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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 September 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 October 31, 2016 was 283,428,125, excluding 49,672,636 common shares held by our subsidiaries, or 333,100,761 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 September 30, 2016 and December 31, 2015

 

 

 

 

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

 

 

 

 

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

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

 

 

 

 

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

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

Item 2. 

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

38 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

50 

 

 

 

Item 4. 

Controls and Procedures

50 

 

 

 

PART II OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

51 

 

 

 

Item 1A. 

Risk Factors

51 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

51 

 

 

 

Item 3. 

Defaults Upon Senior Securities

51 

 

 

 

Item 4. 

Mine Safety Disclosures

52 

 

 

 

Item 5. 

Other Information

52 

 

 

 

Item 6. 

Exhibits

53 

 

 

 

Signatures 

54 

 

 

 

Exhibit Index 

55 

 

2


 

Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands, except per

 

 

 

share amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

177,043

 

$

254,530

 

Short-term investments

 

 

23,607

 

 

20,059

 

Assets held for sale

 

 

69,436

 

 

75,678

 

Accounts receivable, net

 

 

503,966

 

 

784,671

 

Inventory

 

 

141,934

 

 

153,824

 

Other current assets

 

 

156,094

 

 

187,135

 

Total current assets

 

 

1,072,080

 

 

1,475,897

 

Property, plant and equipment, net

 

 

6,616,711

 

 

7,027,802

 

Goodwill

 

 

167,131

 

 

166,659

 

Investment in unconsolidated affiliates

 

 

889

 

 

415,177

 

Other long-term assets

 

 

567,693

 

 

452,305

 

Total assets

 

$

8,424,504

 

$

9,537,840

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

120

 

$

6,508

 

Trade accounts payable

 

 

215,627

 

 

271,984

 

Accrued liabilities

 

 

548,337

 

 

686,613

 

Income taxes payable

 

 

23,778

 

 

41,394

 

Total current liabilities

 

 

787,862

 

 

1,006,499

 

Long-term debt

 

 

3,475,978

 

 

3,655,200

 

Other long-term liabilities

 

 

551,004

 

 

552,947

 

Deferred income taxes

 

 

10,966

 

 

29,326

 

Total liabilities

 

 

4,825,810

 

 

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 333,007 and 330,526,  respectively

 

 

333

 

 

331

 

Capital in excess of par value

 

 

2,513,417

 

 

2,493,100

 

Accumulated other comprehensive income (loss)

 

 

(11,925)

 

 

(47,593)

 

Retained earnings

 

 

2,386,053

 

 

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

 

 

3,591,929

 

 

4,282,710

 

Noncontrolling interest

 

 

6,765

 

 

11,158

 

Total equity

 

 

3,598,694

 

 

4,293,868

 

Total liabilities and equity

 

$

8,424,504

 

$

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

 

Nine Months Ended

 

 

    

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands, except per share amounts)

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

519,729

 

$

847,553

 

$

1,688,891

 

$

3,125,565

 

Earnings (losses) from unconsolidated affiliates

 

 

2

 

 

(35,100)

 

 

(221,918)

 

 

(29,714)

 

Investment income (loss)

 

 

310

 

 

(22)

 

 

923

 

 

2,128

 

Total revenues and other income

 

 

520,041

 

 

812,431

 

 

1,467,896

 

 

3,097,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and other deductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs

 

 

306,436

 

 

518,174

 

 

1,012,738

 

 

1,926,306

 

General and administrative expenses

 

 

56,078

 

 

72,032

 

 

175,036

 

 

263,272

 

Research and engineering

 

 

8,476

 

 

9,716

 

 

24,818

 

 

31,899

 

Depreciation and amortization

 

 

220,713

 

 

240,107

 

 

655,444

 

 

739,322

 

Interest expense

 

 

46,836

 

 

44,448

 

 

137,803

 

 

135,518

 

Other, net

 

 

10,392

 

 

259,731

 

 

267,403

 

 

205,227

 

Total costs and other deductions

 

 

648,931

 

 

1,144,208

 

 

2,273,242

 

 

3,301,544

 

Income (loss) from continuing operations before income taxes

 

 

(128,890)

 

 

(331,777)

 

 

(805,346)

 

 

(203,565)

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

8,600

 

 

13,735

 

 

39,323

 

 

46,682

 

Deferred

 

 

(39,651)

 

 

(94,633)

 

 

(163,621)

 

 

(81,840)

 

Total income tax expense (benefit)

 

 

(31,051)

 

 

(80,898)

