equity in losses of unconsolidated affiliates, net of dividends

 

 

221,920

 

 

3,809

 

Other

 

 

6,174

 

 

4,815

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

255,945

 

 

449,062

 

Inventory

 

 

5,222

 

 

7,763

 

Other current assets

 

 

(6,609)

 

 

148,563

 

Other long-term assets

 

 

33,234

 

 

255,845

 

Trade accounts payable and accrued liabilities

 

 

(103,864)

 

 

(633,640)

 

Income taxes payable

 

 

(27,387)

 

 

(29,212)

 

Other long-term liabilities

 

 

(42,097)

 

 

(259,802)

 

Net cash provided by operating activities

 

 

336,672

 

 

517,404

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

 

 —

 

 

(8)

 

Sales and maturities of investments

 

 

367

 

 

745

 

Cash paid for acquisition of businesses, net

 

 

 —

 

 

(57,909)

 

Investment in unconsolidated affiliates

 

 

 —

 

 

(445)

 

Capital expenditures

 

 

(193,234)

 

 

(566,672)

 

Proceeds from sales of assets and insurance claims

 

 

13,834

 

 

24,790

 

Proceeds from merger transaction

 

 

 —

 

 

660,050

 

Other

 

 

38

 

 

1,809

 

Net cash (used for) provided by investing activities

 

 

(178,995)

 

 

62,360

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

 

294

 

 

310

 

Proceeds from revolving credit facilities

 

 

260,000

 

 

 —

 

Reduction in revolving credit facilities

 

 

(260,000)

 

 

(450,000)

 

Proceeds from (payments for) issuance of common shares

 

 

39

 

 

1,198

 

Repurchase of common shares

 

 

(1,687)

 

 

 —

 

Reduction in long-term debt

 

 

(148,045)

 

 

 —

 

Dividends to shareholders

 

 

(16,922)

 

 

(34,980)

 

Proceeds from (payment for) commercial paper, net

 

 

(1,500)

 

 

(208,467)

 

Proceeds from term loan

 

 

 —

 

 

300,000

 

Payments on term loan

 

 

 —

 

 

(300,000)

 

Proceeds from (payments for) short-term borrowings

 

 

(6,333)

 

 

60,169

 

Other

 

 

(4,280)

 

 

(7,426)

 

Net cash (used for) provided by financing activities

 

 

(178,434)

 

 

(639,196)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(21)

 

 

(5,042)

 

Net increase (decrease) in cash and cash equivalents

 

 

(20,778)

 

 

(64,474)

 

Cash and cash equivalents, beginning of period

 

 

254,530

 

 

501,149

 

Cash and cash equivalents, end of period

 

$

233,752

 

$

436,675

 

 

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

 

 

6


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED 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)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

86,813

 

 

 —

 

 

(133)

 

 

86,680

 

Dividends to shareholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(34,980)

 

 

 —

 

 

 —

 

 

(34,980)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

(52,366)

 

 

 —

 

 

 —

 

 

(718)

 

 

(53,084)

 

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

 

130

 

 

 —

 

 

1,198

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,198

 

Share-based compensation

 

 —

 

 

 —

 

 

30,102

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

30,102

 

Other

 

2,317

 

 

3

 

 

(7,429)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,904)

 

 

(9,330)

 

As of June 30, 2015

 

330,643

 

$

331

 

$

2,476,132

 

$

25,156

 

$

3,625,005

 

$

(1,194,664)

 

$

7,415

 

$

4,939,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(582,944)

 

 

 —

 

 

(2,175)

 

 

(585,119)

 

Dividends to shareholders

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(33,925)

 

 

 —

 

 

 —

 

 

(33,925)

 

Repurchase of common shares

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,687)

 

 

 —

 

 

(1,687)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

39,343

 

 

 —

 

 

 —

 

 

461

 

 

39,804

 

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

 

4

 

 

 —

 

 

39

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

39

 

Share-based compensation

 

 —

 

 

 —

 

 

16,596

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16,596

 

Other

 

2,524

 

 

2

 

 

(4,284)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,596)

 

 

(6,878)

 

As of June 30, 2016

 

333,054

 

$

333

 

$

2,505,451

 

$

(8,250)

 

$

2,514,265

 

$

(1,295,949)

 

$

6,848

 

$

3,722,698

 

 

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

 

 

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Nabors Industries Ltd. and Subsidiaries

 

NOTES TO CONDENSED 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 June 30, 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

 

·

42 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.

 

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.

 

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 condensed 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 six months ended June 30, 2015 are not directly comparable to the six months ended June 30, 2016. On July 20, 2016, CJES voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

 

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 condensed 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.

 

Note 2 Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying unaudited consolidated condensed 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

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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 condensed consolidated financial statements contain all adjustments necessary to state fairly our financial position as of June 30, 2016 and the results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented herein. Interim results for the six months ended June 30, 2016 may not be indicative of results that will be realized for the full year ending December 31, 2016.

 

Principles of Consolidation

 

Our condensed 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 condensed consolidated statements of income (loss). The investments in these entities are included in investment in unconsolidated affiliates in our condensed 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:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

Raw materials

 

$

101,213

 

$

105,217

 

Work-in-progress

 

 

31,867

 

 

29,710

 

Finished goods

 

 

18,673

 

 

18,897

 

 

 

$

151,753

 

$

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 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.

