EXHIBIT 13
2002
PERSPECTIVE(S)
Nabors Industries Ltd. ANNUAL REPORT
(PHOTO nbr)
INVESTOR
PERSPECTIVE(S)
nbr (01)
(PICTURE OF MAN READING NEWSPAPER)
$2,158,455 I want to invest
2002 in a company
that delivers good,
$1,806,468 long-term returns
2000 in all markets.
$867,469
1998
$457,822
1996
$317,424
1994
Stockholders'
Equity
INVESTOR
PERSPECTIVE
(1)
Nabors has remained consistently profitable
in every one of the energy industry's cycles,
delivering a long-term average return on capital
that is among the industry's best.
nbr (02-03)
INVESTOR
PERSPECTIVE
(2)
Nabors has earned the trust of its investors
and the credit markets by conservatively managing the
Company's resources, investing in high-quality assets
when the timing is appropriate, and maintaining a strong
balance sheet and good access to low-cost capital.
nbr (04-05)
(PICTURE OF WORKER)
I want to invest
in a company that
keeps a close watch
on my investment.
(PICTURE OF BUILDING)
I want to invest in a
company that can propel
its earnings upward without
expending significant capital.
INVESTOR
PERSPECTIVE
(3)
A large fleet of well-equipped and strategically
located rigs with potential for significant increases
in utilization and pricing, positions the Company
to substantially improve profitability in a growing
market with little or no investment.
nbr (06-07)
INVESTOR
PERSPECTIVE
(4)
Nabors' existing presence in most of the
strategic oil and gas producing areas worldwide,
coupled with a full range of available equipment,
gives the Company competitive advantages,
whether making acquisitions or deploying rigs.
nbr (08-09)
(PICTURE OF EARTH)
I want to invest in a
company that can exploit
a world of opportunities.
(PICTURE OF MAN LOOKING AT HIS WATCH)
I want to invest in a company
that knows its customers'
time is money.
INVESTOR
PERSPECTIVE
(5)
Nabors provides the right rig with appropriate technology
and capable crews to efficiently and economically drill its
customers' wells, particularly those with a high degree of
complexity or environmental sensitivity.
nbr (10-11)
Bottom line, I want
value.
nbr (12-13)
FINANCIAL HIGHLIGHTS
{Nabors Industries Ltd. and Subsidiaries}
TWELVE
MONTHS ENDED
DECEMBER 31,
OPERATING DATA YEAR ENDED DECEMBER 31, (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS 2002 2001 2000 1999 1998 1997
AND RATIO DATA)
Operating revenues
and Earnings
from unconsoli-
dated affiliates $1,481,218 $2,228,070 $1,414,943 $670,186 $1,007,864 $1,115,032
Depreciation and
amortization 195,365 189,896 152,413 99,893 84,949 72,350
Net income 121,489 357,450 137,356 27,704 124,988 136,020
Earnings per
diluted share $ .81 $ 2.24 $ .90 $ .23 $ 1.16 $ 1.24
Weighted average
number of
diluted shares
outstanding 149,997 168,790 152,417 120,449 112,555 113,793
Capital expendi-
tures and
acquisitions
of businesses $ 582,559 $ 784,925 $ 300,637 $667,517 $ 313,464 $ 381,009
Interest
coverage ratio 6.0 : 1 13.3 : 1 11.8 : 1 5.8 : 1 19.4 : 1 18.3 : 1
---------- ---------- ---------- -------- ---------- ----------
OPERATING DATA YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS 1997 1996 1995 1994
AND RATIO DATA)
Operating revenues
and Earnings
from unconsoli-
dated affiliates $1,029,303 $719,743 $572,788 $484,268
Depreciation and
amortization 66,391 46,117 31,042 26,241
Net income 114,808 70,500 51,104 1,350
Earnings per
diluted share $ 1.08 $ .75 $ .57 $ .02
Weighted average
number of
diluted shares
outstanding 111,975 93,752 89,655 85,620
Capital expendi-
tures and
acquisitions
of businesses $ 396,668 $174,483 $144,560 $ 62,907
Interest
coverage ratio 16.1 : 1 11.7 : 1 12.8 : 1 4.9 : 1
---------- -------- -------- --------
AS OF
DECEMBER 31,
BALANCE SHEET DATA AS OF DECEMBER 31, (UNAUDITED)
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS, 2002 2001 2000 1999 1998 1997
EXCEPT RATIO DATA)
Cash and cash
equivalents
and marketable
securities $1,330,799 $ 918,637 $ 550,953 $ 111,666 $ 47,340 $ 42,135
Working capital 618,454 700,816 524,437 195,817 36,822 62,571
Property, plant
and equip-
ment, net 2,781,050 2,433,247 1,821,392 1,669,466 1,127,154 923,402
Total assets 5,063,872 4,151,915 3,136,868 2,398,003 1,465,907 1,281,306
Long-term debt 1,614,656 1,567,616 854,777 482,600 217,034 226,299
Stockholders'
equity $2,158,455 $1,857,866 $1,806,468 $1,470,074 $ 867,469 $ 767,340
Funded debt to
capital ratio:
Gross 0.49 : 1 0.46 : 1 0.32 : 1 0.25 : 1 0.26 : 1 0.27 : 1
Net 0.26 : 1 0.26 : 1 0.15 : 1 0.20 : 1 0.17 : 1 0.20 : 1
---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA AS OF SEPTEMBER 30,
- ------------------------------------------------------------------
(IN THOUSANDS, 1997 1996 1995 1994
EXCEPT RATIO DATA)
Cash and cash
equivalents
and marketable
securities $ 53,323 $115,866 $ 24,979 $ 65,498
Working capital 70,872 172,091 33,892 77,248
Property, plant
and equip-
ment, net 861,393 511,203 393,464 283,141
Total assets 1,234,232 871,274 593,272 490,273
Long-term debt 229,507 229,504 51,478 61,879
Stockholders'
equity $ 727,843 $457,822 $368,750 $317,424
Funded debt to
capital ratio:
Gross 0.27 : 1 0.35 : 1 0.20 : 1 0.21 : 1
Net 0.20 : 1 0.21 : 1 0.09 : 1 0.02 : 1
---------- -------- -------- --------
TWELVE
MONTHS ENDED
GEOGRAPHIC DISTRIBUTION DECEMBER 31,
OF RESERVES AND ASSETS YEAR ENDED DECEMBER 31, (UNAUDITED)
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000 1999 1998 1997
Operating rev-
enues and
Earnings from
unconsolidated
affiliates:
United States $1,012,503 $1,859,356 $1,115,899 $ 448,478 $ 706,046 $ 867,999
Foreign 468,715 368,714 299,044 221,708 301,818 247,033
---------- ---------- ---------- ---------- ---------- ----------
$1,481,218 $2,228,070 $1,414,943 $ 670,186 $1,007,864 $1,115,032
---------- ---------- ---------- ---------- ---------- ----------
GEOGRAPHIC DISTRIBUTION
OF RESERVES AND ASSETS YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994
Operating rev-
enues and
Earnings from
unconsolidated
affiliates:
United States $ 797,319 $503,622 $383,376 $299,278
Foreign 231,984 216,121 189,412 184,990
---------- -------- -------- --------
$1,029,303 $719,743 $572,788 $484,268
---------- -------- -------- --------
AS OF
DECEMBER 31,
AS OF DECEMBER 31, (UNAUDITED)
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000 1999 1998 1997
Total assets:
United States $3,569,657 $3,282,429 $2,649,923 $1,917,751 $1,068,193 $ 958,026
Foreign 1,494,215 869,486 486,945 480,252 397,714 323,280
---------- ---------- ---------- ---------- ---------- ----------
$5,063,872 $4,151,915 $3,136,868 $2,398,003 $1,465,907 $1,281,306
---------- ---------- ---------- ---------- ---------- ----------
AS OF SEPTEMBER 30,
- ----------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994
Total assets:
United States $ 897,453 $593,014 $348,248 $287,390
Foreign 336,779 278,260 245,024 202,883
---------- -------- -------- --------
$1,234,232 $871,274 $593,272 $490,273
---------- -------- -------- --------
nbr (14-15)
INVESTOR
PERSPECTIVE(S)
solid financial position
capital stewardship
superior returns
operating leverage
global infrastructure
premium assets
safety, efficiency and productivity
THEY ALL MATTER (HERE'S WHY)
Growth in our International operations fueled a solid year despite protracted
weakness in our North American businesses, once again demonstrating the
beneficial impact that Nabors' breadth and diversity can have on our
performance. The year also provided strategic opportunities to expand our
business in Canada and further enhance our financial structure, actions which
had a slightly negative short-term impact, but which are already significantly
enhancing the long-term outlook. While 2002 likely represented a cyclical low
point, we still managed to post the fifth best year in the Company's history at
$0.81 per share.
nbr (16-17)
Our strong international performance reflected the initial contribution of
multiple long-term, higher-margin offshore contracts, partially offset by
temporarily diminished land activity in Latin America. Nine similar contracts
were secured throughout 2002, with their full impact materializing in 2003.
Nabors' high success rate in securing such contracts stems largely from the
operating and capital cost advantages associated with our existing global
infrastructure and asset inventory. Last year's offshore reorganization was
another contributing factor in that it effectively equalized Nabors' tax burden
with that of our foreign competitors.
Our expansion in Canada is proving to be particularly well timed and will be
increasingly germane to earnings throughout the emerging up cycle. The late 2001
acquisition of Command Drilling was followed by the 2002 acquisitions of Enserco
in April and Ryan Energy Technologies in October. These actions substantially
increased our presence in this important market, an essential component in the
North American gas picture. Even though Canadian drilling was lackluster in
2002, the upswing this operation enjoyed in the fourth quarter validates the
investments we made and, along with early 2003 results, reinforces our
confidence in the long-term nature of this market.
2002
offshore,
land workover
and land drilling
rig fleet
non-U.S. affiliates
U.S. affiliates
2001
<Table>
2001 1,339
2002 1,372
2003 1,598.5
</Table>
cash flow derived from
operating activities
nbr (18-19)
Nabors took advantage of favorable credit markets to lengthen the average
term of our debt at very attractive rates. This consisted of two new debt
issues, one with a seven-year term at an interest rate of 4 7/8 percent and a
ten-year issue at 5 1/8 percent. Even though we experienced weaker
year-over-year results, we were still able to internally fund more than 90
percent of the cash portion of our expenditures for acquisitions and new capital
equipment, resulting in a financial position that is stronger and more flexible
than ever.
Commodity prices recovered throughout 2002, but did not reach the levels
necessary for our customers to substantially accelerate their drilling programs
until the fourth quarter. This perceived disconnect is due to the fact that the
threshold at which our customers' drilling prospects become viable has risen
substantially since the robust drilling environment we witnessed in 2001. This
rising threshold can be attributed to the higher costs and risks associated with
finding and developing incremental gas supplies to offset a depletion rate that
has nearly doubled over the last decade. Confidence in the long-term
sustainability of these prices was building as the year ended, but awareness of
historical gas price volatility was a factor in the deferral of higher activity
into the new year. As 2002 came to a close, higher than anticipated commodity
prices spurred a significant up tick in
Canadian activity, which has been a precursor to higher U.S. activity, concrete
signs of which are rapidly emerging.
Going forward, we firmly believe that significantly higher levels of land
drilling are necessary if the U.S. is to develop a sufficient supply of natural
gas, which is the fuel of choice to drive economic growth because of its
environmental desirability. While there are a number of potential fuel
alternatives for natural gas and petroleum, the regulatory, economic and
technical challenges associated with their development remain formidable.
Indeed, economic competition from these energy sources on a scale large enough
to challenge the preeminence of natural gas and dampen the need for continued
and expanding worldwide exploration and production efforts is at least a decade
away.
In the interim, we expect to see higher average gas prices than we have
witnessed in recent years. These will serve to reduce the components of gas
demand that are most flexible and sensitive to price, while stimulating supply
by improving the economic incentives to drill. While North America is generally
thought to be a mature basin, a sustained higher price environment makes
drilling in more remote areas and the pursuit of deeper reservoirs more viable,
and justifies the increased use of rig-intensive technologies to improve the
exploitation of existing
nbr (20-21)
(PICTURE OF MR. ISENBERG & MR. PETRELLO)
We want what our
investors want.
Eugene M. Isenberg Anthony G. Petrello
Chairman and Chief President and Chief
Executive Officer Operating Officer
fields. These trends will increase the demand for rigs, particularly those
higher specification units that can drill deeper, more complex wells and those
that are uniquely suited for specialized applications like the Canadian Arctic.
Nabors' fleet is particularly well suited to meet these challenges.
We expect Nabors to post progressively improving results over the next few
years, even if the U.S. Lower 48 component of the North American gas market does
not materialize to the extent we believe it will. Our confidence is based in
large part on our increased presence in the strategic Canadian market, the
probability of continued robust growth in our International operations and
anticipated improvements in our multitude of other businesses. It appears
increasingly likely that we may be entering a period wherein all of our
businesses will experience simultaneous growth for the first time in the
Company's history.
This bodes well from an investor perspective, providing great promise that
we will continue to deliver the kind of profitability and return on capital that
merits the trust you have shown by investing in this Company.
Sincerely,
/s/ EUGENE M. ISENBERG
Eugene M. Isenberg
Chairman and Chief Executive Officer
nbr (22-23)
Sophisticated equipment.
Experienced crews.
Anytime.
Anywhere.
land
drilling 586
rigs
nbr (24-25)
land workover rigs 951
43
platforms
top drive manufacturing
+ drilling instrumentation systems
oilfield services
nbr (26-27)
3 barge rigs
16 jack-ups
30 marine vessels
RIG FLEET STATUS
(a global perspective)
(MAP OF EARTH)
nbr (28-29)
AS OF MARCH 2003
OFFSHORE
RIG FLEET
<Table>
<Caption>
Platform Workover Platform Drilling
------------------------------------------------------ ----------------------
Greater
Less Than Than Super Self- Workover Drilling
Concentric 750 HP Sundowner(R) 750 HP Sundowner(R) MASE(R) Elevated API Barge Jack-up Jack-up Total
---------- ------- ------------ ------ ------------ ------- -------- --- ----- -------- ------- -----
International
Offshore
Australia 1 1
Brazil 1 1 2
Congo 1 1
Indonesia 1 1
India 1 1
Mediterranean 1 1 2
Malaysia 1 1
Mexico 3 1 1 1 6
Qatar 1 1
Saudi Arabia 2.5(1) 2.5
Trinidad 1 1 2
United States 1 1
---- ----- ------- ----- ----- --- ---- -- ------ ---- --- ----
Total International
Offshore 0 0 2 2 6 3 1 0 0 2 5.5 21.5
---- ----- ------- ----- ----- --- ---- -- ------ ---- --- ----
U.S. Gulf of Mexico 3 3 6 3 2 0 5 5 3 8 0 38
Alaska 1 1
California 1 1
---- ----- ------- ----- ----- --- ---- -- ------ ---- --- ----
TOTAL OFFSHORE 3 3 8 6 8 4 6 5 3 10 5.5 61.5
---- ----- ------- ----- ----- --- ---- -- ------ ---- --- ----
</Table>
(1) Includes one joint venture rig, in which Nabors owns a 50 percent interest.
WORKOVER/WELL-SERVICING RIGS
<Table>
<Caption>
Less Than 500 HP
300 HP 300 - 350 HP 400 - 450 HP and Greater Total
-------- ------------ ------------ ------------ -----
U.S. Lower 48
West Texas 8 75 67 8 158
East Texas 1 7 12 5 25
South Texas 0 11 12 7 30
Oklahoma 4 8 17 9 38
Rocky Mountain 1 5 29 8 43
California 61 73 60 5 199
Stacked 32 161 41 15 249
---- ------- ----- ------- ----
Total U.S. Lower 48 107 340 238 57 742
---- ------- ----- ------- ----
Canada 14 126 60 9 209
---- ------- ----- ------- ----
TOTAL WORKOVER / WELL-SERVICING 121 466 298 66 951
---- ------- ----- ------- ----
</Table>
LAND DRILLING FLEET
<Table>
<Caption>
Less Than 1,000 HP 1,000 - 1,399 HP
--------------------- ---------------------
SCR Other Total SCR Other Total
--- ----- ----- --- ----- -----
Alaska
North Slope 1 1 2 4 0 4
Cook Inlet 0 1 1 0 0 0
Joint Venture 0 1 1 0 0 0
--- ----- ----- --- ----- -----
Total Alaska 1 3 4 4 0 4
--- ----- ----- --- ----- -----
U.S. Lower 48
Southern Division
East Texas 4 9 13 16 7 23
Gulf Coast 0 0 0 3 2 5
South Texas 1 1 2 2 6 8
--- ----- ----- --- ----- -----
Subtotal Southern Division 5 10 15 21 15 36
--- ----- ----- --- ----- -----
Southwestern Division
California 4 4 8 2 0 2
Mid-continent 1 25 26 5 17 22
North Dakota 0 6 6 1 10 11
West Texas 0 9 9 4 4 8
Wyoming 4 9 13 3 5 8
--- ----- ----- --- ----- -----
Subtotal Southwestern Division 9 53 62 15 36 51
--- ----- ----- --- ----- -----
Stacked Inventory 6 37 43 4 21 25
--- ----- ----- --- ----- -----
Subtotal U.S. Lower 48 20 100 120 40 72 112
--- ----- ----- --- ----- -----
TOTAL U.S. LAND DRILLING FLEET 21 103 124 44 72 116
--- ----- ----- --- ----- -----
Canada 5 52 57 10 3 13
--- ----- ----- --- ----- -----
International
Latin America
Argentina 0 17 17 2 0 2
Bolivia 0 0 0 0 2 2
Colombia 0 3 3 0 1 1
Ecuador 0 5 5 0 2 2
Venezuela 0 3 3 0 0 0
--- ----- ----- --- ----- -----
Subtotal Latin America 0 28 28 2 5 7
--- ----- ----- --- ----- -----
Australia and Far East
Australia 0 4 4 0 0 0
Indonesia 0 2 2 0 0 0
--- ----- ----- --- ----- -----
Subtotal Australia and Far East 0 6 6 0 0 0
--- ----- ----- --- ----- -----
Middle East/Africa/CIS
Algeria 0 0 0 0 0 0
Kazakhstan 1 0 1 0 0 0
Oman 0 0 0 2 0 2
Saudi Arabia 0 0 0 0 0 0
Turkmenistan 0 2 2 0 0 0
U.A.E. 0 4 4 0 0 0
Yemen 0 2 2 3 1 4
--- ----- ----- --- ----- -----
Subtotal Middle East/Africa/CIS 1 8 9 5 1 6
--- ----- ----- --- ----- -----
Joint Ventures
Oman 0 1 1 0 0 0
Saudi Arabia 1 11 12 2 0 2
--- ----- ----- --- ----- -----
Subtotal Joint Ventures 1 12 13 2 0 2
--- ----- ----- --- ----- -----
TOTAL INTERNATIONAL 2 54 56 9 6 15
--- ----- ----- --- ----- -----
TOTAL GLOBAL LAND DRILLING FLEET 28 209 237 63 81 144
--- ----- ----- --- ----- -----
</Table>
nbr (30-31)
<Table>
<Caption>
1,400 - 1,999 HP Greater Than 2,000 HP Total
- --------------------------------------- --------------------------------------- ---------------------------------------
SCR Other Total SCR Other Total SCR Other Total
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
0 0 0 9 0 9 14 1 15
1 0 1 1 0 1 2 1 3
0 0 0 0 0 0 0 1 1
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1 0 1 10 0 10 16 3 19
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
13 2 15 6 0 6 39 18 57
4 2 6 17 2 19 24 6 30
14 8 22 10 1 11 27 16 43
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
31 12 43 33 3 36 90 40 130
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5 0 5 7 0 7 18 4 22
7 4 11 9 3 12 22 49 71
0 1 1 0 0 0 1 17 18
1 2 3 4 0 4 9 15 24
1 0 1 2 0 2 10 14 24
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
14 7 21 22 3 25 60 99 159
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
8 12 20 3 3 6 21 73 94
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
53 31 84 58 9 67 171 212 383
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
54 31 85 68 9 77 187 215 402
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
6 0 6 5 0 5 26 55 81
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
0 0 0 0 0 0 2 17 19
1 0 1 0 0 0 1 2 3
4 0 4 3 0 3 7 4 11
0 1 1 1 0 1 1 8 9
0 0 0 1 0 1 1 3 4
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5 1 6 5 0 5 12 34 46
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
0 0 0 0 0 0 0 4 4
0 0 0 0 0 0 0 2 2
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
0 0 0 0 0 0 0 6 6
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
2 0 2 3 0 3 5 0 5
1 0 1 1 0 1 3 0 3
0 0 0 0 0 0 2 0 2
2 0 2 5 0 5 7 0 7
0 0 0 0 0 0 0 2 2
1 0 1 0 0 0 1 4 5
2 0 2 0 0 0 5 3 8
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
8 0 8 9 0 9 23 9 32
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
0 0 0 0 0 0 0 1 1
3 0 3 1 0 1 7 11 18
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
3 0 3 1 0 1 7 12 19
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
16 1 17 15 0 15 42 61 103
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
76 32 108 88 9 97 255 331 586
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</Table>
(PICTURES OF RIGS)
units (1-2) U.S. LAND DRILLING
ALASKA DRILLING - NABORS ALASKA POSTED A RELATIVELY GOOD YEAR IN 2002 PRIMARILY
ON THE STRENGTH OF SEVERAL EXPLORATION WELLS DRILLED EARLY IN THE YEAR, SOME
WITH RECENTLY UPGRADED RIGS.
This unit was quite busy with a number of strategic projects with great
potential, including multiple remote exploration projects on the North Slope and
the first of what promises to be several technically challenging extended reach
wells from a shore base to a new discovery four miles offshore in the Cook
Inlet.
Going forward, Nabors Alaska is preparing for a slower year in development
drilling activity on the North Slope, although several exploration projects
could improve results, including a three-well program for a new independent in
the Beaufort Sea. A number of new multi-year development drilling projects could
materialize pending further confirmation of commercial viability, including a
new approach to pressure maintenance at Prudhoe Bay and the development of
shallow, heavy oil sands utilizing new technologies. An additional bright spot
is the high level of inquiries we are receiving regarding projects in the Cook
Inlet.
Safety will continue to draw special attention in 2003 as the company takes
steps to improve on one of the best records in the industry. The company's Rig
Pass program, which focuses on a comprehensive approach to health, safety and
environmental issues, will be expanded and additional training will be conducted
in conjunction with the highly successful DuPont STOP program.
nbr (32-33)
(PICTURES OF RIGS)
U.S. LOWER 48 DRILLING - RESULTS FOR THIS UNIT WERE RELATIVELY FLAT THROUGHOUT
2002 FOLLOWING THE PRECIPITOUS DECLINE IN LATE 2001 AS A SECOND-QUARTER RISE IN
COMMODITY PRICES DID NOT STIMULATE A COMMENSURATE INCREASE IN DRILLING ACTIVITY.
NDUSA responded by further curtailing overhead and capital expenditures while
diversifying its marketing efforts to target smaller independents. We also
secured a number of rigs on alliance contracts, which sustained continuity of
operations, facilitated equipment maintenance and allowed us to retain the most
skilled and experienced part of our workforce for the inevitable upturn. The
company absorbed Peak USA, the oilfield hauling and rig moving operation, to
further reduce administrative costs.
NDUSA had its best year ever from a safety standpoint, dropping its total
recordable rate from 3.37 in 2001 to 2.23 in 2002, the result of continued
investment in training. This will pay off in the continued welfare of our
workforce, with additional benefits of lower insurance premiums and improved
marketability.
Going forward, NDUSA expects a much improved year as sustained higher customer
cash flows translate into increased levels of spending. Nabors recognizes the
challenges our customers face in terms of the higher costs and risks associated
with replacing gas production. To better assist in this effort, Nabors has
undertaken a number of initiatives to increase efficiency and productivity. Most
significant has been a program to reduce rig moving time through better planning
and optimal unitization of rig components, which translates into fewer loads and
better customer economics. We are also selectively implementing new and existing
technologies on our higher specification land rigs that were heretofore
unavailable or uneconomical.
(PICTURES OF RIG AND WORKER)
unit (3) CANADA
NABORS CANADA EXPERIENCED A WEAK YEAR IN 2002 AS THE EFFECTS OF CYCLICALLY LOW
CANADIAN GAS PRICES WERE COMPOUNDED BY SEVERE AND PROTRACTED SEASONAL
CONSTRAINTS.
This situation was exacerbated by further temporary reductions in customer
capital spending pending the completion of two high profile operator mergers and
related restructuring and property disposal.
This unit completed the acquisition of Enserco Energy Services in April.
Combined with the Command Drilling acquisition in late 2001, this increased
the number of drilling rigs in this unit from 35 to 81 while adding
209 well-servicing rigs. The Enserco acquisition also served to add multiple
auxiliary production service capabilities, giving this unit a full suite of post
completion services. The Command and Enserco acquisitions dovetailed perfectly
with Nabors' existing rig manufacturing capabilities, creating even more
innovative rig design and construction expertise which was further enhanced with
the acquisition of a small electrical company with proprietary A/C drive
technology. The result of this melding of expertise was evident in the
construction of three new state-of-the-art rigs in the last twelve months, two
of which have A/C drives.
2003 is off to a very good start, with indications of a higher than normal level
of activity continuing throughout the spring and probably throughout the
remainder of the year. With activity peaking, field supervisory and technical
staffing is becoming critical, an issue Nabors has addressed by temporarily
augmenting its workforce from other Nabors subsidiaries.
nbr (34-35)
(PICTURES OF RIGS)
unit (4) INTERNATIONAL
NABORS DRILLING INTERNATIONAL HAD AN EXCELLENT YEAR IN 2002 AS WE REALIZED A
FULL YEAR'S CONTRIBUTION FROM A NUMBER OF RIGS THAT DEPLOYED IN THE SECOND HALF
OF 2001.
These included five rigs in Algeria, which set several drilling records during
the year, and two jack-ups offshore Saudi Arabia. We also received incremental
contributions from higher utilization of our existing land fleet in Saudi Arabia
and Yemen. This included four additional rigs which began working in Saudi
Arabia, bringing the number of active rigs in that country to seventeen, the
highest ever for this unit. The year was further bolstered by three significant
offshore contracts, two platform rigs that were deployed in The Congo and
Trinidad early in the year and a jack-up which, along with five of Nabors'
standard supply vessels, commenced offshore Mexico in September. The full impact
of all of these developments was partially offset by reduced land activity in
Latin America, although Colombia and Ecuador appear to be coming back as we
enter 2003. Argentina continued to be productive in spite of the currency
problems that plague that country.
Nabors Drilling International expanded its competency training program in all
operating areas. This program is aimed at training local nationals to staff
positions at every level. It has resulted in less turnover, improved security
and reduced travel expenses, and has proven to be more efficient and more
economical for our customers.
The outlook for this unit in 2003 is excellent, with a full year's contribution
expected from last year's deployments, substantially aided by incremental
contributions from the numerous new contracts that will begin this year. Among
these are five long-term platform contracts offshore Mexico, other platform rigs
offshore Indonesia and India, and a jack-up in Trinidad.
The optimistic outlook for this unit is further enhanced by a continuing high
level of bids for both onshore and offshore projects in Latin America, the Far
East and Russia. We also expect to see results from our continuing emphasis on
safety and from our benchmarking program, which measures relative performance
among our various rigs, creating an environment for continuous improvement.
(PICTURES OF OFFSHORE PLATFORM RIG AND WORKER)
unit (5) U.S. OFFSHORE
NABORS OFFSHORE CORPORATION'S PERFORMANCE IN 2002 WAS DOWN FROM THE PREVIOUS
YEAR, TRACKING THE GENERAL MALAISE IN THE NORTH AMERICAN GAS MARKET.
All asset classes of this unit were affected, with the only notable exception
being rigs deployed on deep water projects. Jack-up rig utilization and dayrates
were substantially lower than during the prior year, mitigated somewhat by a
flurry of activity in the second and fourth quarters, the former linked to
rising commodity prices and the latter to year-end budgetary spending by
customers. We also saw a reduced level of activity in platform drilling and
barge utilization. Although the U.S. Gulf of Mexico offshore market remains
weak, the international offshore market is experiencing robust growth in
activity for our type of rigs. This provided the opportunity to sell a number of
our best assets and to reassign several key technical, project management and
field supervisory personnel to sister company Nabors Drilling International,
allowing that entity to capitalize on the opportunities available worldwide.
Nabors Offshore's continued emphasis on safety paid off in 2002. The OSHA
recordable rate for Gulf of Mexico operations dropped from 3.76 to 2.85,
primarily the result of increased training in a number of different areas.
This unit expects to see improvement in 2003, primarily on the strength of
deepwater development projects on SPAR and tension leg platforms. Nabors enjoys
a disproportionate participation in this market largely because of its
innovative and proprietary MODS (Modular Offshore Dynamic Series) platform rig
design. Four existing rigs have been modified to this design and are already on
contract, enhancing the outlook for this unit for the next several years. A
newly constructed MODS rig will deploy late this year and another rig is
currently being modified to the MODS design and should commence early next year.
Sustained commodity prices should further improve the outlook for our jack-up
and platform workover and drilling rigs, although the timing of this still lacks
clarity.
nbr (36-37)
(PICTURES OF TRUCK AND EQUIPMENT)
unit (6) U.S. LAND WELL-SERVICING
THE WEAK MARKET ENVIRONMENT IN 2002 FOR POOL WELL SERVICES' MORE PROFITABLE
24-HOUR COMPLETION, WORKOVER AND STIMULATION SERVICES WAS PARTIALLY MITIGATED BY
OUR STRENGTH IN THE REMEDIAL OILWELL-SERVICING MARKET, PRODUCING A BETTER YEAR
THAN COULD REASONABLY BE EXPECTED UNDER THE CIRCUMSTANCES.
This unit also improved on its industry best safety record, lowering OSHA
recordables from 3.69 to 2.5. In the process, Pool was presented the Gold Safety
Award by the Association of Energy Service Companies for the sixth year in a
row.