 

 

(124,298)

 

 

(35,158)

 

Income (loss) from continuing operations, net of tax

 

 

(97,839)

 

 

(250,879)

 

 

(681,048)

 

 

(168,407)

 

Income (loss) from discontinued operations, net of tax

 

 

(12,187)

 

 

(45,275)

 

 

(14,097)

 

 

(41,067)

 

Net income (loss)

 

 

(110,026)

 

 

(296,154)

 

 

(695,145)

 

 

(209,474)

 

Less: Net (income) loss attributable to noncontrolling interest

 

 

(1,185)

 

 

320

 

 

990

 

 

453

 

Net income (loss) attributable to Nabors

 

$

(111,211)

 

$

(295,834)

 

$

(694,155)

 

$

(209,021)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Nabors:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(99,024)

 

$

(250,559)

 

$

(680,058)

 

$

(167,954)

 

Net income (loss) from discontinued operations

 

 

(12,187)

 

 

(45,275)

 

 

(14,097)

 

 

(41,067)

 

Net income (loss) attributable to Nabors

 

$

(111,211)

 

$

(295,834)

 

$

(694,155)

 

$

(209,021)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(0.35)

 

$

(0.86)

 

$

(2.41)

 

$

(0.57)

 

Basic from discontinued operations

 

 

(0.04)

 

 

(0.16)

 

 

(0.05)

 

 

(0.15)

 

Total Basic

 

$

(0.39)

 

$

(1.02)

 

$

(2.46)

 

$

(0.72)

 

Diluted from continuing operations

 

$

(0.35)

 

$

(0.86)

 

$

(2.41)

 

$

(0.57)

 

Diluted from discontinued operations

 

 

(0.04)

 

 

(0.16)

 

 

(0.05)

 

 

(0.15)

 

Total Diluted

 

$

(0.39)

 

$

(1.02)

 

$

(2.46)

 

$

(0.72)

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

276,707

 

 

284,112

 

 

276,369

 

 

285,186

 

Diluted

 

 

276,707

 

 

284,112

 

 

276,369

 

 

285,186

 

 

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

 

Nine Months Ended

 

 

    

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Net income (loss) attributable to Nabors

 

$

(111,211)

 

$

(295,834)

 

$

(694,155)

 

$

(209,021)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment attributable to Nabors

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on translation adjustment

 

 

(8,950)

 

 

(38,859)

 

 

27,870

 

 

(95,125)

 

Less: reclassification adjustment for realized loss on translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

5,365

 

Translation adjustment attributable to Nabors

 

 

(8,950)

 

 

(38,859)

 

 

27,870

 

 

(89,760)

 

Unrealized gains (losses) on marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on marketable securities

 

 

1,502

 

 

(8,127)

 

 

3,551

 

 

(10,127)

 

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

 

 

3,495

 

 

 —

 

 

3,495

 

 

 —

 

Unrealized gains (losses) on marketable securities

 

 

4,997

 

 

(8,127)

 

 

7,046

 

 

(10,127)

 

Pension liability amortization and adjustment

 

 

297

 

 

276

 

 

765

 

 

828

 

Unrealized gains (losses) and amortization on cash flow hedges

 

 

153

 

 

153

 

 

459

 

 

459

 

Other comprehensive income (loss), before tax

 

 

(3,503)

 

 

(46,557)

 

 

36,140

 

 

(98,600)

 

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

 

 

172

 

 

162

 

 

472

 

 

485

 

Other comprehensive income (loss), net of tax

 

 

(3,675)

 

 

(46,719)

 

 

35,668

 

 

(99,085)

 

Comprehensive income (loss) attributable to Nabors

 

 

(114,886)

 

 

(342,553)

 

 

(658,487)

 

 

(308,106)

 

Net income (loss) attributable to noncontrolling interest

 

 

1,185

 

 

(320)

 

 

(990)

 

 

(453)

 

Translation adjustment attributable to noncontrolling interest

 

 

(90)

 

 

(476)

 

 

371

 

 

(1,194)

 

Comprehensive income (loss) attributable to noncontrolling interest

 

 

1,095

 

 

(796)

 

 

(619)

 

 

(1,647)

 

Comprehensive income (loss)

 

$

(113,791)

 

$

(343,349)

 

$

(659,106)

 

$

(309,753)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(695,145)

 

$

(209,474)

 

Adjustments to net income (loss):

 

 

 

 

 

 

 

Depreciation and amortization

 

 

657,541

 

 

741,919

 

Deferred income tax expense (benefit)