 

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Based on our annual review during the second quarter of 2016, we did not record a goodwill impairment. However, a significantly prolonged period of lower natural gas or oil prices could continue to adversely affect demand for and prices of our services.  This could result in future impairment charges, particularly in our U.S. Drilling and Rig Services segments.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, 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 condensed consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall, 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 condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, relating to leases to increase transparency and comparability among companies. This standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and a lease liability. Additionally, this standard will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2018. Early application is permitted. This standard requires an entity to separate lease components from nonlease components within a contract. While the lease components would be accounted for under ASU No. 2016-02, nonlease components would be accounted for under ASU No. 2014-09. Therefore, we are evaluating ASU No. 2016-02 concurrently with the provisions of ASU No. 2014-09 and the impact this will have on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures, 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 condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, 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 condensed 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 we have significant influence over CJES, but not a controlling financial interest, we have accounted for our investment in CJES under the equity method of accounting. 

 

Our condensed consolidated statement of income (loss) for the six months ended June 30, 2015 consolidates the operating results of our Completion & Production Services business through the closing date of the Merger. As a result

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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 condensed 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. The equity in earnings from CJES, which is reflected in earnings (losses) from unconsolidated affiliates in our condensed consolidated statement of income (loss) is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Nabors' share of equity method earnings (losses)

 

$

(54,788)

 

$

(800)

 

$

(221,933)

 

$

(800)

 

 

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.

 

We record our investment in the equity of CJES in the Investment in unconsolidated affiliates line in our condensed 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 first quarter of 2016, 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 of $93.8 million, 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.

 

Throughout the second quarter of 2016, CJES issued multiple statements regarding a potential restructuring of the company in response to its failure to satisfy covenants set forth under its credit agreements. On July 8, 2016, CJES announced a restructuring plan that it agreed to with lenders under its credit agreement in which it expects to voluntarily commence a reorganization under chapter 11 of the U.S. Bankruptcy Code. Under this restructuring plan, existing common shareholders would not receive any of the new common shares of the company.  On July 20, 2016, CJES voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As a result, we determined our investment was other than temporarily impaired and recorded a charge of $39.0 million to write off substantially all of the remaining net book value of our investment. In anticipation of CJES’s bankruptcy filing, we recognized an additional $3.9 million in professional fees incurred in connection with our efforts to preserve the value of our CJES holdings. These charges are reflected in other expense (income), net in our condensed consolidated statement of income (loss) for the three and six months ended June 30, 2016. See Note 9 – Supplemental Balance Sheet, Income Statement and Cash Flow Information. Beginning in the third quarter of 2016, we expect to no longer report our investment in CJES as an equity method investment.

 

The following table presents summarized income statement (loss) information for CJES for each of the three months ended December 31, 2015 and March 31, 2016, which is reflected in earnings (losses) from unconsolidated affiliates in our condensed consolidated statement of income (loss) for the three and six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

December 31,

 

 

    

2016

 

2015

 

 

 

(In thousands)

 

Gross revenues

 

$

269,615

 

$

409,011

 

Gross margin

 

 

7,849

 

 

37,417

 

Net income (loss)

 

 

(428,412)

 

 

(321,742)

 

Nabors' share of equity method earnings (losses)

 

 

(54,788)

 

 

(167,145)

 

 

 

 

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Note 4 Fair Value Measurements

 

Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 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 and six months ended June 30, 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 $22.1 million as of June 30, 2016.

 

 

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, equity method investments, 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 fair value of our debt instruments is determined using Level 2 measurements. The carrying and fair values of these liabilities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2016

    

December 31, 2015

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair  

 

 

    

Value

    

Value

    

Value

    

Value

 

 

 

(In thousands)

 

(In thousands)

 

2.35% senior notes due September 2016

 

$

338,549

 

$

338,350

 

$

347,955

 

$

347,708

 

6.15% senior notes due February 2018

 

 

827,868

 

 

857,192

 

 

921,162

 

 

935,962

 

9.25% senior notes due January 2019

 

 

303,489

 

 

322,648

 

 

339,607

 

 

342,575

 

5.00% senior notes due September 2020

 

 

669,387

 

 

635,465

 

 

683,839

 

 

617,409

 

4.625% senior notes due September 2021

 

 

698,748

 

 

642,250

 

 

698,628

 

 

581,630

 

5.10% senior notes due September 2023

 

 

349,084

 

 

312,596

 

 

349,021

 

 

280,907

 

Term loan facility

 

 

325,000

 

 

325,000

 

 

325,000

 

 

325,000

 

Revolving credit facility

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial paper

 

 

6,500

 

 

6,500

 

 

8,000

 

 

8,000

 

Other

 

 

175

 

 

175

 

 

6,508

 

 

6,508

 

 

 

 

3,518,800

 

 

3,440,176

 

 

3,679,720

 

 

3,445,699

 

Less: Deferred financing costs

 

 

15,453

 

 

 

 

 

18,012

 

 

 

 

 

 

$

3,503,347

 

 

 

 

$

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.

 

 

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Note 5 Debt

 

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

2.35% senior notes due September 2016 (1)

 

$

338,549

 

$

347,955

 

6.15% senior notes due February 2018

 

 

827,868

 

 

921,162

 

9.25% senior notes due January 2019

 

 

303,489

 

 

339,607

 

5.00% senior notes due September 2020

 

 

669,387

 

 

683,839

 

4.625% senior notes due September 2021

 

 

698,748

 

 

698,628

 

5.10% senior notes due September 2023

 

 

349,084

 

 

349,021

 

Term loan facility

 

 

325,000

 

 

325,000

 

Revolving credit facility

 

 

 —

 

 

 —

 

Commercial paper

 

 

6,500

 

 

8,000

 

Other

 

 

175

 

 

6,508

 

 

 

 

3,518,800

 

 

3,679,720

 

Less: current portion

 

 

175

 

 

6,508

 

Less: deferred financing costs

 

 

15,453

 

 

18,012

 

 

 

$

3,503,172

 

$

3,655,200

 


(1)

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

 

During the six months ended June 30, 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 condensed consolidated statement of income (loss) for the six months ended June 30, 2016.