Pool expects improved performance in 2003 as higher than expected customer cash
flows translate into increased activity. We are already seeing a first quarter
improvement in well servicing, and greater volume in the type of inquiries that
usually act as a prelude to an increase in our more lucrative workover and
completion businesses. Increased activity in the first quarter has already
worked to diminish the pressure on pricing and reverse the trend toward more
onerous contract terms. Collectively, these actions will have a leveraging
effect on our profitability, given the high fixed-cost nature of this business
and the higher margins associated with 24-hour rig activity.
(PICTURES OF VESSELS AND WORKERS)
units (7-11) MANUFACTURING & LOGISTICS
MARINE TRANSPORTATION
SUSTAINED UTILIZATION AND PRICING IN ITS SUPER 200 CLASS VESSELS PROVIDED THE
IMPETUS FOR A SOLID YEAR IN 2002.
These dynamically positioned boats continued to demonstrate the value of their
unique design, which allows them to work more efficiently in support of
deepwater drilling. The innovative capabilities of these new-generation supply
vessels was demonstrated with the transport of one of our sister company's
Sundowner(TM) platform workover rigs, complete with quarters, to an Eastern
Mediterranean Sea location in a single load, a feat that would normally require
three standard 180-foot supply vessels. The year was further highlighted by the
customer sponsored upgrade of our well stimulation vessel, which augers well for
the long-term utilization and returns for this special marine transportation
service vessel.
The decline in U.S. Gulf of Mexico utilization of our standard supply vessels
that began in mid-2001 showed signs of recovery in the third quarter of 2002
with higher rig activity in this strategic area. This was bolstered by a busy
fourth quarter as we assisted in the inspection, repair and maintenance of
offshore rigs, equipment and facilities following two back-to-back hurricanes.
Going forward, this unit expects to see an upturn in activity in the Gulf of
Mexico in 2003. We are also intensifying our marketing efforts internationally,
capitalizing on the synergies we enjoy with sister company Nabors Drilling
International. This was evident in the recent five-boat contract which began in
Mexico and the aforementioned single-boat workover rig system which deployed to
the Eastern Mediterranean. We will continue to investigate foreign applications
where the packaging of rigs and supply vessels gives us a competitive advantage.
nbr (38-39)
(PICTURES OF EQUIPMENT)
CANRIG DRILLING TECHNOLOGY, LTD.
Canrig posted a solidly profitable year in 2002 in spite of the weak market
conditions in North America. This unit's prior year focus on non-Nabors accounts
was rewarded with a significant improvement in contributions from this important
business segment, highlighted by the sale of 15 top drives to Russian customers.
The year was further augmented by the continued increase in the level of parts
sales and scheduled top drive overhauls. Canrig rolled out two ancillary
products for its top drive line, a Directional Steering Control System and a
Washpipe Installation and Removal Tool, both of which will become increasingly
important as optional features to new units and as retrofits to existing models.
Going forward, Canrig expects to introduce even more products to augment its
profitability, including remote diagnostic capabilities, which will be available
to customers as a monthly service. The company has also begun development of a
175-ton top drive for small land rigs and should have a prototype in the second
quarter. Non-Nabors customers will continue to be targeted in order to expand a
growing backlog of orders.
EPOCH WELL SERVICES, INC.
Results were down in 2002, but Epoch capitalized on available opportunities,
acquiring a complementary company in Bengal Development in April, and
integrating a portion of Ryan Energy Technologies after its acquisition by
Nabors in October. Both fill in gaps in the Epoch product lines, both allow the
company to participate more aggressively in the data gathering component of the
directional drilling market and both represent a meaningful enhancement of
Nabors' wellsite capabilities. The company also introduced instrumentation
systems into Mexico, benefiting from the relationships previously established by
other Nabors affiliates.
Going forward, we expect sales to be flat over the short term, but improve with
the anticipated recovery in the North American drilling market. We further hope
to improve our market share through the introduction of an upgrade to our
instrumentation software, incorporating Ryan's Datawise product, and an enhanced
version of our reporting software. We will also continue to focus on improving
our excellent safety record, which has seen the number of OSHA recordables
consistently trend downward over the last few years.
(PICTURES OF TRUCK AND EQUIPMENT)
RYAN ENERGY TECHNOLOGIES
Results for Ryan Energy Technologies were down in 2002 as the directional
drilling, measurement while drilling and instrumentation product lines all
tracked the reduced levels of North American drilling activity. Nabors' late
year acquisition of Ryan positioned this unit for future growth, removing
previous capital constraints, providing a much broader distribution platform and
facilitating access to new markets.
Going forward, this unit will continue to invest in new and upgraded technology,
the benefits of which will be evident to both Nabors' and Ryan's customers in
the near term. Foremost of these is the integration of Ryan's Tru Vu data
gathering system with sister company Epoch's Rigwatch system, combining the best
features of both into an instrumentation platform that is among the best in the
industry. Customer acceptance of this product in the first quarter of 2003 bodes
well for improved performance in the coming year.
PEAK OILFIELD SERVICES, OUR ALASKAN CONSTRUCTION AND LOGISTICS JOINT VENTURE,
POSTED A SOLID YEAR IN 2002, DESPITE WEAK DEVELOPMENT ACTIVITY ON THE NORTH
SLOPE.
A robust, early-year exploration effort resulted in significant ice road
construction, most of it in support of drilling activity in the National
Petroleum Reserve. The renewal of the tank cleaning contract at Alyeska's Valdez
terminal also contributed to results, and continued focus on safety paid off
with a significant reduction in worker's compensation per-incident cost.
We expect 2003 to be flat to down slightly, as another strong year in support of
exploration is offset by lower activity at Prudhoe Bay. Reduction in development
activity and less content in a major Prudhoe Bay contract should result in
significantly less routine trucking and maintenance work. The Alyeska contract
will continue to contribute for at least two more years and further improvements
in our results should materialize if exploration efforts by smaller independents
are successful.
nbr (40-41)
2002
FINANCIAL REVIEW
42 Selected Financial Data
44 Management's Discussion and Analysis
of Financial Condition and Results of Operations
66 Report of Independent Accountants
67 Consolidated Balance Sheets
68 Consolidated Statements of Income
69 Consolidated Statements of Cash Flows
70 Consolidated Statements of Changes in Stockholders' Equity
72 Notes to Consolidated Financial Statements
Selected Financial Data
{Nabors Industries Ltd. and Subsidiaries}
TWELVE
MONTHS ENDED
DECEMBER 31,
OPERATING DATA(1)(2)(3) YEAR ENDED DECEMBER 31, (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, 2002 2001 2000 1999 1998 1997(4)
EXCEPT PER SHARE AMOUNTS
AND RATIO DATA)
Revenues and
other income:
Operating revenues $1,466,443 $2,201,736 $1,388,660 $666,429 $ 1,008,169 $1,114,758
Earnings (losses)
from unconsoli-
dated affiliates 14,775 26,334 26,283 3,757 (305) 274
Interest income 34,086 53,973 20,581 8,756 1,480 1,936
Other income, net 3,708 28,650 27,157 8,860 31,626 28,502
---------- ---------- ---------- -------- ----------- ----------
Total revenues and
other income 1,519,012 2,310,693 1,462,681 687,802 1,040,970 1,145,470
---------- ---------- ---------- -------- ----------- ----------
Costs and
other deductions:
Direct costs 973,910 1,366,967 938,651 446,597 663,551 774,856
General and
administrative
expenses 141,895 135,496 106,504 65,288 77,026 72,478
Depreciation and
amortization 195,365 189,896 152,413 99,893 84,949 72,350
Interest expense 67,068 60,722 35,370 30,395 15,463 16,323
Merger expenses -- -- -- -- -- --
Provision for reduction
in book value
of assets -- -- -- -- -- --
---------- ---------- ---------- -------- ----------- ----------
Total costs and
other deductions 1,378,238 1,753,081 1,232,938 642,173 840,989 936,007
---------- ---------- ---------- -------- ----------- ----------
Income before
income taxes 140,774 557,612 229,743 45,629 199,981 209,463
Income tax expense 19,285 200,162 92,387 17,925 74,993 73,443
---------- ---------- ---------- -------- ----------- ----------
Net income $ 121,489 $ 357,450 $ 137,356 $ 27,704 $ 124,988 $ 136,020
---------- ---------- ---------- -------- ----------- ----------
Earnings per
diluted share $ .81 $ 2.24 $ .90 $ .23 $ 1.16 $ 1.24
Weighted average
number of diluted
shares outstanding 149,997 168,790 152,417 120,449 112,555 113,793
Capital expenditures
and acquisitions
of businesses(6) $ 582,559 $ 784,925 $ 300,637 $667,517 $ 313,464 $ 381,009
Interest coverage ratio(7) 6.0 : 1 13.3 : 1 11.8 : 1 5.8 : 1 19.4 : 1 18.3 : 1
---------- ---------- ---------- -------- ----------- ----------
THREE
MONTHS
ENDED
OPERATING DATA(1)(2)(3) DECEMBER 31, YEAR ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------------
(IN THOUSANDS, 1997 1997 1996 1995 1994
EXCEPT PER SHARE AMOUNTS
AND RATIO DATA)
Revenues and
other income:
Operating revenues $ 302,831 $1,028,853 $719,604 $572,788 $484,268
Earnings (losses)
from unconsoli-
dated affiliates (25) 450 139 -- --
Interest income 93 3,422 2,695 1,694 2,459
Other income, net 2,303 40,747 13,690 5,990 2,718
--------- ---------- -------- -------- --------
Total revenues and
other income 305,202 1,073,472 736,128 580,472 489,445
--------- ---------- -------- -------- --------
Costs and
other deductions:
Direct costs 199,714 737,780 539,665 434,097 369,677
General and
administrative
expenses 18,580 68,616 56,862 49,094 47,770
Depreciation and
amortization 20,313 66,391 46,117 31,042 26,241
Interest expense 3,979 16,520 11,884 7,611 8,237
Merger expenses -- 1,755 -- -- 1,595
Provision for reduction
in book value
of assets -- -- -- -- 29,686(5)
--------- ---------- -------- -------- --------
Total costs and
other deductions 242,586 891,062 654,528 521,844 483,206
--------- ---------- -------- -------- --------
Income before
income taxes 62,616 182,410 81,600 58,628 6,239
Income tax expense 21,289 67,602 11,100 7,524 4,889
--------- ---------- -------- -------- --------
Net income $ 41,327 $ 114,808 $ 70,500 $ 51,104 $ 1,350
--------- ---------- -------- -------- --------
Earnings per
diluted share $ .37 $ 1.08 $ .75 $ .57 $ .02
Weighted average
number of diluted
shares outstanding 116,427 111,975 93,752 89,655 85,620
Capital expenditures
and acquisitions
of businesses(6) $ 84,038 $ 396,668 $174,483 $144,560 $ 62,907
Interest coverage ratio(7) 21.8 : 1 16.1 : 1 11.7 : 1 12.8 : 1 4.9 : 1
--------- ---------- -------- -------- --------
42
BALANCE SHEET DATA(1)(2) AS OF DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT RATIO DATA) 2002 2001 2000 1999 1998 1997
Cash and cash equivalents
and marketable securities $1,330,799 $ 918,637 $ 550,953 $ 111,666 $ 47,340 $ 42,135
Working capital 618,454 700,816 524,437 195,817 36,822 62,571
Property, plant and
equipment, net 2,781,050 2,433,247 1,821,392 1,669,466 1,127,154 923,402
Total assets 5,063,872 4,151,915 3,136,868 2,398,003 1,465,907 1,281,306
Long-term debt 1,614,656 1,567,616 854,777 482,600 217,034 226,299
Stockholders' equity $2,158,455 $1,857,866 $1,806,468 $1,470,074 $ 867,469 $ 767,340
Funded debt to capital ratio:
Gross(8) 0.49 : 1 0.46 : 1 0.32 : 1 0.25 : 1 0.26 : 1 0.27 : 1
Net(9) 0.26 : 1 0.26 : 1 0.15 : 1 0.20 : 1 0.17 : 1 0.20 : 1
---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA(1)(2) AS OF SEPTEMBER 30,
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT RATIO DATA) 1997 1996 1995 1994
Cash and cash equivalents
and marketable securities $ 53,323 $115,866 $ 24,979 $ 65,498
Working capital 70,872 172,091 33,892 77,248
Property, plant and
equipment, net 861,393 511,203 393,464 283,141
Total assets 1,234,232 871,274 593,272 490,273
Long-term debt 229,507 229,504 51,478 61,879
Stockholders' equity $ 727,843 $457,822 $368,750 $317,424
Funded debt to capital ratio:
Gross(8) 0.27 : 1 0.35 : 1 0.20 : 1 0.21 : 1
Net(9) 0.20 : 1 0.21 : 1 0.09 : 1 0.02 : 1
---------- -------- -------- --------
(1) Our acquisitions' results of operations and financial position have been
included beginning on the respective dates of acquisition and include Ryan
Energy Technologies, Inc. (October 2002), Enserco Energy Service Company
Inc. (April 2002), Command Drilling Corporation (November 2001), Pool
Energy Services Co. (November 1999), Bayard Drilling Technologies, Inc.
(April 1999), New Prospect Drilling Company (May 1998), Can-Tex Drilling &
Exploration, Ltd. land rigs (May 1998), Veco Drilling, Inc. land rigs
(November 1997), Diamond L Drilling & Production land rigs (November
1997), Cleveland Drilling Company, Inc. (August 1997), Chesley Pruet
Drilling Company (April 1997), Adcor-Nicklos Drilling Company (January
1997, retroactive to October 1996), Noble Drilling Corporation land rigs
(December 1996), Exeter Drilling Company and its subsidiary, J.W. Gibson
Well Services Company (April 1996) and Delta Drilling Company (January
1995). The results of operations and financial position for fiscal year
1994 have been retroactively restated to include the results of operations
and financial position of Sundowner Offshore Services, Inc., which was
acquired by us during October 1994. Our results of operations also reflect
the disposition of our UK North Sea (November 1996) and J.W. Gibson
(January 1998) operations.
(2) We changed our fiscal year end from September 30 to December 31, effective
for the fiscal year beginning January 1, 1998. The three-month transition
period from October 1, 1997 through December 31, 1997 preceded the start
of the new fiscal year.
(3) We adopted Emerging Issues Task Force No. 01-14, "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred" in the second quarter of 2002 and accordingly have reclassified
reimbursements received from our customers from direct costs to revenues
for the each of the five years in the period ended December 31, 2002. We
have not reclassified reimbursements received for any period prior to the
year ending December 31, 1998 as these amounts are not material to our
overall results of operations and it is not practicable to provide this
information for those years.
(4) Represents unaudited recast financial data for the twelve months ended
December 31, 1997. This data was derived by adjusting the audited results
for the year ended September 30, 1997 to exclude the unaudited results for
the quarter ended December 31, 1996 and to include the audited results for
the three months ended December 31, 1997.
(5) Represents reduction in carrying value of our Yemen logistical assets and
inventory, as well as facility closure costs in certain international
areas, including Yemen, totaling $.35 per diluted share.
(6) Represents capital expenditures and the portion of the purchase price of
acquisitions allocated to fixed assets based on their fair market value.
(7) The interest coverage ratio is computed by calculating the sum of income
before income taxes, interest expense, depreciation and amortization
expense, and provision for reduction in book value of assets and then
dividing by interest expense. This ratio is a method for calculating the
amount of cash flows available to cover interest expense.
(8) The gross funded debt to capital ratio is calculated by dividing funded
debt by funded debt plus capital. Funded debt is defined as the sum of (1)
short-term borrowings, (2) current portion of long-term debt and (3)
long-term debt. Capital is defined as stockholders' equity.
(9) The net funded debt to capital ratio is calculated by dividing net funded
debt by net funded debt plus capital. Net funded debt is defined as the
sum of (1) short-term borrowings, (2) current portion of long-term debt
and (3) long-term debt and then subtracting cash and cash equivalents and
marketable securities. Capital is defined as stockholders' equity.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
NATURE OF OPERATIONS
Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East and Africa. Nabors also is one of the largest land
well-servicing and workover contractors in the United States and Canada. We own
over 900 land workover and well-servicing rigs in the United States, primarily
in the southwestern and western United States, and over 200 land workover and
well-servicing rigs in Canada. Nabors is a leading provider of offshore platform
workover and drilling rigs, and owns 43 platform, 16 jack-up and three barge
rigs in the Gulf of Mexico and international markets. These rigs provide
well-servicing, workover and drilling services. We have a 50% ownership interest
in a joint venture in Saudi Arabia, which owns 18 rigs.
To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including oilfield management,
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. Our land
transportation and hauling fleet includes 240 rig and oilfield equipment hauling
tractor-trailers and a number of cranes, loaders and light-duty vehicles. We
maintain over 290 fluid hauling trucks, approximately 700 fluid storage tanks,
eight saltwater disposal wells and other auxiliary equipment used in domestic
drilling, workover and well-servicing operations. In addition, we own a fleet of
30 marine transportation and supply vessels, primarily in the Gulf of Mexico,
which provide transportation of drilling materials, supplies and crews for
offshore operations. We manufacture and lease or sell top drives for a broad
range of drilling applications, directional drilling systems, rig
instrumentation and data collection equipment and rig reporting software.
Our overall business is conducted through two major segments: (1) Contract
Drilling and (2) Manufacturing and Logistics. Our Contract Drilling segment
includes our drilling, workover and well-servicing operations, on land and
offshore, and our Manufacturing and Logistics segment includes our marine
transportation and supply services, top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and logistics
operations.
A discussion of market trends and outlook for our industry and our results
of operations for the last three years are included below. This discussion
should be read in conjunction with our consolidated financial statements and
notes thereto. Our discussion includes various forward-looking statements about
our markets, demand for our products and services and our future results. These
statements are "forward-looking statements" within the meaning of the safe
harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934. These forward-looking statements are not
historical facts, but instead are based upon our analysis of currently available
competitive, financial and economic data and our operating plans. They are
inherently uncertain and investors must recognize that events and actual results
could turn out to be significantly different from our expectations. Important
factors, among others, that could cause our results to differ, possibly
materially, from those indicated in the forward-looking statements are discussed
below under "Forward-Looking Statements."
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
MARKET TRENDS AND OUTLOOK
To a large degree, Nabors' businesses depend on the level of spending by
oil and gas companies for exploration, development and production activities. A
sustained increase or decrease in the price of natural gas or oil could have a
material impact on exploration, development and production activities, and could
also materially affect our financial position, results of operations and cash
flows.
44
The oil and gas industry has been subject to extreme volatility in recent
years because of significant changes in the demand, supply and pricing of
natural gas and oil. In 2000 the price of natural gas and oil improved
substantially. The primary contributing factors associated with these price
increases were the convergence of supply and demand for natural gas and oil
brought about by secular global economic growth and the increasing difficulty,
expense and long lead times involved in adding to supply. Rising demand and
difficulty in finding and developing additional supply brought the U.S. land rig
market to the point where the demand for rigs far exceeded supply. The same
situation existed, to a lesser extent, in Canada and U.S. Offshore markets. This
high-demand, low-supply environment had a positive impact on our industry.
The tightening of the supply-demand balance continued during the first
half of 2001 and along with a colder-than-normal winter provided a catalyst for
a spike in natural gas demand, which led to a rapid escalation in natural gas
prices. While high natural gas prices fueled a sharp increase in drilling
utilization and margins, they soon had an adverse effect on many elements of
industrial demand, particularly petrochemicals, and that portion of electric
generation that could utilize more economical fuels. Demand was also impacted by
a general contraction in the nation's economy beginning in the second half of
2001. These factors led to downward pressure on natural gas prices, leading to a
sharp reduction in drilling activity.
Natural gas and oil prices began to recover in the first quarter of 2002
as a result of falling natural gas production and low storage levels. However,
a recovery in North American drilling activity did not materialize until early
2003. This time lag in spending was attributable to the need for significantly
higher natural gas prices to offset the increased cost and risk of finding and
developing incremental gas production along with confidence that prices will
sustain at such levels. Sufficiently higher prices did not materialize until
the fourth quarter of 2002 and there is generally a two to three quarter lead
time in implementing increased spending following higher cash flow.
The higher-than-anticipated pricing for natural gas and oil has continued
into 2003, and the continued fall in natural gas production and storage levels
resulting from lower drilling activity is increasing the likelihood that higher
average prices will be sustained over the intermediate term. We expect these
factors to result in an improvement in North American drilling activity during
2003.
The following table sets forth certain industry data that are reflective
of historical market conditions:
YEAR ENDED DECEMBER 31, INCREASE (DECREASE)
- -----------------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 TO 2001 2001 TO 2000
Industry data:
Commodity prices:(1)
Average Henry Hub natural gas
spot price ($/mcf) $3.37 $3.96 $4.30 $(.59) (15%) $ (.34) (8%)
Average West Texas intermediate
crude oil spot price ($/barrel) $26.17 $25.96 $30.37 $.21 1% $(4.41) (15%)
Rig count data:(2)
Average U.S. land rig count 701 980 762 (279) (29%) 218 29%
Average U.S. Offshore rig count 113 153 140 (40) (26%) 13 9%
Average Canadian land rig count 260 336 340 (76) (23%) (4) (1%)
Average International land rig count 506 525 466 (19) (4%) 59 13%
------ ------ ------ ----- ----- ------ -----
(1) Source: Bloomberg
(2) Source: Baker Hughes
45
RESULTS OF OPERATIONS
The following tables set forth certain information with respect to our
reportable segments and rig activity:
YEAR ENDED DECEMBER 31, INCREASE (DECREASE)
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2002 2001 2000 2002 TO 2001 2001 TO 2000
Operating revenues and Earnings
from unconsolidated affiliates:
Contract drilling:(1)
U.S. Land Drilling(2) $ 498,421 $ 1,146,463 $ 580,706 $(648,042) (57%) $ 565,757 97%
U.S. Land Well-servicing 294,428 345,785 268,211 (51,357) (15%) 77,574 29%
U.S. Offshore 105,717 226,078 209,404 (120,361) (53%) 16,674 8%
Canada 141,497 86,310 75,906 55,187 64% 10,404 14%
International 320,160 282,404 181,926 37,756 13% 100,478 55%
----------- ----------- ----------- --------- --- --------- ---
Subtotal contract drilling(3) 1,360,223 2,087,040 1,316,153 (726,817) (35%) 770,887 59%
Manufacturing and logistics(4)(5) 174,775 259,298 176,775 (84,523) (33%) 82,523 47%
Other(6) (53,780) (118,268) (77,985) 64,488 55% (40,283) (52%)
----------- ----------- ----------- --------- --- --------- ---
Total $ 1,481,218 $ 2,228,070 $ 1,414,943 $(746,852) (34%) $ 813,127 57%
----------- ----------- ----------- --------- --- --------- ---
Adjusted cash flow derived from
operating activities:(7)
Contract drilling:
U.S. Land Drilling $ 132,806 $ 409,760 $ 138,158 $(276,954) (68%) $ 271,602 197%
U.S. Land Well-servicing 58,231 82,402 46,930 (24,171) (29%) 35,472 76%
U.S. Offshore 19,094 55,107 62,914 (36,013) (65%) (7,807) (12%)
Canada 38,127 37,464 29,945 663 2% 7,519 25%
International 113,641 89,595 64,775 24,046 27% 24,820 38%
----------- ----------- ----------- --------- --- --------- ---
Subtotal contract drilling 361,899 674,328 342,722 (312,429) (46%) 331,606 97%
Manufacturing and logistics 42,704 105,770 63,428 (63,066) (60%) 42,342 67%
Other(8) (39,190) (54,491) (36,362) 15,301 28% (18,129) (50%)
----------- ----------- ----------- --------- --- --------- ---
Total $ 365,413 $ 725,607 $ 369,788 $(360,194) (50%) $ 355,819 96%
Depreciation and amortization (195,365) (189,896) (152,413) (5,469) (3%) (37,483) (25%)
----------- ----------- ----------- --------- --- --------- ---
Adjusted income derived from
operating activities(9) 170,048 535,711 217,375 (365,663) (68%) 318,336 146%
Interest expense (67,068) (60,722) (35,370) (6,346) (10%) (25,352) (72%)
Interest income 34,086 53,973 20,581 (19,887) (37%) 33,392 162%
Other income, net 3,708 28,650 27,157 (24,942) (87%) 1,493 5%
----------- ----------- ----------- --------- --- --------- ---
Income before income taxes $ 140,774 $ 557,612 $ 229,743 $(416,838) (75%) $ 327,869 143%
----------- ----------- ----------- --------- --- --------- ----
Net cash provided by operating activities(7) $ 372,445 $ 695,085 $ 219,448 $(322,640) (46%) $ 475,637 217%
----------- ----------- ----------- --------- --- --------- ----
Rig years:(10)
U.S. Land Drilling 112.3 220.6 166.8 (108.3) (49%) 53.8 32%
U.S. Offshore 14.5 28.8 30.8 (14.3) (50%) (2.0) (6%)
Canada 22.9 20.4 21.5 2.5 12% (1.1) (5%)
International 55.1 54.5 43.7 .6 1% 10.8 25%
----------- ----------- ----------- --------- --- --------- ---
Total rig years 204.8 324.3 262.8 (119.5) (37%) 61.5 23%
Rig hours:(11)
U.S. Land Well-servicing 1,014,657 1,170,104 1,110,920 (155,447) (13%) 59,184 5%
Canada Well-servicing(12) 164,785 -- -- 164,785 -- -- --
----------- ----------- ----------- --------- --- --------- ---
Total rig hours 1,179,442 1,170,104 1,110,920 9,338 1% 59,184 5%
----------- ----------- ----------- --------- --- --------- ---
(1) This segment includes our drilling, workover and well-servicing
operations, on land and offshore.
(2) U.S. Land Drilling is comprised of our Alaska and U.S. Lower 48 drilling
operations.
(3) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $3.9 million, $9.0 million and $6.8 million for 2002,
2001 and 2000, respectively.
(4) This segment includes our marine transportation and supply services, top
drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations.
(5) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $10.9 million, $17.3 million and $19.5 million for 2002,
2001 and 2000, respectively.
(6) Includes the elimination of inter-segment manufacturing and logistics
sales.
46
(7) Adjusted cash flow derived from operating activities is computed by:
subtracting direct costs and general and administrative expenses from
Operating revenues and then adding Earnings from unconsolidated
affiliates. Such amounts should not be used as a substitute to those
amounts reported under accounting principles generally accepted in the
United States of America (GAAP). However, management evaluates the
performance of our business units based on several criteria, including
adjusted cash flow derived from operating activities, because it believes
that this financial measure is an accurate reflection of the ongoing
performance of our business units. The following is a reconciliation of
net cash provided by operating activities from our consolidated statements
of cash flows, which is a GAAP measure, to this non-GAAP measure:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Net cash provided by operating activities $ 372,445 $ 695,085 $ 219,448
Interest expense 67,068 60,722 35,370
Interest income (34,086) (53,973) (20,581)
Other income (3,708) (28,650) (27,157)
Current income tax expense 10,185 83,718 19,594
Deferred financing costs amortization (5,122) (6,339) (183)
Discount amortization on zero coupon debentures (30,790) (31,832) (6,625)
Amortization of loss on cash flow hedges (50) -- --
Gains on long-term assets, net 4,570 10,246 1,713
Gains (losses) on marketable securities and warrants 2,877 (474) 18,800
Loss on derivative instruments (1,983) -- --
Sales of marketable securities, trading -- -- (401)
Foreign currency transaction gains 486 419 1,441
(Loss) gain on early extinguishment of debt (202) 15,330 3,036
Equity in earnings from unconsolidated affiliates, net of dividends 4,900 15,833 10,333
(Increase) decrease, net of effects from acquisitions,
from changes in working capital accounts (21,177) (34,478) 115,000
- ---------------------------------------------------------------------------------------------------------
Adjusted cash flow derived from operating activities $ 365,413 $ 725,607 $ 369,788
- ---------------------------------------------------------------------------------------------------------
(8) Includes the elimination of inter-segment transactions and unallocated
corporate expenses.
(9) Adjusted income derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, and
depreciation and amortization expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under accounting principles
generally accepted in the United States of America. However, management
evaluates the performance of our business units and the consolidated
company based on several criteria, including adjusted income derived from
operating activities, because it believes that this financial measure is
an accurate reflection of the ongoing profitability of our company. A
reconciliation of this non-GAAP measure to consolidated income before
income taxes, which is a GAAP measure, is provided herein.
(10) Excludes well-servicing rigs. Includes our percentage ownership of rigs
from unconsolidated affiliates. Rig years represents a measure of the
number of equivalent rigs operating during a given period. For example,
one rig operating 182.5 days during a 365-day period represents 0.5 rig
years.
(11) Rig hours represents the number of hours that our well-servicing rig fleet
operated during the year.
(12) The Canada Well-servicing operation was acquired during April 2002 as part
of our acquisition of Enserco Energy Service Company Inc.
2002 COMPARED TO 2001
Operating revenues and Earnings from unconsolidated affiliates for 2002
totaled $1.5 billion, representing a decrease of $746.9 million, or 34%, as
compared to 2001. Adjusted income derived from operating activities and net
income for 2002 totaled $170.0 million and $121.5 million ($.81 per diluted
share), respectively, representing decreases of 68% and 66%, respectively, as
compared to 2001.
The decrease in our operating results during 2002 primarily resulted from
the continuing weak environment in several of our key North American markets.
The depressed price for natural gas and oil over the period beginning in the
third quarter of 2001 through the latter part of the first quarter of 2002
resulted in decreased spending by our customers for our services during the
second half of 2001 and for all of 2002.
This decreased spending and corresponding decline in our rig activity
resulted in declining profitability for Nabors over that period. These lower
activity levels were experienced by a majority of our North American business
units, with the sharpest decline coming from our U.S. Land Drilling business.
The decrease in North American land and offshore drilling activity is
illustrated by the drilling industry's lower total active land and offshore rig
count. The drilling industry's average U.S. Land, Canadian Land and U.S.
Offshore rig counts during 2002 were lower by 29%, 23% and 26%, respectively,
than the 2001 period. Also contributing to the overall decline in our operating
results was a decline in activity for our U.S. Land Well-servicing and workover
business, driven primarily by lower rig utilization due to the overall weak
market, and the loss of some higher margin workover rigs and an offshore
platform operation during the second half of 2002.