 

 

(168,413)

 

 

(100,751)

 

Impairments and other charges

 

 

45,809

 

 

62,838

 

Losses (gains) on debt buyback

 

 

(6,707)

 

 

 —

 

Losses (gains) on long-lived assets, net

 

 

13,608

 

 

13,202

 

Impairments on equity method holdings

 

 

216,242

 

 

180,591

 

Share-based compensation

 

 

24,070

 

 

39,024

 

Foreign currency transaction losses (gains), net

 

 

5,916

 

 

7,443

 

Gain on merger transaction, net

 

 

 —

 

 

(47,074)

 

Gain on acquisitions

 

 

 —

 

 

(2,308)

 

Equity in losses of unconsolidated affiliates, net of dividends

 

 

221,918

 

 

38,909

 

Other

 

 

6,957

 

 

7,259

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

255,455

 

 

449,847

 

Inventory

 

 

14,660

 

 

9,483

 

Other current assets

 

 

30,192

 

 

146,123

 

Other long-term assets

 

 

(377)

 

 

263,582

 

Trade accounts payable and accrued liabilities

 

 

(187,771)

 

 

(699,765)

 

Income taxes payable

 

 

(22,496)

 

 

(40,756)

 

Other long-term liabilities

 

 

(6,691)

 

 

(255,081)

 

Net cash provided by operating activities

 

 

404,768

 

 

605,011

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

 

(24)

 

 

(8)

 

Sales and maturities of investments

 

 

643

 

 

859

 

Cash paid for acquisition of businesses, net

 

 

 —

 

 

(57,909)

 

Investment in unconsolidated affiliates

 

 

 —

 

 

(445)

 

Capital expenditures

 

 

(284,950)

 

 

(744,047)

 

Proceeds from sales of assets and insurance claims

 

 

26,597

 

 

30,164

 

Proceeds from merger transaction

 

 

 —

 

 

650,050

 

Other

 

 

(19)

 

 

1,700

 

Net cash (used for) provided by investing activities

 

 

(257,753)

 

 

(119,636)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Increase (decrease) in cash overdrafts

 

 

5

 

 

363

 

Proceeds from revolving credit facilities

 

 

560,000

 

 

 —

 

Reduction in revolving credit facilities

 

 

(260,000)

 

 

(450,000)

 

Proceeds from (payments for) issuance of common shares

 

 

562

 

 

1,198

 

Repurchase of common shares

 

 

(1,687)

 

 

(44,978)

 

Reduction in long-term debt

 

 

(492,625)

 

 

 —

 

Dividends to shareholders

 

 

(33,927)

 

 

(52,489)

 

Proceeds from (payment for) commercial paper, net

 

 

15,000

 

 

(162,544)

 

Proceeds from term loan

 

 

 —

 

 

300,000

 

Payments on term loan

 

 

 —

 

 

(300,000)

 

Proceeds from (payments for) short-term borrowings

 

 

(6,388)

 

 

2,792

 

Other

 

 

(4,313)

 

 

(7,534)

 

Net cash (used for) provided by financing activities

 

 

(223,373)

 

 

(713,192)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,129)

 

 

(21,966)

 

Net increase (decrease) in cash and cash equivalents

 

 

(77,487)

 

 

(249,783)

 

Cash and cash equivalents, beginning of period

 

 

254,530

 

 

501,149

 

Cash and cash equivalents, end of period

 

$

177,043

 

$

251,366

 

 

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)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(209,021)

 

 

 —

 

 

(453)

 

 

(209,474)

 

Dividends to shareholders ($0.06 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(52,489)

 

 

 —

 

 

 —

 

 

(52,489)

 

Repurchase of treasury shares

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(78,399)

 

 

 —

 

 

(78,399)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

(99,085)

 

 

 —

 

 

 —

 

 

(1,194)

 

 

(100,279)

 

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

 

130

 

 

 —

 

 

1,198

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,198

 

Share-based compensation

 

 —

 

 

 —

 

 

39,024

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

39,024

 

Other

 

2,269

 

 

3

 

 

(7,537)

 

 

 —

 

 

 —

 

 

 —

 

 

563

 

 

(6,971)

 

As of September 30, 2015

 

330,595

 

$

331

 

$

2,484,946

 

$

(21,563)

 

$

3,311,662

 

$

(1,273,063)

 

$

9,086

 

$

4,511,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(694,155)

 

 

 —

 

 

(990)

 

 

(695,145)

 

Dividends to shareholders ($0.06 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(50,926)

 

