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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
COMMISSION FILE NUMBER: 000-49887
---------------------
NABORS INDUSTRIES LTD.
INCORPORATED IN BERMUDA
MINTFLOWER PLACE
8 PAR-LA-VILLE ROAD
HAMILTON, HM08
BERMUDA
(441) 292-1510
98-0363970
(I.R.S. Employer Identification No.)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of common shares, par value $.001 per share, outstanding as of
July 29, 2005 was 157,277,958. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 185,559 exchangeable shares outstanding as of July 29, 2005
that are exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares, including
but not limited to voting rights and the right to receive dividends, if any.
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NABORS INDUSTRIES LTD. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2005 and December
31, 2004.................................................... 2
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2005 and 2004......................... 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004................................ 4
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2005 and 2004............. 5
Notes to Consolidated Financial Statements.................. 7
Report of Independent Registered Public Accounting Firm..... 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 35
Item 4. Controls and Procedures..................................... 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
and Issuer Repurchases of Equity Securities................. 37
Item 4. Submission of Matters to a Vote of Security Holders......... 37
Item 6. Exhibits.................................................... 38
Signatures................................................................... 39
</Table>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 567,949 $ 384,709
Short-term investments.................................... 493,339 515,842
Accounts receivable, net.................................. 619,330 540,103
Inventory................................................. 36,163 28,653
Deferred income taxes..................................... 36,853 39,599
Other current assets...................................... 79,581 72,068
---------- ----------
Total current assets................................... 1,833,215 1,580,974
Long-term investments....................................... 518,070 510,496
Property, plant and equipment, net.......................... 3,460,599 3,275,495
Goodwill, net............................................... 331,635 327,225
Other long-term assets...................................... 165,073 168,419
---------- ----------
Total assets........................................... $6,308,592 $5,862,609
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 814,607 $ 804,550
Trade accounts payable.................................... 227,406 211,600
Accrued liabilities....................................... 182,468 171,234
Income taxes payable...................................... 17,049 11,932
---------- ----------
Total current liabilities.............................. 1,241,530 1,199,316
Long-term debt.............................................. 1,203,409 1,201,686
Other long-term liabilities................................. 144,589 146,337
Deferred income taxes....................................... 428,455 385,877
---------- ----------
Total liabilities...................................... 3,017,983 2,933,216
---------- ----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000; issued and
outstanding 157,089 and 149,861, respectively......... 157 150
Capital in excess of par value............................ 1,551,653 1,358,374
Unearned compensation..................................... (18,855) --
Accumulated other comprehensive income.................... 141,604 148,229
Retained earnings......................................... 1,616,050 1,422,640
---------- ----------
Total shareholders' equity............................. 3,290,609 2,929,393
---------- ----------
Total liabilities and shareholders' equity............. $6,308,592 $5,862,609
---------- ----------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
2
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2005 2004 2005 2004
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues and other income:
Operating revenues............................ $765,337 $530,715 $1,549,065 $1,123,696
Earnings from unconsolidated affiliates....... 5,204 1,153 7,207 4,975
Investment income............................. 15,578 8,631 27,366 20,884
-------- -------- ---------- ----------
Total revenues and other income............ 786,119 540,499 1,583,638 1,149,555
-------- -------- ---------- ----------
Costs and other deductions:
Direct costs.................................. 454,584 368,941 929,210 758,981
General and administrative expenses........... 59,805 45,441 118,446 91,040
Depreciation and amortization................. 70,982 60,843 139,170 121,331
Depletion..................................... 11,343 9,977 23,696 25,587
Interest expense.............................. 11,333 11,387 22,070 27,246
Losses (gains) on sales of long-lived assets,
impairment charges and other expense
(income), net.............................. 4,223 (6,155) 8,094 (4,826)
-------- -------- ---------- ----------
Total costs and other deductions........... 612,270 490,434 1,240,686 1,019,359
-------- -------- ---------- ----------
Income before income taxes...................... 173,849 50,065 342,952 130,196
-------- -------- ---------- ----------
Income tax expense (benefit):
Current....................................... 1,903 6,391 14,118 10,596
Deferred...................................... 40,141 (2,674) 69,615 1,535
-------- -------- ---------- ----------
Total income tax expense................... 42,044 3,717 83,733 12,131
-------- -------- ---------- ----------
Net income...................................... $131,805 $ 46,348 $ 259,219 $ 118,065
-------- -------- ---------- ----------
Earnings per share:
Basic......................................... $ .84 $ .31 $ 1.67 $ .80
Diluted....................................... $ .82 $ .30 $ 1.62 $ .76
Weighted-average number of common shares
outstanding:
Basic......................................... 157,440 148,866 154,803 148,425
-------- -------- ---------- ----------
Diluted....................................... 161,212 155,234 159,996 163,417
-------- -------- ---------- ----------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
---------------------
2005 2004
--------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................. $ 259,219 $ 118,065
Adjustments to net income:
Depreciation and amortization............................. 139,170 121,331
Depletion................................................. 23,696 25,587
Deferred income tax expense............................... 69,615 1,535
Deferred financing costs amortization..................... 2,441 2,620
Pension liability amortization............................ 240 428
Discount amortization on long-term debt................... 10,301 10,065
Amortization of loss on cash flow hedges.................. 76 76
Losses on long-lived assets, net.......................... 3,952 241
Gains on investments, net................................. (7,319) (6,500)
Losses (gains) on derivative instruments.................. 158 (3,087)
Amortization of unearned compensation..................... 1,821 --
Foreign currency transaction losses....................... 1,268 106
Equity in earnings from unconsolidated affiliates, net of
dividends.............................................. (5,707) (3,975)
Increase (decrease) from changes in:
Accounts receivable....................................... (83,143) (8,117)
Inventory................................................. (7,326) 1,554
Other current assets...................................... (8,871) (4,983)
Other long-term assets.................................... 7,862 (1,426)
Trade accounts payable and accrued liabilities............ 15,138 16,669
Income taxes payable...................................... 6,895 (5,986)
Other long-term liabilities............................... 2,508 (8,672)
--------- ---------
Net cash provided by operating activities................... 431,994 255,531
--------- ---------
Cash flows from investing activities:
Purchases of investments.................................. (249,708) (425,998)
Sales and maturities of investments....................... 281,523 488,449
Cash paid for acquisitions of businesses, net............. (43,005) --
Capital expenditures...................................... (347,124) (289,327)
Proceeds from sales of assets and insurance claims........ 16,262 2,588
--------- ---------
Net cash used for investing activities...................... (342,052) (224,288)
--------- ---------
Cash flows from financing activities:
Increase in cash overdrafts............................... 14,530 5,349
Reduction of long-term debt............................... -- (298,117)
Proceeds from issuance of common shares................... 160,584 42,628
Repurchase of common shares............................... (80,572) --
--------- ---------
Net cash provided by (used for) financing activities........ 94,542 (250,140)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (1,244) 1,747
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 183,240 (217,150)
Cash and cash equivalents, beginning of period.............. 384,709 579,737
--------- ---------
Cash and cash equivalents, end of period.................... $ 567,949 $ 362,587
--------- ---------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
---------------------------------------------------
COMMON UNREALIZED
SHARES GAINS MINIMUM UNREALIZED
--------------- CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE
PAR EXCESS OF UNEARNED MARKETABLE LIABILITY CASH FLOW TRANSLATION
SHARES VALUE PAR VALUE COMPENSATION SECURITIES ADJUSTMENT HEDGES ADJUSTMENT
------- ----- ---------- ------------ ----------- ---------- ---------- -----------
(IN THOUSANDS)
Balances, December 31,
2004...................... 149,861 $150 $1,358,374 $ -- $ 271 $(2,419) $(1,143) $151,520
------- ---- ---------- -------- ------- ------- ------- --------
Comprehensive income
(loss):
Net income................
Translation adjustment.... (16,532)
Unrealized gains on
marketable securities,
net of income taxes of
$772.................... 13,830
Less: reclassification
adjustment for gains
included in net
income, net of income
taxes of $392......... (4,150)
Pension liability
amortization, net of
income taxes of $89..... 151
Amortization of loss on
cash flow hedges........ 76
------- ---- ---------- -------- ------- ------- ------- --------
Total comprehensive
income (loss)....... -- -- -- -- 9,680 151 76 (16,532)
------- ---- ---------- -------- ------- ------- ------- --------
Issuance of common shares
for stock options
exercised................. 8,336 8 160,576
Nabors Exchangeco shares
exchanged................. 33
Repurchase of common
shares.................... (1,500) (1) (14,762)
Tax effect of stock option
deductions................ 26,789
Grants of restricted stock
awards.................... 365 20,999 (20,999)
Forfeitures of restricted
shares.................... (6) (323) 323
Amortization of unearned
compensation.............. 1,821
------- ---- ---------- -------- ------- ------- ------- --------
Subtotal.............. 7,228 7 193,279 (18,855) -- -- -- --
------- ---- ---------- -------- ------- ------- ------- --------
Balances, June 30, 2005.... 157,089 $157 $1,551,653 $(18,855) $ 9,951 $(2,268) $(1,067) $134,988
------- ---- ---------- -------- ------- ------- ------- --------
<Caption>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
---------- -------------
(IN THOUSANDS)
Balances, December 31,
2004...................... $1,422,640 $2,929,393
---------- ----------
Comprehensive income
(loss):
Net income................ 259,219 259,219
Translation adjustment.... (16,532)
Unrealized gains on
marketable securities,
net of income taxes of
$772.................... 13,830
Less: reclassification
adjustment for gains
included in net
income, net of income
taxes of $392......... (4,150)
Pension liability
amortization, net of
income taxes of $89..... 151
Amortization of loss on
cash flow hedges........ 76
---------- ----------
Total comprehensive
income (loss)....... 259,219 252,594
---------- ----------
Issuance of common shares
for stock options
exercised................. 160,584
Nabors Exchangeco shares
exchanged................. --
Repurchase of common
shares.................... (65,809) (80,572)
Tax effect of stock option
deductions................ 26,789
Grants of restricted stock
awards.................... --
Forfeitures of restricted
shares.................... --
Amortization of unearned
compensation.............. 1,821
---------- ----------
Subtotal.............. (65,809) 108,622
---------- ----------
Balances, June 30, 2005.... $1,616,050 $3,290,609
---------- ----------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
5
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY -- (CONTINUED)
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
---------------------------------------------------
COMMON UNREALIZED
SHARES GAINS MINIMUM UNREALIZED
--------------- CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE
PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS
------- ----- ---------- ----------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Balances, December 31,
2003...................... 146,656 $147 $1,270,362 $ 4,969 $(2,815) $(1,294) $ 98,723 $1,120,183
------- ---- ---------- ------- ------- ------- -------- ----------
Comprehensive income
(loss):
Net income............... 118,065
Translation adjustment... (19,123)
Unrealized losses on
marketable securities,
net of income tax
benefit of $927........ (1,578)
Less: reclassification
adjustment for gains
included in net
income, net of income
taxes of $1,379...... (2,348)
Pension liability
amortization, net of
income taxes of $158... 270
Amortization of loss on
cash flow hedges....... 76
------- ---- ---------- ------- ------- ------- -------- ----------
Total comprehensive
income (loss)...... -- -- -- (3,926) 270 76 (19,123) 118,065
------- ---- ---------- ------- ------- ------- -------- ----------
Issuance of common shares
for stock options
exercised................ 1,906 2 42,626
Nabors Exchangeco shares
exchanged................ 89
Tax effect of stock option
deductions............... 15,837
------- ---- ---------- ------- ------- ------- -------- ----------
Subtotal............. 1,995 2 58,463 -- -- -- -- --
------- ---- ---------- ------- ------- ------- -------- ----------
Balances, June 30, 2004.... 148,651 $149 $1,328,825 $ 1,043 $(2,545) $(1,218) $ 79,600 $1,238,248
------- ---- ---------- ------- ------- ------- -------- ----------
<Caption>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
(IN THOUSANDS)
Balances, December 31,
2003...................... $2,490,275
----------
Comprehensive income
(loss):
Net income............... 118,065
Translation adjustment... (19,123)
Unrealized losses on
marketable securities,
net of income tax
benefit of $927........ (1,578)
Less: reclassification
adjustment for gains
included in net
income, net of income
taxes of $1,379...... (2,348)
Pension liability
amortization, net of
income taxes of $158... 270
Amortization of loss on
cash flow hedges....... 76
----------
Total comprehensive
income (loss)...... 95,362
----------
Issuance of common shares
for stock options
exercised................ 42,628
Nabors Exchangeco shares
exchanged................ --
Tax effect of stock option
deductions............... 15,837
----------
Subtotal............. 58,465
----------
Balances, June 30, 2004.... $2,644,102
----------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
6
NABORS INDUSTRIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 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, the Far East and Africa. We are also one of the
largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 660 land workover and well-servicing rigs in the
United States, primarily in the southwestern and western United States, and
approximately 215 land workover and well-servicing rigs in Canada. Nabors is a
leading provider of offshore platform workover and drilling rigs, and owns 43
platform, 19 jack-up units and three barge rigs in the United States and
multiple 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 17 rigs. We also offer a wide range of ancillary well-site
services, including engineering, transportation, construction, maintenance, well
logging, directional drilling, rig instrumentation, data collection and other
support services in selected domestic and international markets. We time charter
a fleet of 28 marine transportation and supply vessels, 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. We have also made
selective investments in oil and gas exploration, development and production
activities.