Natural gas prices are the primary driver of our U.S. Lower 48 land,
Canadian and U.S. Offshore (Gulf of Mexico) operations while oil prices are the
primary driver of our Alaskan, International and U.S. Well-servicing operations.
The Henry Hub natural gas spot price (per Bloomberg) averaged $3.37 per million
cubic feet (mcf) during 2002, down from the $3.96 per mcf average during 2001.
West Texas intermediate spot oil prices (per Bloomberg) averaged $26.17 per
barrel during 2002, up slightly from $25.96 per barrel during 2001. Beginning in
47
the first quarter of 2002, a tightening in natural gas and oil supply resulted
in an improvement in natural gas and oil prices. Natural gas and oil prices
averaged $3.76 per mcf and $28.29 per barrel, respectively, during the last six
months of 2002, as compared to $2.98 per mcf and $24.01 per barrel for the first
six months of 2002. A substantial portion of the improvement in natural gas
prices occurred during the fourth quarter of 2002, when natural gas prices
averaged $4.31 per mcf. As discussed above, these price increases did not result
in a corresponding strengthening of our key North American markets until early
2003.
As had been expected, we realized improvements in our International,
Canadian and U.S. Offshore businesses during the fourth quarter of 2002 which
were offset by lower results in our U.S. Land Drilling and U.S. Well-servicing
businesses. We expect an improvement in all of our business units in 2003 given
the high level of natural gas and oil prices sustained during the latter part of
2002 and the beginning of 2003.
CONTRACT DRILLING The business units that comprise this segment contain
one or more of the following operations: drilling, workover and well-servicing,
on land and offshore. Operating revenues and Earnings from unconsolidated
affiliates for the contract drilling segment totaled $1.4 billion, and adjusted
cash flow derived from operating activities totaled $361.9 million during 2002,
representing decreases of 35% and 46%, respectively, compared to 2001. Rig years
(excluding well-servicing rigs) decreased to 204.8 years during 2002 from an
average of 324.3 years during 2001. The lower revenues realized by our U.S. Land
Drilling, U.S. Land Well-servicing and U.S. Offshore business units during 2002
as compared to 2001 were only partially offset by higher revenues from our
Canadian and International operations.
U.S. Land Drilling Operating revenues and Earnings from unconsolidated
affiliates, and adjusted cash flow derived from operating activities totaled
$498.4 million and $132.8 million, respectively, representing decreases of 57%
and 68%, respectively, as compared to 2001. These substantial decreases were a
result of decreased demand for our drilling services. The weakness of the North
American natural gas market during 2002 resulted in significant decreases in
both rig years and dayrates. We began to experience this deterioration in North
American gas rig activity during the third quarter of 2001 and such reduced rig
activity continued through the end of 2002. We expect the recovery in natural
gas prices that began during 2002 to result in higher rig years in 2003 as
demand for our services rebounds. U.S. Land Drilling rig years decreased to
112.3 years during 2002 from 220.6 years during 2001.
U.S. Land Well-servicing Operating revenues and Earnings from
unconsolidated affiliates, and adjusted cash flow derived from operating
activities totaled $294.4 million and $58.2 million, respectively, representing
decreases of 15% and 29%, respectively, as compared to 2001. These decreases
resulted from decreased activity as a function of the reduction in capital
spending by our customers resulting from lower oil prices in the beginning of
2002 and, to a lesser extent, lower natural gas prices over the same period.
U.S. Land Well-servicing rig hours decreased to 1.01 million hours during 2002
from 1.17 million hours during 2001.
U.S. Offshore Operating revenues and Earnings from unconsolidated
affiliates, and adjusted cash flow derived from operating activities totaled
$105.7 million and $19.1 million, respectively, representing decreases of 53%
and 65%, respectively, as compared to 2001. These decreases resulted from lower
rig years and lower average dayrates. This negative trend began during the third
quarter of 2001 and continued through the second quarter of 2002, following the
similar decline in natural gas and oil prices over that period. During that
period of time offshore operators reduced their demand for offshore rigs and the
prices they were willing to pay for offshore services in the Gulf of Mexico.
Sustained higher commodity prices should improve the outlook for our jack-up and
platform workover and drilling rigs in 2003. Offshore rig years decreased to
14.5 years during 2002 from 28.8 years during 2001. Our U.S. Offshore unit's
2002 operating results include an incremental $6.4 million, representing
business interruption insurance proceeds related to our Dolphin 105 jack-up rig,
which was lost in a hurricane in the fourth quarter of 2002. We also recorded a
$2.3 million gain as a result of the casualty insurance settlement in excess of
the carrying value of this rig, which is included in other income in our
consolidated statement of income for the year ended December 31, 2002.
48
Canadian Operating revenues and Earnings from unconsolidated affiliates,
and adjusted cash flow derived from operating activities totaled $141.5 million
and $38.1 million, respectively, representing increases of 64% and 2%,
respectively, as compared to 2001. The increase in Operating revenues and
Earnings from unconsolidated affiliates primarily resulted from an increase in
well-servicing revenues from the acquisition of Enserco Energy Service Company
Inc. in April 2002. Operating revenues also increased due to a year-over-year
increase in drilling revenues. Drilling revenues increased due to the April 2002
acquisition of Enserco and the November 2001 acquisition of Command Drilling
Corporation. These acquisitions increased our position in Canada with assets
that are relatively new and in excellent condition, allowing us to provide
services to many of our key U.S. customers who have increased their presence in
Canada because of its increasingly strategic importance to the North American
gas supply market. Rig years in Canada increased to 22.9 years during 2002 from
20.4 years during 2001. Rig years peaked during the fourth quarter of 2002,
averaging 29.6 years for the period, and the growth in this business is expected
to continue in 2003. Canadian well-servicing hours totaled 164,785 hours for the
period from April 26, 2002, the date we acquired Enserco, through December 31,
2002. Adjusted cash flow derived from operating activities for Canada increased
at a smaller rate than Operating revenues and Earnings from unconsolidated
affiliates due primarily to the addition of well-servicing operations in 2002
which tend to have lower margins than drilling operations, lower average margins
in our drilling operations caused by the downward pressure on pricing for much
of the first half of 2002, as well as increased general and administrative
expenses caused by the Enserco and Command acquisitions and the related build-up
of our Canadian operations during 2002.
International Operating revenues and Earnings from unconsolidated
affiliates, and adjusted cash flow derived from operating activities totaled
$320.2 million and $113.6 million, respectively, representing increases of 13%
and 27%, respectively, as compared to 2001. These increases resulted from higher
rig years and higher average dayrates in our Middle East operations, primarily
in Saudi Arabia and Yemen, and our African operations, primarily in Algeria.
International rig years increased slightly to 55.1 years during 2002 from 54.5
years during 2001.
MANUFACTURING AND LOGISTICS This segment includes our marine
transportation and supply services, top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and transportation
operations. Manufacturing and logistics Operating revenues and Earnings from
unconsolidated affiliates were $174.8 million during 2002, representing a
decrease of 33% compared with the prior year. Adjusted cash flow derived from
operating activities decreased to $42.7 million compared to $105.8 million in
the prior year, representing a 60% decrease. Decreases in this segment resulted
primarily from lower average dayrates and lower utilization in our marine
transportation and supply services and U.S. trucking operations and from
decreased top drive sales.
On October 9, 2002, we completed our acquisition of Ryan Energy
Technologies Inc., a corporation incorporated under the laws of Alberta, Canada.
Ryan manufactures and sells directional drilling and rig instrumentation systems
and provides directional drilling, rig instrumentation and data collection
services to oil and gas exploration and service companies in the United States,
Canada and Venezuela.
OTHER FINANCIAL INFORMATION Our gross margin percentage decreased to 34%
in 2002 from 38% in 2001. Gross margin percentage is calculated by dividing
gross margin by operating revenues. Gross margin is calculated by subtracting
direct costs from operating revenues. The decrease in our gross margin
percentage is primarily due to a decline in rig activity as well as lower
average dayrates in our U.S. Land Drilling and U.S. Offshore operations.
General and administrative expenses increased by $6.4 million, or 5%, in
2002 compared to 2001 due to increases related to our recent Canadian
acquisitions partially offset by decreased rig activity. As a percent-age of
operating revenues, general and administrative expenses increased during 2002 as
compared to 2001 (9.7% vs. 6.2%) as these expenses were spread over a lower
revenue base.
Depreciation and amortization expense increased by $5.5 million, or 3%, in
2002 compared to 2001 due to significant capital expenditures and acquisitions
during 2001 and 2002. This was partially offset by decreased rig activity, an
extension of certain of our fixed asset depreciable lives and the required
discontinuance of goodwill amortization. Effective October 1, 2001, we changed
the depreciable lives of our drilling and workover rigs from 4,200 to 4,900
active days,
49
our jack-up rigs from 4,200 to 8,030 active days and certain other drilling
equipment lives, to better reflect the estimated useful lives of these assets.
The effect of this change in accounting estimate was accounted for on a
prospective basis beginning October 1, 2001 and decreased depreciation expense
by $28.7 million and $8.6 million in 2002 and 2001, respectively. On January 1,
2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," which resulted in us no longer
amortizing goodwill. The effect of this change, if applied to 2001, would have
decreased amortization expense by approximately $7.1 million for the year ended
December 31, 2001.
Interest expense increased during 2002 due to higher average outstanding
debt balances, resulting from the August 2002 issuance of our $225 million
aggregate principal amount of 4.875% senior notes due 2009 and $275 million
aggregate principal amount of 5.375% senior notes due 2012, which added $8.3
million to interest expense in 2002. Interest income decreased during 2002 due
to lower average yields on investments resulting from the overall declining
interest rate environment partially offset by higher average cash and marketable
securities balances.
Other income decreased during 2002, as compared to 2001, due primarily to
the following: a gain on extinguishment of debt of $15.3 million recorded during
2001, a year-to-year decrease in gains on long-term assets of $5.7 million and
corporate reorganization expense of $3.8 million recorded during 2002 (see
Corporate Reorganization below).
Our effective income tax rate was 14% during 2002 as compared to 36% for
2001 due primarily to an increase in international earnings as a percentage of
our overall earnings. Our international earnings, other than earnings from our
Canadian operations, generally are taxed at lower rates than earnings from our
U.S. operations. Our corporate reorganization also had the effect of lowering
our effective income tax rate. The tax benefit attributable to our corporate
reorganization was approximately $13.0 million ($.09 per diluted share). It is
possible that the tax savings recorded as a result of the corporate
reorganization may not be realized, depending on the final disposition of
various legislative proposals being considered by the U.S. Congress, and any
responsive action taken by Nabors. Excluding the $13.0 million in tax savings
related to the corporate reorganization, our effective tax rate for 2002 was
23%.
2001 COMPARED TO 2000
Our operating results for 2001 were the highest in Nabors' history and
significantly above our 2000 results. Operating revenues and Earnings from
unconsolidated affiliates for 2001 totaled $2.2 billion, representing an
increase of $813.1 million, or 57%, as compared to 2000. Adjusted income derived
from operating activities and net income for 2001 totaled $535.7 million and
$357.5 million ($2.24 per diluted share), respectively, representing increases
of 146% and 160% as compared to 2000.
The increase in our operating results was due to substantial improvements
in essentially all of our business units, driven primarily by higher prices for
natural gas and oil due to tightness of supply and demand that continued until
the beginning of the third quarter of 2001. The increase in the price of natural
gas and the sustained higher price of oil during the two-year period from August
1999 to August 2001 resulted in increased spending by our customers for our
services. This increased spending was especially evident in our U.S. Lower 48
and Canadian operations for natural gas-related drilling activities and our U.S.
Land Well-servicing business which is more directed toward oil.
However, beginning in the third quarter of 2001 a reduction in demand for
natural gas caused by high natural gas prices and a general contraction in the
nation's economy and, later in the year, warm weather resulted in a build up of
excess supply of natural gas. This caused U.S. natural gas prices to decline.
Natural gas prices (per the Bloomberg average Henry Hub natural gas spot price),
which averaged $5.32 per mcf during the first six months of 2001 and spiked as
high as $10.20 per mcf in January 2001, declined significantly, averaging only
$2.60 per mcf during the second half of 2001. This significant drop in the price
of natural gas reached a low of $1.74 per mcf in November 2001, and resulted in
the rapid weakening of natural gas-related drilling activity in the U.S. Lower
48 and U.S. Offshore markets. Oil prices also began to decline during this
period with average prices (per the West Texas Intermediate crude oil spot
price) of $27.79 per barrel during the first nine months of 2001, decreasing to
$20.46 per barrel during the fourth quarter of 2001. The U.S. active land rig
count, which averaged 1,022 working rigs during the nine months ended September
30, 2001 and peaked at 1,100 rigs in July 2001, declined to an average of 853
rigs during the fourth quarter of 2001 and a low of 759 rigs in
50
December 2001. Similarly, our U.S. Lower 48 rig years averaged 231 years during
the first nine months of 2001 and declined to an average of 145 years during the
fourth quarter of 2001.
CONTRACT DRILLING Operating revenues and Earnings from unconsolidated
affiliates for the contract drilling segment totaled $2.1 billion, and adjusted
cash flow derived from operating activities totaled $674.3 million during 2001,
representing increases of 59% and 97%, respectively, compared to the prior year.
Rig years (excluding well-servicing rigs) increased to 324.3 years during 2001
from an average of 262.8 years during the prior year. All of our contract
drilling operations recorded higher revenues in 2001 compared to 2000 as a
result of increased drilling and workover activity and higher average dayrates
due to relatively higher natural gas and oil prices during the first six months
of 2001.
U.S. Land Drilling Operating revenues and Earnings from unconsolidated
affiliates, and adjusted cash flow derived from operating activities totaled
$1.1 billion and $409.8 million, respectively, representing increases of 97% and
197%, respectively, as compared to 2000. These dramatic increases were a result
of increased demand for drilling services during the first half of the year. To
meet the increased demand for additional rigs, during September 2000 we
implemented a capital expenditure program to refurbish, recommission and in many
cases, upgrade our stacked, domestic drilling fleet. As part of this program,
which was terminated in the fourth quarter of 2001, we recommissioned 113 rigs
and partially completed 32 rigs. The prolonged strength of the North American
natural gas market that continued until the beginning of the third quarter of
2001 resulted in significant increases in both rig years and dayrates. However,
this positive trend ended in July 2001 due to the continued steady decline in
U.S. natural gas prices. As a result of these lower natural gas prices, the
majority of our customers' drilling programs declined and demand for additional
rigs in the U.S. Lower 48 drilling market was substantially reduced. We began to
experience deterioration in North American gas rig activity during the third
quarter of 2001. Nevertheless, U.S. Land Drilling rig years increased to 220.6
years during 2001 from 166.8 years during 2000.
U.S. Land Well-servicing Operating revenues and Earnings from
unconsolidated affiliates, and adjusted cash flow derived from operating
activities totaled $345.8 million and $82.4 million, respectively, representing
increases of 29% and 76%, respectively, as compared to 2000. These increases
resulted from increased rates per hour and activity resulting from higher
natural gas and oil prices. U.S. Land Well- servicing rig hours increased to
1.17 million hours during 2001 from 1.11 million hours during 2000.
U.S. Offshore Operating revenues and Earnings from unconsolidated
affiliates, and adjusted cash flow derived from operating activities totaled
$226.1 million and $55.1 million, respectively, representing an increase of 8%
and a decrease of 12%, respectively, as compared to 2000. The increase in
revenues during 2001 resulted from higher average dayrates, partially offset by
lower rig years. The positive trend of increased revenues ended during July 2001
as a result of the decline in natural gas and oil prices during the third
quarter of 2001. Offshore rig years decreased to 28.8 years during 2001 from
30.8 years during 2000.
Canadian Operating revenues and Earnings from unconsolidated affiliates,
and adjusted cash flow derived from operating activities totaled $86.3 million
and $37.5 million, respectively, representing increases of 14% and 25%,
respectively, as compared to 2000. These increases resulted from higher average
dayrates associated with continued strong demand for natural gas drilling
services throughout the Canadian market. During November 2001 we expanded our
presence in Canada by completing our acquisition of Command Drilling
Corporation, which owned 15 rigs operating in the Canadian Rockies. Rig years in
Canada decreased slightly to 20.4 years during 2001 from 21.5 years during 2000.
International Operating revenues and Earnings from unconsolidated
affiliates, and adjusted cash flow derived from operating activities totaled
$282.4 million and $89.6 million, respectively, representing increases of 55%
and 38%, respectively, as compared to 2000. These increases resulted from higher
average dayrates and higher rig years in our South American operations,
primarily in Colombia, Ecuador and Trinidad, and our African operations,
primarily in Algeria. Additionally, effective January 1, 2001, we purchased our
partner's 49% interest in our Argentina operation for $4.5 million, and we now
own and consolidate 100% of this operation. Prior to January 1, 2001, our
interest was accounted for using the equity
51
method of accounting because Nabors' ability to control the entity's operations
was restricted by certain substantive participating rights granted to the
minority shareholder. International rig years increased to 54.5 years during
2001 from 43.7 years during 2000.
MANUFACTURING AND LOGISTICS Manufacturing and logistics Operating revenues
and Earnings from unconsolidated affiliates were $259.3 million during 2001,
representing an increase of 47% compared with the prior year. Adjusted cash flow
derived from operating activities increased to $105.8 million compared to $63.4
million in the prior year, representing a 67% increase. Increases in this
segment resulted primarily from higher average dayrates and utilization in our
supply vessel and U.S. trucking operations and from increased top drive sales.
OTHER FINANCIAL INFORMATION Our gross margin percentage increased to 38%
in 2001 from 32% in 2000, primarily due to higher average dayrates at virtually
all of our business units.
General and administrative expenses increased by $29.0 million, or 27%, in
2001 compared to 2000 due to increased rig activity. As a percentage of
operating revenues, general and administrative expenses decreased during 2001 as
compared to 2000 (6.2% vs. 7.7%) as these expenses were spread over a larger
revenue base.
Depreciation and amortization expense increased by $37.5 million, or 25%,
in 2001 compared to 2000 due to capital expenditures during 2000 and 2001 and
increased rig activity during 2001. Effective October 1, 2001, we changed the
depreciable lives of our drilling and workover rigs from 4,200 to 4,900 active
days, our jack-up rigs from 4,200 to 8,030 active days and certain other
drilling equipment lives, to better reflect the estimated useful lives of these
assets. The effect of this change in accounting estimate was accounted for on a
prospective basis beginning October 1, 2001 and decreased depreciation expense
by approximately $8.6 million for 2001, partially offsetting the increase for
the year.
Interest expense increased during 2001 due to higher average debt
outstanding, resulting from the issuance of our $825 million zero coupon
convertible senior debentures in June 2000 and our $1.381 billion zero coupon
convertible senior debentures in February 2001. The issuance of these debentures
increased interest expense in 2001 by $30.5 million as compared to 2000.
Interest income increased during 2001 due to higher average cash balances
resulting from the investment of the proceeds from the issuances of these
debentures.
Other income, net increased during 2001, as compared to 2000, due
primarily to a gain on extinguishment of debt of $15.3 million recorded during
2001 and a year-over-year increase in gains on long-term assets of $8.5 million,
partially offset by a year-over-year decrease in gains on marketable securities
and warrants of $17.8 million.
Our effective income tax rate was 36% during 2001 compared to 40% in the
prior year. This lower effective tax rate is primarily due to certain transfers
of foreign assets formerly owned by our U.S. entities to our foreign companies
operating the assets, which generally operate in lower tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
OPERATING ACTIVITIES Net cash provided by operating activities totaled
$372.4 million during 2002, compared to $695.1 million during 2001. This
decrease primarily reflects the decrease in our net income. During 2002 and
2001, in determining net cash provided by operating activities, net income was
increased from changes in working capital accounts and for non-cash items such
as depreciation and amortization expense, discount amortization on zero coupon
debentures and deferred income taxes.
INVESTING ACTIVITIES Net cash used for investing activities totaled $629.5
million during 2002, compared to $1.13 billion during 2001. We used cash
primarily for purchases of marketable securities, net of sales, capital
expenditures and acquisitions of businesses during both 2002 and 2001.
On October 9, 2002, we acquired Ryan pursuant to a plan of arrangement
whereby Nabors Exchangeco (Canada) Inc., an indirect wholly-owned Canadian
subsidiary of Nabors, acquired all of the issued and outstanding common shares
of Ryan in exchange for approximately Cdn. $22.6 million (U.S. $14.2 million) in
cash and 380,264 exchangeable shares of Nabors Exchangeco, of which 219,493
exchangeable shares were immediately exchanged for common shares of Nabors in
accordance with the instructions of the holders of those shares. The value of
the Nabors Exchangeco shares issued totaled Cdn. $18.5 million (U.S. $11.6
million). In addition, we assumed Ryan debt totaling Cdn. $14.5 million (U.S.
$9.1 million).
52
On March 18, 2002, we acquired, for cash, 20.5% of the issued and
outstanding shares of Enserco, a Canadian publicly-held corporation, for Cdn.
$15.50 per share for a total price of Cdn. $83.2 million (U.S. $52.6 million).
On April 26, 2002, Nabors Exchangeco acquired all of the remaining issued and
outstanding common shares of Enserco in exchange for approximately Cdn. $100.1
million (U.S. $64.1 million) in cash and 3,549,082 exchangeable shares of Nabors
Exchangeco, of which 2,638,526 exchangeable shares were immediately exchanged
for Nabors Delaware common stock in accordance with the instructions of the
holders of those shares. The value of the Nabors Exchangeco shares issued
totaled Cdn. $254.2 million (U.S. $162.8 million). In addition, we assumed
Enserco debt totaling Cdn. $33.4 million (U.S. $21.4 million).
FINANCING ACTIVITIES Financing activities provided cash totaling $470.4
million during 2002, compared to $432.4 million during 2001. During 2002 cash
was provided by our issuance of senior notes totaling $495.9 million and was
used primarily for the reduction of long-term borrowings of $30.8 million.
During 2001 cash was primarily provided by the $840.3 million in proceeds
from our issuance of $1.381 billion zero coupon convertible senior debentures
during February 2001. This was partially offset by $156.0 million of cash used
for the reduction of long-term borrowings, primarily attributable to the
repurchase of a portion of our zero coupon convertible senior debentures. In
addition, we used $248.0 million of cash to repurchase shares of our common
stock.
During 2002 we purchased $.6 million face value of our 8.625% senior
subordinated notes due April 2008 in the open market at a price of 108%. In
addition, we purchased $4.7 million face value of our 6.8% senior notes due
April 2004 in the open market at a price of 104%. Upon settlement of these
transactions, we paid $5.7 million and recognized a pretax loss of approximately
$.2 million, resulting from the repurchases of these notes at prices higher than
their carrying value. Additionally, we repaid Cdn. $12.9 million (U.S. $8.3
million) and Cdn. $22.3 million (U.S. $14.3 million) of the debt assumed in the
Ryan and Enserco acquisitions, respectively. We also made a $2.5 million
scheduled principal payment relating to certain of our medium-term notes.
We had a $200 million unsecured committed revolving credit facility with a
syndicate of banks, with an original term of five years, that was scheduled to
mature on September 5, 2002. As a result of the corporate reorganization
discussed below, we may have failed to comply with a covenant contained in the
credit facility agreement and a related $30 million letter of credit facility
agreement. At the time of the potential default, there were no outstanding
borrowings on the credit facility, and $23 million was outstanding on the
related letter of credit facility. The bank provided a waiver on the letter of
credit facility and the letter of credit facility has since expired. Because we
had cash and marketable securities balances totaling approximately $800 million
at the time of the potential default, and because the credit facility was
scheduled to mature on September 5, 2002, we terminated the revolving credit
facility.
On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect,
wholly-owned subsidiaries, issued $225 million aggregate principal amount of
4.875% senior notes due 2009 that are fully and unconditionally guaranteed by
Nabors and Nabors Delaware. Concurrently with this offering by Nabors Holdings,
Nabors Delaware issued $275 million aggregate principal amount of 5.375% senior
notes due 2012, which are fully and unconditionally guaranteed by Nabors. Cash
provided by our issuance of these senior notes totaled $495.9 million. The
proceeds from our issuance of senior notes were invested in cash and marketable
securities. Both issues of senior notes were resold by a placement agent to
qualified institutional buyers under Rule 144A of the Securities Act of 1933, as
amended. Interest on each issue of senior notes is payable semi-annually on
February 15 and August 15, beginning on February 15, 2003. On October 28, 2002,
Nabors' registration statements with respect to resales of these senior notes
became effective.
On October 21, 2002, we entered into an interest rate swap transaction and
purchased a LIBOR range cap and sold a LIBOR floor, in the form of a cashless
collar, with a third-party financial institution to hedge our exposure to
changes in the fair value of $200 million of our fixed rate 5.375% senior notes
due 2012 and to mitigate and manage our exposure to changes in the three-month
U.S. dollar LIBOR rate, respectively (see Quantitative and Qualitative
Disclosures About Market Risk below).
53
On July 17, 2002, the Board of Directors of Nabors authorized the
continuation of the share repurchase program that had begun under Nabors
Delaware, and provided that the amount of Nabors common shares authorized for
purchase by Nabors going forward be increased to $400 million. Under the Nabors
Delaware program, Nabors Delaware had acquired an aggregate of approximately
$248.0 million of Nabors Delaware common stock, or 6.2 million shares, during
2001. During the third quarter of 2002 Nabors also acquired, through a
subsidiary, 91,000 of its common shares in the open market for $27.30 per share
for an aggregate price of $2.5 million. Immediately thereafter these shares were
transferred to Nabors. Pursuant to Bermuda law, any shares, when purchased, will
be treated as cancelled. Therefore, a repurchase of shares will not have the
effect of reducing the amount of Nabors' authorized share capital. Additionally,
the Board approved the repurchase of up to $400 million of outstanding debt
securities of Nabors and its subsidiaries. These amounts may be increased or
decreased at the discretion of the Board, depending upon market conditions and
consideration of the best interest of shareholder value. Repurchases may be
conducted on the open market, through negotiated transactions or by other means,
from time to time, depending upon market conditions and other factors.
FUTURE CASH REQUIREMENTS
As of December 31, 2002, we had long-term debt, including current
maturities, of $2.1 billion and stockholders' equity of $2.2 billion. See table
included in "Interest Rate and Marketable Security Price Risk" below for a
breakout of the components of long-term debt as of December 31, 2002.
Our $825 million debentures can be put to us on June 20, 2003, June 20,
2008 and June 20, 2013, and our $1.381 billion debentures can be put to us on
February 5, 2006, February 5, 2011 and February 5, 2016, for a purchase price
equal to the issue price plus accrued original issue discount to the dates of
repurchase. Based on the ability of the debenture holders to exercise their put
option on June 20, 2003, the outstanding principal amount on the $825 million
debentures of $489.1 million is classified in current liabilities in our
consolidated balance sheet as of December 31, 2002.
We may elect to pay all or a portion of the purchase price of the
debentures in common stock instead of cash, depending upon our cash balances and
cash requirements at that time. We do not presently anticipate using stock to
satisfy any such future purchase obligations. In accordance with the indentures
with respect to the debt securities, we cannot redeem the $825 million and
$1.381 billion debentures before June 20, 2003 and February 5, 2006,
respectively, after which time we may redeem all or a portion of the debentures
for cash at any time at their accreted value.
The following table summarizes our contractual cash obligations as of
December 31, 2002:
PAYMENTS DUE BY PERIOD
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) TOTAL 2003 2004-2005 2006-2007 THEREAFTER
CONTRACTUAL CASH OBLIGATIONS:
Long-term debt:
Principal $2,167,641 $498,701(1) $300,575 $826,800(2) $541,565
Interest 259,695 49,414 64,527 58,671 87,083
Operating leases(3) 42,285 16,632 21,045 2,434 2,174
Capital expenditure purchase commitments(3) 42,813 42,813 -- -- --
Time charter commitment(4) 119,080 26,863 53,726 38,491 --
Employment contracts(3) 8,709 2,413 3,540 2,756 --
---------- -------- -------- -------- --------
Total contractual cash obligations $2,640,223 $636,836 $443,413 $929,152 $630,822
---------- -------- -------- -------- --------
(1) Includes $494.9 million related to our $825 million zero coupon
convertible senior debentures which can to be put to us on June 20, 2003.
(2) Represents our $1.381 billion zero coupon convertible senior debentures
which can be put to us on February 5, 2006.
(3) See Note 15 to the accompanying consolidated financial statements.
(4) Relates to our future commitments under our time charter with Sea Mar
Management LLC. See Related Party Transactions below.
54
On February 21, 2003, we issued a Notice of Redemption to the holders of
our 8.625% senior subordinated notes due April 2008 for redemption of the notes
and all associated guarantees on April 1, 2003. The redemption price will be
$1,043.13 per $1,000 principal amount of the notes together with accrued and
unpaid interest to the date of redemption. We estimate that the total redemption
price will be $45.2 million and will require the recognition of a pretax loss of
approximately $.9 million, resulting from the redemption of the notes at prices
higher than their carrying value on April 1, 2003. The impact of this
post-December 31, 2002 event is not reflected in the table above.
Historical capital expenditures and acquisitions of businesses, which
represent the portion of the purchase price of acquisitions allocated to fixed
assets based on their fair market value, are classified as follows:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
New construction $ 14,008 $ 17,374 $ 64,512
Enhancement 136,837 398,513 79,251
Acquisitions 329,081 137,355 28,388
Sustaining 102,633 231,683 128,486
-------- -------- --------
$582,559 $784,925 $300,637
-------- -------- --------
As of December 31, 2002, we had outstanding capital expenditure purchase
commitments of approximately $42.8 million, primarily for rig-related sustaining
and enhancement capital expenditures. Projected capital expenditures for 2003
for sustaining and known new construction and enhancement projects are expected
to total approximately $250 million. We have historically completed a number of
acquisitions during down markets and will continue to evaluate opportunities to
acquire assets or businesses to enhance our operations.
Several of our previous acquisitions were funded through issuances of our
common stock. Future acquisitions may be paid for using existing cash,
borrowings under future lines of credit or issuance of debt or Nabors stock.
Such capital expenditures and acquisitions are at our discretion and will depend
on our view of market conditions and other factors.