 

 —

 

 

 —

 

 

(50,926)

 

Repurchase of common shares

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,687)

 

 

 —

 

 

(1,687)

 

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 

 —

 

 

35,668

 

 

 —

 

 

 —

 

 

371

 

 

36,039

 

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

 

57

 

 

 —

 

 

562

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

562

 

Share-based compensation

 

 —

 

 

 —

 

 

24,070

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

24,070

 

Other

 

2,424

 

 

2

 

 

(4,315)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,774)

 

 

(8,087)

 

As of September 30, 2016

 

333,007

 

$

333

 

$

2,513,417

 

$

(11,925)

 

$

2,386,053

 

$

(1,295,949)

 

$

6,765

 

$

3,598,694

 

 

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

 

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.

 

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 September 30, 2016 includes:

 

·

430 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 was accounted for as an unconsolidated affiliate as of the acquisition date through June 30, 2016. As a result of the Merger, we reported our share of the earnings (losses) of CJES through earnings (losses) from unconsolidated affiliates in our condensed consolidated statements of income (loss). 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 included 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 nine months ended September 30, 2015 are not directly comparable to the nine months ended September 30, 2016.

 

On July 20, 2016, CJES voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Based on the current reorganization plans, we no longer expect to maintain any significant influence over CJES. As a result, beginning in the third quarter of 2016, we ceased accounting for our investment in CJES as an equity method investment and now report this investment at our estimate of fair value. Due to the uncertainties around the eventual outcome of the bankruptcy process, we have reduced the carrying value of our currently held shares of CJES to zero. We continue to monitor the voluntary reorganization process and defend our interests in the bankruptcy proceedings. See further discussion in Note 3 — Investments in Unconsolidated Affiliates.

 

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 former 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.

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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 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 together 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 September 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 nine months ended September 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 have historically recorded 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. During the third quarter of 2016, CJES filed for bankruptcy, at which time we ceased accounting for our investment in CJES as an equity method investment and now report this investment at our estimate of fair value. See Note 3 — Investments in Unconsolidated Affiliates.

 

Revenue Recognition

 

We recognize revenues and costs on daywork contracts daily as the work progresses. For certain contracts, we receive lump-sum payments for the mobilization of rigs and other drilling equipment. We defer revenue related to mobilization periods and recognize the revenue over the term of the related drilling contract. At September 30, 2016 and December 31, 2015, our deferred revenues classified as other long-term liabilities were $342.5 million and $324.3 million, respectively. At September 30, 2016 and December 31, 2015, our deferred revenues classified as accrued liabilities were $269.6 million and $340.5 million, respectively.

 

Costs incurred related to a mobilization period for which a contract is secured are deferred and recognized over the term of the related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. We defer recognition of revenue on amounts received from customers for prepayment of services until those services are provided. At September 30, 2016 and December 31, 2015, our deferred expenses classified as other current assets were $57.5 million and $79.6 million, respectively. At September 30, 2016 and December 31, 2015, our deferred expenses classified as other long-term assets were $77.7 million and $68.9 million, respectively.

 

We recognize revenue for top drives and instrumentation systems we manufacture when the earnings process is complete. This generally occurs when products have been shipped, title and risk of loss have been transferred, collectability is probable, and pricing is fixed and determinable.

 

We recognize, as operating revenue, proceeds from business interruption insurance claims in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in other expense (income), net in the period that the applicable proof of loss documentation is received. Proceeds from casualty insurance settlements that are expected to be less than the

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carrying value of damaged assets are recognized at the time the loss is incurred and recorded in other expense (income), net.

 

We recognize reimbursements received for out-of-pocket expenses incurred as revenues and account for out-of-pocket expenses as direct costs.

 

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:

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(In thousands)

 

Raw materials

 

$

98,072

 

$

105,217

 

Work-in-progress

 

 

26,057

 

 

29,710

 

Finished goods

 

 

17,805

 

 

18,897

 

 

 

$

141,934

 

$

153,824

 

 

Property, Plant and Equipment

 

We review our assets for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the estimated undiscounted future cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying amount of the long-lived asset to its estimated fair value. The determination of future cash flows requires the estimation of dayrates and utilization, and such estimates can change based on market conditions, technological advances in the industry or changes in regulations governing the industry.

 

For an asset classified as held for sale, we consider the asset impaired when its carrying amount exceeds fair value less its cost to sell. Fair value is determined in the same manner as an impaired long-lived asset that is held and used.