The majority of our business is conducted through our various Contract
Drilling operating segments, which include our drilling, workover and
well-servicing operations, on land and offshore. Our limited oil and gas
exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes. Our operating segments
engaged in marine transportation and supply services, drilling technology and
top drive manufacturing, directional drilling, rig instrumentation and software,
and construction and logistics operations are aggregated in a category labeled
Other Operating Segments for segment reporting purposes.
As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The unaudited consolidated financial statements of Nabors are prepared in
conformity with accounting principles generally accepted in the United States of
America (GAAP). Certain reclassifications have been made to the prior period to
conform to the current period presentation, with no effect on our consolidated
financial position, results of operations or cash flows. Pursuant to the rules
and regulations of the U.S. Securities and Exchange Commission, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with GAAP have been omitted. Therefore, these
financial statements should be read along with our Annual Report on Form 10-K
for the year ended December 31, 2004. In our management's opinion, the
consolidated financial statements contain all adjustments necessary to present
fairly our financial position as of June 30, 2005, and the results of our
operations and our cash flows for the three and six months ended June 30, 2005
and 2004, in accordance with GAAP. Interim results for the three and six months
ended June 30, 2005 may not be indicative of results that will be realized for
the full year ending December 31, 2005.
Our independent registered public accounting firm has performed a review
of, and issued a report on, these consolidated interim financial statements in
accordance with standards established by the Public Company Accounting Oversight
Board. Pursuant to Rule 436(c) under the Securities Act of 1933, this report
should not be considered a part of any registration statement prepared or
certified within the meanings of Sections 7 and 11 of the Securities Act.
7
PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Nabors, all
majority-owned subsidiaries, and all non-majority owned subsidiaries required to
be consolidated under Financial Accounting Standards Board (FASB) Interpretation
No. 46R, which are not material to our financial position, results of operations
or cash flows. All significant intercompany accounts and transactions are
eliminated in consolidation.
Investments in operating entities where we have the ability to exert
significant influence, but where we do not control their operating and financial
policies, are accounted for using the equity method. Our share of the net 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. Investments in
net assets of unconsolidated affiliates accounted for using the equity method
totaled $72.9 million and $67.1 million as of June 30, 2005 and December 31,
2004, respectively, and are included in other long-term assets in our
consolidated balance sheets. Similarly, investments in certain overseas funds
are accounted for using the equity method of accounting based on our ownership
interest in each fund. Our share of the gains and losses of these funds is
recorded in investment income in our consolidated statements of income, and our
investments in these funds are included in long-term investments in our
consolidated balance sheets.
STOCK-BASED COMPENSATION
We account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation expense for stock options
and restricted stock awards is measured as the excess, if any, of the quoted
market price of Nabors common shares at the date of grant over the amount an
employee must pay to acquire the common shares. We grant options at prices equal
to the market price of our shares on the date of grant and therefore do not
record compensation expense related to these grants. For restricted stock
awards, we record unearned compensation in shareholders' equity equal to the
market value of the restricted shares on the date of grant with an offset to
capital in excess of par value. Unearned compensation is charged to expense over
the vesting period of the restricted stock awards. As the restrictions on the
restricted stock awards are removed, which occurs as the restricted stock awards
vest, the par value of the shares are reclassified from capital in excess of par
value to common shares. Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123,"
requires companies that continue to account for stock-based compensation in
accordance with APB 25 to disclose certain information using a tabular
presentation. The table presented below illustrates the effect on our net income
and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our
stock-based employee compensation. Under the provisions of SFAS 123,
compensation cost for stock-based compensation is determined based on fair
values as of the dates of grant. For stock options, fair value is estimated
using an option pricing model such as the Black-Scholes option-pricing model
(which we use in our calculations), and compensation cost is amortized over the
applicable option vesting period.
8
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2005 2004 2005 2004
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income, as reported..................... $131,805 $46,348 $259,219 $118,065
Add: Stock-based compensation expense,
relating to restricted stock awards,
included in reported net income, net of
related tax effects....................... 843 -- 1,147 --
Deduct: Total stock-based employee
compensation expense determined under the
fair value method for all awards, net of
related tax effects....................... (13,012) (6,415) (22,089) (10,252)
-------- ------- -------- --------
Pro forma net income-basic.................. 119,636 39,933 238,277 107,813
Add: Interest expense on assumed conversion
of our zero coupon
convertible/exchangeable senior
debentures/notes, net of tax.............. -- -- -- 6,180
-------- ------- -------- --------
Adjusted pro forma net income-diluted....... $119,636 $39,933 $238,277 $113,993
-------- ------- -------- --------
Earnings per share:
Basic-as reported......................... $ .84 $ .31 $ 1.67 $ .80
Basic-pro forma........................... $ .76 $ .27 $ 1.54 $ .73
Diluted-as reported....................... $ .82 $ .30 $ 1.62 $ .76
Diluted-pro forma......................... $ .74 $ .26 $ 1.49 $ .70
</Table>
COMPREHENSIVE INCOME
Comprehensive income totaled $125.1 million and $29.7 million for the three
months ended June 30, 2005 and 2004, respectively, and $252.6 million and $95.4
million for the six months ended June 30, 2005 and 2004, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
As discussed under Stock-Based Compensation above, we currently account for
stock-based compensation as prescribed by APB 25, and because we grant options
at prices equal to the market price of our shares on the date of the grant, we
do not record compensation expense related to these grants in our consolidated
statements of income. On December 16, 2004, the FASB issued a revision to SFAS
No. 123, "Share-Based Payment," which will eliminate our ability to account for
stock-based compensation using APB 25 and instead would require us to account
for stock option awards using a fair-value based method resulting in
compensation expense for stock option awards being recorded in our consolidated
statements of income. The statement will be effective for stock options granted,
modified, or settled in cash in annual periods beginning after June 15, 2005
(2006 for Nabors). Additionally, for stock options granted or modified after
December 15, 1994 that have not vested as of the effective date of the
statement, compensation cost will be measured and recorded in our consolidated
statements of income based on the same estimates of fair value calculated as of
the date of grant as currently disclosed within the table required by SFAS No.
148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123,"
presented above. The statement may have a material adverse effect on our results
of operations during the periods of adoption and annual and interim periods
thereafter. The impact that the adoption of this statement in its current form
on January 1, 2005 or 2004 would have had on our net income and basic and
diluted earnings per share for the three and six months ended June 30, 2005 and
2004 is presented in the table above.
NOTE 3 INCOME TAXES
Our effective income tax rate was 24.2% and 24.4% during the three and six
months ended June 30, 2005, respectively, compared to 7.4% and 9.3% during the
respective prior year periods. The increases in our effective income tax rate
resulted from a higher proportion of our taxable income being generated in the
9
U.S. during the three and six months ended June 30, 2005 compared to the prior
year periods. Income generated in the U.S. is generally taxed at a higher rate
than in international jurisdictions in which we operate.
NOTE 4 COMMON SHARES
During the six months ended June 30, 2005, the Compensation Committee of
our Board of Directors granted restricted stock awards to certain of our
executive officers, other key employees, and independent directors. In
conjunction with these grants, we awarded 365,079 restricted shares at an
average market price of $57.52 to these individuals. We recorded unearned
compensation totaling approximately $21.0 million in shareholders' equity, equal
to the market value of the restricted shares on the dates of grant, and will
charge the unearned compensation to expense over the vesting period of the
restricted stock awards (which ranges from 3 to 4 years). Subsequent to these
awards, restricted shares totaling approximately $.3 million have been
forfeited. During the three and six months ended June 30, 2005, $1.3 million and
$1.8 million, respectively, was charged to compensation expense and is included
in direct costs and general and administrative expenses in our consolidated
statements of income.
During the second quarter of 2005, we repurchased and retired 1.5 million
of our common shares in the open market for $80.6 million.
NOTE 5 COMMITMENTS AND CONTINGENCIES
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 April 1, 2005, with our insurance
renewal, certain changes have been made to our insurance coverage resulting in
additional loss exposure. In addition to the insurance retentions that we are
responsible for relating to rig, equipment, property and business interruption
risk, we are now responsible for 30% of all losses in excess of those
retentions.
LITIGATION
Nabors and its subsidiaries are defendants or otherwise involved in a
number of 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 material adverse effect on our consolidated financial
position, results of operations or cash flows.
GUARANTEES
We enter into various agreements and obligations providing financial or
performance assurance to third parties. Certain of these agreements serve as
guarantees, including standby letters of credit issued on behalf of insurance
carriers in conjunction with our workers' compensation insurance program and
other financial surety instruments such as bonds. We have also guaranteed
payment of contingent consideration in conjunction with two separate
acquisitions completed during 2002 and the first quarter of 2005, which is based
on future operating results of those businesses. 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. We are not able to estimate the potential
future maximum payments that might be due under our indemnification guarantees.