GUARANTEES
We enter into various agreements providing financial or performance
assurance to third parties. Certain of these agreements act as guarantees,
including standby letters of credit issued on behalf of insurance carriers in
conjunction with our workers' compensation insurance program and guarantees of
residual value in certain of our operating lease agreements. We have also
guaranteed payment of contingent consideration in conjunction with an
acquisition in 2002 which is based on future operating results of that business.
In addition, we have provided indemnifications to certain third parties which
serve as guarantees. These guarantees include indemnification provided by Nabors
to our stock transfer agent and our insurance carriers.
Management believes the likelihood that we would be required to perform or
otherwise incur any significant losses associated with any of these guarantees
is remote. We are not able to estimate the potential future maximum payments
that might be due under our indemnification guarantees. The following table
summarizes the total maximum amount of financial and performance guarantees
issued by Nabors:
MAXIMUM AMOUNT
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2003 2004 2005 THEREAFTER TOTAL
Financial standby letters of credit $34,436 $ - $ - $ -- $34,436
Guarantee of residual value in lease agreements 542 418 694 -- 1,654
Contingent consideration in acquisition 769 769 769 193 2,500
------- ------ ------- ----- -------
Total $35,747 $1,187 $ 1,463 $ 193 $38,590
------- ------ ------- ----- -------
55
FINANCIAL CONDITION AND SOURCES OF LIQUIDITY
As of December 31, 2002, we had cash and cash equivalents and investments
in marketable securities totaling $1,330.8 million and working capital of $618.5
million. This compares to cash and cash equivalents and investments in
marketable securities totaling $918.6 million and working capital of $700.8
million as of December 31, 2001. In addition, we generate significant cash from
operations over the course of a twelve-month period. Our ability to raise money
in the public markets is enhanced by our senior unsecured debt ratings as
provided by Moody's Investor Service and Standard & Poor's, which are currently
"A3" and "A-," respectively.
The year-over-year increase in cash and cash equivalents and investments
in marketable securities relates primarily to proceeds received from our August
2002 issuance of senior notes, cash provided by operating activities and cash
received from sales of marketable securities classified as available for sale in
2002. This increase was partially offset by cash used for acquisitions,
sustaining and enhancement capital expenditures and purchases of marketable
securities in 2002. The year-over-year decrease in working capital relates
primarily to the current liability classification of $489.1 million principal
amount of our $825 million debentures, which can be put to us on June 20, 2003.
This decrease was partially offset by the increase in cash and cash equivalents
and investments in marketable securities discussed above. Year-over-year
declines in accounts receivable, accounts payable and accrued liabilities relate
to the overall decrease in revenues and costs in 2002 because of lower activity
levels.
Our funded debt to capital ratio was 0.49:1 as of December 31, 2002,
compared to 0.46:1 as of December 31, 2001. Our net funded debt to capital ratio
was 0.26:1 as of December 31, 2002 and 2001. Funded debt to capital ratio is
calculated by dividing funded debt by funded debt plus capital. Funded debt is
defined as the sum of (1) short-term borrowings, (2) current portion of
long-term debt and (3) long-term debt. Capital is defined as stockholders'
equity. The net funded debt to capital ratio nets cash and cash equivalents,
short-term marketable securities and long-term marketable securities against
funded debt. This ratio is calculated by dividing net funded debt by net funded
debt plus capital. Both of these ratios are a method for calculating the amount
of leverage a company has in relation to its capital. Our interest coverage
ratio was 6.0:1 as of December 31, 2002, compared to 13.3:1 as of December 31,
2001. The interest coverage ratio is computed by calculating the sum of income
before income taxes, interest expense, and depreciation and amortization expense
and then dividing by interest expense. This ratio is a method for calculating
the amount of cash flows available to cover interest expense.
We have two letter of credit facilities and a Canadian line of credit
facility with various banks as of December 31, 2002. Additionally, we also have
letters of credit outstanding under an expired $30 million letter of credit
facility. Availability and borrowings under our credit facilities as of December
31, 2002 are as follows:
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Credit available $ 79,745
Letters of credit outstanding (56,267)
--------
Remaining availability $ 23,478
--------
On December 30, 2002, we filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission to allow us to offer, from time to
time, up to $700 million in debt securities, guarantees of debt securities,
preferred shares, depository shares, common shares, share purchase contracts,
share purchase units and warrants. The Commission declared the registration
statement effective on January 16, 2003. We currently have not issued any
securities registered under this registration statement.
Our current cash and cash equivalents, investments in marketable
securities and projected cash flow generated from current operations are
expected to more than adequately finance our sustaining and planned enhancement
capital expenditures and our debt service requirements for the next twelve
months, including the planned redemption of our 8.625% senior subordinated notes
in April 2003 and the possible redemption of our $825 million zero coupon
convertible senior debentures in June 2003.
CORPORATE REORGANIZATION
Effective June 24, 2002, Nabors, a Bermuda-exempt company, became the
successor to Nabors Delaware, a Delaware corporation, following a corporate
reorganization. The reorganization was accomplished through the merger of an
indirect, newly formed Delaware subsidiary owned by Nabors, into Nabors
Delaware. Nabors Delaware was the surviving company in the merger and became a
wholly-owned, indirect subsidiary of Nabors.
56
Upon consummation of the merger, all outstanding shares of Nabors Delaware
common stock automatically converted into the right to receive Nabors common
shares, with the result that the shareholders of Nabors Delaware on the date of
the merger became the shareholders of Nabors. Nabors and its subsidiaries
continue to conduct the businesses previously conducted by Nabors Delaware and
its subsidiaries. The reorganization was accounted for as a reorganization of
entities under common control and accordingly, it did not result in any changes
to the consolidated amounts of assets, liabilities and stockholders' equity.
The authorized share capital of Nabors consists of 400 million common
shares, par value $.001 per share, and 25 million preferred shares, par value
$.001 per share. Common shares issued were 144,964,668 at $.001 par value at
December 31, 2002 compared to 144,368,390 at $.10 par value immediately
preceding the reorganization. The decrease in par value of common stock from
$.10 to $.001 was recorded as an increase to capital in excess of par value and
a decrease in common shares in our Consolidated Financial Statements. In
conjunction with the reorganization, 6.8 million shares of outstanding treasury
stock were retired, as Bermuda law does not recognize the concept of treasury
stock. The effect of this retirement reduced common shares by $.7 million,
capital in excess of par value by $59.2 million and retained earnings by $192.9
million.
The Board of Nabors Delaware approved the reorganization transaction
because international activities are an important part of our current business
and we believe that our international operations will continue to grow in the
future. Expansion of our international business is an important part of our
current business strategy and significant growth opportunities exist in the
international marketplace. We believe that reorganizing as a Bermuda company
will allow us to implement our business strategy more effectively. In addition,
we believe that the reorganization should increase our access to international
capital markets and acquisition opportunities, increase our attractiveness to
non-U.S. investors, improve global cash management, improve our global tax
position and result in a more favorable corporate structure for expansion of our
current business.
Several members of the United States Congress have proposed legislation
that, if enacted, would have the effect of eliminating the tax benefits of the
reorganization. During 2002 the Senate Finance Committee and the House Ways and
Means Committee approved legislation that, for United States federal tax
purposes, would treat a corporation such as Nabors that reorganizes in a foreign
jurisdiction as a domestic corporation and, thus, such foreign corporation would
be subject to United States federal income tax. The proposed legislation did not
pass during the 2002 session of Congress, but is expected to be reintroduced
during 2003. This proposed legislation may have an effective date that is
retroactive to a date prior to our reorganization and, if enacted, the
expected tax savings from the reorganization will not be realized.
In light of such events and if and when any such legislation is enacted,
we will consider the effects of the legislation and will evaluate all strategic
alternatives that may be appropriate.
OTHER MATTERS
FORWARD-LOOKING STATEMENTS
We often discuss expectations regarding our future markets, demand for our
products and services, and our performance in our annual and quarterly reports,
press releases, and other written and oral statements. Statements that relate to
matters that are not historical facts are "forward-looking statements" within
the meaning of the safe harbor provisions of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These "forward-looking statements" are based on an analysis of currently
available competitive, financial and economic data and our operating plans. They
are inherently uncertain and investors must recognize that events and actual
results could turn out to be significantly different from our expectations.
You should consider the following key factors when evaluating these
forward-looking statements:
- - fluctuations in worldwide prices of and demand for natural gas and oil;
- - fluctuations in levels of natural gas and oil exploration and development
activities;
- - fluctuations in the demand for our services;
- - the existence of competitors, technological changes and developments in
the oilfield services industry;
- - the existence of operating risks inherent in the oilfield services
industry;
- - the existence of regulatory and legislative uncertainties;
- - the possibility of political instability, war or acts of terrorism in any
of the countries in which we do business; and
- - general economic conditions.
57
Our businesses depend, to a large degree, on the level of spending by oil
and gas companies for exploration, development and production activities.
Therefore, a sustained increase or decrease in the price of natural gas or oil,
which could have a material impact on exploration, development and production
activities, could also materially affect our financial position, results of
operations and cash flows.
The above description of risks and uncertainties is by no means
all-inclusive, but is designed to highlight what we believe are important
factors to consider. For a more detailed description of risk factors, please
refer to our Form 10-K filed with the Securities and Exchange Commission under
Item I, Part I, "Risk Factors".
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the
accounting for goodwill and other intangible assets after an acquisition. The
most significant changes made by SFAS 142 are: (1) goodwill and intangible
assets with indefinite lives no longer will be amortized; (2) goodwill and
intangible assets with indefinite lives must be tested for impairment at least
annually; and (3) the amortization period for those intangible assets with
finite lives no longer will be limited to 40 years. The effect of no longer
amortizing goodwill would have increased net income by approximately $4.6
million ($.02 per diluted share) and $3.5 million ($.02 per diluted share) for
the years ended December 31, 2001 and 2000, respectively.
We adopted SFAS 142 effective January 1, 2002, and accordingly we no
longer record goodwill amortization expense. During the second quarter of 2002
we performed our initial goodwill impairment assessment as required. As part of
that assessment, we determined that our 11 business units, as of January 1,
2002, represented our reporting units as defined by SFAS 142. We determined the
aggregate carrying values and fair values of all such reporting units, which
were measured as of the January 1, 2002 adoption date. We calculated the fair
value of each reporting unit based on discounted cash flows and determined there
was no goodwill impairment.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. Upon adoption, this new accounting pronouncement had no impact on our
reported results of operations or financial position.
We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," effective April
1, 2002. Due to the nature of our business, Financial Accounting Standards Board
(FASB) 44, 64 and Amendment of FASB 13 are not applicable. SFAS 145 eliminates
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and states
that gains and losses from the extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in Accounting Principles
Board (APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." APB 30 defines extraordinary
items as events and transactions that are distinguished by their unusual nature
and by the infrequency of their occurrence. Accordingly, we no longer classify
gains and losses from extinguishment of debt that are usual and frequent as
extraordinary items, and we reclassified to other income all similar debt
extinguishment items that had been reported as extraordinary items in prior
accounting periods. In conjunction with adopting SFAS 145 we reclassified, for
fiscal years 2002, 2001 and 2000, the following extraordinary (losses) gains to
other income with the related income tax component reclassified to income tax
expense, respectively: $(.13 million), net of tax benefit of $.08 million; $9.6
million, net of taxes of $5.7 million and $1.9 million, net of taxes of $1.1
million. These reclassifications had no impact on net income.
In July 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement will require us to
recognize costs associated with exit or disposal activities when they are
incurred rather than when we commit to an exit or
58
disposal plan. Examples of costs covered by this guidance include lease
termination costs, employee severance costs that are associated with a
restructuring, discontinued operations, plant closings or other exit or disposal
activities. This statement is effective for fiscal years beginning after
December 31, 2002 and will impact any exit or disposal activities initiated
after January 1, 2003. This statement does not currently impact Nabors.
We adopted Emerging Issues Task Force (EITF) No. 01-14, "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred," in the second quarter of 2002. Previously, we recognized
reimbursements received as a reduction to the related direct costs. EITF 01-14
requires that reimbursements received be included in operating revenues and
out-of-pocket expenses be included in direct costs. Accordingly, reimbursements
received from our customers have been reclassified to revenues for all periods
presented. The effect of adopting EITF 01-14 resulted in the following
reclassifications to our annual results for 2001 and 2000: operating revenues
and direct costs were increased from previously reported amounts by $70.0
million and $50.3 million, respectively. These reclassifications had no impact
on net income.
In November 2002 the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements, Including Guarantees of
Indebtedness of Others." FIN 45 requires that upon issuance of certain types of
guarantees, a guarantor recognize and account for the fair value of the
guarantee as a liability. FIN 45 contains exclusions to this requirement,
including the exclusion of a parent's guarantee of its subsidiaries' debt to a
third party. The initial recognition and measurement provisions of FIN 45 should
be applied on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of both interim and annual periods ending after December
15, 2002. The adoption of the recognition and measurement provisions of FIN 45
is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows. The disclosures required by FIN
45 are included in Liquidity and Capital Resources and in Note 15 to our
accompanying consolidated financial statements.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - an Amendment of FAS 123." This statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that statement to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002. SFAS 148 does not change the provisions of SFAS 123 that
permit entities to continue to apply the intrinsic value method of APB No. 25,
"Accounting for Stock Issued to Employees." However, those companies that
continue to account for awards of stock-based employee compensation under the
intrinsic value method of APB 25 are required to disclose certain information
using a tabular presentation mandated by SFAS 148. At the present time, we plan
to continue accounting for stock-based compensation using the intrinsic value
method under APB 25 and have presented the disclosures required by SFAS 148 in
Note 3 to our accompanying consolidated financial statements.
In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. The consolidation requirements of FIN 46 apply immediately to VIEs
created after January 31, 2003. For VIEs created at an earlier date, the
consolidation requirements apply in the first fiscal year or interim period
beginning after June 15, 2003. Certain disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the VIE
was established. Based on current information, Nabors believes it has no
material interests in VIEs that will require disclosure or consolidation under
FIN 46.
59
RELATED PARTY TRANSACTIONS
Pursuant to his employment agreement, we provided an unsecured,
non-interest bearing loan of approximately $2.9 million to Nabors' President and
Chief Operating Officer. This loan is due on September 30, 2006.
Pursuant to their employment agreements, Nabors and its Chairman and Chief
Executive Officer, President and Chief Operating Officer, its former Vice
Chairman, and certain other key employees entered into split-dollar life
insurance agreements pursuant to which we pay a portion of the premiums under
life insurance policies with respect to these individuals and, in certain
instances, members of their families. Under these agreements, we are reimbursed
for such premiums upon the occurrence of specified events, including the death
of an insured individual. Any recovery of premiums paid by Nabors could
potentially be limited to the cash surrender value of these policies under
certain circumstances. As such, the values of these policies are recorded at
their respective cash surrender values in our consolidated balance sheet. We
have made premium payments to date totaling $12.8 million related to these
policies. The cash surrender value of these policies of approximately $8.7
million is included in other long-term assets in our consolidated balance sheet
as of December 31, 2002.
Under the recently enacted Sarbanes-Oxley Act of 2002, the future payment
of premiums by Nabors under these agreements may be deemed to be prohibited
loans by us to these individuals. We have paid no premiums related to these
agreements since the adoption of the Sarbanes-Oxley Act, and we have postponed
premium payments related to these agreements pending clarification of the Act's
application to these insurance agreements. We will monitor developments and
intend to take appropriate action to ensure that these agreements do not violate
applicable law.
In the ordinary course of business, we enter into various rig leases, rig
transportation and related oilfield services agreements with our Alaskan and
Saudi Arabian unconsolidated affiliates at market prices. Additionally, we own
certain marine vessels that are chartered under a Bareboat Charter arrangement
to Sea Mar Management LLC, which is wholly-owned by Sea Mar Investco LLC, an
entity in which we own a 25% interest. Sea Mar Management has entered into a
time charter of these vessels with a subsidiary of ours, which then time
charters the vessels to various third-party customers. Revenues from these
business transactions totaled $65.7 million, $26.9 million and $27.6 million in
2002, 2001 and 2000, respectively. Expenses from these business transactions
totaled $32.1 million, $4.8 million and $4.9 million in 2002, 2001 and 2000,
respectively. Additionally, we had amounts receivable from these affiliated
entities of $53.3 million and $24.4 million as of December 31, 2002 and 2001,
respectively. We had accounts payable to these affiliated entities of $1.1
million and $3.3 million as of December 31, 2002 and 2001, respectively.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. The following is a discussion of our critical accounting policies.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including
renewals and betterments, are stated at cost, while maintenance and repairs are
expensed currently. Interest costs applicable to the construction of qualifying
assets are capitalized as a component of the cost of such assets. We provide for
the depreciation of our drilling and workover rigs using the units-of-production
method over an approximate 4,900-day period, with the exception of our jack-up
rigs which are depreciated over an 8,030-day period, after provision for salvage
value. When our drilling and workover rigs are not operating, a depreciation
charge is provided using the straight-line method over an assumed depreciable
life of 20 years, with the exception of our jack-up rigs, where a 30-year
depreciable life is used.
Depreciation on buildings, well-servicing rigs, oilfield hauling and
mobile equipment, marine transportation and supply vessels, and other machinery
and equipment is computed using the straight-line method over the estimated
useful life of the asset after provision for salvage value (buildings - 10 to 30
years; well-servicing rigs - 15 to 25 years; marine transportation and supply
vessels - 15 to 25 years; oilfield hauling and mobile equipment and other
machinery and equipment - 3 to 10 years). Amortization of capitalized leases is
included in depreciation and amortization expense. Upon retirement or other
disposal of fixed assets, the cost and related accumulated depreciation are
removed from the respective accounts and any gains or losses are included in our
results of operations. We review our assets for impairment when events or
changes in circumstances indicate that the net book values of equipment may not
be recovered over their remaining service lives. Provisions for asset impairment
60
are charged to income when the sum of estimated future cash flows, on an
undiscounted basis, is less than the asset's net book value. Impairment charges
are recorded using discounted cash flows which require 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. There were no impairment charges related to assets held
for use recorded by Nabors in 2002, 2001 and 2000. In 2002 we reclassified four
supply vessels to available-for-sale as we intend to sell these vessels in 2003.
Accordingly, we reduced the carrying values of these assets to levels
approximating their respective fair values, resulting in a charge to other
income of $3.7 million in 2002.
SELF-INSURANCE ACCRUALS We are self-insured for certain losses relating to
workers' compensation, employers' liability, general liability, automobile
liability and property damage. Given the recent tightening in the insurance
market, effective April 1, 2002, in connection with our insurance renewal, our
self-insurance levels have significantly increased. As a result, our
self-insurance retentions for losses relating to workers' compensation, general
liability and property damage have increased significantly. Effective for the
period from April 1, 2002 to March 31, 2003, our exposure (that is, our
deductible) per occurrence is $1.0 million for workers' compensation and
employers' liability, $2.0 million for marine employers' liability (Jones Act)
and $5.0 million for general liability losses. Our self-insurance for automobile
liability loss is $0.5 million per occurrence. We maintain actuarially supported
accruals on our consolidated balance sheet to cover the self-insurance
retentions.
We are self-insured for certain other losses relating to rig, equipment,
property, business interruption and political, war and terrorism risks.
Effective April 1, 2002, our per occurrence self-insured retentions are $10.0
million for rig physical damage and business interruption. However, our rigs,
equipment and property in Canada and Saudi Arabia are subject to $1.0 million
self-insurance retentions. As a result, with the exception of Canada and Saudi
Arabia, we are self-insured for rigs with replacement values less than $10.0
million. If a Nabors rig with a net book value of less than $10.0 million was
destroyed, we would record a loss equal to its net book value in the period in
which the loss event occurred. In previous years, we had physical damage
insurance for essentially all of our rigs, with a substantially lower deductible
of $.25 million per occurrence. Thus, historically we have not recorded
significant losses in our financial statements related to the destruction of one
of our rigs. We have purchased stop-loss coverage in order to limit our
aggregate exposure to certain physical damage claims for insured rigs (that is,
those rigs with replacement values in excess of $10.0 million). The effect of
this coverage is that our maximum physical damage loss on insured rigs would be
$20.0 million plus $1.0 million per occurrence.
Political risk, war and terrorism insurance is procured for our operations
in Mexico, the Caribbean, South America, Africa, the Middle East and Asia.
Through December 31, 2002, political and war risk losses were subject to $10.0
million per occurrence deductibles while terrorism was subject to a $1.0 million
per occurrence deductible. On January 1, 2003, we purchased additional insurance
to reduce these self-insurance retentions to $0.25 million per occurrence,
except for Colombia which remains at $10.0 million and $1.0 million for
political risk and terrorism, respectively. There is no assurance that such
coverage will adequately protect Nabors against liability from all potential
consequences.
REVENUE RECOGNITION Revenues and costs on daywork contracts are recognized
daily as the work progresses, and revenues and costs applicable to footage and
turnkey contracts are recognized when the well is completed (completed contract
method). For certain contracts, we receive lump-sum payments for the
mobilization of rigs and other drilling equipment. Mobilization revenues earned
and the related direct costs incurred for the mobilization 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 recognize revenue for those top drives and instrumentation systems we
manufacture for third parties when the earnings process is complete. This
generally occurs when products have been shipped or factory acceptance testing
on our products has been completed and the products are made available to our
customers in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility 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 income in the period
that the applicable proof of loss documentation is received.
61
In accordance with EITF 00-14, we recognize reimbursements received for
out-of-pocket expenses incurred as revenues and account for out-of-pocket
expenses as direct costs.
INCOME TAXES We are a Bermuda-exempt company and are not subject to income
taxes in Bermuda. Consequently, income taxes have been provided based on the tax
laws and rates in effect in the countries in which our operations are conducted
and income is earned. The income taxes in these jurisdictions vary
substantially. Our effective tax rate for financial statement purposes will
continue to fluctuate from year to year as our operations are conducted in
different taxing jurisdictions.
For U.S. federal income tax purposes, we have net operating loss
carryforwards of approximately $249.5 million that, if not utilized, will expire
from 2003 to 2023. The net operating loss carryforwards for alternative minimum
tax purposes are approximately $145.6 million. There are alternative minimum tax
credit carryforwards of $22.8 million available to offset future regular tax
liabilities.
We do not provide U.S. income and foreign withholding taxes on unremitted
earnings of our international subsidiaries, as these earnings are considered
permanently reinvested. Unremitted earnings totaled approximately $377.2 million
and $212.0 million as of December 31, 2002 and 2001, respectively. It is not
practicable to estimate the amount of deferred income taxes associated with
these unremitted earnings. Deferred taxes have been provided for foreign taxes
related to assets which are expected to reside in certain foreign locations long
enough to give rise to future tax consequences.
USE OF ESTIMATES The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the balance sheet date and
the amounts of revenues and expenses recognized during the reporting period.
Actual results could differ from such estimates. Key estimates used by
management include:
ALLOWANCE FOR DOUBTFUL ACCOUNTS We estimate our allowance for doubtful accounts
based on an analysis of historical collection activity and specific
identification of overdue accounts. Factors that may affect this estimate
include changes in the financial position of a major customer or significant
changes in the prices of natural gas or oil.
DEPRECIATION AND AMORTIZATION In order to depreciate and amortize our property,
plant and equipment and our intangible assets with definite lives, we estimate
the useful lives and salvage values of these items. Our estimates may be
affected by such factors as changing market conditions, technological advances
in the industry or changes in regulations governing the industry.
TAX ESTIMATES Under U.S. federal tax law, the amount and availability of loss
carryforwards (and certain other tax attributes) are subject to a variety of
interpretations and restrictive tests applicable to Nabors and our subsidiaries.
The utilization of such carryforwards could be limited or effectively lost upon
certain changes in ownership. Accordingly, although we believe substantial loss
carryforwards are available to us, no assurance can be given concerning such
loss carryforwards, or whether or not such loss carryforwards will be available
in the future.
LITIGATION AND INSURANCE RESERVES We estimate our reserves related to litigation
and insurance based on the facts and circumstances specific to the litigation
and insurance claims and our past experience with similar claims. The actual
outcome of litigated claims could differ significantly from estimated amounts.
We maintain actuarially supported accruals on our consolidated balance sheets to
cover self-insurance retentions.
FAIR VALUES OF ASSETS ACQUIRED AND LIABILITIES ASSUMED We estimate the values of
those assets acquired and liabilities assumed in business combinations, which
involves the use of various assumptions. These estimates may be affected by such
factors as changing market conditions, technological advances in the industry or
changes in regulations governing the industry. Our adoption of SFAS 142 on
January 1, 2002 requires us to test for impairment annually the goodwill and
intangible assets with indefinite useful lives recorded in business
combinations. This requires us to estimate the fair values of our own assets and
liabilities at a reporting unit level. Therefore, considerable judgment, similar
to that described above in connection with our estimation of the fair value of
an acquired company, will be required to assess goodwill and certain intangible
assets for impairment.
For additional information on our accounting policies, see Note 3 to our
accompanying consolidated financial statements.
62
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to certain market risks arising from the use of
financial instruments in the ordinary course of business. This risk arises
primarily as a result of potential changes in the fair market value of financial
instruments that would result from adverse fluctuations in foreign currency
exchange rates, credit risk, interest rates and marketable security prices as
discussed below.
FOREIGN CURRENCY RISK We operate in a number of international areas and
are involved in transactions denominated in currencies other than U.S. dollars,
which exposes us to foreign exchange rate risk. The most significant exposures
arise in connection with our operations in Canada and Saudi Arabia, which
usually are substantially unhedged. For our unconsolidated affiliate in Saudi
Arabia, upon renewal of our contracts, we have been converting Saudi
riyal-denominated contracts to U.S. dollar-denominated contracts in order to
reduce our exposure to the Saudi riyal, even though that currency has been
pegged to the U.S. dollar at a rate of 3.745 Saudi riyals to 1.00 U.S. dollar
since 1986. We cannot guarantee that we will be able to convert future Saudi
riyal-denominated contracts to U.S. dollar-denominated contracts or that the
Saudi riyal exchange rate will continue in effect as in the past.
We have an operation in Argentina that is not significant to our overall
profitability. Our Argentina operation contributed approximately 1% of our
revenues and adjusted income derived from operating activities in 2002. As a
result of the financial crisis in Argentina, the Argentine government allowed
their currency, the peso, to float beginning in January 2002. The peso, which
had been pegged to the U.S. dollar for several years, has devalued approximately
68%. Changes in the valuation of the peso in 2002 resulted in a translation gain
of approximately $1.1 million, recorded to accumulated other comprehensive
income in our consolidated balance sheet.
At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate. A
hypothetical 10% decrease in the value of all our foreign currencies relative to
the U.S. dollar as of December 31, 2002 would result in a $9.2 million decrease
in the fair value of our net monetary assets denominated in currencies other
than U.S. dollars.
CREDIT RISK Our financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash equivalents, investments
and marketable securities, accounts receivable, and our interest rate swap and
range cap and floor transactions. Cash equivalents such as deposits and
temporary cash investments are held by major banks or investment firms. Our
investments in marketable securities are managed within established guidelines
which limit the amounts that may be invested with any one issuer and which
provide guidance as to issuer credit quality. We believe that the credit risk in
such instruments is minimal. In addition, our trade receivables are with a
variety of U.S., international and foreign-country national oil and gas
companies. Management considers this credit risk to be limited due to the
financial resources of these companies. We perform ongoing credit evaluations of
our customers and we generally do not require material collateral. We maintain
reserves for potential credit losses, and such losses have been within
management's expectations.
INTEREST RATE AND MARKETABLE SECURITY PRICE RISK Our financial instruments
that are potentially sensitive to changes in interest rates include our $825
million and $1.381 billion zero coupon convertible senior debentures, our 6.8%,
4.875% and 5.375% senior notes, our 8.625% senior subordinated notes, our
interest rate swap and range cap and floor transactions, and our investments in
debt securities, including corporate, asset-backed, U.S. Government, Government
agencies, foreign government and mortgage-backed debt securities.
We may utilize derivative financial instruments that are intended to
manage our exposure to interest rate risks. The use of derivative financial
instruments could expose us to further credit risk and market risk. Credit risk
in this context is the failure of a counterparty to perform under the terms of
the derivative contract. When the fair value of a derivative contract is
positive, the counterparty would owe us, which can create credit risk for us.
When the fair value of a derivative contract is negative, we would owe the
counterparty, and therefore, we would not be exposed to credit risk. We attempt
to minimize credit risk in derivative instruments by entering into transactions
with major financial institutions that have a significant asset base. Market
risk related to derivatives is the adverse effect to the value of a financial
instrument that results from changes in
63
interest rates. We try to manage market risk associated with interest-rate
contracts by establishing and monitoring parameters that limit the type and
degree of market risk that we undertake.
On October 21, 2002, we entered into an interest rate swap transaction
with a third-party financial institution to hedge our exposure to changes in the
fair value of $200 million of our fixed rate 5.375% senior notes due 2012. The
purpose of this transaction was to convert future interest due on $200 million
of the senior notes to a lower variable rate in an attempt to realize savings on
our future interest payments. We have designated this swap agreement as a fair
value hedge. The swap agreement has a notional amount of $200 million and
matures in August 2012 to match the maturity of the senior notes. Under the
agreement, we pay on a quarterly basis a floating rate based on a three-month
U.S. dollar LIBOR rate, plus a spread of 62.625 basis points, and receive
a fixed rate of interest of 5.375% semi-annually. During 2002 we recorded
interest savings related to this interest rate swap of $1.2 million which served
to reduce interest expense. The change in cumulative fair value of this
derivative instrument resulted in the recording of a derivative asset, included
in other long-term assets, of $10.1 million as of December 31, 2002. The
carrying value of our 5.375% senior notes was increased by the same amount.
On October 21, 2002, we purchased a LIBOR range cap and sold a LIBOR
floor, in the form of a cashless collar, with the same third-party financial
institution with which we had executed the interest rate swap. This transaction
is intended to mitigate and manage our exposure to changes in the three-month
U.S. dollar LIBOR rate and does not qualify for hedge accounting treatment under
SFAS 133. Any change in the cumulative fair value of the range cap and the floor
will be reflected as a gain or loss in our consolidated statement of income. The
range cap and the floor are effective August 15, 2003 and expire on August 15,
2012. The range cap will be triggered when the three-month U.S. dollar LIBOR
rate is at or above 4.50%, and below 6.50%, such that the counterparty will pay
us any difference between the actual LIBOR rate and the 4.50% strike rate on a
notional amount of $200 million. No payment will be due to us if the three-month
U.S. dollar LIBOR rate is below 4.50% or at or above 6.50%. The floor is
triggered when the three-month U.S. dollar LIBOR rate is at or below 2.665% such
that we will pay the counterparty any difference between the actual LIBOR rate
and the 2.665% floor rate on a notional amount of $200 million. We recorded a
loss of $3.8 million during 2002 related to the change in cumulative fair value
of this derivative instrument. This loss is included in other income in our
consolidated statement of income for the year ended December 31, 2002 and has
been accrued in other long-term liabilities in our consolidated balance sheet as
of December 31, 2002.