 

Significant and unanticipated changes to the assumptions could result in future impairments. A continuation of the lower oil and natural gas prices experienced over the last two years could continue to adversely affect the demand for and prices of our services. As such, we will continue to assess our asset fleet, particularly our legacy and undersized rigs. Should we continue experiencing weakening in the market for a prolonged period for any specific rig class, this could result in future impairment charges or retirements of assets. As the determination of whether impairment charges should be recorded on our long-lived assets is subject to significant management judgment, and an impairment of these assets could result in a material charge on our condensed consolidated statements of income (loss), management believes that accounting estimates related to impairment of long-lived assets are critical.

 

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,

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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.

 

Based on our annual review during the second quarter of 2016, we did not record a goodwill impairment.  No events were noted in the current quarter that would cause us to revise our previous assessment.  However, a continuation of the lower natural gas or oil prices experienced over the last two years 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 and have not made any decision on the method of adoption.

 

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.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. 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.

 

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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.

 

On July 20, 2016, CJES voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Prior to the bankruptcy reorganization, we had significant influence over CJES, but not a controlling financial interest, and accounted for our investment in CJES under the equity method of accounting. Based on the current reorganization plans, we no longer expect to maintain any significant influence over CJES. Accordingly, beginning in the third quarter of 2016, we ceased accounting for our investment in CJES as an equity method investment and now report this investment at our estimated fair value. Due to the uncertainties around the eventual outcome of the bankruptcy process, we wrote off the remaining carrying value of our investment in CJES during the second quarter of 2016, and as such, there is no impact to our condensed consolidated financial statements during the third quarter as a result of the change in accounting.

 

Historical Treatment of the Completion & Production Services business and our investment in CJES

 

Prior to the Merger, we consolidated the results of our Completion & Production Services business into our operating results. As a result of the Merger, CJES became an unconsolidated affiliate and we ceased consolidating 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 was recorded as earnings (losses) from unconsolidated affiliates in our condensed consolidated statements of income (loss) through June 30, 2016. Our policy was 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) was as follows for the periods noted below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 30,

 

September 30,

 

 

 

2016

 

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Nabors' share of equity method earnings (losses)

 

$

 —

(1)

 

$

(35,100)

 

$

(221,933)

 

$

(35,900)

 


(1)

As we wrote off the remaining carrying value of our investment in CJES during the second quarter of 2016, we did not record our share of the earnings (losses) of CJES for the three months ended June 30, 2016 as we are not contractually responsible for losses beyond our investment.

 

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 recorded our investment in the equity of CJES in the investment in unconsolidated affiliates line in our condensed consolidated balance sheet. Our policy is to 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. As a result of this review, 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.

 

As a result of CJES’s Chapter 11 filing on July 20, 2016, 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. We also recognized an additional $3.9 million in professional fees incurred in connection with our efforts to

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preserve the value of our CJES holdings in anticipation of the bankruptcy filing. These charges are reflected in other expense (income), net in our condensed consolidated statement of income (loss) for the nine months ended September 30, 2016. See Note 9 – Supplemental Balance Sheet, Income Statement and Cash Flow Information.

 

The following table presents summarized income statement (loss) information for CJES for each of the three months ended December 31, 2015, March 31, 2016 and June 30, 2016 and for the six months ended June 30, 2015, which is reflected in earnings (losses) from unconsolidated affiliates in our condensed consolidated statement of income (loss) for the nine months ended September 30, 2016 and 2015, respectively. As we wrote off the remaining carrying value of our investment in CJES during the second quarter of 2016, we did not record our share of the earnings (losses) of CJES for the three months ended June 30, 2016 in our condensed consolidated statement of income (loss) during the three months ended September 30, 2016 as we are not contractually responsible for losses beyond our investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

March 31,

 

December 31,

 

June 30,

 

 

    

2016

 

2016

 

2015

 

2015

 

 

 

 

 

 

(In thousands)

 

 

 

 

Gross revenues

 

$

225,168

 

$

269,615

 

$

409,011

 

$

912,381

 

Gross margin

 

 

(4,603)

 

 

7,849

 

 

37,417

 

 

146,772

 

Net income (loss)

 

 

(291,116)

 

 

(428,412)

 

 

(321,742)

 

 

(95,784)

 

Nabors' share of equity method earnings (losses)

 

 

 —

 

 

(54,788)

 

 

(167,145)

 

 

(35,900)

 

 

 

 

Note 4 Fair Value Measurements

 

Our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 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 nine months ended September 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 $23.6 million as of September 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.

 

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2016

    

December 31, 2015