10
Management believes the likelihood that we would be required to perform or
otherwise incur any material losses associated with any of these guarantees is
remote. The following table summarizes the total maximum amount of financial and
performance guarantees issued by Nabors:
<Table>
<Caption>
MAXIMUM AMOUNT
-----------------------------------------------------
REMAINDER OF
2005 2006 2007 THEREAFTER TOTAL
------------ ------- ---- ---------- --------
(IN THOUSANDS)
Financial standby letters of credit
and other financial surety
instruments...................... $1,639 $93,825 $ -- $1,285 $ 96,749
Contingent consideration in
acquisitions..................... 1,667 1,541 708 2,834 6,750
------ ------- ---- ------ --------
Total.............................. $3,306 $95,366 $708 $4,119 $103,499
------ ------- ---- ------ --------
</Table>
NOTE 6 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (numerator):
Net income -- basic......................... $131,805 $ 46,348 $259,219 $118,065
Add interest expense on assumed conversion
of our zero coupon
convertible/exchangeable senior
debentures/notes, net of tax:
$1.381 billion due 2021(1)............. -- -- -- 6,180
$700 million due 2023(2)............... -- -- -- --
-------- -------- -------- --------
Adjusted net income -- diluted........... $131,805 $ 46,348 $259,219 $124,245
-------- -------- -------- --------
Earnings per share:
Basic.................................... $ .84 $ .31 $ 1.67 $ .80
Diluted.................................. $ .82 $ .30 $ 1.62 $ .76
Shares (denominator):
Weighted-average number of shares
outstanding-basic(3)..................... 157,440 148,866 154,803 148,425
Net effect of dilutive stock options and
warrants based on the treasury stock
method................................... 3,772 6,368 5,193 6,501
Assumed conversion of our zero coupon
convertible/exchangeable senior
debentures/notes:
$1.381 billion due 2021(1)............. -- -- -- 8,491
$700 million due 2023(2)............... -- -- -- --
-------- -------- -------- --------
Weighted-average number of shares
outstanding-diluted...................... 161,212 155,234 159,996 163,417
-------- -------- -------- --------
</Table>
- ---------------
(1) Diluted earnings per share for the three months ended June 30, 2005 and 2004
and for the six months ended June 30, 2005 excludes approximately 8.5
million potentially dilutive shares initially issuable upon the conversion
of these debentures. Such shares did not impact our calculation of diluted
earnings per share for the three and six months ended June 30, 2005 as we
are required to pay cash up to the principal amount of any debentures
converted resulting from the issuance of a supplemental indenture relating
to the debentures in October 2004. We would only issue an incremental number
of shares upon conversion of these debentures, and such shares would only be
included in the calculation of the weighted-average number of shares
outstanding in our diluted earnings per share calculation, if the price of
our shares
11
exceeded approximately $96. Such shares did not impact our calculation of
diluted earnings per share for the three months ended June 30, 2004 because
the inclusion of such shares would have been anti-dilutive, given the level
of net income for that period. Net income for the three months ended June
30, 2004 excludes the related add-back of interest expense, net of tax, of
$3.1 million for these debentures. These shares would have been dilutive and
therefore included in the calculation of the weighted-average number of
shares outstanding-diluted had diluted earnings per share been at or above
$.37 for the three months ended June 30, 2004. Diluted earnings per share
for the six months ended June 30, 2004 reflects the assumed conversion of
our $1.381 billion zero coupon convertible senior debentures due 2021, as
the conversion in that period would have been dilutive.
(2) Diluted earnings per share for the three and six months ended June 30, 2005
and 2004 excludes approximately 10.0 million potentially dilutive shares
initially issuable upon the exchange of our $700 million zero coupon senior
exchangeable notes due 2023. Such shares did not impact our calculation of
diluted earnings per share for the three and six months ended June 30, 2005
as we are required to pay cash up to the principal amount of any notes
exchanged as a result of the supplemental indenture issued for these notes
during the fourth quarter of 2004. We would only issue an incremental number
of shares upon exchange of these notes, and such shares would only be
included in the calculation of the weighted-average number of shares
outstanding in our diluted earnings per share calculation, if the price of
our shares exceeded $70.10. Such shares did not impact our calculation of
diluted earnings per share for the three and six months ended June 30, 2004
as the notes are contingently exchangeable under certain circumstances and
would only be included in the calculation of the weighted-average number of
shares outstanding-diluted if any of those criteria were met. Such criteria
were not met during the three and six months ended June 30, 2004. Based on
the initial exchange price per share, these notes would have been
exchangeable for our common shares during those periods if the closing sale
price per share of Nabors' common shares for at least 20 trading days during
the period of 30 consecutive trading days ending on the last trading day of
the previous calendar quarter was greater than or equal to $84.12.
(3) Includes the following weighted-average number of common shares of Nabors
and weighted-average number of exchangeable shares of Nabors Exchangeco
(Canada) Inc., an indirect wholly-owned Canadian subsidiary of Nabors,
respectively: 157.2 million and .2 million shares for the three months ended
June 30, 2005; 148.6 million and .3 million shares for the three months
ended June 30, 2004; 154.6 million and .2 million shares for the six months
ended June 30, 2005; and 148.1 million and .3 million shares for the six
months ended June 30, 2004. The exchangeable shares of Nabors Exchangeco are
exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares,
including but not limited to voting rights and the right to receive
dividends, if any.
For all periods presented, the computation of diluted earnings per share
excludes outstanding stock options and warrants with exercise prices greater
than the average market price of Nabors' common shares, because the inclusion of
such options and warrants would be anti-dilutive. The number of options,
warrants and restricted stock awards that were excluded from diluted earnings
per share that would potentially dilute earnings per share in the future were
878,257 and 760,254 shares during the three and six months ended June 30, 2005
and 8,917,857 and 8,237,941 shares during the three and six months ended June
30, 2004. In any period during which the average market price of Nabors' common
shares exceeds the exercise prices of these stock options and warrants, such
stock options and warrants will be included in our diluted earnings per share
computation using the treasury stock method of accounting. Restricted stock will
similarly be included in our diluted earnings per share computation using the
treasury stock method of accounting in any period where the amount of restricted
stock to be issued in future periods exceeds the number of shares assumed
repurchased in those periods.
NOTE 7 SUPPLEMENTAL BALANCE SHEET INFORMATION
As of June 30, 2005 and December 31, 2004, we had investments in marketable
securities classified as short-term investments in our consolidated balance
sheets totaling $493.3 million and $428.3 million, respectively, and had
investments in marketable securities classified as long-term investments in our
consolidated balance sheets totaling $340.6 million and $439.5 million,
respectively.
12
NOTE 8 SEGMENT INFORMATION
The following tables set forth certain financial information with respect
to our reportable segments:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2005 2004 2005 2004
-------- -------- ---------- ----------
(IN THOUSANDS)
Operating revenues and Earnings from
unconsolidated affiliates:
Contract Drilling:(1)
U.S. Lower 48 Land Drilling........... $300,700 $172,049 $ 559,690 $ 325,417
U.S. Land Well-servicing.............. 118,776 88,162 224,889 167,641
U.S. Offshore......................... 45,130 31,556 83,197 62,877
Alaska................................ 21,955 19,701 46,723 49,038
Canada................................ 76,720 61,905 250,122 200,671
International......................... 135,168 107,185 259,198 210,172
-------- -------- ---------- ----------
Subtotal Contract Drilling(2)....... 698,449 480,558 1,423,819 1,015,816
Oil and Gas(3)........................... 15,218 14,173 30,517 35,299
Other Operating Segments(4)(5)........... 78,729 52,740 147,645 108,678
Other reconciling items(6)............... (21,855) (15,603) (45,709) (31,122)
-------- -------- ---------- ----------
Total............................... $770,541 $531,868 $1,556,272 $1,128,671
-------- -------- ---------- ----------
Adjusted income (loss) derived from
operating activities:(7)
Contract Drilling:
U.S. Lower 48 Land Drilling........... $101,813 $ 12,971 $ 175,272 $ 21,539
U.S. Land Well-servicing.............. 26,401 14,394 45,829 24,127
U.S. Offshore......................... 12,498 4,796 19,509 9,613
Alaska................................ 4,159 3,756 10,131 10,966
Canada................................ 57 2,851 47,337 46,123
International......................... 32,558 18,753 62,325 37,344
-------- -------- ---------- ----------
Subtotal Contract Drilling.......... 177,486 57,521 360,403 149,712
Oil and Gas.............................. 2,869 896 3,743 5,402
Other Operating Segments................. 7,982 (2,106) 11,532 (2,537)
-------- -------- ---------- ----------
Total segment adjusted income
derived from operating
activities....................... 188,337 56,311 375,678 152,577
Other reconciling items(8)................. (14,510) (9,645) (29,928) (20,845)
Interest expense........................... (11,333) (11,387) (22,070) (27,246)
Investment income.......................... 15,578 8,631 27,366 20,884
Gains (losses) on sales of long-lived
assets, impairment charges and other
income (expense), net.................... (4,223) 6,155 (8,094) 4,826
-------- -------- ---------- ----------
Income before income taxes................. $173,849 $ 50,065 $ 342,952 $ 130,196
-------- -------- ---------- ----------
</Table>
13
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
----------- ---------------
(IN THOUSANDS)
Total assets:
Contract Drilling:
U.S. Lower 48 Land Drilling............................ $1,258,892 $1,119,280
U.S. Land Well-servicing............................... 321,333 274,734
U.S. Offshore.......................................... 410,975 409,687
Alaska................................................. 206,212 204,614
Canada................................................. 950,896 945,226
International.......................................... 1,229,983 1,121,749
---------- ----------
Subtotal Contract Drilling(9)........................ 4,378,291 4,075,290
Oil and Gas............................................... 95,190 93,169
Other Operating Segments(10).............................. 327,451 321,979
Other reconciling items(8)................................ 1,507,660 1,372,171
---------- ----------
Total assets......................................... $6,308,592 $5,862,609
---------- ----------
</Table>
- ---------------
(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.2 million and $1.1 million for the three months ended
June 30, 2005 and 2004, respectively, and $1.9 million and $2.2 million for
the six months ended June 30, 2005 and 2004, respectively.
(3) Represents our oil and gas exploration, development and production
operations.
(4) Includes our marine transportation and supply services, drilling technology
and 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 $4.0 million and $.1 million for the three months ended
June 30, 2005 and 2004, respectively, and $5.3 million and $2.8 million for
the six months ended June 30, 2005 and 2004, respectively.
(6) Represents the elimination of inter-segment transactions.
(7) Adjusted income (loss) derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, and
depreciation and amortization, and depletion 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
GAAP. However, management evaluates the performance of our business units
and the consolidated company based on several criteria, including adjusted
income (loss) 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
income before income taxes, which is a GAAP measure, is provided within the
table above.