A hypothetical 10% adverse shift in quoted interest rates would decrease
the fair values of our interest rate swap, and range cap and floor by
approximately $6.8 million and $1.0 million, respectively.
On July 25, 2002, we entered into an interest rate hedge transaction with
a third-party financial institution to manage and mitigate interest rate risk
exposure relative to our August 2002 debt financing. Under the agreement, we
agreed to receive (pay) cash from (to) the counterparty based on the difference
between 4.43% and the ten-year Treasury rate on August 23, 2002, assuming a
$100.0 million notional amount with semi-annual interest payments over a
ten-year maturity. We accounted for this transaction as a cash flow hedge.
During August 2002 we paid approximately $1.5 million related to the termination
of this agreement. This payment was recorded as a reduction to accumulated other
comprehensive income in our consolidated balance sheet and will be amortized
into earnings as additional interest expense, using the effective interest
method, over the term of the 5.375% senior notes due 2012.
On March 26, 2002, in anticipation of closing the Enserco acquisition, we
entered into two foreign exchange contracts with a total notional value of Cdn.
$115.9 million and maturity dates of April 29, 2002. Additionally, on April 9,
2002, we entered into a third foreign exchange contract with a notional value of
Cdn. $50.0 million maturing April 29, 2002. The notional amounts of these
contracts were used to fund the cash portion of the Enserco acquisition purchase
price. The notional amounts of these contracts represented the amount of foreign
currency purchased at maturity and did not represent our exposure under these
contracts. Although such contracts served as an economic hedge against our
foreign currency risk related to the cash portion of the acquisition cost, these
contracts did not qualify for hedge accounting treatment under SFAS 133. We
recognized a gain on these foreign exchange contracts of approximately U.S.
$1.78 million included in other income in our consolidated statement of income
for the year ended December 31, 2002.
64
FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of our fixed rate long-term
debt is estimated based on quoted market prices or price quotes from third-party
financial institutions. The carrying and fair values of our long-term debt,
including the current portion, are as follows:
DECEMBER 31, 2002
- -----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EFFECTIVE
INTEREST RATES) INTEREST RATE CARRYING VALUE FAIR VALUE
4.875% senior notes
due August 2009 4.952% $ 223,234 $ 231,854
5.375% senior notes
due August 2012 4.194%(1) 282,901(2) 293,478(2)
$825 million zero
coupon convertible
senior debentures
due June 2020 2.5% 489,126 494,081
$1.381 billion zero
coupon convertible
senior debentures
due February 2021 2.5% 765,549 756,733
6.8% senior notes
due April 2004 6.8% 295,237 310,068
Other long-term debt 7.8% 9,101 9,101
8.625% senior
subordinated notes
due April 2008 8.415% 42,493 43,930
--------- ---------- ----------
$2,107,641 $2,139,245
--------- ---------- ----------
(1) Includes the effect of interest savings realized from the interest rate
swap executed on October 21, 2002.
(2) Includes $10.1 million related to the fair value of the interest rate
swap.
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. Our cash and cash equivalents and investments in marketable debt
and equity securities are as follows:
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT INTEREST RATES WEIGHTED
AND WEIGHTED AVERAGE LIFE) INTEREST AVERAGE
FAIR VALUE RATES LIFE (YEARS)
Cash and cash equivalents $ 414,051 N/A N/A
Marketable equity securities:
Trading 4,260 N/A N/A
Available-for-sale 45,574 N/A N/A
Marketable debt securities:
Commercial paper and CDs 76,548 1.33%-2.51% .1
Corporate debt securities 204,084 1.37%-7.88% .5
U.S. Government
debt securities 42,675 3.00%-5.87% 1.7
Government agencies
debt securities 386,096 1.24%-5.63% .7
Foreign government
debt securities 15,213 7.12%-8.80% .2
Mortgage-CMO
debt securities 355 7.50% .6
Asset-backed
debt securities 141,943 2.76%-7.75% .9
---------- ---------- -------
$1,330,799
---------- ---------- -------
Our investments in marketable debt securities listed in the above table
are sensitive to changes in interest rates. Additionally, our investment
portfolio of marketable debt and equity securities, which are carried at fair
value, expose us to price risk. A hypothetical 10% decrease in the market prices
for all marketable securities would decrease the fair value of our trading
securities and available-for-sale securities by $.4 million and $91.2 million,
respectively.
65
REPORT OF INDEPENDENT ACCOUNTANTS
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NABORS INDUSTRIES LTD.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Nabors Industries Ltd. and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, Nabors
Industries Ltd. changed its method of accounting for goodwill effective January
1, 2002.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
January 29, 2003,
except for Note 21, as to which the date is
March 18, 2003
66
CONSOLIDATED BALANCE SHEETS
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
DECEMBER 31,
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 414,051 $ 198,443
Marketable securities 457,600 343,169
Accounts receivable, net 277,735 361,086
Inventory and supplies 20,524 18,515
Deferred income taxes 32,846 28,145
Prepaid expenses and other current assets 167,152 81,588
----------- -----------
TOTAL CURRENT ASSETS 1,369,908 1,030,946
Marketable securities 459,148 377,025
Property, plant and equipment, net 2,781,050 2,433,247
Goodwill, net 306,762 199,048
Other long-term assets 147,004 111,649
----------- -----------
TOTAL ASSETS $ 5,063,872 $ 4,151,915
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 492,985 $ 2,510
Trade accounts payable 109,163 131,821
Accrued liabilities 133,406 168,022
Income taxes payable 15,900 27,777
----------- -----------
TOTAL CURRENT LIABILITIES 751,454 330,130
Long-term debt 1,614,656 1,567,616
Other long-term liabilities 137,253 110,902
Deferred income taxes 402,054 285,401
----------- -----------
TOTAL LIABILITIES 2,905,417 2,294,049
----------- -----------
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock, par value $.001 and $.10 per share, respectively:
Authorized common shares 400,000;
issued 144,965 and 147,711, respectively 145 14,771
Capital in excess of par value 1,233,598 1,091,536
Accumulated other comprehensive (loss) income (3,243) 3,260
Retained earnings 927,955 1,001,079
Less treasury stock, at cost, 0 and 6,822 common shares -- (252,780)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,158,455 1,857,866
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,063,872 $ 4,151,915
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
67
CONSOLIDATED STATEMENTS OF INCOME
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
REVENUES AND OTHER INCOME:
Operating revenues $1,466,443 $2,201,736 $1,388,660
Earnings from unconsolidated affiliates 14,775 26,334 26,283
Interest income 34,086 53,973 20,581
Other income, net 3,708 28,650 27,157
---------- ---------- ----------
Total revenues and other income 1,519,012 2,310,693 1,462,681
---------- ---------- ----------
Cost and other deductions:
Direct costs 973,910 1,366,967 938,651
General and administrative expenses 141,895 135,496 106,504
Depreciation and amortization 195,365 189,896 152,413
Interest expense 67,068 60,722 35,370
---------- ---------- ----------
Total costs and other deductions 1,378,238 1,753,081 1,232,938
---------- ---------- ----------
Income before income taxes 140,774 557,612 229,743
---------- ---------- ----------
Income tax expense:
Current 10,185 83,718 19,594
Deferred 9,100 116,444 72,793
---------- ---------- ----------
Total income tax expense 19,285 200,162 92,387
---------- ---------- ----------
NET INCOME $ 121,489 $ 357,450 $ 137,356
---------- ---------- ----------
EARNINGS PER SHARE:
BASIC $ .85 $ 2.48 $ .95
DILUTED $ .81 $ 2.24 $ .90
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC 143,655 144,430 144,344
DILUTED 149,997 168,790 152,417
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
68
CONSOLIDATED STATEMENTS OF CASH FLOWS
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 121,489 $ 357,450 $ 137,356
Adjustments to net income:
Depreciation and amortization 195,365 189,896 152,413
Deferred income taxes 9,100 116,444 72,793
Deferred financing costs amortization 5,122 6,339 183
Discount amortization on zero coupon debentures 30,790 31,832 6,625
Amortization of loss on cash flow hedges 50 -- --
Gains on long-term assets, net (4,570) (10,246) (1,713)
(Gains) losses on marketable securities and warrants (2,877) 474 (18,800)
Loss on derivative instruments 1,983 -- --
Sales of marketable securities, trading -- -- 401
Foreign currency transaction gains (486) (419) (1,441)
Loss (gain) on early extinguishment of debt 202 (15,330) (3,036)
Equity in earnings from unconsolidated affiliates, net of dividends (4,900) (15,833) (10,333)
Increase (decrease), net of effects from acquisitions, from changes in:
Accounts receivable 114,580 3,026 (144,659)
Inventory and supplies 1,712 (791) 7,729
Prepaid expenses and other current assets (55,490) (13,753) 17,688
Other long-term assets (39,034) 7,464 (31,715)
Trade accounts payable and accrued liabilities and other (30,101) 31,033 12,998
Income taxes payable 11,725 801 10,661
Other long-term liabilities 17,785 6,698 12,298
--------- ----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 372,445 695,085 219,448
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, available-for-sale (745,383) (804,067) (325,286)
Sales of marketable securities, available-for-sale 542,133 431,498 42,450
Cash paid for acquisitions of businesses, net (135,652) (66,352) --
Capital expenditures (316,763) (701,156) (300,637)
Cash paid for other current assets (8,725) -- --
Proceeds from sales of assets and insurance claims 34,877 15,067 7,523
--------- ----------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (629,513) (1,125,010) (575,950)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash 210 692 1,634
Decrease in short-term borrowings, net (844) -- --
Proceeds from long-term debt 495,904 840,338 501,941
Reduction of long-term debt (30,831) (156,001) (136,434)
Debt issuance costs (2,945) (12,879) (6,810)
Payments related to cash flow hedges (1,494) -- --
Proceeds from issuance of common shares 12,850 8,219 112,979
Repurchase of common shares (2,486) (247,963) --
--------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 470,364 432,406 473,310
--------- ----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 2,312 (1,350) (76)
--------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 215,608 1,131 116,732
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 198,443 197,312 80,580
--------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 414,051 $ 198,443 $ 197,312
--------- ----------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
69
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
----------------------------------------
UNREALIZED UNREALIZED
COMMON STOCK CAPITAL GAINS (LOSSES) LOSSES ON CUMULATIVE
-------------------- IN EXCESS ON MARKETABLE CASH FLOW TRANSLATION
SHARES PAR VALUE OF PAR VALUE SECURITIES HEDGES ADJUSTMENT
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCES, DECEMBER 31, 1999 137,421 $ 13,742 $ 958,704 $ 2,485 $ -- $(6,313)
------- -------- ----------- -------- ------ -------
Comprehensive income:
Net income
Translation adjustment (2,490)
Unrealized gains on
marketable securities,
net of income taxes
of $13,771 23,448
Less: reclassification
adjustment for gains
included in net income,
net of income taxes
of $5,894 (10,036)
------- -------- ----------- -------- ------ -------
Total comprehensive income -- -- -- 13,412 -- (2,490)
------- -------- ----------- -------- ------ -------
Issuance of common shares
for stock options exercised 9,664 966 110,532
Issuance of common shares
in connection with the
Bayard warrants exercised 70 7 1,636
Tax effect of stock
option deductions 75,137
Other (162)
------- -------- ----------- -------- ------ -------
Subtotal 9,734 973 187,143 -- -- --
------- -------- ----------- -------- ------ -------
BALANCES, DECEMBER 31, 2000 147,155 $ 14,715 $ 1,145,847 $ 15,897 $ -- $(8,803)
------- -------- ----------- -------- ------ -------
Comprehensive income:
Net income
Translation adjustment (347)
Unrealized losses on
marketable securities,
net of income tax
benefit of $1,560 (2,657)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of $488 (830)
------- -------- ----------- -------- ------ -------
Total comprehensive income -- -- -- (3,487) -- (347)
------- -------- ----------- -------- ------ -------
Issuance of common shares
for stock options exercised 556 56 8,163
Tax effect of stock
option deductions (62,474)
Repurchase of common shares
------- -------- ----------- -------- ------ -------
Subtotal 556 56 (54,311) -- -- --
------- -------- ----------- -------- ------ -------
BALANCES, DECEMBER 31, 2001 147,711 $ 14,771 $ 1,091,536 $ 12,410 $ -- $(9,150)
------- -------- ----------- -------- ------ -------
TOTAL
RETAINED TREASURY STOCKHOLDERS'
EARNINGS STOCK EQUITY
- -------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCES, DECEMBER 31, 1999 $ 506,273 $ (4,817) $ 1,470,074
----------- ---------- -----------
Comprehensive income:
Net income 137,356 137,356
Translation adjustment (2,490)
Unrealized gains on
marketable securities,
net of income taxes
of $13,771 23,448
Less: reclassification
adjustment for gains
included in net income,
net of income taxes
of $5,894 (10,036)
----------- ---------- -----------
Total comprehensive income 137,356 -- 148,278
----------- ---------- -----------
Issuance of common shares
for stock options exercised 111,498
Issuance of common shares
in connection with the
Bayard warrants exercised 1,643
Tax effect of stock
option deductions 75,137
Other (162)
----------- ---------- -----------
Subtotal -- -- 188,116
----------- ---------- -----------
BALANCES, DECEMBER 31, 2000 $ 643,629 $ (4,817) $ 1,806,468
----------- ---------- -----------
Comprehensive income:
Net income 357,450 357,450
Translation adjustment (347)
Unrealized losses on
marketable securities,
net of income tax
benefit of $1,560 (2,657)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of $488 (830)
----------- ---------- -----------
Total comprehensive income 357,450 -- 353,616
----------- ---------- -----------
Issuance of common shares
for stock options exercised 8,219
Tax effect of stock
option deductions (62,474)
Repurchase of common shares (247,963) (247,963)
----------- ---------- -----------
Subtotal -- (247,963) (302,218)
----------- ---------- -----------
BALANCES, DECEMBER 31, 2001 $ 1,001,079 $ (252,780) $ 1,857,866
----------- ---------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
70
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
------------------------------------------------------
UNREALIZED MINIMUM UNREALIZED
COMMON STOCK CAPITAL GAINS (LOSSES) PENSION LOSSES ON CUMULATIVE
--------------------- IN EXCESS ON MARKETABLE LIABILITY CASH FLOW TRANSLATION
SHARES PAR VALUE OF PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCES, DECEMBER 31, 2001 147,711 $14,771 $ 1,091,536 $ 12,410 $ -- $ -- $ (9,150)
-------- ------- ----------- -------- ------- ------- --------
Comprehensive income:
Net income
Translation adjustment 3,910
Unrealized losses on
marketable securities,
net of income tax
benefit of $2,786 (4,743)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes
of $1,187 (2,021)
Minimum pension
liability adjustment (2,205)
Unrealized losses on
cash flow hedges (1,444)
-------- ------- ----------- -------- ------- ------- --------
Total comprehensive income -- -- -- (6,764) (2,205) (1,444) 3,910
-------- ------- ----------- -------- ------- ------- --------
Issuance of common shares
for stock options exercised 806 64 10,210
Issuance of common shares
in connection with the
Bayard warrants exercised 18 2 (2)
Issuance of common shares
in connection with the
Enserco acquisition 2,638 264 162,497
Issuance of common shares
in connection with the
Ryan acquisition 220 11,636
Nabors Exchangeco
shares exchanged 485 19 (19)
Tax effect of stock
option deductions 842
Repurchase of common shares (91) (799)
Put option on common shares 2,576
Retirement of treasury stock (6,822) (682) (59,172)
Change in par value (14,293) 14,293
-------- ------- ----------- -------- ------- ------- --------
Subtotal (2,746) (14,626) 142,062 -- -- -- --
-------- ------- ----------- -------- ------- ------- --------
BALANCES, DECEMBER 31, 2002 144,965 $ 145 $ 1,233,598 $ 5,646 $(2,205) $(1,444) $ (5,240)
-------- ------- ----------- -------- ------- ------- --------
TOTAL
RETAINED TREASURY STOCKHOLDERS'
EARNINGS STOCK EQUITY
- --------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCES, DECEMBER 31, 2001 $ 1,001,079 $ (252,780) $ 1,857,866
----------- ---------- -----------
Comprehensive income:
Net income 121,489 121,489
Translation adjustment 3,910
Unrealized losses on
marketable securities,
net of income tax
benefit of $2,786 (4,743)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes
of $1,187 (2,021)
Minimum pension
liability adjustment (2,205)
Unrealized losses on
cash flow hedges (1,444)
----------- ---------- -----------
Total comprehensive income 121,489 -- 114,986
----------- ---------- -----------
Issuance of common shares
for stock options exercised 10,274
Issuance of common shares
in connection with the
Bayard warrants exercised --
Issuance of common shares
in connection with the
Enserco acquisition 162,761
Issuance of common shares
in connection with the
Ryan acquisition 11,636
Nabors Exchangeco
shares exchanged --
Tax effect of stock
option deductions 842
Repurchase of common shares (1,687) (2,486)
Put option on common shares 2,576
Retirement of treasury stock (192,926) 252,780 --
Change in par value --
----------- ---------- -----------
Subtotal (194,613) 252,780 185,603
----------- ---------- -----------
BALANCES, DECEMBER 31, 2002 $ 927,955 $ -- $ 2,158,455
----------- ---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
1 CORPORATE REORGANIZATION
Effective June 24, 2002, Nabors Industries Ltd., a Bermuda-exempt company
(Nabors), became the successor to Nabors Industries, Inc., a Delaware
corporation (Nabors Delaware), following a corporate reorganization. The
reorganization was accomplished through the merger of an indirect, newly formed
Delaware subsidiary owned by Nabors, into Nabors Delaware. Nabors Delaware was
the surviving company in the merger and became a wholly-owned, indirect
subsidiary of Nabors. Upon consummation of the merger, all outstanding shares of
Nabors Delaware common stock automatically converted into the right to receive
Nabors common shares, with the result that the shareholders of Nabors Delaware
on the date of the merger became the shareholders of Nabors. Nabors and its
subsidiaries continue to conduct the businesses previously conducted by Nabors
Delaware and its subsidiaries. The reorganization was accounted for as a
reorganization of entities under common control and accordingly, it did not
result in any changes to the consolidated amounts of assets, liabilities and
stockholders' equity.
2 NATURE OF OPERATIONS
Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East and Africa. Nabors also is one of the largest land
well-servicing and workover contractors in the United States and Canada. We own
over 900 land workover and well-servicing rigs in the United States, primarily
in the southwestern and western United States, and over 200 land workover and
well-servicing rigs in Canada. Nabors is a leading provider of offshore platform
workover and drilling rigs, and owns 43 platform, 16 jack-up and three barge
rigs in the Gulf of Mexico and international markets. These rigs provide
well-servicing, workover and drilling services. We have a 50% ownership interest
in a joint venture in Saudi Arabia, which owns 18 rigs.
To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including oilfield management,
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. Our land
transportation and hauling fleet includes 240 rig and oilfield equipment hauling
tractor-trailers and a number of cranes, loaders and light-duty vehicles. We
maintain over 290 fluid hauling trucks, approximately 700 fluid storage tanks,
eight saltwater disposal wells and other auxiliary equipment used in domestic
drilling, workover and well-servicing operations. In addition, we own a fleet of
30 marine transportation and supply vessels, primarily in the Gulf of Mexico,
which provide transportation of drilling materials, supplies and crews for
offshore operations. We manufacture and lease or sell top drives for a broad
range of drilling applications, directional drilling systems, rig
instrumentation and data collection equipment and rig reporting software.
Our businesses depend to a large degree on the level of capital spending
by oil and gas companies for exploration, development and production activities.
Therefore, a sustained increase or decrease in the price of natural gas or oil,
which could have a material impact on exploration, development and production
activities, also could materially affect our financial position, results of
operations and cash flows.
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Nabors and
all majority-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net
72
income of these entities is recorded as Earnings from unconsolidated affiliates
in our consolidated statements of income, and our investment in these entities
is carried as a single amount in our consolidated balance sheets.
Although Nabors had a majority voting interest (51%) in an Argentine
entity prior to January 1, 2001, Nabors' ability to control the entity's
operations was restricted by certain substantive participating rights granted to
the minority shareholder. These rights included the unanimous approval of
operating and capital budgets by the Board of Directors, which included two
representatives of the minority shareholder. Additionally, the general manager
of the entity was subject to approval by the minority shareholder. Accordingly,
we accounted for this entity using the equity method of accounting prior to
January 1, 2001, since such participating rights allowed the minority
shareholder to effectively participate in decisions made in the ordinary course
of business. On January 1, 2001, we acquired the remaining 49% of this Argentine
operation, and therefore we have consolidated these operations from that date
(Note 4).
Investments in net assets of affiliated entities accounted for using the
equity method totaled $58.6 million and $55.1 million as of December 31, 2002
and 2001, respectively, and are included in other long-term assets in our
consolidated balance sheets.
RECLASSIFICATIONS
Certain reclassifications have been made to prior periods to conform to
the current period presentation, with no effect on our consolidated financial
position, results of operations or cash flows (see Recent Accounting
Pronouncements).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and various other
short-term investments with original maturities of three months or less.
MARKETABLE SECURITIES
Marketable securities consist of equity securities, certificates of
deposit, corporate debt securities, U.S. Government debt securities, government
agencies debt securities, foreign government debt securities, mortgage-backed
debt securities and asset-backed debt securities. Securities classified as
available-for-sale or trading are stated at fair value. Unrealized holding gains
and losses for available-for-sale securities are excluded from earnings and,
until realized, are reported net of taxes in a separate component of
stockholders' equity. Unrealized and realized gains and losses on securities
classified as trading are reported in earnings currently.
In computing realized gains and losses on the sale of equity securities,
the specific identification method is used. In accordance with this method, the
cost of the equity securities sold is determined using the specific cost of the
security when originally purchased.
INVENTORY AND SUPPLIES
Inventory and supplies are composed of replacement parts and supplies held
for use in our drilling operations and top drives and drilling instrumentation
systems manufactured by our subsidiaries for resale. Inventory and supplies are
valued at the lower of weighted average cost or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including renewals and betterments, are
stated at cost, while maintenance and repairs are expensed currently. Interest
costs applicable to the construction of qualifying assets are capitalized as a
component of the cost of such assets. We provide for the depreciation of our
drilling and workover rigs using the units-of-production method over an
approximate 4,900-day period, with the exception of our jack-up rigs which are
depreciated over an 8,030-day period, after provision for salvage value. When
our drilling and workover rigs are not operating, a depreciation charge is
provided using the straight-line method over an assumed depreciable life of 20
years, with the exception of our jack-up rigs, where a 30-year depreciable life
is used. Effective October 1, 2001, we changed the depreciable lives of our
drilling and workover rigs from 4,200 to 4,900 active days, our jack-up rigs
from 4,200 to 8,030 active days and certain other drilling equipment lives, to
better reflect the estimated useful lives of these assets. The effect of this
change in accounting estimate was accounted for on a prospective basis beginning
October 1, 2001 and increased net income by approximately $19.7 million ($.13
per diluted share) and $5.5 million ($.03 per diluted share) for 2002 and 2001,
respectively.
Depreciation on buildings, well-servicing rigs, oilfield hauling and
mobile equipment, marine transportation and supply vessels, and other machinery
and equipment is computed using the straight-line method over the estimated
useful life of the asset after provision for salvage value (buildings - 10 to
30 years; well-servicing rigs - 15 to 25 years; marine transportation and supply
vessels - 15 to 25 years; oilfield hauling and mobile equipment and other
machinery and equipment - 3 to 10 years). Amortization of capitalized leases is
included in depreciation and amortization
73
expense. Upon retirement or other disposal of fixed assets, the cost and related
accumulated depreciation are removed from the respective accounts and any gains
or losses are included in our results of operations.
We review our assets for impairment when events or changes in
circumstances indicate that the net book values of equipment may not be
recovered over their remaining service lives. Provisions for asset impairment
are charged to income when the sum of estimated future cash flows, on an
undiscounted basis, is less than the asset's net book value. Impairment charges
are recorded using discounted cash flows which 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. There were no impairment charges related to assets held
for use recorded by Nabors in 2002, 2001 and 2000. In 2002 we reclassified four
supply vessels to available-for-sale as we intend to sell these vessels in 2003.
Accordingly, we reduced the carrying values of these assets to levels
approximating their respective fair values, resulting in a charge to other
income of $3.7 million in 2002.
GOODWILL
Goodwill represents the cost in excess of fair value of the net assets of
companies acquired. Prior to January 1, 2002, goodwill was amortized using the
straight-line method over 30 years and was recorded net of accumulated
amortization of $16.1 million as of December 31, 2001. Effective January 1,
2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets." SFAS 142 supersedes Accounting
Principles Board (APB) Opinion No. 17, which stated that goodwill acquired as a
result of a purchase method business combination and all other intangible assets
were subject to amortization. APB 17 also mandated a maximum period of 40 years
for that amortization. SFAS 142 presumes that all goodwill and intangible assets
that have indefinite useful lives will not be subject to amortization, but
rather will be tested at least annually for impairment. In addition, the
standard provides specific guidance on how to determine and measure goodwill
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but without the constraint of a 40-year
maximum amortization period.
During the second quarter of 2002 we performed our initial goodwill
impairment assessment as required. As part of that assessment, we determined
that our 11 business units, as of January 1, 2002, represented our reporting
units as defined by SFAS 142. We determined the aggregate carrying values and
fair values of all such reporting units, which were measured as of the January
1, 2002 adoption date. We calculated the fair value of each reporting unit based
on discounted cash flows and determined there was no goodwill impairment. In
instances where assets acquired and liabilities assumed in a business
combination are assigned solely to one of our business units, the amount of
goodwill resulting from that acquisition is assigned in full to that business
unit. In instances where assets and liabilities are split between more than one
business unit, we assign goodwill to our business units based on the respective
fair values of the fixed assets assigned to each business unit.
If the provisions of SFAS 142 had been in effect during the periods prior
to January 1, 2002, goodwill amortization would not have been recorded,
increasing net income and earnings per share as follows:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000
Reported net income $ 357,450 $ 137,356
Add back: goodwill amortization, net of related
income tax benefit of $2,572 and $2,360, respectively 4,573 3,540
---------- ----------
Adjusted net income $ 362,023 $ 140,896
---------- ----------
Earnings per share:
Basic:
Reported $ 2.48 $ .95
Goodwill amortization .03 .03
---------- ----------
Adjusted $ 2.51 $ .98
---------- ----------
Diluted:
Reported $ 2.24 $ .90
Goodwill amortization .02 .02
---------- ----------
Adjusted $ 2.26 $ .92
---------- ----------
The change in the carrying amount of goodwill for each of Nabors'
reportable segments for the years ended December 31, 2002 and 2001 is as
follows:
74
- -------------------------------------------------------------------------------
CONTRACT MANUFACTURING
(IN THOUSANDS) DRILLING AND LOGISTICS TOTAL
Balance as of January 1, 2001 $ 154,302 $ 37,879 $ 192,181
Acquisitions 12,909 -- 12,909
Purchase price adjustments (6,461) 7,564 1,103
Amortization (5,292) (1,853) (7,145)
--------- -------- ---------
Balance as of December 31, 2001 155,458 43,590 199,048
Acquisitions 107,419 3,217 110,636
Cumulative translation adjustment (2,922) -- (2,922)
--------- -------- ---------
Balance as of December 31, 2002 $ 259,955 $ 46,807 $ 306,762
--------- -------- ---------
Goodwill totaling approximately $4.7 million is expected to be deductible
for tax purposes.
DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative financial instruments in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No. 133." These statements establish
accounting and reporting standards requiring that derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet at fair value as either assets or liabilities. The
accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative and the resulting designation, which is
established at the inception of a derivative. Accounting for derivatives
qualifying as fair value hedges allows a derivative's gains and losses to offset
related results on the hedged item in the statement of income. For derivative
instruments designated as cash flow hedges, changes in fair value, to the extent
the hedge is effective, are recognized in other comprehensive income until the
hedged item is recognized in earnings. Hedge effectiveness is measured quarterly
based on the relative cumulative changes in fair value between the derivative
contract and the hedged item over time. Any change in fair value resulting from
ineffectiveness is recognized immediately in earnings. Any change in fair value
of derivative financial instruments that are speculative in nature and do not
qualify for hedge accounting treatment is also recognized immediately in
earnings.
LITIGATION AND INSURANCE RESERVES
We estimate our reserves related to litigation and insurance based on the
facts and circumstances specific to the litigation and insurance claims and our
past experience with similar claims. We maintain actuarially supported accruals
on our consolidated balance sheets to cover self-insurance retentions (Note 15).
REVENUE RECOGNITION
Revenues and costs on daywork contracts are recognized daily as the work
progresses, and revenues and costs applicable to footage and turnkey contracts
are recognized when the well is completed (completed contract method). For
certain contracts, we receive lump-sum payments for the mobilization of rigs and
other drilling equipment. Mobilization revenues earned and the related direct
costs incurred for the mobilization 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 recognize revenue for those top drives and instrumentation systems we
manufacture for third parties when the earnings process is complete. This
generally occurs when products have been shipped or factory acceptance testing
on our products has been completed and the products are made available to our
customers in accordance with the terms of the agreement, title and risk of loss
have been transferred, collectibility is probable, and pricing is fixed and
determinable.
75
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 income in the period
that the applicable proof of loss documentation is received.
In accordance with Emerging Issues Task Force (EITF) No. 00-14, we
recognize reimbursements received for out-of-pocket expenses incurred as
revenues and account for out-of-pocket expenses as direct costs (see discussion
in Recent Accounting Pronouncements below).