(8) Represents the elimination of inter-segment transactions and unallocated
corporate expenses and assets.
(9) Includes $37.1 million and $35.2 million of investments in unconsolidated
affiliates accounted for by the equity method as of June 30, 2005 and
December 31, 2004, respectively.
(10) Includes $35.8 million and $31.9 million of investments in unconsolidated
affiliates accounted for by the equity method as of June 30, 2005 and
December 31, 2004, respectively.
14
NOTE 9 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Nabors has fully and unconditionally guaranteed all of the issued public
debt securities of Nabors Industries, Inc. (Nabors Delaware), and Nabors and
Nabors Delaware have fully and unconditionally guaranteed the $225 million
4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect
subsidiary.
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 investments in both
consolidated and unconsolidated affiliates using the equity method of
accounting.
The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of June 30, 2005 and December 31,
2004, statements of income for each of the three and six months ended June 30,
2005 and 2004, and statements of cash flows for each of the six months ended
June 30, 2005 and 2004 of (a) Nabors, parent/guarantor, (b) Nabors Delaware,
issuer of public debt securities guaranteed by Nabors and guarantor of the $225
million 4.875% senior notes issued by Nabors Holdings, (c) Nabors Holdings,
issuer of the $225 million 4.875% senior notes, (d) the non-guarantor
subsidiaries, (e) consolidating adjustments necessary to consolidate Nabors and
its subsidiaries and (f) Nabors on a consolidated basis.
15
CONDENSED CONSOLIDATING BALANCE SHEETS
<Table>
<Caption>
JUNE 30, 2005
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 52 $ 15 $ 15 $ 567,867 $ -- $ 567,949
Short-term
investments.......... -- -- -- 493,339 -- 493,339
Accounts receivable,
net.................. -- -- -- 619,330 -- 619,330
Inventory............... -- -- -- 36,163 -- 36,163
Deferred income taxes... -- -- -- 36,853 -- 36,853
Other current assets.... 633 4,031 376 74,541 -- 79,581
---------- ---------- -------- ---------- ----------- ----------
Total current
assets............. 685 4,046 391 1,828,093 -- 1,833,215
Long-term investments..... 25,000 -- -- 493,070 -- 518,070
Property, plant and
equipment, net.......... -- -- -- 3,460,599 -- 3,460,599
Goodwill, net............. -- -- -- 331,635 -- 331,635
Intercompany
receivables............. 496,381 789,881 -- 522 (1,286,784) --
Investments in
affiliates.............. 2,768,619 2,268,619 263,094 1,304,281 (6,531,667) 72,946
Other long-term assets.... -- 17,810 904 73,413 -- 92,127
---------- ---------- -------- ---------- ----------- ----------
Total assets......... $3,290,685 $3,080,356 $264,389 $7,491,613 $(7,818,451) $6,308,592
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt............ $ -- $ 814,607 $ -- $ -- -- $ 814,607
Trade accounts
payable.............. 14 25 -- 227,367 -- 227,406
Accrued liabilities..... 62 6,556 4,150 171,700 -- 182,468
Income taxes payable.... -- -- 815 16,234 -- 17,049
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities........ 76 821,188 4,965 415,301 -- 1,241,530
Long-term debt............ -- 979,512 223,897 -- -- 1,203,409
Other long-term
liabilities............. -- -- -- 144,589 -- 144,589
Deferred income taxes..... -- 39,721 -- 388,734 -- 428,455
Intercompany payable...... -- -- 2,521 1,284,263 (1,286,784) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities.... 76 1,840,421 231,383 2,232,887 (1,286,784) 3,017,983
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity...... 3,290,609 1,239,935 33,006 5,258,726 (6,531,667) 3,290,609
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders'
equity............. $3,290,685 $3,080,356 $264,389 $7,491,613 $(7,818,451) $6,308,592
---------- ---------- -------- ---------- ----------- ----------
</Table>
16
<Table>
<Caption>
DECEMBER 31, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 67,584 $ -- $ 18 $ 317,107 $ -- $ 384,709
Short-term
investments.......... 421,393 -- -- 94,449 -- 515,842
Accounts receivable,
net.................. -- -- -- 540,103 -- 540,103
Inventory............... -- -- -- 28,653 -- 28,653
Deferred income taxes... -- -- -- 39,599 -- 39,599
Other current assets.... 3,952 4,031 376 63,709 -- 72,068
---------- ---------- -------- ---------- ----------- ----------
Total current
assets............. 492,929 4,031 394 1,083,620 -- 1,580,974
Long-term investments..... 388,380 -- -- 122,116 -- 510,496
Property, plant and
equipment, net.......... -- -- -- 3,275,495 -- 3,275,495
Goodwill, net............. -- -- -- 327,225 -- 327,225
Intercompany
receivables............. 488,101 806,293 -- 522 (1,294,916) --
Investments in
affiliates.............. 1,561,019 2,138,488 254,974 1,181,632 (5,069,024) 67,089
Other long-term assets.... -- 19,080 1,009 81,241 -- 101,330
---------- ---------- -------- ---------- ----------- ----------
Total assets......... $2,930,429 $2,967,892 $256,377 $6,071,851 $(6,363,940) $5,862,609
---------- ---------- -------- ---------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt............ $ -- $ 804,550 $ -- $ -- $ -- $ 804,550
Trade accounts
payable.............. -- 23 -- 211,577 -- 211,600
Accrued liabilities..... 524 6,354 4,152 160,204 -- 171,234
Income taxes payable.... 480 -- -- 11,452 -- 11,932
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities........ 1,004 810,927 4,152 383,233 -- 1,199,316
Long-term debt............ -- 977,922 223,764 -- -- 1,201,686
Other long-term
liabilities............. -- -- -- 146,337 -- 146,337
Deferred income taxes..... 32 56,952 -- 328,893 -- 385,877
Intercompany payable...... -- -- 2,522 1,292,394 (1,294,916) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities.... 1,036 1,845,801 230,438 2,150,857 (1,294,916) 2,933,216
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity...... 2,929,393 1,122,091 25,939 3,920,994 (5,069,024) 2,929,393
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders'
equity............. $2,930,429 $2,967,892 $256,377 $6,071,851 $(6,363,940) $5,862,609
---------- ---------- -------- ---------- ----------- ----------
</Table>
17
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2005
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
Revenues and other income:
Operating revenues........... $ -- $ -- $ -- $765,337 $ -- $765,337
Earnings from unconsolidated
affiliates................ -- -- -- 5,204 -- 5,204
Earnings from consolidated
affiliates................ 131,442 74,004 3,643 78,891 (287,980) --
Investment income............ 757 -- -- 14,821 -- 15,578
Intercompany interest
income.................... 998 18,506 -- -- (19,504) --
-------- ------- ------ -------- --------- --------
Total revenues and other
income.................. 133,197 92,510 3,643 864,253 (307,484) 786,119
-------- ------- ------ -------- --------- --------
Costs and other deductions:
Direct costs................. -- -- -- 454,584 -- 454,584
General and administrative
expenses.................. 1,388 979 3 57,547 (112) 59,805
Depreciation and
amortization.............. -- 150 -- 70,832 -- 70,982
Depletion.................... -- -- -- 11,343 -- 11,343
Interest expense............. -- 9,163 2,860 (690) -- 11,333
Intercompany interest
expense................... -- -- -- 19,504 (19,504) --
Losses (gains) on sales of
long-lived assets,
impairment charges and
other expense (income),
net....................... -- 1,086 -- 3,025 112 4,223
-------- ------- ------ -------- --------- --------
Total costs and other
deductions.............. 1,388 11,378 2,863 616,145 (19,504) 612,270
-------- ------- ------ -------- --------- --------
Income before income taxes..... 131,809 81,132 780 248,108 (287,980) 173,849
-------- ------- ------ -------- --------- --------
Income tax expense............. 4 2,637 265 39,138 -- 42,044
-------- ------- ------ -------- --------- --------
Net income..................... $131,805 $78,495 $ 515 $208,970 $(287,980) $131,805
-------- ------- ------ -------- --------- --------
</Table>
18
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
Revenues and other income:
Operating revenues...... $ -- $ -- $ -- $530,715 $ -- $530,715
Earnings from
unconsolidated
affiliates........... -- -- -- 1,153 -- 1,153
Earnings from
consolidated
affiliates........... 18,329 7,372 3,639 12,938 (42,278) --
Investment income....... 4,403 -- -- 4,228 -- 8,631
Intercompany interest
income............... 27,292 17,812 -- 522 (45,626) --
------- ------- ------ -------- -------- --------
Total revenues and
other income....... 50,024 25,184 3,639 549,556 (87,904) 540,499
------- ------- ------ -------- -------- --------
Costs and other
deductions:
Direct costs............ -- -- -- 368,941 -- 368,941
General and
administrative
expenses............. 1,888 56 -- 44,803 (1,306) 45,441
Depreciation and
amortization......... -- 150 -- 60,693 -- 60,843
Depletion............... -- -- -- 9,977 -- 9,977
Interest expense........ -- 8,917 2,860 (390) -- 11,387
Intercompany interest
expense.............. -- 522 -- 45,104 (45,626) --
Losses (gains) on sales
of long-lived assets,
impairment charges
and other expense
(income), net........ -- (5,623) -- (1,838) 1,306 (6,155)
------- ------- ------ -------- -------- --------
Total costs and other
deductions......... 1,888 4,022 2,860 527,290 (45,626) 490,434
------- ------- ------ -------- -------- --------
Income before income
taxes................... 48,136 21,162 779 22,266 (42,278) 50,065
------- ------- ------ -------- -------- --------
Income tax expense
(benefit)............... 1,788 5,091 273 (3,435) -- 3,717
------- ------- ------ -------- -------- --------
Net income................ $46,348 $16,071 $ 506 $ 25,701 $(42,278) $ 46,348
------- ------- ------ -------- -------- --------
</Table>
19
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2005
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
Revenues and other
income:
Operating revenues..... $ -- $ -- $ -- $1,549,065 $ -- $1,549,065
Earnings from
unconsolidated
affiliates.......... -- -- -- 7,207 -- 7,207
Earnings from
consolidated
affiliates.......... 255,750 145,779 8,120 157,386 (567,035) --
Investment income...... 5,583 -- -- 21,783 -- 27,366
Intercompany interest
income.............. 1,984 37,201 -- -- (39,185) --
-------- -------- ------ ---------- --------- ----------
Total revenues and
other income...... 263,317 182,980 8,120 1,735,441 (606,220) 1,583,638
-------- -------- ------ ---------- --------- ----------
Costs and other
deductions:
Direct costs........... -- -- -- 929,210 -- 929,210
General and
administrative
expenses............ 3,719 1,100 3 114,420 (796) 118,446
Depreciation and
amortization........ -- 300 -- 138,870 -- 139,170
Depletion.............. -- -- -- 23,696 -- 23,696
Interest expense....... -- 18,028 5,720 (1,678) -- 22,070
Intercompany interest
expense............. 39,185 (39,185) --
Losses (gains) on sales
of long-lived
assets, impairment
charges and other
expense (income),
net................. 344 157 -- 6,797 796 8,094
-------- -------- ------ ---------- --------- ----------
Total costs and
other
deductions........ 4,063 19,585 5,723 1,250,500 (39,185) 1,240,686
-------- -------- ------ ---------- --------- ----------
Income before income
taxes.................. 259,254 163,395 2,397 484,941 (567,035) 342,952
-------- -------- ------ ---------- --------- ----------
Income tax expense....... 35 6,518 815 76,365 -- 83,733
-------- -------- ------ ---------- --------- ----------
Net income............... $259,219 $156,877 $1,582 $ 408,576 $(567,035) $ 259,219
-------- -------- ------ ---------- --------- ----------
</Table>
20
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
Revenues and other income:
Operating revenues.......... $ -- $ -- $ -- $1,123,696 $ -- $1,123,696
Earnings from unconsolidated
affiliates............... -- -- -- 4,975 -- 4,975
Earnings from consolidated
affiliates............... 60,694 65,701 10,799 67,591 (204,785) --
Investment income........... 9,738 -- -- 11,146 -- 20,884
Intercompany interest
income................... 53,741 34,720 -- 522 (88,983) --
-------- -------- ------- ---------- --------- ----------
Total revenues and other
income................. 124,173 100,421 10,799 1,207,930 (293,768) 1,149,555
-------- -------- ------- ---------- --------- ----------
Costs and other deductions:
Direct costs................ -- -- -- 758,981 -- 758,981
General and administrative
expenses................. 2,446 79 16 89,889 (1,390) 91,040
Depreciation and
amortization............. -- 150 -- 121,181 -- 121,331
Depletion................... -- -- -- 25,587 -- 25,587
Interest expense............ -- 22,156 5,720 (630) -- 27,246
Intercompany interest
expense.................. -- 522 -- 88,461 (88,983) --
Losses (gains) on sales of
long-lived assets,
impairment charges and
other expense (income),
net...................... -- (3,087) -- (3,129) 1,390 (4,826)
-------- -------- ------- ---------- --------- ----------
Total costs and other
deductions............. 2,446 19,820 5,736 1,080,340 (88,983) 1,019,359
-------- -------- ------- ---------- --------- ----------
Income before income taxes.... 121,727 80,601 5,063 127,590 (204,785) 130,196
-------- -------- ------- ---------- --------- ----------
Income tax expense............ 3,662 5,502 1,772 1,195 -- 12,131
-------- -------- ------- ---------- --------- ----------
Net income.................... $118,065 $ 75,099 $ 3,291 $ 126,395 $(204,785) $ 118,065
-------- -------- ------- ---------- --------- ----------
</Table>
21
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2005
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
Net cash provided by (used
for) operating activities... $ 135,811 $ 55,749 $(5,487) $ 301,655 $(55,734) $ 431,994
--------- -------- ------- --------- -------- ---------
Cash flows from investing
activities:
Purchases of investments.... (117,623) -- -- (132,085) -- (249,708)
Sales and maturities of
investments.............. 73,112 -- -- 208,411 -- 281,523
Cash paid for investments in
consolidated
affiliates............... (85,386) (5,484) -- (5,484) 96,354 --
Cash paid for acquisitions
of businesses, net....... -- -- -- (43,005) -- (43,005)
Capital expenditures........ -- -- -- (347,124) -- (347,124)
Proceeds from sales of
assets and insurance
claims................... -- -- -- 16,262 -- 16,262
--------- -------- ------- --------- -------- ---------
Net cash used for investing
activities.................. (129,897) (5,484) -- (303,025) 96,354 (342,052)
--------- -------- ------- --------- -------- ---------
Cash flows from financing
activities:
Increase in cash
overdrafts............... -- -- -- 14,530 -- 14,530
Proceeds from issuance of
parent common shares..... 7,126 -- -- 153,458 -- 160,584
Repurchase of common
shares................... (80,572) -- -- -- -- (80,572)
Proceeds from parent
contributions............ -- -- 5,484 90,870 (96,354) --
Cash dividends paid......... -- (50,250) -- (5,484) 55,734 --
--------- -------- ------- --------- -------- ---------
Net cash (used for) provided
by financing activities..... (73,446) (50,250) 5,484 253,374 (40,620) 94,542
--------- -------- ------- --------- -------- ---------
Effect of exchange rate
changes on cash and cash
equivalents................. -- -- -- (1,244) -- (1,244)
--------- -------- ------- --------- -------- ---------
Net (decrease) increase in
cash and cash equivalents... (67,532) 15 (3) 250,760 -- 183,240
Cash and cash equivalents,
beginning of period......... 67,584 -- 18 317,107 -- 384,709
--------- -------- ------- --------- -------- ---------
Cash and cash equivalents, end
of period................... $ 52 $ 15 $ 15 $ 567,867 $ -- $ 567,949
--------- -------- ------- --------- -------- ---------
</Table>
22
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------
(IN THOUSANDS)
Net cash (used for) provided
by operating activities.... $(162,519) $ 294,844 $(5,483) $ 313,535 $(184,846) $ 255,531
--------- --------- ------- --------- --------- ---------
Cash flows from investing
activities:
Purchases of investments... (331,215) -- -- (94,783) -- (425,998)
Sales and maturities of
investments............. 432,559 -- -- 55,890 -- 488,449
Cash paid for investments
in consolidated
affiliates.............. (178,012) (20,000) -- (125,484) 323,496 --
Capital expenditures....... -- -- -- (289,327) -- (289,327)
Proceeds from sales of
assets and insurance
claims.................. -- -- -- 2,588 -- 2,588
--------- --------- ------- --------- --------- ---------
Net cash used for investing
activities................. (76,668) (20,000) -- (451,116) 323,496 (224,288)
--------- --------- ------- --------- --------- ---------
Cash flows from financing
activities:
Increase in cash
overdrafts.............. -- -- -- 5,349 -- 5,349
Reduction of long-term
debt.................... -- (296,775) -- (1,342) -- (298,117)
Proceeds from issuance of
parent common shares.... 3,287 -- -- 39,341 -- 42,628
Retirement of intercompany
loan.................... 1,325 -- -- (1,325) -- --
Proceeds from parent
contributions........... -- 120,000 5,484 198,012 (323,496) --
Cash dividends paid........ -- (98,070) -- (86,776) 184,846 --
--------- --------- ------- --------- --------- ---------
Net cash provided by (used
for) financing
activities................. 4,612 (274,845) 5,484 153,259 (138,650) (250,140)
--------- --------- ------- --------- --------- ---------
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- -- 1,747 -- 1,747
--------- --------- ------- --------- --------- ---------
Net (decrease) increase in
cash and cash
equivalents................ (234,575) (1) 1 17,425 -- (217,150)
Cash and cash equivalents,
beginning of period........ 403,693 1 17 176,026 -- 579,737
--------- --------- ------- --------- --------- ---------
Cash and cash equivalents,
end of period.............. $ 169,118 $ -- $ 18 $ 193,451 $ -- $ 362,587
--------- --------- ------- --------- --------- ---------
</Table>
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Nabors Industries Ltd.:
We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of June 30, 2005, and the related
consolidated statements of income for each of the three-month and six-month
periods ended June 30, 2005 and 2004, and the consolidated statements of cash
flows and of changes in shareholders' equity for each of the six-month periods
ended June 30, 2005 and 2004. This interim financial information is the
responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial information
for it to be in conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2004, and the related consolidated statements of
income, of cash flows, and of changes in shareholders' equity for the year then
ended, management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 and the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004; and in our report dated March 7, 2005, we expressed unqualified opinions
thereon. The consolidated financial statements and management's assessment of
the effectiveness of internal control over financial reporting referred to above
are not presented herein. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 2004, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
August 2, 2005
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 should recognize that events and actual
results could turn out to be significantly different from our expectations. By
way of illustration, when used in this document, words such as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "should,"
"could," "may," "predict" and similar expressions are intended to identify
forward-looking statements.
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 changes in tax laws;
- the possibility of political instability, war or acts of terrorism in any
of the countries in which we do business; and
- general economic conditions.
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 Annual Report on Form 10-K for the year ended December 31, 2004
filed with the Securities and Exchange Commission under Part 1, Item I,
"Business -- Risk Factors."
Unless the context requires otherwise, references in this Quarterly Report
on Form 10-Q to "we," "us," "our" and "Nabors" means Nabors Industries Ltd. and,
where the context requires, includes our subsidiaries.
RESULTS OF OPERATIONS
A discussion of our results of operations for the three and six months
ended June 30, 2005 and 2004 is included below. This discussion should be read
in conjunction with our accompanying consolidated financial statements and notes
thereto and our Annual Report on Form 10-K for the year ended December 31, 2004.