INCOME TAXES
We are a Bermuda-exempt company and are not subject to income taxes in
Bermuda. Consequently, income taxes have been provided based on the tax laws and
rates in effect in the countries in which our operations are conducted and
income is earned. The income taxes in these jurisdictions vary substantially.
Our effective tax rate for financial statement purposes will continue to
fluctuate from year to year as our operations are conducted in different taxing
jurisdictions.
We do not provide U.S. income and foreign withholding taxes on unremitted
earnings of our international subsidiaries, as these earnings are considered
permanently reinvested. Unremitted earnings totaled approximately $377.2 million
and $212.0 million as of December 31, 2002 and 2001, respectively. It is not
practicable to estimate the amount of deferred income taxes associated with
these unremitted earnings. Deferred taxes have been provided for foreign taxes
related to assets which are expected to reside in certain foreign locations long
enough to give rise to future tax consequences.
Nabors realizes an income tax benefit associated with certain stock
options issued under its stock option plans. This benefit results in a reduction
in income taxes payable and an increase in capital in excess of par value.
FOREIGN CURRENCY TRANSLATION
For certain of our foreign subsidiaries, such as those in Canada and
Argentina, the local currency is the functional currency, and therefore
translation gains or losses associated with foreign-denominated monetary
accounts are accumulated in a separate section of stockholders' equity. For our
other international subsidiaries, the U.S. dollar is the functional currency,
and therefore local currency transaction gains and losses are included in our
results of operations.
STOCK-BASED COMPENSATION
We account for stock-based compensation using the intrinsic value method
prescribed by APB No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of Nabors common stock at the date of grant over
the amount an employee must pay to acquire the common stock. We grant options at
prices equal to the market price of our stock on the date of grant and therefore
do not record compensation costs related to these grants. The following table
illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to our stock-based employee compensation:
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
Net income, as reported $ 121,489 $ 357,450 $ 137,356
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (31,047) (8,350) (68,956)
---------- ---------- ----------
Pro forma net income $ 90,442 $ 349,100 $ 68,400
---------- ---------- ----------
Earnings per share:
Basic - as reported $ .85 $ 2.48 $ .95
---------- ---------- ----------
Basic - pro forma $ .63 $ 2.42 $ .47
---------- ---------- ----------
Diluted - as reported $ .81 $ 2.24 $ .90
---------- ---------- ----------
Diluted - pro forma $ .60 $ 2.19 $ .45
---------- ---------- ----------
76
The pro forma amounts above were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
during 2002, 2001 and 2000, respectively: risk-free interest rates of 3.79%,
4.74% and 6.01%; volatility of 48.19%, 50.42% and 42.38%; dividend yield of 0.0%
for all periods; and expected life of 3.5 years for all periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the balance sheet date and
the amounts of revenues and expenses recognized during the reporting period.
Actual results could differ from such estimates. Key estimates used by
management include:
- - allowance for doubtful accounts;
- - depreciation and amortization;
- - tax estimates;
- - litigation and insurance reserves; and
- - fair values of assets acquired and liabilities assumed.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the
accounting for goodwill and other intangible assets after an acquisition. The
most significant changes made by SFAS 142 are: (1) goodwill and intangible
assets with indefinite lives no longer will be amortized; (2) goodwill and
intangible assets with indefinite lives must be tested for impairment at least
annually; and (3) the amortization period for those intangible assets with
finite lives no longer will be limited to 40 years. We adopted SFAS 142
effective January 1, 2002, and accordingly we no longer record goodwill
amortization expense.
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. Upon adoption, this new accounting pronouncement had no impact on our
reported results of operations or financial position.
We adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," effective April
1, 2002. Due to the nature of our business, Financial Accounting Standards Board
(FASB) 44, 64 and Amendment of FASB 13 are not applicable. SFAS 145 eliminates
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and states
that gains and losses from the extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in APB No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." APB 30 defines extraordinary items as events and transactions
that are distinguished by their unusual nature and by the infrequency of their
occurrence. Accordingly, we no longer classify gains and losses from
extinguishment of debt that are usual and frequent as extraordinary items, and
we reclassified to other income all similar debt extinguishment items that had
been reported as extraordinary items in prior accounting periods. In conjunction
with adopting SFAS 145 we reclassified, for fiscal years 2002, 2001 and 2000,
the following extraordinary (losses) gains to other income with the related
income tax component reclassified to income tax expense, respectively: $(.13
million), net of tax benefit of $.08 million; $9.6 million, net of taxes of $5.7
million, and $1.9 million, net of taxes of $1.1 million. These reclassifications
had no impact on net income.
In July 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement will require us to
recognize costs associated with exit or disposal activities when they are
incurred rather than when we commit to an exit or disposal plan. Examples of
costs covered by this guidance include lease termination costs, employee
severance costs that are associated with a restructuring, discontinued
operations, plant closings or other exit or disposal activities. This statement
is effective for fiscal years beginning after December 31, 2002 and will impact
any exit or disposal activities initiated after January 1, 2003. This statement
does not currently impact Nabors.
77
We adopted EITF No. 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred," in the second
quarter of 2002. Previously, we recognized reimbursements received as a
reduction to the related direct costs. EITF 01-14 requires that reimbursements
received be included in operating revenues and out-of-pocket expenses be
included in direct costs. Accordingly, reimbursements received from our
customers have been reclassified to revenues for all periods presented. The
effect of adopting EITF 01-14 resulted in the following reclassifications to the
annual results for 2001 and 2000: operating revenues and direct costs were
increased from previously reported amounts by $70.0 million and $50.3 million,
respectively. These reclassifications had no impact on net income.
In November 2002 the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements, Including Guarantees of
Indebtedness of Others." FIN 45 requires that upon issuance of certain types of
guarantees, a guarantor recognize and account for the fair value of the
guarantee as a liability. FIN 45 contains exclusions to this requirement,
including the exclusion of a parent's guarantee of its subsidiaries' debt to a
third party. The initial recognition and measurement provisions of FIN 45 should
be applied on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of both interim and annual periods ending after December
15, 2002. The adoption of the recognition and measurement provisions of FIN 45
is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows. The disclosures required by FIN
45 are included in Note 15.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - an Amendment of FAS 123." This statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that statement to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002. SFAS 148 does not change the provisions of SFAS 123 that
permit entities to continue to apply the intrinsic value method of APB No. 25,
"Accounting for Stock Issued to Employees." However, those companies that
continue to account for awards of stock-based employee compensation under the
intrinsic value method of APB 25 are required to disclose certain information
using a tabular presentation mandated by SFAS 148. At the present time, we plan
to continue accounting for stock-based compensation using the intrinsic value
method under APB 25 and have presented the disclosures required by SFAS 148 in
Stock-Based Compensation above.
In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. The consolidation requirements of FIN 46 apply immediately to VIEs
created after January 31, 2003. For VIEs created at an earlier date, the
consolidation requirements apply in the first fiscal year or interim period
beginning after June 15, 2003. Certain disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the VIE
was established. Based on current information, Nabors believes it has no
material interests in VIEs that will require disclosure or consolidation under
FIN 46.
78
4 ACQUISITIONS
On August 12, 2002, Nabors entered into an arrangement agreement to
acquire Ryan Energy Technologies Inc., a corporation incorporated under the laws
of Alberta, Canada. Nabors' acquisition of Ryan was completed on October 9,
2002, and became effective pursuant to a plan of arrangement approved by the
securityholders of Ryan and the Court of Queen's Bench of Alberta.
Pursuant to the arrangement, Nabors Exchangeco (Canada) Inc., an indirect
wholly-owned Canadian subsidiary of Nabors, acquired all of the issued and
outstanding common shares of Ryan in exchange for approximately Cdn. $22.6
million (U.S. $14.2 million) in cash and 380,264 exchangeable shares of Nabors
Exchangeco, of which 219,493 exchangeable shares were immediately exchanged for
common shares of Nabors in accordance with the instructions of the holders of
those shares. The Nabors Exchangeco shares are exchangeable for Nabors common
shares, at each holder's option, on a one-for-one basis and are listed on the
Toronto Stock Exchange. Additionally, these exchangeable shares have essentially
identical rights as Nabors common shares, including but not limited to voting
rights and the right to receive dividends, if any, and will be automatically
exchanged upon the occurrence of certain events. The value of the Nabors
Exchangeco shares issued totaled Cdn. $18.5 million (U.S. $11.6 million). In
addition, we assumed Ryan debt totaling Cdn. $14.5 million (U.S. $9.1 million).
Ryan's results of operations were consolidated into ours commencing on October
9, 2002. The Ryan purchase price has been allocated based on preliminary
estimates of the fair market value of assets acquired and liabilities assumed as
of the acquisition date and resulted in goodwill of approximately Cdn $5.1
million (U.S. $3.2 million). The purchase price allocation for the Ryan
acquisition is subject to adjustment as additional information becomes available
and will be finalized by September 30, 2003.
Ryan manufactures and sells directional drilling and rig instrumentation
systems and provides directional drilling, rig instrumentation and data
collection services to oil and gas exploration and service companies in the
United States, Canada and Venezuela.
On March 18, 2002, we acquired, for cash, 20.5% of the issued and
outstanding shares of Enserco Energy Service Company Inc., a Canadian
publicly-held corporation, for Cdn. $15.50 per share for a total price of Cdn.
$83.2 million (U.S. $52.6 million). On April 26, 2002, Nabors Exchangeco
acquired all of the remaining issued and outstanding common shares of Enserco in
exchange for approximately Cdn. $100.1 million (U.S. $64.1 million) in cash and
3,549,082 exchangeable shares of Nabors Exchangeco, of which 2,638,526
exchangeable shares were immediately exchanged for Nabors Delaware common stock
in accordance with the instructions of the holders of those shares. The value of
the Nabors Exchangeco shares issued totaled Cdn. $254.2 million (U.S. $162.8
million). In addition, we assumed Enserco debt totaling Cdn. $33.4 million (U.S.
$21.4 million). Enserco's results of operations were consolidated into ours
commencing on April 26, 2002. The Enserco purchase price has been allocated
based on estimates of the fair market value of assets acquired and liabilities
assumed as of the acquisition date and resulted in goodwill of approximately
Cdn. $158.7 million (U.S. $101.3 million).
Enserco provided land drilling, well-servicing and workover services in
Canada and operated a fleet of 193 well-servicing rigs and 30 drilling rigs as
of our acquisition date.
On November 13, 2001, we completed our acquisition of Command Drilling
Corporation in which we purchased all of Command's common stock at $3.35 per
share for a total purchase price of Cdn. $102.3 million (U.S. $65.1 million).
Command owned 15 rigs operating in the Canadian Rockies. The Command purchase
price was allocated based on estimates of the fair market value of assets
acquired and liabilities assumed as of the acquisition date and resulted in
goodwill of approximately Cdn. $13.1 million (U.S. $8.2 million).
On January 1, 2001, we purchased our partner's 49% interest in our
Argentina operation for U.S. $4.5 million and we now own 100% of the operation.
The purchase price was allocated based on estimates of the fair market value of
assets acquired and liabilities assumed as of the acquisition date and resulted
in goodwill of approximately U.S. $4.7 million.
79
5 CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
Our cash and cash equivalents, short-term and long-term marketable
securities consist of the following:
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002
GROSS UNREALIZED GROSS UNREALIZED
FAIR VALUE HOLDING GAINS HOLDING LOSSES
Cash and cash equivalents $ 414,051 $ -- $ --
---------- ---------- ----------
Equity securities:
Trading 4,260 1,138 --
Available-for-sale 45,574 4,733 (2,844)
---------- ---------- ----------
Total equity securities 49,834 5,871 (2,844)
---------- ---------- ----------
Debt securities:
Commercial paper and CDs 76,548 57 --
Corporate debt securities 204,084 4,063 --
U.S. Government
debt securities 42,675 401 --
Government agencies
debt securities 386,096 1,564 --
Foreign government
debt securities 15,213 121 --
Mortgage-backed
debt securities 355 5 --
Asset-backed
debt securities 141,943 1,710 --
---------- ---------- ----------
Total debt securities 866,914 7,921 --
---------- ---------- ----------
$1,330,799 $ 13,792 $ (2,844)
---------- ---------- ----------
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2001
GROSS UNREALIZED GROSS UNREALIZED
FAIR VALUE HOLDING GAINS HOLDING LOSSES
Cash and cash equivalents $ 198,443 $ -- $ --
---------- ---------- ----------
Equity securities:
Trading 4,826 1,704 --
Available-for-sale 51,727 6,805 (734)
---------- ---------- ----------
Total equity securities 56,553 8,509 (734)
---------- ---------- ----------
Debt securities:
Corporate debt securities 276,097 6,977 --
U.S. Government
debt securities 20,263 323 --
Government agencies
debt securities 91,727 1,795 --
Foreign government
debt securities 15,895 427 --
Mortgage-backed
debt securities 1,772 28 --
Mortgage-CMO
debt securities 3,620 88 --
Asset-backed
debt securities 254,267 4,018 --
---------- ---------- ----------
Total debt securities 663,641 13,656 --
---------- ---------- ----------
$ 918,637 $ 22,165 $ (734)
---------- ---------- ----------
The estimated fair values of our corporate, U.S. Government, Government
agencies, foreign government, mortgage-backed and asset-backed debt securities
at December 31, 2002, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to repay obligations without prepayment penalties
and we may elect to sell the securities prior to the maturity date.
ESTIMATED
FAIR VALUE
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002
Debt securities:
Due in one year or less $ 407,766
Due after one year through five years 459,148
---------
$ 866,914
---------
Certain information regarding our equity securities is presented below:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Equity securities:
Trading:
Unrealized holding
(losses) gains $ (565) $ (674) $ 2,700
Proceeds -- -- 401
Realized gains, net of taxes -- -- 200
Available-for-sale:
Proceeds 542,133 431,498 42,500
Realized gains, net of taxes 3,442 200 15,900
---------- ---------- ----------
80
6 PROPERTY, PLANT AND EQUIPMENT
The major components of our property, plant and equipment are as follows:
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
Land $ 15,203 $ 14,756
Buildings 30,177 25,541
Drilling, workover and well-servicing
rigs, and related equipment 3,307,504 2,820,274
Marine transportation and
supply vessels 156,212 161,390
Oilfield hauling and mobile equipment 96,540 78,069
Other machinery and equipment 31,319 36,692
---------- ----------
3,636,955 3,136,722
Less: accumulated depreciation
and amortization 855,905 703,475
---------- ----------
$2,781,050 $2,433,247
---------- ----------
Repair and maintenance expense included in direct costs in our
consolidated statements of income totaled $138.5 million, $223.8 million and
$149.6 million for 2002, 2001 and 2000, respectively.
Interest costs of $1.1 million, $1.6 million and $2.0 million were
capitalized during 2002, 2001 and 2000, respectively.
Certain of our marine vessels have been leased under a Bareboat Charter
arrangement to Sea Mar Management LLC (Note 14). Future minimum payments due to
us under this arrangement are as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
2003 $ 29,537
2004 29,537
2005 29,537
2006 29,537
2007 12,786
Thereafter --
---------
$ 130,934
---------
Payments received under this Bareboat Charter arrangement amounted to
$18.0 million in 2002.
7 INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Our principal operations accounted for using the equity method include a
construction operation (40%) and a logistics operation (50%) in Alaska, drilling
and workover operations located in Saudi Arabia (50%), and a supply and marine
transportation operation in the Gulf of Mexico (25%). See Note 14 for a
discussion of transactions with these related parties.
Combined condensed financial data for investments in unconsolidated
affiliates accounted for using the equity method of accounting is summarized as
follows:
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
Current assets $104,265 $ 73,037
Long-term assets 122,682 111,854
Current liabilities 63,366 33,142
Long-term liabilities 40,761 40,722
-------- --------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Gross revenues $334,000 $285,505 $292,472
Gross margin 52,861 73,532 82,273
Net income 29,400 51,421 53,272
Nabors' Earnings from
unconsolidated affiliates 14,775 26,334 26,283
-------- -------- --------
81
8 FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
We may be exposed to certain market risks arising from the use of
financial instruments in the ordinary course of business. This risk arises
primarily as a result of potential changes in the fair market value of financial
instruments that would result from adverse fluctuations in foreign currency
exchange rates, credit risk, interest rates and marketable security prices as
discussed below.
FOREIGN CURRENCY RISK
We operate in a number of international areas and are involved in
transactions denominated in currencies other than U.S. dollars, which exposes
us to foreign exchange rate risk. The most significant exposures arise in
connection with our operations in Canada and Saudi Arabia, which usually are
substantially unhedged. For our unconsolidated affiliate in Saudi Arabia, upon
renewal of our contracts, we have been converting Saudi riyal-denominated
contracts to U.S. dollar-denominated contracts in order to reduce our exposure
to the Saudi riyal, even though that currency has been pegged to the U.S. dollar
at a rate of 3.745 Saudi riyals to 1.00 U.S. dollar since 1986. We cannot
guarantee that we will be able to convert future Saudi riyal-denominated
contracts to U.S. dollar-denominated contracts or that the Saudi riyal exchange
rate will continue in effect as in the past.
We have an operation in Argentina that is not significant to our overall
profitability. Our Argentina operation contributed approximately 1% of our
revenues and adjusted income derived from operating activities in 2002. As a
result of the financial crisis in Argentina, the Argentine government allowed
their currency, the peso, to float beginning in January 2002. The peso, which
had been pegged to the U.S. dollar for several years, has devalued approximately
68%. Changes in the valuation of the peso in 2002 resulted in a translation gain
of approximately $1.1 million, recorded to accumulated other comprehensive
income in our consolidated balance sheet.
At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate.
CREDIT RISK
Our financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents, investments in marketable
securities, accounts receivable, and our interest rate swap and range cap and
floor transactions. Cash equivalents such as deposits and temporary cash
investments are held by major banks or investment firms. Our investments in
marketable securities are managed within established guidelines which limit the
amounts that may be invested with any one issuer and which provide guidance as
to issuer credit quality. We believe that the credit risk in such instruments is
minimal. In addition, our trade receivables are with a variety of U.S.,
international and foreign-country national oil and gas companies. Management
considers this credit risk to be limited due to the financial resources of these
companies. We perform ongoing credit evaluations of our customers and we
generally do not require material collateral. We maintain reserves for potential
credit losses, and such losses have been within management's expectations.
INTEREST RATE AND MARKETABLE SECURITY PRICE RISK
Our financial instruments that are potentially sensitive to changes in
interest rates include our $825 million and $1.381 billion zero coupon
convertible senior debentures, our 6.8%, 4.875% and 5.375% senior notes, our
8.625% senior subordinated notes, our interest rate swap and range cap and floor
transactions, and our investments in debt securities, including corporate,
asset-backed, U.S. Government, Government agencies, foreign government and
mortgage-backed debt securities.
We may utilize derivative financial instruments that are intended to
manage our exposure to interest rate risks. The use of derivative financial
instruments could expose us to further credit risk and market risk. Credit risk
in this context is the failure of a counterparty to perform under the terms of
the derivative contract. When the fair value of a derivative contract is
positive, the counterparty would owe us, which can create credit risk for us.
When the fair value of a derivative contract is negative, we would owe the
counterparty, and therefore, we would not be exposed to credit risk. We attempt
to minimize credit risk in derivative instruments by entering into transactions
with major financial institutions that have a significant asset base. Market
risk related to derivatives is the adverse effect to the value of a financial
instrument that results from changes in interest rates. We try to manage market
risk associated
82
with interest-rate contracts by establishing and monitoring parameters that
limit the type and degree of market risk that we undertake.
On October 21, 2002, we entered into an interest rate swap transaction
with a third-party financial institution to hedge our exposure to changes in the
fair value of $200 million of our fixed rate 5.375% senior notes due 2012. The
purpose of this transaction was to convert future interest due on $200 million
of the senior notes to a lower variable rate in an attempt to realize savings on
our future interest payments. We have designated this swap agreement as a fair
value hedge. The swap agreement has a notional amount of $200 million and
matures in August 2012 to match the maturity of the senior notes. Under the
agreement, we pay on a quarterly basis a floating rate based on a three-month
U.S. dollar LIBOR rate, plus a spread of 62.625 basis points, and receive
a fixed rate of interest of 5.375% semi-annually. During 2002 we recorded
interest savings related to this interest rate swap of $1.2 million which served
to reduce interest expense. The change in cumulative fair value of this
derivative instrument resulted in the recording of a derivative asset, included
in other long-term assets, of $10.1 million as of December 31, 2002. The
carrying value of our 5.375% senior notes was increased by the same amount.
On October 21, 2002, we purchased a LIBOR range cap and sold a LIBOR
floor, in the form of a cashless collar, with the same third-party financial
institution with which we had executed the interest rate swap. This transaction
is intended to mitigate and manage our exposure to changes in the three-month
U.S. dollar LIBOR rate and does not qualify for hedge accounting treatment under
SFAS 133. Any change in the cumulative fair value of the range cap and the floor
will be reflected as a gain or loss in our consolidated statement of income. The
range cap and the floor are effective August 15, 2003 and expire on August 15,
2012. The range cap will be triggered when the three-month U.S. dollar LIBOR
rate is at or above 4.50%, and below 6.50%, such that the counterparty will pay
us any difference between the actual LIBOR rate and the 4.50% strike rate on a
notional amount of $200 million. No payment will be due to us if the three-month
U.S. dollar LIBOR rate is below 4.5% or at or above 6.50%. The floor is
triggered when the three-month U.S. dollar LIBOR rate is at or below 2.665% such
that we will pay the counterparty any difference between the actual LIBOR rate
and the 2.665% floor rate on a notional amount of $200 million. We recorded a
loss of $3.8 million during 2002 related to the change in cumulative fair value
of this derivative instrument. This loss is included in other income in our
consolidated statement of income for the year ended December 31, 2002 and has
been accrued in other long-term liabilities on our consolidated balance sheet as
of December 31, 2002.
On July 25, 2002, we entered into an interest rate hedge transaction with
a third-party financial institution to manage and mitigate interest rate risk
exposure relative to our August 2002 debt financing. Under the agreement, we
agreed to receive (pay) cash from (to) the counterparty based on the difference
between 4.43% and the ten-year Treasury rate on August 23, 2002, assuming a
$100.0 million notional amount with semi-annual interest payments over a
ten-year maturity. We accounted for this transaction as a cash flow hedge.
During August 2002 we paid approximately $1.5 million related to the termination
of this agreement. This payment was recorded as a reduction to accumulated other
comprehensive income in our consolidated balance sheet and will be amortized
into earnings as additional interest expense, using the effective interest
method, over the term of the 5.375% senior notes due 2012 as discussed in Note
10 below.
On March 26, 2002, in anticipation of closing the Enserco acquisition
discussed in Note 4, we entered into two foreign exchange contracts with a total
notional value of Cdn. $115.9 million and maturity dates of April 29, 2002.
Additionally, on April 9, 2002, we entered into a third foreign exchange
contract with a notional value of Cdn. $50.0 million maturing April 29, 2002.
The notional amounts of these contracts were used to fund the cash portion of
the Enserco acquisition purchase price. The notional amounts of these contracts
represented the amount of foreign currency purchased at maturity and did not
represent our exposure under these contracts. Although such contracts served as
an economic hedge against our foreign currency risk related to the cash portion
of the acquisition cost, these contracts did not qualify for hedge accounting
treatment under SFAS 133. We recognized a gain on these foreign exchange
contracts of approximately U.S. $1.78 million included in other income in our
consolidated statement of income for the year ended December 31, 2002.
83
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of our fixed rate long-term debt is estimated based on
quoted market prices or price quotes from third-party financial institutions.
The carrying and fair values of our long-term debt, including the current
portion, are as follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
4.875% senior notes due August 2009 $ 223,234 $ 231,854 $ -- $ --
5.375% senior notes due August 2012 282,901(1) 293,478(1) -- --
$825 million zero coupon convertible senior debentures due June 2020 489,126 494,081 477,132 474,669
$1.381 billion zero coupon convertible senior debentures due
February 2021 765,549 756,733 746,783 668,151
6.8% senior notes due April 2004 295,237 310,068 300,000 315,150
Other long-term debt 9,101 9,101 4,046 4,046
8.625% senior subordinated notes due April 2008 42,493 43,930 42,165 45,391
---------- ---------- ---------- ----------
$2,107,641 $2,139,245 $1,570,126 $1,507,407
---------- ---------- ---------- ----------
(1) Includes $10.1 million related to the fair value of the interest rate swap
executed on October 21, 2002.
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.
We maintain an investment portfolio of marketable debt and equity
securities that exposes us to price risk. The marketable securities are carried
at fair market value and include $4.3 million in securities classified as
trading and $912.5 million in securities classified as available-for-sale as of
December 31, 2002.
9 SHORT-TERM BORROWINGS AND CREDIT FACILITIES
We have two letter of credit facilities and a Canadian line of credit
facility with various banks as of December 31, 2002. Additionally, we also have
letters of credit outstanding under an expired $30 million letter of credit
facility.
We did not have any short-term borrowings outstanding at December 31, 2002
and 2001. Availability and borrowings under our credit facilities are as
follows:
DECEMBER 31,
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
Credit available $ 79,745 $ 259,813
Letters of credit outstanding (56,267) (34,315)
--------- ---------
Remaining availability $ 23,478 $ 225,498
--------- ---------
We had a $200 million unsecured committed revolving credit facility with a
syndicate of banks, with an original term of five years, that was scheduled to
mature on September 5, 2002. As a result of the corporate reorganization,
discussed in Note 1, we may have failed to comply with a covenant contained in
the credit facility agreement and a related $30 million letter of credit
facility agreement. At the time of the potential default, there were no
outstanding borrowings on the credit facility and $23 million outstanding on the
related letter of credit facility. The bank provided a waiver on the letter of
credit facility and the letter of credit facility has since expired. Because we
had cash and marketable securities balances totaling approximately $800 million
at the time of the potential default, and because the credit facility was
scheduled to mature on September 5, 2002, we terminated the revolving credit
facility.
10 LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
4.875% senior notes
due August 2009 $ 223,234 $ --
5.375% senior notes
due August 2012 282,901(1) --
$825 million zero coupon
convertible senior debentures
due June 2020 489,126 477,132
$1.381 billion zero coupon
convertible senior debentures
due February 2021 765,549 746,783
6.8% senior notes
due April 2004 295,237 300,000
Other long-term debt 9,101 4,046
8.625% senior subordinated
notes due April 2008 42,493 42,165
---------- ----------
2,107,641 1,570,126
Less: current portion 492,985 2,510
---------- ----------
$1,614,656 $1,567,616
---------- ----------
(1) Includes $10.1 million related to the fair value of the interest rate swap
executed on October 21, 2002 (Note 8).
84
During 2002 we purchased $.6 million face value of our 8.625% senior
subordinated notes due April 2008 in the open market at a price of 108%. In
addition, we purchased $4.7 million face value of our 6.8% senior notes due
April 2004 in the open market at a price of 104%. Upon settlement of these
transactions, we paid $5.7 million and recognized a pretax loss of approximately
$.2 million, resulting from the repurchases of these notes at prices higher than
their carrying value. Additionally, we repaid Cdn. $12.9 million (U.S. $8.3
million) and Cdn. $22.3 million (U.S. $14.3 million) of the debt assumed in the
Ryan and Enserco acquisitions, respectively. We also made a $2.5 million
scheduled principal payment relating to certain of our medium-term notes.
On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect,
wholly-owned subsidiaries, issued $225 million aggregate principal amount of
4.875% senior notes due 2009 that are fully and unconditionally guaranteed by
Nabors and Nabors Delaware. Concurrently with this offering by Nabors Holdings,
Nabors Delaware issued $275 million aggregate principal amount of 5.375% senior
notes due 2012, which are fully and unconditionally guaranteed by Nabors. Both
issues of senior notes were resold by a placement agent to qualified
institutional buyers under Rule 144A of the Securities Act of 1933, as amended.
Interest on each issue of senior notes is payable semi-annually on February 15
and August 15 of each year, beginning on February 15, 2003.
Both issues are unsecured and are effectively junior in right of payment
to any of their respective issuers' future secured debt. The senior notes will
rank equally in right of payment with any of their respective issuers' future
unsubordinated debt and will be senior in right of payment to any of such
issuers' subordinated debt. The guarantees of Nabors Delaware and Nabors with
respect to the senior notes issued by Nabors Holdings, and the guarantee of
Nabors with respect to the senior notes issued by Nabors Delaware, are similarly
unsecured and have a similar ranking to the series of senior notes so
guaranteed.
Subject to certain qualifications and limitations, the indentures
governing the senior notes issued by Nabors Holdings and Nabors Delaware limit
the ability of Nabors and its subsidiaries to incur liens and to enter into sale
and lease-back transactions. In addition, such indentures limit the ability of
Nabors, Nabors Delaware and Nabors Holdings to enter into mergers,
consolidations or transfers of all or substantially all of such entity's assets
unless the successor company assumes the obligations of such entity under the
applicable indenture. On October 28, 2002, Nabors' registration statements with
respect to resales of these senior notes became effective.
During February 2001 we completed a private placement of zero coupon
convertible senior debentures due 2021. The original aggregate principal amount
of the debentures at maturity totaled $1.381 billion. The debentures were issued
at a discount with net proceeds to Nabors, after expenses, totaling
approximately $828.0 million.
During June 2000 we completed a private placement of zero coupon
convertible senior debentures due 2020. The original aggregate principal amount
of the debentures at maturity totaled $825 million. The debentures were issued
at a discount with net proceeds to Nabors, after expenses, totaling
approximately $495.0 million.
Our $825 million debentures can be put to us on June 20, 2003, June 20,
2008 and June 20, 2013 and our $1.381 billion debentures can be put to us on
February 5, 2006, February 5, 2011 and February 5, 2016, for a purchase price
equal to the issue price plus accrued original issue discount to the dates of
repurchase. Based on the ability of the debenture holders to exercise their put
option on June 20, 2003, the outstanding principal amount on the $825 million
debentures of $489.1 million is classified in current liabilities in our
consolidated balance sheet as of December 31, 2002.