25
The following table sets forth certain information with respect to our
reportable segments and rig activity:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ----------------------------------------
INCREASE INCREASE
2005 2004 (DECREASE) 2005 2004 (DECREASE)
-------- -------- -------------- ---------- ---------- --------------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RIG ACTIVITY)
Reportable segments:
Operating revenues and Earnings
from unconsolidated
affiliates:
Contract Drilling:(1)
U.S. Lower 48 Land
Drilling.................. $300,700 $172,049 $128,651 75% $ 559,690 $ 325,417 $234,273 72%
U.S. Land Well-servicing.... 118,776 88,162 30,614 35% 224,889 167,641 57,248 34%
U.S. Offshore............... 45,130 31,556 13,574 43% 83,197 62,877 20,320 32%
Alaska...................... 21,955 19,701 2,254 11% 46,723 49,038 (2,315) (5)%
Canada...................... 76,720 61,905 14,815 24% 250,122 200,671 49,451 25%
International............... 135,168 107,185 27,983 26% 259,198 210,172 49,026 23%
-------- -------- -------- ---------- ---------- --------
Subtotal Contract
Drilling(2)............. 698,449 480,558 217,891 45% 1,423,819 1,015,816 408,003 40%
Oil and Gas(3)................ 15,218 14,173 1,045 7% 30,517 35,299 (4,782) (14)%
Other Operating
Segments(4)(5).............. 78,729 52,740 25,989 49% 147,645 108,678 38,967 36%
Other reconciling items(6).... (21,855) (15,603) (6,252) (40)% (45,709) (31,122) (14,587) (47)%
-------- -------- -------- ---------- ---------- --------
Total....................... $770,541 $531,868 $238,673 45% $1,556,272 $1,128,671 $427,601 38%
-------- -------- -------- ---------- ---------- --------
Adjusted income (loss) derived
from operating activities:(7)
Contract Drilling:
U.S. Lower 48 Land
Drilling.................. $101,813 $ 12,971 $ 88,842 N/M(8) $ 175,272 $ 21,539 $153,733 N/M(8)
U.S. Land Well-servicing.... 26,401 14,394 12,007 83% 45,829 24,127 21,702 90%
U.S. Offshore............... 12,498 4,796 7,702 161% 19,509 9,613 9,896 103%
Alaska...................... 4,159 3,756 403 11% 10,131 10,966 (835) (8)%
Canada...................... 57 2,851 (2,794) (98)% 47,337 46,123 1,214 3%
International............... 32,558 18,753 13,805 74% 62,325 37,344 24,981 67%
-------- -------- -------- ---------- ---------- --------
Subtotal Contract
Drilling................ 177,486 57,521 119,965 209% 360,403 149,712 210,691 141%
Oil and Gas................... 2,869 896 1,973 220% 3,743 5,402 (1,659) (31)%
Other Operating Segments...... 7,982 (2,106) 10,088 N/M(8) 11,532 (2,537) 14,069 N/M(8)
Other reconciling items(9).... (14,510) (9,645) (4,865) (50)% (29,928) (20,845) (9,083) (44)%
-------- -------- -------- ---------- ---------- --------
Total....................... 173,827 46,666 127,161 272% 345,750 131,732 214,018 162%
Interest expense................ (11,333) (11,387) 54 0% (22,070) (27,246) 5,176 19%
Investment income............... 15,578 8,631 6,947 80% 27,366 20,884 6,482 31%
Gains (losses) on sales of
long-lived assets, impairment
charges and other income
(expense), net................ (4,223) 6,155 (10,378) (169)% (8,094) 4,826 (12,920) (268)%
-------- -------- -------- ---------- ---------- --------
Income before income taxes...... $173,849 $ 50,065 $123,784 247% $ 342,952 $ 130,196 $212,756 163%
-------- -------- -------- ---------- ---------- --------
Rig activity:
Rig years:(10)
U.S. Lower 48 Land
Drilling.................. 229.3 193.4 35.9 19% 225.9 184.4 41.5 23%
U.S. Offshore............... 17.2 15.5 1.7 11% 16.4 14.6 1.8 12%
Alaska...................... 6.8 6.7 .1 1% 6.7 7.2 (.5) (7)%
Canada...................... 26.2 25.8 .4 2% 46.1 44.5 1.6 4%
International(11)........... 83.4 65.6 17.8 27% 79.3 65.3 14.0 21%
-------- -------- -------- ---------- ---------- --------
Total rig years........... 362.9 307.0 55.9 18% 374.4 316.0 58.4 18%
-------- -------- -------- ---------- ---------- --------
Rig hours:(12)
U.S. Land Well-servicing.... 308,718 287,350 21,368 7% 605,329 562,498 42,831 8%
Canada Well-servicing....... 60,297 67,873 (7,576) (11)% 174,633 185,469 (10,836) (6)%
-------- -------- -------- ---------- ---------- --------
Total rig hours........... 369,015 355,223 13,792 4% 779,962 747,967 31,995 4%
-------- -------- -------- ---------- ---------- --------
</Table>
- ---------------
(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.
(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.2 million and $1.1 million for the three months ended
June 30, 2005 and 2004, respectively, and $1.9 million and $2.2 million for
the six months ended June 30, 2005 and 2004, respectively.
26
(3) Represents our oil and gas exploration, development and production
operations.
(4) Includes our marine transportation and supply services, drilling technology
and 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 $4.0 million and $.1 million for the three months ended
June 30, 2005 and 2004, respectively, and $5.3 million and $2.8 million for
the six months ended June 30, 2005 and 2004, respectively.
(6) Represents the elimination of inter-segment transactions.
(7) Adjusted income (loss) derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, and
depreciation and amortization, and depletion 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
(GAAP). However, management evaluates the performance of our business units
and the consolidated company based on several criteria, including adjusted
income (loss) 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
income before income taxes, which is a GAAP measure, is provided within the
table set forth immediately following the heading Results of Operations
above.
(8) The percentage is so large that it is not meaningful.
(9) Represents the elimination of inter-segment transactions and unallocated
corporate expenses.
(10) Excludes well-servicing rigs, which are measured in rig hours. 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) International rig years include our equivalent percentage ownership of rigs
owned by unconsolidated affiliates which totaled 4.0 years during the three
months ended June 30, 2005 and 2004 and 3.9 years and 4.0 years during the
six months ended June 30, 2005 and 2004, respectively.
(12) Rig hours represents the number of hours that our well-servicing rig fleet
operated during the period.
THREE AND SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 2004
Operating revenues and Earnings from unconsolidated affiliates for the
three months ended June 30, 2005 totaled $770.5 million, representing an
increase of $238.7 million, or 45%, compared to the prior year quarter. Adjusted
income derived from operating activities and net income for the three months
ended June 30, 2005 totaled $173.8 million and $131.8 million ($.82 per diluted
share), respectively, representing increases of 272% and 184% compared to the
prior year quarter. Operating revenues and Earnings from unconsolidated
affiliates for the six months ended June 30, 2005 totaled $1.6 billion,
representing an increase of $427.6 million, or 38%, compared to the prior year
period. Adjusted income derived from operating activities and net income for the
six months ended June 30, 2005 totaled $345.8 million and $259.2 million ($1.62
per diluted share), respectively, representing increases of 162% and 120%
compared to the prior year period.
The increase in our operating results during the three and six months ended
June 30, 2005 resulted from higher revenues realized by the majority of our
operating segments. Revenues increased as a result of higher activity levels and
average dayrates during the three and six months ended June 30, 2005 compared to
the prior year periods. This increase in activity reflects an increase in demand
for our services in these markets during the three and six months ended June 30,
2005, which resulted from continuing higher price levels for natural gas and oil
during 2004 and the first two quarters of 2005.
Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil
prices are the primary driver of our Alaskan, International and U.S. Land
Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg)
averaged $6.32 per million cubic feet (mcf) during the period from July 1, 2004
through June 30, 2005, up from a $5.42 per mcf average during the period from
July 1, 2003 through June 30, 2004. West Texas
27
intermediate spot oil prices (per Bloomberg) averaged $48.78 per barrel during
the period from July 1, 2004 through June 30, 2005, up from a $33.72 per barrel
average during the period from July 1, 2003 through June 30, 2004.
Our operating results for 2005 are expected to increase from levels
realized during 2004 given our current expectation of the continuation of high
commodity prices during 2005 and the related impact on drilling and
well-servicing activity and dayrates. The expected increase in drilling activity
and dayrates should have the largest impact on our U.S. Lower 48 Land Drilling
operations. Our U.S. Land Well-servicing operations are also expected to improve
given our expectations of higher prices, activity and dayrates during 2005. We
also expect an improvement in operating results for our Canadian operations
primarily resulting from increased dayrates and drilling activity. Canadian
drilling activity is subject to substantial levels of seasonality, as activity
levels typically peak in the first quarter, decline substantially in the second
quarter, and then generally increase over the last half of the year. We also
expect an improvement in operating results for our U.S. Offshore operations
during 2005 primarily as a result of higher dayrates and a continuing
improvement in the utilization of our workover jack-up rigs. We expect results
from our International operations during 2005 to increase compared to 2004 as a
result of new rigs operating under contract in Saudi Arabia and our expectations
of opportunities in various regions of the world, with the largest impact
expected from our operations in North Africa, the Middle East and Mexico. We
expect results from our drilling operations in Alaska to be reduced overall in
2005 compared to 2004, resulting from the decrease in demand for drilling
services by major operators in that market.
Contract Drilling. Our Contract Drilling operating segments 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
our Contract Drilling operating segments totaled $698.4 million and adjusted
income derived from operating activities totaled $177.5 million during the three
months ended June 30, 2005, representing increases of 45% and 209%,
respectively, compared to the prior year quarter. Operating revenues and
Earnings from unconsolidated affiliates for our Contract Drilling operating
segments totaled $1.4 billion and adjusted income derived from operating
activities totaled $360.4 million during the six months ended June 30, 2005,
representing increases of 40% and 141%, respectively, compared to the prior year
period. Rig years (excluding well-servicing rigs) increased to 362.9 years and
374.4 years during the three and six months ended June 30, 2005, respectively,
from 307.0 years and 316.0 years during the three and six months ended June 30,
2004, respectively, as a result of increased capital spending by our customers,
which resulted from the improvement in commodity prices discussed above.
U.S. Lower 48 Land Drilling Operating revenues totaled $300.7 million and
$559.7 million during the three and six months ended June 30, 2005,
respectively, representing increases of 75% and 72%, respectively, compared to
the prior year periods. Adjusted income derived from operating activities
totaled $101.8 million during the three months ended June 30, 2005 compared to
$13.0 million during the prior year quarter, and totaled $175.3 million during
the six months ended June 30, 2005 compared to $21.5 million during the prior
year period. The increase in operating results during the three and six months
ended June 30, 2005 primarily resulted from an increase in drilling activity
driven by higher natural gas prices, which is reflected in the increase in rig
years to 229.3 years and 225.9 years during the three and six months ended June
30, 2005, respectively, compared to 193.4 years and 184.4 years during the three
and six months ended June 30, 2004, respectively, and higher average dayrates.
U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $118.8 million and $26.4 million,
respectively, during the three months ended June 30, 2005, representing
increases of 35% and 83%, respectively, compared to the prior year quarter.
Operating revenues and adjusted income derived from operating activities totaled
$224.9 million and $45.8 million, respectively, during the six months ended June
30, 2005, representing increases of 34% and 90%, respectively, compared to the
prior year period. These increases primarily resulted from an increase in
average dayrates compared to the prior year periods and from higher
well-servicing hours, which totaled 308,718 hours and 605,329 hours during the
three and six months ended June 30, 2005, respectively, compared to 287,350
hours and 562,498 hours during the three and six months ended June 30, 2004,
respectively. These increases in dayrates and activity
28
resulted from higher customer demand for our services in a number of markets in
which we operate, which was driven by a sustained level of higher oil prices.
U.S. Offshore Operating revenues and adjusted income derived from operating
activities totaled $45.1 million and $12.5 million, respectively, during the
three months ended June 30, 2005, representing increases of 43% and 161%,
respectively, compared to the prior year quarter. Operating revenues and
adjusted income derived from operating activities totaled $83.2 million and
$19.5 million, respectively, during the six months ended June 30, 2005,
representing increases of 32% and 103%, respectively, compared to the prior year
period. These increases primarily resulted from the addition of two new platform
rigs for deepwater development projects, which commenced operations late in the
second quarter of 2004, and an increase in average dayrates for our jack-up rigs
during the 2005 periods compared to the prior year periods. These increases were
partially offset by the significant damage to one of our MODS deepwater platform
rigs during Hurricane Ivan in September 2004, as this rig has not worked since
that date. However, our U.S. Offshore unit's operating results for the three and
six months ended June 30, 2005 were increased by $2.2 million of net business
interruption insurance proceeds recorded in June 2005 related to this rig. Rig
years for our U.S. Offshore operations totaled 17.2 years and 16.4 years during
the three and six months ended June 30, 2005, respectively, compared to 15.5
years and 14.6 years during the three and six months ended June 30, 2004,
respectively.
Alaskan Operating revenues and adjusted income derived from operating
activities totaled $22.0 million and $4.2 million, respectively, during the
three months ended June 30, 2005, representing increases of 11% compared to the
prior year quarter. These increases primarily resulted from revenues associated
with a water injection project, an increase in rentals of full size camps, and
the receipt of a lump sum demobilization fee on a rig during the three months
ended June 30, 2005. These increases were partially offset by lower average
dayrates during the three months ended June 30, 2005 compared to the prior year
quarter. Rig years for our Alaskan operations remained substantially unchanged
during the three months ended June 30, 2005 compared to the prior year quarter,
totaling 6.8 years and 6.7 years for the three months ended June 30, 2005 and
2004, respectively. Operating revenues and adjusted income derived from
operating activities totaled $46.7 million and $10.1 million, respectively,
during the six months ended June 30, 2005, representing decreases of 5% and 8%,
respectively, compared to the prior year period. These decreases primarily
resulted from lower drilling activity and lower average dayrates during the six
months ended June 30, 2005 compared to the prior year period, which resulted
from decreased demand for drilling services by major operators in that market
despite the increase in oil prices discussed above. This decrease in demand
resulted from the major operators in Alaska concentrating their capital spending
in other regions of the world where fields are less mature than those in Alaska.
The decrease in drilling activity is reflected in the decrease in rig years to
6.7 years during the six months ended June 30, 2005 from 7.2 years during the
prior year period.
Canadian Operating revenues and adjusted income derived from operating
activities totaled $76.7 million and $.1 million, respectively, during the three
months ended June 30, 2005, representing an increase of 24% and a decrease of
98%, respectively, compared to the prior year quarter. The increase in Operating
revenues for the three months ended June 30, 2005 primarily resulted from an
increase in average dayrates for our Canadian drilling and well-servicing
operations and from an overall increase in drilling activity (driven by
increased natural gas prices) compared to the prior year quarter. This increase
was partially offset by a decrease in well-servicing hours resulting from
excessively wet weather during the second quarter of 2005. Rig years in Canada
increased to 26.2 years during the three months ended June 30, 2005 from 25.8
years during the prior year quarter and well-servicing hours in Canada decreased
to 60,297 hours during the three months ended June 30, 2005 from 67,873 hours
during the prior year quarter. Adjusted income derived from operating activities
for the three months ended June 30, 2005 decreased primarily as a result of
increased costs incurred during the second quarter of 2005 from planned
maintenance activities compared to the prior year quarter. These maintenance
activities are normally carried out during the second and third quarter of the
year when activity is lower, but during the current year were completed mostly
during the second quarter in anticipation of higher activity levels during the
third quarter of 2005. Operating revenues and adjusted income derived from
operating activities totaled $250.1 million and $47.3 million, respectively,
during the six months ended June 30, 2005, representing increases of 25% and 3%,
respectively, compared to the prior year period. These
29
increases resulted from an increase in average dayrates for our Canadian
drilling and well-servicing operations and from an overall increase in drilling
activity compared to the prior year period. This increase was partially offset
by a decrease in well-servicing hours resulting from an early end to the winter
drilling season and the excessively wet weather during the second quarter of
2005. Rig years in Canada increased to 46.1 years during the six months ended
June 30, 2005 from 44.5 years during the prior year period and well-servicing
hours in Canada decreased to 174,633 hours during the six months ended June 30,
2005 from 185,469 hours during the prior year period.
International Operating revenues and Earnings from unconsolidated
affiliates and adjusted income derived from operating activities totaled $135.2
million and $32.6 million, respectively, during the three months ended June 30,
2005, representing increases of 26% and 74%, respectively, compared to the prior
year quarter. Operating revenues and Earnings from unconsolidated affiliates and
adjusted income derived from operating activities totaled $259.2 million and
$62.3 million, respectively, during the six months ended June 30, 2005,
representing increases of 23% and 67%, respectively, compared to the prior year
period. The improved results during the three and six months ended June 30, 2005
primarily resulted from an increase in operations in South and Central America
(primarily in Mexico, Colombia and Ecuador) and in the Middle East (primarily in
Saudi Arabia and Qatar). International rig years increased to 83.4 years and
79.3 years during the three and six months ended June 30, 2005, respectively,
from 65.6 years and 65.3 years during the three and six months ended June 30,
2004, respectively.
Oil and Gas. This operating segment represents our oil and gas
exploration, development and production operations. Oil and Gas Operating
revenues and adjusted income derived from operating activities totaled $15.2
million and $2.9 million, respectively, during the three months ended June 30,
2005, representing increases of 7% and 220%, respectively, compared to the prior
year quarter. The increase in Operating revenues resulted from higher commodity
prices during the three months ended June 30, 2005 compared to the prior year
quarter and an increase in production resulting from new investments in oil and
gas properties during the first half of 2005. Adjusted income derived from
operating activities increased as a result of $2.4 million in expense recorded
during the three months ended June 30, 2004 resulting from a dry hole in the
Gulf of Mexico. The increase in results during the three months ended June 30,
2005 was partially offset by the expected decline in production under our
contracts executed with El Paso Corporation in the fourth quarter of 2003. Oil
and Gas Operating revenues and adjusted income derived from operating activities
totaled $30.5 million and $3.7 million, respectively, during the six months
ended June 30, 2005, representing decreases of 14% and 31%, respectively,
compared to the prior year period. These decreases primarily resulted from the
expected decline in production under our agreements with El Paso, which was
partially offset by increases in commodity prices and production from new
investments during the current year period.
Other Operating Segments. These operations include our marine
transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations. Operating revenues and Earnings from
unconsolidated affiliates for our Other Operating Segments totaled $78.7 million
and $147.6 million, respectively, during the three and six months ended June 30,
2005, representing increases of 49% and 36%, respectively, compared to the prior
year periods. These increases primarily resulted from increased sales of top
drives and increased demand for directional drilling, rig instrumentation and
data collection services, which was driven by an overall increase in drilling
activity in the Canadian market, compared to the prior year quarter. Adjusted
income derived from operating activities totaled $8.0 million and $11.5 million
during the three and six months ended June 30, 2005, respectively, compared to
adjusted losses derived from operating activities totaling $2.1 million and $2.5
million during the three and six months ended June 30, 2004, respectively. These
increases primarily resulted from the increased Operating revenues during the
three and six months ended June 30, 2005 and from increased margins from our
marine transportation and supply services, which was driven by higher average
dayrates compared to prior year periods.
Other Financial Information. General and administrative expenses totaled
$59.8 million during the three months ended June 30, 2005, representing an
increase of $14.4 million, or 32%, compared to the prior year quarter, and
totaled $118.4 million during the six months ended June 30, 2005, representing
an increase of $27.4 million, or 30%, compared to the prior year period. These
increases primarily resulted from increased
30
activity for a majority of our operating segments and increased corporate
expenses. As a percentage of operating revenues, general and administrative
expenses decreased during the three months ended June 30, 2005 compared to the
prior year quarter (7.8% vs. 8.6%), and decreased during the six months ended
June 30, 2005 compared to the prior year period (7.6% vs. 8.1%), as these
expenses were spread over a larger revenue base.
Depreciation and amortization expense totaled $71.0 million during the
three months ended June 30, 2005, representing an increase of $10.1 million, or
17%, compared to the prior year quarter, and totaled $139.2 million during the
six months ended June 30, 2005, representing an increase of $17.8 million, or
15%, compared to the prior year period. Depreciation and amortization expense
increased during the current year periods primarily as a result of increases in
average rig years for our U.S. Lower 48 Land Drilling, Canadian land drilling
and International operations, and depreciation on capital expenditures made
during the last half of 2004 and the first half of 2005.
Depletion expense totaled $11.3 million during the three months ended June
30, 2005, representing an increase of $1.4 million, or 14%, compared to the
prior year quarter. Depletion expense for the three months ended June 30, 2005
increased as a result of production increases from new investments in oil and
gas properties, partially offset by the decline in production under our
agreements with El Paso. Depletion expense totaled $23.7 million during the six
months ended June 30, 2005, representing a decrease of $1.9 million, or 7%,
compared to the prior year period. Depletion expense for the six months ended
June 30, 2005 decreased as a result of the decline in production under our
agreements with El Paso. This decrease was only partially offset by increased
production from new investments in oil and gas properties during the six months
ended June 30, 2005 and by additional depletion expense of $1.6 million
recognized during the first quarter of 2005 as a result of the casing collapse
on a producing well in South Texas.
Interest expense remained relatively constant during the three months ended
June 30, 2005 compared to the prior year quarter, totaling $11.3 million and
$11.4 million during the three months ended June 30, 2005 and 2004,
respectively. Interest expense totaled $22.1 million during the six months ended
June 30, 2005, representing a decrease of $5.2 million, or 19%, compared to the
prior year period. This decrease resulted from the payment upon maturity of our
6.8% senior notes in April 2004.
Investment income totaled $15.6 million during the three months ended June
30, 2005, representing an increase of $6.9 million, or 80%, compared to the
prior year quarter, and totaled $27.4 million during the six months ended June
30, 2005, representing an increase of $6.5 million, or 31%, compared to the
prior year period. These increases resulted from higher average yields on our
investments and an increase in average balances invested.
Gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net decreased to a loss of $4.2 million during the three
months ended June 30, 2005 from a gain of $6.2 million during the prior year
quarter. The amounts for the three months ended June 30, 2005 include losses on
long-lived assets of approximately $2.1 million, mark-to-market losses on our
range cap and floor derivative instrument of approximately $1.1 million, and
foreign currency transaction losses of approximately $1.0 million. The amounts
for the three months ended June 30, 2004 include mark-to-market gains recorded
on our range cap and floor derivative instrument of approximately $5.6 million.
Gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net decreased to a loss of $8.1 million during the six months
ended June 30, 2005 from a gain of $4.8 million during the prior year period.
The amounts for the six months ended June 30, 2005 include losses on long-lived
assets of approximately $3.2 million, foreign currency transaction losses of
approximately $1.3 million, and minority interest of approximately $1.2 million
related to non-majority owned subsidiaries required to be consolidated under
Financial Accounting Standards Board (FASB) Interpretation No. 46R. The amounts
for the six months ended June 30, 2004 include mark-to-market gains recorded on
our range cap and floor derivative instrument of approximately $3.1 million.
Our effective income tax rate was 24.2% and 24.4% during the three and six
months ended June 30, 2005, respectively, compared to 7.4% and 9.3% during the
respective prior year periods. The increases in our effective income tax rate
resulted from a higher proportion of our taxable income being generated in the
31
U.S. during the three and six months ended June 30, 2005, compared to the prior
year periods. Income generated in the U.S. is generally taxed at a higher rate
than in international jurisdictions in which we operate. In October 2004 the
U.S. Congress passed and the President signed into law the American Jobs
Creation Act of 2004. The Act did not impact the corporate reorganization
completed by Nabors effective June 24, 2002, that made us a foreign entity. It
is possible that future changes to tax laws (including tax treaties) could have
an impact on our ability to realize the tax savings recorded to date as well as
future tax savings as a result of our corporate reorganization, depending on any
responsive action taken by Nabors. We expect our effective tax rate during 2005
to be in the 24%-27% range because we expect a higher proportion of our income
to be generated in the U.S.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Our cash flows depend, to a large degree, on the level of spending by oil
and gas companies for exploration, development and production activities.