The original issue price of both issues of debentures was $608.41 per
$1,000 principal amount at maturity. The yield to maturity of the debentures is
2.5% compounded semi-annually with no periodic cash payments of interest. At the
holder's option, the $825 million and $1.381 billion debentures can be
converted, at any time prior to maturity or their earlier redemption, into
Nabors common stock, at conversion rates of 10.738 shares and 7.0745 shares,
respectively, per $1,000 principal amount at maturity. The conversion rates are
subject to adjustment under formulae as set forth in the indentures (the
agreements governing the terms of the debt) in certain events, including: (1)
the
85
issuance of Nabors common stock as a dividend or distribution on the common
stock; (2) certain subdivisions and combinations of the common stock; (3) the
issuance to all holders of common stock of certain rights or warrants to
purchase common stock; (4) the distribution of capital stock, other than Nabors
common stock to Nabors' stockholders, or evidences of Nabors' indebtedness or of
assets; and (5) distribution consisting of cash, excluding any quarterly cash
dividend on the common stock to the extent that the aggregate cash dividend per
share of common stock in any quarter does not exceed certain amounts. Instead of
delivering shares of common stock upon conversion of any debentures, we may
elect to pay the holder cash for all or a portion of the debentures.
We may elect to pay all or a portion of the purchase price of the
debentures in common stock instead of cash, depending upon our cash balances and
cash requirements at that time. We do not presently anticipate using stock to
satisfy any such future purchase obligations. In accordance with the indentures
with respect to the debt securities, we cannot redeem the $825 million and
$1.381 billion debentures before June 20, 2003 and February 5, 2006,
respectively, after which time we may redeem all or a portion of the debentures
for cash at any time at their accreted value.
During 2001 we entered into several private transactions with a
counterparty to purchase $70 million face value of our $825 million debentures
at an average price of $606.07 for each $1,000 face amount of debentures and
$181 million face value of our $1.381 billion debentures at an average price of
$528.30 for each $1,000 face amount of debentures. Upon settlement of these
transactions in December 2001 we paid $139.8 million to the counterparty and
recognized a pretax gain of $15.3 million resulting from the repayment of the
debentures at prices lower than their carrying value. The gain was recorded as
other income in our consolidated statements of income.
During December 2000 we purchased $25.0 million of our 6.8% senior notes
in the open market at 99.85%. Upon settlement of this transaction, we recognized
an insignificant gain resulting from the repurchases of these notes at prices
lower than their carrying value.
Prior to its acquisition by Nabors in November 1999, Pool Energy Services
Co. had issued 8.625% senior subordinated notes in the aggregate principal
amount of $150.0 million. As a result of the Pool acquisition, Nabors Holding
Company, the successor by merger to Pool, completed a mandatory change of
control cash tender offer to purchase the notes due 2008 at a redemption price
of 101% in February 2000. When we made the change of control offer, we also
solicited the consent of the remaining holders of the notes to amend the terms
of the indenture governing the notes to generally conform to the covenants
contained in Nabors' 6.8% senior notes and to add Nabors as a guarantor of the
obligations thereunder. Holders of over 75% of the principal amount of the notes
consented, the amendments were adopted and the full and unconditional guarantee
was entered into as of February 14, 2000. In addition, during 2000 Nabors
Holding Company purchased additional notes in the open market at prices ranging
from 100.5% to 102.0%. During 2000, a total of $107.8 million of the notes were
acquired as a result of these transactions, leaving $42.5 million outstanding as
of December 31, 2002. Upon settlement of these transactions, we recognized a
$3.0 million pretax gain, resulting from repurchases of these notes at prices
lower than their carrying value. Subsequent to December 31, 2002, we issued a
Notice of Redemption to the holders of these notes for a redemption of the notes
and all associated guarantees on April 1, 2003 (see Note 21).
As of December 31, 2002, the maturities of our long-term debt for each of
the five years after 2002 and thereafter are as follows:
ASSUMING ZERO COUPON
CONVERTIBLE DEBENTURES ARE
- --------------------------------------------------------------------------------
(IN THOUSANDS) PAID AT PAID AT
MATURITY FIRST PUT DATE
2003 $ 3,801 $ 498,701(1)
2004 300,575 300,375
2005 -- --
2006 -- 826,800(2)
2007 -- --
Thereafter 2,496,765(3) 541,565
---------- ----------
$2,801,141 $2,167,441
---------- ----------
(1) Includes $494.9 million related to our $825 million zero coupon
convertible senior debentures which can be put to us on June 20, 2003.
(2) Represents our $1.381 billion zero coupon convertible senior debentures
which can be put to us on February 5, 2006.
(3) Includes $41.6 million of our 8.625% senior subordinated notes due 2008,
$755 million and $1.2 billion of our zero coupon convertible senior
debentures due 2020 and 2021, respectively, and $225 million and $275
million of our senior notes due 2009 and 2012, respectively.
86
11 INCOME TAXES
Income before income taxes was comprised of the following:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
United States $ (28,157) $ 461,042 $ 175,527
Foreign 168,931 96,570 54,216
--------- --------- ---------
Income before
income taxes $ 140,774 $ 557,612 $ 229,743
--------- --------- ---------
Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted and income is earned. We are a
Bermuda-exempt company. Bermuda does not impose corporate income taxes. Our U.S.
subsidiaries are subject to a U.S. federal tax rate of 35%.
Income tax expense consisted of the following:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Current:
U.S. federal $ 4,458 $ 60,783 $ 1,176
Foreign 5,113 17,078 17,574
State 614 5,857 844
--------- --------- ---------
10,185 83,718 19,594
Deferred:
U.S. federal 4,669 114,465 69,427
Foreign 2,274 (1,091) 1,013
State 2,157 3,070 2,353
--------- --------- ---------
9,100 116,444 72,793
--------- --------- ---------
Income tax expense $ 19,285 $ 200,162 $ 92,387
--------- --------- ---------
Nabors is not subject to tax in Bermuda. A reconciliation of the
differences between taxes on income before income taxes computed at the
appropriate statutory rate and our reported provision for income taxes follows:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Income tax provision at statutory rate
(Bermuda rate of 0% in 2002 and U.S. rate of 35% in 2001 and 2000) $ -- $ 195,164 $ 80,410
Taxes on U.S. and foreign earnings at greater than the Bermuda rate 10,944 -- --
Increase in valuation allowance 6,540 -- --
Taxes on foreign earnings at (less) greater than the U.S. rate and other -- (805) 9,899
State income taxes 1,801 5,803 2,078
--------- --------- ---------
Income tax expense $ 19,285 $ 200,162 $ 92,387
--------- --------- ---------
Effective tax rate 14% 36% 40%
--------- --------- ---------
The significant components of our deferred tax assets and liabilities were
as follows:
DECEMBER 31,
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
Deferred tax assets:
Net operating loss carryforwards $ 116,664 $ 45,039
Tax credit carryforwards 22,871 18,952
Accrued expenses not currently deductible and other 35,496 71,152
Less: valuation allowance (6,540) --
--------- ---------
Deferred tax assets, net of valuation allowance 168,491 135,143
--------- ---------
Deferred tax liabilities:
Depreciation for tax in excess of book expense (534,383) (385,111)
Unrealized gain on marketable securities (3,316) (7,288)
--------- ---------
Total deferred tax liabilities (537,699) (392,399)
--------- ---------
Net deferred tax liabilities (369,208) (257,256)
Less: net current asset portion 32,846 28,145
--------- ---------
Net long-term deferred tax liability $(402,054) $(285,401)
--------- ---------
87
In conjunction with the 2002 acquisitions of Enserco and Ryan, and the
2001 acquisition of Command, deferred tax liabilities of $52.8 million, $4.2
million and $20.2 million, respectively, were recorded in the year of
acquisition.
For U.S. federal income tax purposes, we have net operating loss
carryforwards of approximately $249.5 million that, if not utilized, will expire
from 2003 to 2023. The net operating loss carryforwards for alternative minimum
tax purposes are approximately $145.6 million. There are alternative minimum tax
credit carryforwards of $22.8 million available to offset future regular tax
liabilities.
The NOL carryforwards subject to expiration expire as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Year Ended December 31, Total U.S. Federal Foreign
2003 $ 11,308 $ 6,289 $ 5,019
2004 5,144 -- 5,144
2005 1,295 -- 1,295
2006 7,807 -- 7,807
2007 3,438 -- 3,438
2009 779 779 --
2010 and thereafter 242,460 242,460 --
-------- -------- --------
Total $272,231 $249,528 $ 22,703
-------- -------- --------
In addition, we have approximately $9.2 million of non-expiring net
operating loss carryforwards in various other foreign jurisdictions.
Under U.S. federal tax law, the amount and availability of loss
carryforwards (and certain other tax attributes) are subject to a variety of
interpretations and restrictive tests applicable to Nabors and our subsidiaries.
The utilization of such carryforwards could be limited or effectively lost upon
certain changes in ownership. Accordingly, although we believe substantial loss
carryforwards are available to us, no assurance can be given concerning such
loss carryforwards, or whether or not such loss carryforwards will be available
in the future.
12 CAPITAL STOCK AND STOCK OPTIONS
CAPITAL STOCK
In conjunction with our October 2002 acquisition of Ryan and our April
2002 acquisition of Enserco (Note 4), we issued 380,264 and 3,549,082
exchangeable shares of Nabors Exchangeco, respectively, of which 219,493 and
2,638,526 exchangeable shares were immediately exchanged for our common shares,
respectively.
Subsequent to these acquisitions, an additional 484,756 exchangeable
shares were exchanged for our common shares leaving a total of 586,571
exchangeable shares outstanding as of December 31, 2002.
The exchangeable shares of Nabors Exchangeco are exchangeable for Nabors
common shares on a one-for-one basis. The exchangeable shares are included in
capital in excess of par value.
As a result of the corporate reorganization (Note 1), the authorized share
capital of Nabors consists of 400 million common shares, par value $.001 per
share, and 25 million preferred shares, par value $.001 per share. Common shares
issued were 144,964,668 at $.001 par value at December 31, 2002 compared to
144,368,390 at $.10 par value immediately preceding the reorganization. The
decrease in par value of common stock from $.10 to $.001 was recorded as an
increase to capital in excess of par value and a decrease in common shares in
our Consolidated Financial Statements. In conjunction with the reorganization,
6.8 million shares of outstanding treasury stock were retired, as Bermuda law
does not recognize the concept of treasury stock. The effect of this retirement
reduced common shares by $.7 million, capital in excess of par value by $59.2
million and retained earnings by $192.9 million.
On July 23, 2002, we entered into a private transaction with a
counterparty in which we sold 1.0 million European-style put options for $2.6
million with a maturity date of October 23, 2002. Under the arrangement, if the
price of our common shares was less than $26.5698 on the maturity date, the
counterparty could have exercised the put option resulting in, at our option (1)
our purchase of 1.0 million of our common shares at a price of $26.5698 per
share or (2) our payment, in cash or Nabors common shares, of an amount equal to
the difference between $26.5698 and our stock price on October 23, 2002
multiplied by 1.0 million. These put options expired on October 23, 2002 and we
retained the $2.6 million in proceeds, which was recorded as an increase in
capital in excess of par value on our consolidated balance sheet.
On July 17, 2002, the Board of Directors of Nabors authorized the
continuation of the share repurchase program that had begun under Nabors
Delaware, and provided that the amount of Nabors common shares authorized for
purchase by Nabors going forward be increased to $400 million. Under the Nabors
Delaware program, Nabors Delaware had acquired an aggregate of approximately
$248.0 million of Nabors Delaware common stock, or 6.2 million shares, during
2001.
88
During the third quarter of 2002 Nabors also acquired, through a subsidiary,
91,000 of its common shares in the open market for $27.30 per share for an
aggregate price of $2.5 million. Immediately thereafter these shares were
transferred to Nabors. Pursuant to Bermuda law, any shares, when purchased, will
be treated as cancelled. Therefore, a repurchase of shares will not have the
effect of reducing the amount of Nabors' authorized share capital. Additionally,
the Board approved the repurchase of up to $400 million of outstanding debt
securities of Nabors and its subsidiaries. These amounts may be increased or
decreased at the discretion of the Board, depending upon market conditions and
consideration of the best interest of shareholder value. Repurchases may be
conducted on the open market, through negotiated transactions or by other means,
from time to time, depending upon market conditions and other factors.
As of December 31, 2002, there were warrants outstanding to purchase
318,850 shares of Nabors common stock at prices ranging from $6.08 per share to
$30.00 per share. The remaining warrants expire April 30, 2003 and November 12,
2003.
STOCK OPTION PLANS
As of December 31, 2002, we have several stock option plans under which
options to purchase shares of Nabors common stock may be granted to key
officers, directors and managerial employees of Nabors and its subsidiaries.
Options granted under the plans are at prices equal to the fair market value of
the stock on the date of the grant. Options granted under the plans generally
are exercisable in varying cumulative periodic installments after one year. In
the case of certain key executives, options granted under the plans are subject
to accelerated vesting related to targeted common stock prices, or may vest
immediately on the grant date. Options granted under the plans cannot be
exercised more than ten years from the date of grant. Options to purchase 5.0
million and 6.9 million shares of Nabors common stock remained available for
grant as of December 31, 2002 and 2001, respectively.
A summary of stock option transactions is as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE) WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Options outstanding as of December 31, 1999 22,678 $ 14.13
Granted 6,199 45.63
Exercised (9,664) 11.54
Forfeited (142) 18.45
------- -------
Options outstanding as of December 31, 2000 19,071 $ 25.65
Granted 881 53.52
Exercised (556) 14.26
Forfeited (139) 32.56
------- -------
Options outstanding as of December 31, 2001 19,257 $ 27.21
Granted 5,495 27.35
Exercised (806) 12.68
Forfeited (277) 33.81
------- -------
Options outstanding as of December 31, 2002 23,669 $ 27.66
------- -------
Of the options outstanding, 20.6 million, 17.2 million and 16.8 million
were exercisable at weighted average exercise prices of $27.13, $26.46 and
$26.28, as of December 31, 2002, 2001 and 2000, respectively.
A summary of stock options outstanding as of December 31, 2002 is as
follows:
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT CONTRACTUAL WEIGHTED
LIFE AND EXERCISE PRICE) AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
OUTSTANDING LIFE PRICE
Range of exercise prices:
$ 4.77 - 7.16 100 0.8 $ 5.20
7.87 -11.81 512 5.8 11.31
12.20 -18.30 7,393 4.8 12.57
18.94 -28.41 8,457 8.2 26.17
28.44 -42.66 561 8.3 35.32
42.94 -67.26 6,646 5.8 47.28
------- ------ -------
23,669 6.4 $ 27.66
------- ------ -------
A summary of stock options exercisable as of December 31, 2002 is as
follows:
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE) WEIGHTED
AVERAGE
NUMBER EXERCISE
EXERCISABLE PRICE
Range of exercise prices:
$ 4.77 - 7.16 100 $ 5.20
7.87 -11.81 311 11.19
12.20 -18.30 7,339 12.55
18.94 -28.41 6,497 25.98
28.44 -42.66 262 37.22
42.94 -67.26 6,084 46.67
------- -------
20,593 $ 27.13
------- -------
89
The weighted average fair value of options granted during 2002, 2001 and
2000 was $10.69, $22.22 and $17.37, respectively.
13 PENSION, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PLANS
In conjunction with the November 1999 Pool acquisition, Nabors acquired
the assets and liabilities of a defined benefit pension plan, the Pool Company
Retirement Income Plan. Benefits under the plan are frozen and participants were
fully vested in their accrued retirement benefit on December 31, 1998.
Summarized information on the Pool pension plan is as follows:
PENSION BENEFITS YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 13,542 $ 13,395
Interest cost 868 844
Actuarial loss (27) (129)
Benefit payments (752) (568)
-------- --------
Benefit obligation at end of year 13,631 13,542
-------- --------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 10,596 11,655
Actual return on plan assets (1,009) (491)
Benefit payments (752) (568)
-------- --------
Fair value of plan assets at end of year 8,835 10,596
-------- --------
FUNDED STATUS:
Funded status at end of year (4,796) (2,946)
Unrecognized net actuarial loss 3,549 1,935
-------- --------
Net liability recognized $ (1,247) $ (1,011)
-------- --------
AMOUNTS RECOGNIZED IN
CONSOLIDATED BALANCE SHEETS:
Accrued benefit liability 3,500 --
Accumulated other comprehensive income 2,205 --
-------- --------
WEIGHTED AVERAGE ASSUMPTIONS:
Weighted average discount rate 6.50% 6.50%
Expected long-term rate of return
on plan assets 6.50% 6.50%
-------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Interest cost $ 868 $ 844
Expected return on plan assets (677) (739)
Recognized net actuarial loss 45 --
-------- --------
Net periodic benefit cost $ 236 $ 105
-------- --------
Certain of Nabors' employees are covered by defined contribution plans.
Our contributions to the plans are based on employee contributions and totaled
$9.0 million, $11.0 million and $7.9 million for 2002, 2001 and 2000,
respectively. Nabors does not provide postemployment benefits to its employees.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Prior to the date of the acquisition, Pool provided certain postretirement
healthcare and life insurance benefits to eligible retirees who had attained
specific age and years of service requirements. Nabors terminated this plan at
the date of acquisition, November 24, 1999. A liability of approximately $.8
million is recorded on our balance sheet at December 31, 2002 to cover the
estimated costs of beneficiaries covered by the plan at the date of acquisition.
14 RELATED PARTY TRANSACTIONS
Pursuant to his employment agreement, we provided an unsecured,
non-interest bearing loan of approximately $2.9 million to Nabors' President and
Chief Operating Officer. This loan is due on September 30, 2006.
Pursuant to their employment agreements, Nabors and its Chairman and Chief
Executive Officer, President and Chief Operating Officer, its former Vice
Chairman and certain other key employees entered into split-dollar life
insurance agreements pursuant to which we pay a portion of the premiums under
life insurance policies with respect to these individuals and, in certain
instances, members of their families. Under these agreements, we are reimbursed
for such premiums upon the occurrence of specified events, including the death
of an insured individual. Any recovery of premiums paid by Nabors could
potentially be limited to the cash surrender values of these policies under
certain circumstances. As such, the values of these policies are recorded at
their respective cash surrender values in our consolidated balance sheet. We
have made premium payments to date totaling $12.8 million related to these
policies. The cash surrender value of these policies of approximately $8.7
million is included in other long-term assets in our consolidated balance sheet
as of December 31, 2002.
Under the recently enacted Sarbanes-Oxley Act of 2002, the future payment
of premiums by Nabors under these agreements may be deemed to be prohibited
loans by us to these individuals. We have paid no premiums related to these
agreements since the adoption of the
90
Sarbanes-Oxley Act, and have postponed premium payments related to these
agreements pending clarification of the Act's application to these insurance
agreements.
In the ordinary course of business, we enter into various rig leases, rig
transportation and related oilfield services agreements with our Alaskan and
Saudi Arabian unconsolidated affiliates at market prices. Additionally, we own
certain marine vessels that are chartered under a Bareboat Charter arrangement
to Sea Mar Management, which is wholly-owned by Sea Mar Investco LLC, an entity
in which we own a 25% interest. Sea Mar Management has entered into a time
charter of these vessels with a subsidiary of ours, which then time charters the
vessels to various third-party customers. Revenues from these business
transactions totaled $65.7 million, $26.9 million and $27.6 million in 2002,
2001 and 2000, respectively. Expenses from these business transactions totaled
$32.1 million, $4.8 million and $4.9 million in 2002, 2001 and 2000,
respectively. Additionally, we had amounts receivable from these affiliated
entities of $53.3 million and $24.4 million as of December 31, 2002 and 2001,
respectively. We had accounts payable to these affiliated entities of $1.1
million and $3.3 million as of December 31, 2002 and 2001, respectively.
15 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Nabors and its subsidiaries occupy various facilities and lease certain
equipment under various lease agreements. The minimum rental commitments under
non-cancelable operating leases, with lease terms in excess of one year
subsequent to December 31, 2002, are as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
2003 $16,632
2004 13,346
2005 7,699
2006 1,663
2007 771
Thereafter 2,174
-------
$42,285
-------
The above amounts do not include property taxes, insurance or normal
maintenance that the lessees are required to pay. Rental expense relating to
operating leases with terms greater than 30 days amounted to $21.8 million,
$20.3 million and $15.2 million for 2002, 2001 and 2000, respectively.
In addition, we have an obligation under the time charter agreement with
Sea Mar Management. The minimum commitments under this agreement subsequent to
December 31, 2002 are as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
2003 $ 26,863
2004 26,863
2005 26,863
2006 26,863
2007 11,628
--------
$119,080
--------
Payments under this time charter agreement amounted to $16.5 million in
2002.
EMPLOYMENT CONTRACTS
We have entered into employment contracts with certain of our employees.
Our minimum salary and bonus obligations under these contracts as of December
31, 2002 are as follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
2003 $2,413
2004 1,815
2005 1,725
2006 1,575
2007 1,181
------
$8,709
------
CAPITAL EXPENDITURES
As of December 31, 2002, we had outstanding capital expenditure purchase
commitments of approximately $42.8 million, primarily for rig-related enhancing
and sustaining capital expenditures.
CONTINGENCIES
SELF-INSURANCE ACCRUALS We are self-insured for certain losses relating to
workers' compensation, employers' liability, general liability, automobile
liability and property damage. Effective for the period from April 1, 2002 to
March 31, 2003, our exposure (that is, our deductible) per occurrence is $1.0
million for workers' compensation and employers' liability, $2.0 million for
marine employers' liability (Jones Act) and $5.0 million for general liability
losses. Our self-insurance for automobile liability loss is $0.5 million per
occurrence. We maintain actuarially supported accruals in our consolidated
balance sheet to cover the self-insurance retentions.
91
We are self-insured for certain other losses relating to rig, equipment,
property, business interruption and political, war and terrorism risks.
Effective April 1, 2002, our per occurrence self-insured retentions are $10.0
million for rig physical damage and business interruption. However, our rigs,
equipment and property in Canada and Saudi Arabia are subject to $1.0 million
self-insurance retentions. We have purchased stop-loss coverage in order to
limit our aggregate exposure to certain physical damage claims for insured rigs
(that is, those rigs with replacement values in excess of $10.0 million). The
effect of this coverage is that our maximum physical damage loss on insured rigs
would be $20.0 million plus $1.0 million per occurrence.
Political risk, war and terrorism insurance is procured for our operations
in Mexico, the Caribbean, South America, Africa, the Middle East and Asia.
Through December 31, 2002, political and war risk losses were subject to $10.0
million per occurrence deductibles while terrorism was subject to a $1.0 million
per occurrence deductible. On January 1, 2003, we purchased additional insurance
to reduce these self-insurance retentions to $0.25 million per occurrence,
except for Colombia which remains at $10.0 million and $1.0 million for
political risk and terrorism, respectively.
As of December 31, 2002 and 2001, our self-insurance accruals totaled
$117.3 million and $104.2 million, respectively, and our related insurance
recoveries/receivables were $47.6 million and $27.9 million, respectively.
LITIGATION On May 23, 2002, Steve Rosenberg, an individual shareholder of
Nabors, filed a complaint against Nabors and its directors in the United States
District Court for the Southern District of Texas (Civil Action No. 02-1942),
alleging that Nabors' May 10, 2002 proxy statement/prospectus contained certain
material misstatements and omissions in violation of federal securities laws and
state law. Nabors' May 10, 2002 proxy statement/prospectus was sent to
shareholders in connection with the special meeting to consider and vote on
Nabors' proposed reorganization and effective reorganization in Bermuda. The
AFL-CIO moved to intervene in Civil Action No. 02-1942 and filed a complaint
containing similar allegations. On June 5, 2002, Marilyn Irey, an individual
shareholder of Nabors, filed a complaint in the United States District Court for
the Southern District of Texas (Civil Action No. 02-2108) that is nearly
identical to Steve Rosenberg's complaint. The three shareholders requested that
the Court either enjoin the closing of the shareholder vote on the scheduled
date or the effectuation of the reorganization. In addition, two of the
shareholders (Steve Rosenberg and Marilyn Irey) purported to bring a class
action on behalf of all shareholders, alleging that Nabors and its directors
violated their state law fiduciary duties by making these alleged misstatements
and omissions. These two shareholders, on behalf of their purported class, seek
monetary damages for their state law claims. Since the beginning of the
litigation, two of the shareholders (Steve Rosenberg and the AFL-CIO) have
amended their complaints, but have not added any substantive allegations.
On June 13, 2002, the Court granted the AFL-CIO's motion to intervene. On
June 15, 2002, the Court denied a motion for temporary restraining order brought
by two of the shareholders (Steve Rosenberg and the AFL-CIO) in their attempts
to prevent the closing of Nabors' reorganization and its effective
reorganization in Bermuda. On July 2, 2002, the Court granted an agreed motion
to consolidate Civil Action No. 02-2108 into Civil Action No. 02-1942. Nabors
and its directors moved to dismiss the lawsuits of all three shareholders.
Subsequent to December 31, 2002, the Court granted the motion and dismissed all
claims with prejudice (Note 21).
Nabors and its subsidiaries are defendants or otherwise involved in a
number of other lawsuits in the ordinary course of their business. In the
opinion of management, our ultimate liability with respect to these pending
lawsuits is not expected to have a significant or material adverse effect on our
consolidated financial position, results of operations or cash flows.
GUARANTEES
We enter into various agreements providing financial or performance
assurance to third parties. Certain of these agreements act as guarantees,
including standby letters of credit issued on behalf of insurance carriers in
conjunction with our workers' compensation insurance program and guarantees of
residual value in certain of our operating lease agreements. We have also
guaranteed payment of contingent consideration in conjunction with an
acquisition in 2002 which is based on future operating results of that business.
In addition, we have provided indemnifications to certain third parties which
serve as guarantees. These guarantees include indemnification provided by Nabors
to our stock transfer agent and our insurance carriers.
92
Management believes the likelihood that we would be required to perform or
otherwise incur any significant losses associated with any of these guarantees
is remote. We are not able to estimate the potential future maximum payments
that might be due under our indemnification guarantees. The following table
summarizes the total maximum amount of financial and performance guarantees
issued by Nabors:
MAXIMUM AMOUNT
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2003 2004 2005 THEREAFTER TOTAL
Financial standby letters of credit $34,436 $ -- $ -- $ -- $34,436
Guarantee of residual value in lease agreements 542 418 694 -- 1,654
Contingent consideration in acquisition 769 769 769 193 2,500
------- ------- ------- ------- -------
Total $35,747 $ 1,187 $ 1,463 $ 193 $38,590
------- ------- ------- ------- -------
16 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
Net income (numerator):
Net income - basic $121,489 $357,450 $137,356
Add interest expense on assumed conversion of our
zero coupon convertible senior debentures, net of tax:
$825 million due 2020(1) -- 8,060 --
$1.381 billion due 2021(2) -- 11,995 --
-------- -------- --------
Adjusted net income - diluted $121,489 $377,505 $137,356
-------- -------- --------
Earnings per share:
Basic $ .85 $ 2.48 $ .95
Diluted $ .81 $ 2.24 $ .90
Shares (denominator):
Weighted average number of shares outstanding - basic(3) 143,655 144,430 144,344
Net effect of dilutive stock options and warrants based
on the treasury stock method 6,342 6,697 8,073
Assumed conversion of our zero coupon convertible senior debentures:
$825 million due 2020(1) -- 8,852 --
$1.381 billion due 2021(2) -- 8,811 --
-------- -------- --------
Weighted average number of shares outstanding - diluted 149,997 168,790 152,417
-------- -------- --------
(1) Diluted earnings per share for 2002 and 2000 excludes 8,107,190 and
4,453,630 potentially dilutive shares issuable upon conversion of the $825
million zero coupon convertible senior debentures, respectively, because
the inclusion of such shares would have been anti-dilutive, given the
level of net income for those years. Net income for these years also
excludes the related add back of interest expense for these debentures.
(2) Diluted earnings per share for 2002 excludes 8,490,815 potentially
dilutive shares issuable upon conversion of the $1.381 billion zero coupon
convertible senior debentures, because inclusion of such shares would have
been anti-dilutive, given the level of net income for 2002. Net income for
this year also excludes the related add back of interest expense for these
debentures.
(3) Includes the weighted average number of common shares of Nabors and the
weighted average number of exchangeable shares of Nabors Exchangeco.
93
For all periods presented, the computations of diluted earnings per share
excludes outstanding stock options and warrants with exercise prices greater
than the average market price of the Nabors' common stock, because the inclusion
of such options and warrants would be anti-dilutive. The number of options and
warrants that were excluded from diluted earnings per share that could
potentially dilute earnings per share in the future were 890,959 shares in 2002,
919,478 shares in 2001 and 73,250 shares in 2000.
As discussed in Note 10, holders of the $825 million and $1.381 billion
zero coupon convertible senior debentures have the right to require Nabors to
repurchase the debentures at various dates commencing June 20, 2003 and February
5, 2006, respectively. Nabors may pay the redemption price with either cash or
stock or a combination thereof. We do not presently anticipate using stock to
satisfy any such future purchase obligation.
17 SUPPLEMENTAL BALANCE SHEET, INCOME STATEMENT AND CASH FLOW INFORMATION
Accounts receivable is net of an allowance for doubtful accounts of $13.8
million and $22.4 million as of December 31, 2002 and 2001, respectively.
Accrued liabilities include the following:
DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
Accrued compensation $ 40,761 $ 49,287
Deferred revenue 33,157 42,157
Workers' compensation liabilities 16,926 17,650
Interest payable 16,431 6,911
Other accrued liabilities 26,131 52,017
-------- --------
$133,406 $168,022
-------- --------
Other income includes the following:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Gains on marketable
securities and warrants $ 2,877 $ 989 $ 18,800
Gains on long-term
assets, net 4,570 10,246 1,713
Foreign currency
transaction gains 486 419 1,441
(Loss) gain on
extinguishment of debt (202) 15,330 3,036
Corporate reorganization
expense (3,769) -- --
Loss on derivative
instruments (1,983) -- --
Other 1,729 1,666 2,167
-------- -------- --------
$ 3,708 $ 28,650 $ 27,157
-------- -------- --------
Supplemental cash flow information for 2002, 2001 and 2000 is as follows:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Cash paid for income taxes $ 22,831 $ 82,831 $ 10,619
Cash paid for interest,
net of capitalized interest 22,653 24,614 32,796
Acquisitions of businesses:
Fair value of
assets acquired 305,399 111,034 --
Goodwill 110,636 12,909 --
Liabilities assumed
or created (105,986) (54,372) --
Common stock of acquired
company previously owned (282) -- --
Equity consideration issued (174,115) -- --
--------- --------- ---------
Cash paid for acquisitions
of businesses 135,652 69,571 --
Cash acquired in acquisitions
of businesses -- (3,219) --
--------- --------- ---------
Cash paid for acquisitions
of businesses, net $ 135,652 $ 66,352 $ --
--------- --------- ---------
94
18 UNAUDITED QUARTERLY FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
Operating revenues and Earnings from unconsolidated affiliates(1) $386,837 $356,518 $355,078 $382,785
Gross margin(2) 131,766 113,957 119,256 127,554
Net income 41,942 25,420 26,922 27,205
Earnings per share:(3)
Basic $ .30 $ .18 $ .19 $ .19
Diluted $ .28 $ .17 $ .18 $ .18
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 2001
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
Operating revenues and Earnings from unconsolidated affiliates(4) $541,167 $611,480 $622,417 $453,006
Gross margin(2) 192,806 237,743 248,083 156,137
Net income 83,138 104,015 108,241 62,056
Earnings per share:(3)
Basic $ .57 $ .71 $ .75 $ .44
Diluted $ .51 $ .63 $ .68 $ .41
-------- -------- -------- --------
(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $5.6 million, $4.4 million, $1.9 million and $2.8
million, respectively.
(2) Gross margin represents Operating revenues minus direct costs.
(3) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total computed for the year.
(4) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $8.0 million, $7.7 million, $6.1 million and $4.5
million, respectively.
19 SEGMENT INFORMATION
As of December 31, 2002, Nabors' 12 business units have been aggregated
into two reportable segments, specifically (1) contract drilling, including
drilling, workover and well-servicing, and (2) manufacturing and logistics,
based on the nature of the services provided, the class of customers, the
methods used to provide services and other economic characteristics. The
contract drilling segment consists of our Alaska, U.S. Lower 48, U.S. Land
well-servicing, U.S. Offshore, Canada and International operations. These units
include our drilling, workover and well-servicing operations, on land and
offshore. The manufacturing and logistics segment consists of our Canrig, Epoch,
Peak Oilfield Service Company, Peak USA, Ryan and Sea Mar operating units. These
units manufacture top drives, manufacture drilling instrumentation systems,
provide construction and logistics services, provide trucking and logistics
services, manufacture and sell directional drilling and rig instrumentation
systems, provide directional drilling, rig instrumentation and data collection
services, and provide marine transportation and supply services, respectively.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note 3). Inter-segment sales are
recorded at cost or cost plus a profit margin. Nabors evaluates the performance
of its segments based on adjusted income derived from operating activities.
95
The following table sets forth financial information with respect to our
reportable segments:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Reportable segments:
Operating revenues and Earnings from unconsolidated affiliates:
Contract drilling(1) $ 1,360,223 $ 2,087,040 $ 1,316,153
Manufacturing and logistics(2) 174,775 259,298 176,775
Other(3) (53,780) (118,268) (77,985)
----------- ----------- -----------
Total revenues $ 1,481,218 $ 2,228,070 $ 1,414,943
----------- ----------- -----------
Depreciation and amortization:
Contract drilling $ 179,043 $ 173,922 $ 138,772
Manufacturing and logistics 18,045 17,923 14,904
Other(4) (1,723) (1,949) (1,263)
----------- ----------- -----------
Total depreciation and amortization $ 195,365 $ 189,896 $ 152,413
----------- ----------- -----------
Adjusted income derived from operating activities:(5)
Contract drilling(1) $ 182,853 $ 500,555 $ 203,950
Manufacturing and logistics(2) 24,660 87,849 48,522
Other(4) (37,465) (52,693) (35,097)
----------- ----------- -----------
Total adjusted income derived from operating activities $ 170,048 $ 535,711 $ 217,375
Interest expense (67,068) (60,722) (35,370)
Interest income 34,086 53,973 20,581
Other income, net 3,708 28,650 27,157
----------- ----------- -----------
Income before income taxes $ 140,774 $ 557,612 $ 229,743
----------- ----------- -----------
Total assets:
Contract drilling(6) $ 3,266,292 $ 2,872,534
Manufacturing and logistics(7) 343,365 311,629
Other(4) 1,454,215 967,752
----------- -----------
Total assets $ 5,063,872 $ 4,151,915
----------- -----------
Capital expenditures and acquisition of businesses:
Contract drilling $ 554,897 $ 764,869 $ 234,368
Manufacturing and logistics 28,859 26,885 70,348
Other(4) (1,197) (6,829) (4,079)
----------- ----------- -----------
Total capital expenditures $ 582,559 $ 784,925 $ 300,637
----------- ----------- -----------
(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $3.9 million, $9.0 million and $6.8 million for 2002,
2001 and 2000, respectively.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $10.9 million, $17.3 million and $19.5 million for 2002,
2001 and 2000, respectively.
(3) Includes the elimination of inter-segment manufacturing and logistics
sales.
(4) Includes the elimination of inter-segment transactions and unallocated
corporate expenses, assets and capital expenditures.
(5) Adjusted income derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, and
depreciation and amortization expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under accounting principles
generally accepted in the United States of America. However, management
evaluates the performance of our business units and the consolidated
company based on several criteria, including adjusted income derived from
operating activities, because it believes that this financial measure is
an accurate reflection of the ongoing profitability of our company. A
reconciliation of this non-GAAP measure to consolidated Income before
income taxes, which is a GAAP measure, is provided herein.
(6) Includes $25.3 million and $22.3 million of investments in unconsolidated
affiliates accounted for by the equity method for 2002 and 2001,
respectively.
(7) Includes $33.3 million and $32.8 million of investments in unconsolidated
affiliates accounted for by the equity method for 2002 and 2001,
respectively.
96
The following table sets forth financial information with respect to Nabors
operations by geographic area:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000
Operating revenues and Earnings from unconsolidated affiliates:
United States $1,012,503 $1,859,356 $1,115,899
Foreign 468,715 368,714 299,044
---------- ---------- ----------
$1,481,218 $2,228,070 $1,414,943
---------- ---------- ----------
Property, plant and equipment, net:
United States $1,739,182 $1,816,409
Foreign 1,041,868 616,838
---------- ----------
$2,781,050 $2,433,247
---------- ----------
Goodwill, net:
United States $ 165,609 $ 165,694
Foreign 141,153 33,354
---------- ----------
$ 306,762 $ 199,048
---------- ----------
97
20 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the corporate reorganization as discussed in Note 1,
Nabors fully and unconditionally guaranteed all of the issued public debt
securities of Nabors Delaware at the effective time of the merger. As discussed
in Note 10, Nabors also fully and unconditionally guaranteed the senior notes
issued by Nabors Delaware, and Nabors and Nabors Delaware fully and
unconditionally guaranteed the senior notes issued by Nabors Holdings in August
2002.
The following condensed consolidating financial information is included so
that separate financial statements of Nabors Delaware and Nabors Holdings are
not required to be filed with the U.S. Securities and Exchange Commission. The
condensed consolidating financial statements present Nabors' and Nabors
Delaware's investments in their subsidiaries using the equity method of
accounting. Nabors and Nabors Holdings were formed on December 11, 2001 and
December 28, 2001, respectively, and as such are not presented for the periods
ending prior to those dates.
The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of December 31, 2002 and 2001 and
statements of income and cash flows for each of the three years ended December
31, 2002 of (a) Nabors, Parent-Guarantor after June 24, 2002 and Non-Parent/
Non-Guarantor prior to June 24, 2002, (b) Nabors Delaware, issuer of existing
debt and the 5.375% senior notes due 2012 and guarantor of the 4.875% senior
notes due 2009 issued by Nabors Holdings, (c) Nabors Holdings, issuer of the
4.875% senior notes due 2009, (d) the non-guarantor subsidiaries, (e)
consolidating adjustments necessary to consolidate Nabors and its subsidiaries
and (f) Nabors on a consolidated basis.
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS NABORS NABORS
(PARENT/ DELAWARE HOLDINGS
GUARANTOR) (ISSUER/GUARANTOR) (ISSUER)
ASSETS
Current assets:
Cash and cash equivalents $ 40,127 $ 38 $ 207
Marketable securities 5,721 -- 21
Accounts receivable, net -- -- --
Inventory and supplies -- -- --
Prepaid expenses and other current assets -- 2,607 --
----------- ----------- -----------
Total current assets 45,848 2,645 228
Marketable securities 19,378 -- --
Property, plant and equipment, net -- -- --
Goodwill, net -- -- --
Intercompany receivables 2,009,672 2,158,524 140
Investments in affiliates 84,887 1,773,633 221,484
Other long-term assets -- 20,150 1,220
----------- ----------- -----------
TOTAL ASSETS $ 2,159,785 $ 3,954,952 $ 223,072
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 489,126 $ --
Trade accounts payable 4 23 --
Accrued liabilities 217 10,168 3,930
Income taxes payable 892 (189) --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,113 499,128 3,930
Long-term debt -- 1,343,686 223,234
Other long-term liabilities -- 3,763 --
Deferred income taxes 152 72,258 (1,560)
Intercompany payables 65 -- --
----------- ----------- -----------
TOTAL LIABILITIES 1,330 1,918,835 225,604
----------- ----------- -----------
STOCKHOLDERS' EQUITY 2,158,455 2,036,117 (2,532)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,159,785 $ 3,954,952 $ 223,072
----------- ----------- -----------
DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) OTHER
SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(NON-GUARANTORS) ADJUSTMENTS TOTAL
ASSETS
Current assets:
Cash and cash equivalents $ 373,679 $ -- $ 414,051
Marketable securities 451,858 -- 457,600
Accounts receivable, net 277,735 -- 277,735
Inventory and supplies 20,524 -- 20,524
Prepaid expenses and other current assets 197,391 -- 199,998
----------- ----------- -----------
TOTAL CURRENT ASSETS 1,321,187 -- 1,369,908
Marketable securities 439,770 -- 459,148
Property, plant and equipment, net 2,781,050 -- 2,781,050
Goodwill, net 306,762 -- 306,762
Intercompany receivables -- (4,168,336) --
Investments in affiliates 2,092,224 (4,113,589) 58,639
Other long-term assets 66,995 -- 88,365
----------- ----------- -----------
TOTAL ASSETS $ 7,007,988 $(8,281,925) $ 5,063,872
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,859 $ -- $ 492,985
Trade accounts payable 109,136 -- 109,163
Accrued liabilities 119,091 -- 133,406
Income taxes payable 15,197 -- 15,900
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 247,283 -- 751,454
Long-term debt 47,736 -- 1,614,656
Other long-term liabilities 133,490 -- 137,253
Deferred income taxes 331,204 -- 402,054
Intercompany payables 4,168,271 (4,168,336) --
----------- ----------- -----------
TOTAL LIABILITIES 4,927,984 (4,168,336) 2,905,417
----------- ----------- -----------
STOCKHOLDERS' EQUITY 2,080,004 (4,113,589) 2,158,455
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,007,988 $(8,281,925) $ 5,063,872
----------- ----------- -----------
98
DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS NABORS NABORS
(PARENT/ DELAWARE HOLDINGS
GUARANTOR) (ISSUER/GUARANTOR) (ISSUER)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 2,201 $ --
Marketable securities -- -- --
Accounts receivable, net -- -- --
Inventory and supplies -- -- --
Prepaid expenses and other current assets -- 417 --
----------- ----------- -----------
TOTAL CURRENT ASSETS -- 2,618 --
Marketable securities -- -- --
Property, plant and equipment, net -- -- --
Goodwill, net -- -- --
Intercompany receivables -- 1,931,893 12
Investments in affiliates 13 1,467,127 --
Other long-term assets -- 13,574 --
----------- ----------- -----------
TOTAL ASSETS $ 13 $ 3,415,212 $ 12
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ -- $ --
Trade accounts payable -- 23 --
Accrued liabilities -- 4,372 --
Income taxes payable -- (189) --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES -- 4,206 --
Long-term debt -- 1,523,915 --
Other long-term liabilities -- -- --
Deferred income taxes -- 29,225 --
Intercompany payables 1 -- --
----------- ----------- -----------
TOTAL LIABILITIES 1 1,557,346 --
----------- ----------- -----------
STOCKHOLDERS' EQUITY 12 1,857,866 12
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13 $ 3,415,212 $ 12
----------- ----------- -----------
DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) OTHER
SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(NON-GUARANTORS) ADJUSTMENTS TOTAL
ASSETS
Current assets:
Cash and cash equivalents $ 196,242 $ -- $ 198,443
Marketable securities 343,169 -- 343,169
Accounts receivable, net 361,086 -- 361,086
Inventory and supplies 18,515 -- 18,515
Prepaid expenses and other current assets 109,316 -- 109,733
----------- ----------- -----------
TOTAL CURRENT ASSETS 1,028,328 -- 1,030,946
Marketable securities 377,025 -- 377,025
Property, plant and equipment, net 2,433,247 -- 2,433,247
Goodwill, net 199,048 -- 199,048
Intercompany receivables -- (1,931,905) --
Investments in affiliates 55,141 (1,467,140) 55,141
Other long-term assets 42,934 -- 56,508
----------- ----------- -----------
TOTAL ASSETS $ 4,135,723 $(3,399,045) $ 4,151,915
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,510 $ -- $ 2,510
Trade accounts payable 131,798 -- 131,821
Accrued liabilities 163,650 -- 168,022
Income taxes payable 27,966 -- 27,777
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 325,924 -- 330,130
Long-term debt 43,701 -- 1,567,616
Other long-term liabilities 110,902 -- 110,902
Deferred income taxes 256,176 -- 285,401
Intercompany payables 1,931,904 (1,931,905) --
----------- ----------- -----------
TOTAL LIABILITIES 2,668,607 (1,931,905) 2,294,049
----------- ----------- -----------
STOCKHOLDERS' EQUITY 1,467,116 (1,467,140) 1,857,866
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,135,723 $(3,399,045) $ 4,151,915
----------- ----------- -----------
99
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS NABORS NABORS
(PARENT/ DELAWARE HOLDINGS
GUARANTOR) (ISSUER/GUARANTOR) (ISSUER)
REVENUES AND OTHER INCOME:
Operating revenues $ -- $ -- $ --
Earnings from unconsolidated affiliates -- -- --
Earnings from consolidated affiliates 18,159 89,947 --
Interest income 48 49 --
Intercompany interest income 101,436 54,326 --
Other (expense) income, net 3,469 (6,191) --
----------- ----------- -----------
Total revenues and other income 123,112 138,131 --
----------- ----------- -----------
Costs and other deductions:
Direct costs -- -- --
General and administrative expenses 579 483 2
Depreciation and amortization -- -- --
Interest expense -- 60,206 4,102
Intercompany interest expense -- -- --
----------- ----------- -----------
Total costs and other deductions 579 60,689 4,104
----------- ----------- -----------
Income (loss) before income taxes 122,533 77,442 (4,104)
----------- ----------- -----------
Income tax expense (benefit) 1,044 (4,627) (1,560)
----------- ----------- -----------
NET INCOME (LOSS) $ 121,489 $ 82,069 $ (2,544)
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) OTHER
SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(NON-GUARANTORS) ADJUSTMENTS TOTAL
REVENUES AND OTHER INCOME:
Operating revenues $ 1,466,443 $ -- $ 1,466,443
Earnings from unconsolidated affiliates 14,775 -- 14,775
Earnings from consolidated affiliates 79,525 (187,631) --
Interest income 33,989 -- 34,086
Intercompany interest income -- (155,762) --
Other (expense) income, net 6,430 -- 3,708
----------- ----------- -----------
Total revenues and other income 1,601,162 (343,393) 1,519,012
----------- ----------- -----------
Costs and other deductions:
Direct costs 973,910 -- 973,910
General and administrative expenses 140,831 -- 141,895
Depreciation and amortization 195,365 -- 195,365
Interest expense 2,760 -- 67,068
Intercompany interest expense 155,762 (155,762) --
----------- ----------- -----------
Total costs and other deductions 1,468,628 (155,762) 1,378,238
----------- ----------- -----------
Income (loss) before income taxes 132,534 (187,631) 140,774
----------- ----------- -----------
Income tax expense (benefit) 24,428 -- 19,285
----------- ----------- -----------
NET INCOME (LOSS) $ 108,106 $ (187,631) $ 121,489
----------- ----------- -----------
100
YEAR ENDED DECEMBER 31, 2001
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS NABORS NABORS
(PARENT/ DELAWARE HOLDINGS
GUARANTOR) (ISSUER/GUARANTOR) (ISSUER)
REVENUES AND OTHER INCOME:
Operating revenues $ -- $ -- $ --
Earnings from unconsolidated affiliates -- -- --
Earnings from consolidated affiliates -- 336,851 --
Interest income -- 53 --
Intercompany interest income -- 77,211 --
Other income, net -- 14,301 --
----------- ----------- -----------
Total revenues and other income -- 428,416 --
----------- ----------- -----------
Costs and other deductions:
Direct costs -- -- --
General and administrative expenses -- 482 --
Depreciation and amortization -- -- --
Interest expense -- 58,386 --
Intercompany interest expense -- -- --
----------- ----------- -----------
Total costs and other deductions -- 58,868 --
----------- ----------- -----------
Income before income taxes -- 369,548 --
----------- ----------- -----------
Income tax expense -- 12,098 --
----------- ----------- -----------
NET INCOME $ -- $ 357,450 $ --
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2001
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS) OTHER
SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(NON-GUARANTORS) ADJUSTMENTS TOTAL
REVENUES AND OTHER INCOME:
Operating revenues $ 2,201,736 $ -- $ 2,201,736
Earnings from unconsolidated affiliates 26,334 -- 26,334
Earnings from consolidated affiliates -- (336,851) --
Interest income 53,920 -- 53,973
Intercompany interest income -- (77,211) --
Other income, net 14,349 -- 28,650
----------- ----------- -----------
Total revenues and other income 2,296,339 (414,062) 2,310,693
----------- ----------- -----------
Costs and other deductions:
Direct costs 1,366,967 -- 1,366,967
General and administrative expenses 135,014 -- 135,496
Depreciation and amortization 189,896 -- 189,896
Interest expense 2,336 -- 60,722
Intercompany interest expense 77,211 (77,211) --
----------- ----------- -----------
Total costs and other deductions 1,771,424 (77,211) 1,753,081
----------- ----------- -----------
Income before income taxes 524,915 (336,851) 557,612
----------- ----------- -----------
Income tax expense 188,064 -- 200,162
----------- ----------- -----------
NET INCOME $ 336,851 $ (336,851) $ 357,450
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS OTHER
DELAWARE SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(ISSUER/GUARANTOR) (NON-GUARANTORS) ADJUSTMENTS TOTAL
REVENUES AND OTHER INCOME:
Operating revenues $ -- $ 1,388,660 $ -- $ 1,388,660
Earnings from unconsolidated affiliates -- 26,283 -- 26,283
Earnings from consolidated affiliates 115,908 -- (115,908) --
Interest income 87 20,494 -- 20,581
Intercompany interest income 64,618 -- (64,618) --
Other income, net 69 27,088 -- 27,157
----------- ----------- ----------- -----------
Total revenues and other income 180,682 1,462,525 (180,526) 1,462,681
----------- ----------- ----------- -----------
Costs and other deductions:
Direct costs -- 938,651 -- 938,651
General and administrative expenses 493 106,011 -- 106,504
Depreciation and amortization -- 152,413 -- 152,413
Interest expense 30,236 5,134 -- 35,370
Intercompany interest expense -- 64,618 (64,618) --
----------- ----------- ----------- -----------
Total costs and other deductions 30,729 1,266,827 (64,618) 1,232,938
----------- ----------- ----------- -----------
Income before income taxes 149,953 195,698 (115,908) 229,743
----------- ----------- ----------- -----------
Income tax expense 12,597 79,790 -- 92,387
----------- ----------- ----------- -----------
NET INCOME $ 137,356 $ 115,908 $ (115,908) $ 137,356
----------- ----------- ----------- -----------
101
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS NABORS NABORS
(PARENT/ DELAWARE HOLDINGS
GUARANTOR) (ISSUER/GUARANTOR) (ISSUER)
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 78,235 $ (193,818) $ (128)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, available-for-sale (25,055) -- (21)
Sales of marketable securities, available-for-sale -- -- --
Investments in consolidated affiliates (15,089) -- (221,484)
Cash paid for acquisitions of businesses, net -- -- --
Capital expenditures -- -- --
Cash paid for other current assets -- -- --
Proceeds from sales of assets and insurance claims -- -- --
----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (40,144) -- (221,505)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash -- -- --
Decrease in short-term borrowings -- -- --
Proceeds from long-term debt -- 272,765 223,139
Reduction of long-term debt -- (5,047) --
Debt issuance costs -- (1,634) (1,311)
Payments related to cash flow hedges -- (1,494) --
Proceeds from issuance of common shares 4,522 8,328 --
Proceeds from parent contributions -- -- 12
Repurchase of common shares (2,486) -- --
Dividends paid -- (81,263) --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,036 191,655 221,840
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS -- -- --
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40,127 (2,163) 207
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 2,201 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 40,127 $ 38 $ 207
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) OTHER
SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(NON-GUARANTORS) ADJUSTMENTS TOTAL
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 569,419 $ (81,263) $ 372,445
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, available-for-sale (720,307) -- (745,383)
Sales of marketable securities, available-for-sale 542,133 -- 542,133
Investments in consolidated affiliates (24) 236,597 --
Cash paid for acquisitions of businesses, net (135,652) -- (135,652)
Capital expenditures (316,763) -- (316,763)
Cash paid for other current assets (8,725) -- (8,725)
Proceeds from sales of assets and insurance claims 34,877 -- 34,877
----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (604,461) 236,597 (629,513)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash 210 -- 210
Decrease in short-term borrowings (844) -- (844)
Proceeds from long-term debt -- -- 495,904
Reduction of long-term debt (25,784) -- (30,831)
Debt issuance costs -- -- (2,945)
Payments related to cash flow hedges -- -- (1,494)
Proceeds from issuance of common shares -- -- 12,850
Proceeds from parent contributions 236,585 (236,597) --
Repurchase of common shares -- -- (2,486)
Dividends paid -- 81,263 --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 210,167 (155,334) 470,364
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 2,312 -- 2,312
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 177,437 -- 215,608
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 196,242 -- 198,443
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 373,679 $ -- $ 414,051
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS NABORS NABORS
(PARENT/ DELAWARE HOLDINGS
GUARANTOR) (ISSUER/GUARANTOR) (ISSUER)
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES $ -- $ (447,834) $ --
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, available-for-sale -- -- --
Sales of marketable securities, available-for-sale -- -- --
Cash paid for acquisition of businesses, net -- -- --
Capital expenditures -- -- --
Proceeds from sales of assets and insurance claims -- -- --
----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES -- -- --
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash -- -- --
Proceeds from long-term debt -- 840,338 --
Reduction of long-term debt -- (139,798) --
Debt issuance costs -- (12,879) --
Proceeds from issuance of common shares -- 8,219 --
Repurchase of common shares -- (247,963) --
----------- ----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES -- 447,917 --
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS -- -- --
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- 83 --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 2,118 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ 2,201 $ --
----------- ----------- -----------
YEAR ENDED DECEMBER 31, 2001
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) OTHER
SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(NON-GUARANTORS) ADJUSTMENTS TOTAL
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES $ 1,142,919 $ -- $ 695,085
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, available-for-sale (804,067) -- (804,067)
Sales of marketable securities, available-for-sale 431,498 -- 431,498
Cash paid for acquisition of businesses, net (66,352) -- (66,352)
Capital expenditures (701,156) -- (701,156)
Proceeds from sales of assets and insurance claims 15,067 -- 15,067
----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (1,125,010) -- (1,125,010)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash 692 -- 692
Proceeds from long-term debt -- -- 840,338
Reduction of long-term debt (16,203) -- (156,001)
Debt issuance costs -- -- (12,879)
Proceeds from issuance of common shares -- -- 8,219
Repurchase of common shares -- -- (247,963)
----------- ----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (15,511) -- 432,406
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (1,350) -- (1,350)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,048 -- 1,131
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 195,194 -- 197,312
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 196,242 $ -- $ 198,443
----------- ----------- -----------
102
YEAR ENDED DECEMBER 31, 2000
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) NABORS OTHER
DELAWARE SUBSIDIARIES CONSOLIDATING CONSOLIDATED
(ISSUER/GUARANTOR) (NON-GUARANTORS) ADJUSTMENTS TOTAL
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES $ (597,524) $ 816,972 $ -- $ 219,448
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, available-for-sale -- (325,286) -- (325,286)
Sales of marketable securities, available-for-sale -- 42,450 -- 42,450
Capital expenditures -- (300,637) -- (300,637)
Proceeds from sales of assets and insurance claims -- 7,523 -- 7,523
----------- ----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES -- (575,950) -- (575,950)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash -- 1,634 -- 1,634
Proceeds from long-term debt 501,941 -- -- 501,941
Reduction of long-term debt (25,625) (110,809) -- (136,434)
Debt issuance costs (6,810) -- -- (6,810)
Proceeds from issuance of common shares 112,979 -- -- 112,979
----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 582,485 (109,175) -- 473,310
----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS -- (76) -- (76)
----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,039) 131,771 -- 116,732
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,157 63,423 -- 80,580
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,118 $ 195,194 $ -- $ 197,312
----------- ----------- ----------- -----------
21 SUBSEQUENT EVENTS
On February 21, 2003, we issued a Notice of Redemption to the holders of
our 8.625% senior subordinated notes due April 2008 for redemption of the notes
and all associated guarantees on April 1, 2003. The redemption price will be
$1,043.13 per $1,000 principal amount of the notes together with accrued and
unpaid interest to the date of redemption. We estimate that the total redemption
price will be $45.2 million and will require the recognition of a pretax loss of
approximately $.9 million, resulting from the redemption of the notes at prices
higher than their carrying value on April 1, 2003.
On March 18, 2003, the United States District Court for the Southern
District of Texas granted our motion to dismiss complaints filed by three of our
shareholders (Note 15) and dismissed all claims with prejudice. We are unable to
predict whether an appeal will be filed.
103
CORPORATE INFORMATION
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}CORPORATE ADDRESS
CORPORATE ADDRESS
Nabors Industries Ltd.
2nd Floor International Trading Center
Warrens
P.O. Box 905E
St. Michaels, Barbados
Telephone: (246) 421-9471
Fax: (246) 421-9472
FORM 10-K
Copies may be obtained at no charge by writing to our Corporate Secretary at
Nabors' corporate office.
TRANSFER AGENT
EquiServe
P.O. Box 43069
Providence, Rhode Island 02940-3069
INVESTOR CONTACT
Dennis A. Smith
Director of Corporate Development
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Houston, Texas
PRICE OF COMMON STOCK
As of December 31, 2002, there were 144,964,668 shares of common stock
outstanding held by 2,340 holders of record.
The common stock is listed on the American Stock Exchange under the symbol
"NBR". The following table sets forth the reported high and low sales prices of
the common stock on the Composite Tape for the calendar quarters indicated.
STOCK PRICE
- --------------------------------------------------------------------------------
CALENDAR YEAR HIGH LOW
2000 First quarter $40.56 $28.13
Second quarter 44.25 34.00
Third quarter 53.81 38.56
Fourth quarter 60.47 40.50
- --------------------------------------------------------------------------------
2001 First quarter 62.51 51.00
Second quarter 60.41 37.20
Third quarter 36.65 18.66
Fourth quarter 35.73 20.66
- --------------------------------------------------------------------------------
2002 First quarter 42.88 27.05
Second quarter 48.70 35.30
Third quarter 36.50 26.52
Fourth quarter 38.86 30.60
- --------------------------------------------------------------------------------
104
OFFICERS AND DIRECTORS
{NABORS INDUSTRIES LTD. AND SUBSIDIARIES}
OFFICERS
EUGENE M. ISENBERG
Chairman and Chief Executive Officer
ANTHONY G. PETRELLO
President and Chief Operating Officer
DANIEL MCLACHLIN
Vice President - Administration and Corporate Secretary
BRUCE P. KOCH
Vice President and Chief Financial Officer
DIRECTORS
EUGENE M. ISENBERG
Chairman and Chief Executive Officer,
Nabors Industries Ltd.
ANTHONY G. PETRELLO
President and Chief Operating Officer,
Nabors Industries Ltd.
JAMES L. PAYNE
Chairman, Chief Executive Officer and President,
Nuevo Energy Company
HANS W. SCHMIDT
Former Director,
Deutag Drilling
MYRON M. SHEINFELD
Senior Counsel,
Akin, Gump, Straus, Hauer & Feld, L.L.P.
RICHARD F. SYRON
Executive Chairman,
Thermo Electron Corporation
JACK WEXLER
International Business Consultant
MARTIN J. WHITMAN
Director,
Danielson Holding Corporation
Chairman,
Third Avenue Trust
PRINCIPAL OPERATING SUBSIDIARIES AND LEAD EXECUTIVES
NABORS ALASKA DRILLING, INC.
Anchorage, Alaska
James Denney
NABORS CANADA L.P.
Calgary, Alberta
Duane A. Mather
NABORS DRILLING USA, LP
PEAK USA ENERGY SERVICES, LTD.
Houston, Texas
Larry P. Heidt
POOL WELL SERVICES CO. AND
POOL COMPANY TEXAS, LTD.
Houston, Texas
Nicholas Petronio
RYAN ENERGY TECHNOLOGIES
Calgary, Alberta
Richard Ryan
NABORS MANAGEMENT LTD.
NABORS DRILLING INTERNATIONAL LIMITED
SUNDOWNER OFFSHORE INTERNATIONAL
(BERMUDA) LIMITED
Hamilton, Bermuda
Siegfried Meissner
NABORS OFFSHORE CORPORATION
Houston, Texas
Jerry C. Shanklin
CANRIG DRILLING TECHNOLOGY LTD.
Magnolia, Texas
Christopher P. Papouras
EPOCH WELL SERVICES, INC.
Houston, Texas
Christopher P. Papouras
PEAK OILFIELD SERVICE COMPANY
Anchorage, Alaska
Michael R. O' Connor
SEA MAR, A DIVISION OF POOL WELL SERVICES CO.
Houston, Texas
Van Dewitt