Sustained increases or decreases in the price of natural gas or oil could have a
material impact on these activities, and could also materially affect our cash
flows. Certain sources and uses of cash, such as the level of discretionary
capital expenditures, purchases and sales of marketable securities, issuances
and repurchases of debt and of our common shares are within our control and are
adjusted as necessary based on market conditions. The following is a discussion
of our cash flows for the six months ended June 30, 2005 and 2004.
Operating Activities. Net cash provided by operating activities totaled
$432.0 million during the six months ended June 30, 2005, compared to net cash
provided by operating activities of $255.5 million during the prior year period.
During the six months ended June 30, 2005 and 2004, net income was increased for
non-cash items such as depreciation and amortization, and depletion, and was
reduced for changes in our working capital (primarily accounts receivable) and
other balance sheet accounts.
Investing Activities. Net cash used for investing activities totaled
$342.1 million during the six months ended June 30, 2005, compared to net cash
used for investing activities of $224.3 million during the prior year period.
During each of the six months ended June 30, 2005 and 2004, cash was used for
capital expenditures and acquisitions, and was provided by sales, net of
purchases, of investments.
Financing Activities. Net cash provided by financing activities totaled
$94.5 million during the six months ended June 30, 2005 compared to net cash
used for financing activities of $250.1 million during the prior year period.
During the six months ended June 30, 2005, cash was provided by our receipt of
proceeds totaling $160.6 million from the exercise of options to acquire our
common shares by our employees and was used for the repurchase of our common
shares in the open market totaling $80.6 million. During the six months ended
June 30, 2004, cash was used for the reduction of long-term debt of $298.1
million (including the payment upon maturity of our 6.8% senior notes in April
2004 totaling $295.3 million) and was provided by our receipt of proceeds
totaling $42.6 million from the exercise of options to acquire our common shares
by our employees.
FUTURE CASH REQUIREMENTS
As of June 30, 2005, we had long-term debt, including current maturities,
of $2.0 billion and cash and cash equivalents and investments of $1.6 billion.
Our $1.381 billion zero coupon convertible senior 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 date
of repurchase. The amount of the purchase price would total $826.8 million,
$936.2 million and $1.1 billion if the debentures were put to us on February 5,
2006, February 5, 2011 or February 5, 2016, respectively. As our $1.381 billion
zero coupon convertible senior debentures can be put to us on February 5, 2006,
the outstanding principal amount of these debentures of $814.6 million is
included in current liabilities in our balance sheet as of June 30, 2005. We
cannot redeem the debentures before February 5, 2006, after which time we may
redeem all or a portion of the debentures for cash at any time at
32
their accreted value. We treat the redemption price, including accrued original
issue discount, on such debentures as a financing activity for purposes of
reporting cash flows in our consolidated statements of cash flows.
Additionally, each of our $700 million zero coupon senior exchangeable
notes and our $1.381 billion zero coupon convertible senior debentures provide
that upon an exchange or conversion, as applicable, of these convertible debt
instruments, we will be required to pay holders of these debt instruments, in
lieu of common shares, cash up to the principal amount of the instruments and,
at our option, consideration in the form of either cash or our common shares for
any amount above the principal amount of the instruments required to be paid
pursuant to the terms of the indentures. If the $1.381 billion debentures were
converted, our cash obligation would be an amount equal to the lesser of 8.5
million multiplied by the sale price of our common shares on the trading day
immediately prior to the related conversion date or the principal amount of the
debentures on the date of conversion. If these debentures had been converted on
June 30, 2005, we would have been required to pay cash totaling approximately
$506.1 million to the holders of the debentures (based on the closing price for
our common shares on June 29, 2005 of $59.60). As this amount is substantially
lower than the $826.8 million that the holders of the debentures will receive if
they put the debentures to us on the first put date of February 5, 2006 or if
they sold the debentures in the open market, we do not currently expect the
debentures to be converted and any payment to be required prior to February 5,
2006 (when the holders have the option to put the debentures back to us), unless
the price for our shares were to exceed approximately $96. Our $700 million zero
coupon senior exchangeable notes cannot be exchanged until the price for our
shares exceeds approximately $84 or in various other circumstances as described
in the note indenture.
As of June 30, 2005, we had outstanding purchase commitments of
approximately $212.9 million, primarily for rig-related enhancing, construction
and sustaining capital expenditures. Total capital expenditures over the next
twelve months, including these outstanding purchase commitments, are currently
expected to be approximately $1.1 billion, including currently planned
rig-related enhancing, construction and sustaining capital expenditures. This
amount could change significantly based on market conditions and new business
opportunities. The level of our outstanding purchase commitments and our
expected level of capital expenditures over the next twelve months represent a
number of capital programs that are currently underway or planned. These
programs will result in an expansion in the number of drilling and
well-servicing rigs that we own and operate and will consist primarily of land
drilling and well-servicing rigs. The increase in capital expenditures is
expected across a majority of our operating segments, most significantly within
our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, Canadian, and
International operations.
Our 2004 Annual Report on Form 10-K includes our contractual cash
obligations table as of December 31, 2004. As a result of the increase in our
outstanding purchase commitments discussed above, we are presenting the
following table in this Report which summarizes our remaining contractual cash
obligations related to purchase commitments as of June 30, 2005:
<Table>
<Caption>
PAYMENT DUE BY PERIOD
---------------------------------------------------------------------------
TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS THEREAFTER
(IN THOUSANDS) -------- --------------------- ------------ ------------ ----------
Purchase commitments(1)........... $212,879 $212,879 $ -- $ -- $ --
</Table>
- ---------------
(1) Purchase commitments include agreements to purchase goods or services that
are enforceable and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable pricing provisions; and the approximate timing of the transaction.
No other significant changes have occurred to the contractual cash
obligations information disclosed in our 2004 Annual Report on Form 10-K.
We have historically completed a number of acquisitions 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 shares. Future acquisitions may be paid for using existing cash or
issuance of debt or Nabors' shares. Such capital expenditures and acquisitions
will depend on our view of market conditions and other factors.
33
During 2002 our Board of Directors authorized the continuation of a share
repurchase program under which we may repurchase our common shares in the open
market. Under this program we are authorized to purchase up to $400 million of
our common shares. Through June 30, 2005, approximately $83.1 million of our
common shares have been repurchased under this program, which includes 1.5
million of our common shares repurchased and retired for $80.6 million during
the second quarter of 2005.
See our discussion of guarantees issued by Nabors that could have a
potential impact on our financial position, results of operations or cash flows
in future periods included in Note 5 to our accompanying consolidated financial
statements.
FINANCIAL CONDITION AND SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash and cash equivalents, marketable
and non-marketable securities and cash generated from operations. As of June 30,
2005, we had cash and cash equivalents and investments of $1.6 billion
(including $518.1 million of long-term investments) and working capital of
$591.7 million. This compares to cash and cash equivalents and investments of
$1.4 billion (including $510.5 million of long-term investments) and working
capital of $381.7 million as of December 31, 2004.
Our funded debt to capital ratio was 0.38:1 as of June 30, 2005 and 0.41:1
as of December 31, 2004. Our net funded debt to capital ratio was 0.12:1 as of
June 30, 2005 and 0.17:1 as of December 31, 2004. The 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 shareholders'
equity. The net funded debt to capital ratio nets cash and cash equivalents and
marketable and non-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. Non-marketable securities consist of investments in
overseas funds investing primarily in a variety of public and private U.S. and
non-U.S. securities (including asset-backed securities and mortgage-backed
securities, global structured asset securitizations, whole loan mortgages, and
participations in whole loans and whole loan mortgages). These investments are
classified as non-marketable, because they do not have published fair values.
Our interest coverage ratio was 21:1 as of June 30, 2005, compared to 14.1:1 as
of December 31, 2004. The interest coverage ratio is computed by calculating the
sum of income before income taxes, interest expense, depreciation and
amortization, and depletion 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 three letter of credit facilities with various banks as of June 30,
2005. Availability and borrowings under our credit facilities as of June 30,
2005 are as follows:
<Table>
<Caption>
(IN THOUSANDS)
Credit available............................................ $128,531
Letters of credit outstanding............................... (93,146)
--------
Remaining availability...................................... $ 35,385
--------
</Table>
We have a shelf registration statement on file with the U.S. 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. We currently have not issued any securities registered under this
registration statement.
Our current cash and cash equivalents, investments in marketable and
non-marketable securities and projected cash flow generated from current
operations are expected to more than adequately finance our sustaining capital
expenditures, our debt service requirements, and all other expected cash
requirements for the next twelve months.
See our discussion of the impact of changes in market conditions on our
derivative financial instruments discussed under Item 3. Quantitative and
Qualitative Disclosures About Market Risk below.
34
OTHER MATTERS
RECENT ACCOUNTING PRONOUNCEMENTS
As discussed under Stock-Based Compensation in Note 2 to our accompanying
consolidated financial statements, we currently account for stock-based
compensation as prescribed by Accounting Principals Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and because we grant options at
prices equal to the market price of our shares on the date of the grant, we do
not record compensation expense related to these grants in our consolidated
statements of income. On December 16, 2004, the FASB issued a revision to
Statement of Financial Accounting Standards (SFAS) No. 123, "Share-Based
Payment," which will eliminate our ability to account for stock-based
compensation using APB 25 and instead would require us to account for stock
option awards using a fair-value based method resulting in compensation expense
for stock option awards being recorded in our consolidated statements of income.
The statement will be effective for stock options granted, modified, or settled
in cash in annual periods beginning after June 15, 2005 (2006 for Nabors).
Additionally, for stock options granted or modified after December 15, 1994 that
have not vested as of the effective date of the statement, compensation cost
will be measured and recorded in our consolidated statements of income based on
the same estimates of fair value calculated as of the date of grant as currently
disclosed within the table required by SFAS No. 148, "Accounting for Stock-Based
Compensation -- an Amendment to FAS 123," presented in Note 2 to our
accompanying consolidated financial statements. The statement may have a
material adverse effect on our results of operations during the periods of
adoption and annual and interim periods thereafter. The impact that the adoption
of this statement in its current form on January 1, 2005 or 2004 would have had
on our net income and basic and diluted earnings per share for the three and six
months ended June 30, 2005 and 2004 is presented in the table included in Note 2
to our accompanying consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We disclosed our critical accounting policies in our 2004 Annual Report on
Form 10-K. No significant changes have occurred to those policies.
SELF-INSURANCE ACCRUALS
Effective April 1, 2005, with our insurance renewal, certain changes have
been made to our insurance coverage resulting in additional exposure to
obligations from claims that might arise in the ordinary course of business. In
addition to the insurance retentions that we are responsible for relating to
rig, equipment, property and business interruption risk, we are now responsible
for 30% of all losses in excess of those retentions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to market risk through changes in interest rates and
foreign currency risk due to our operations in international markets as
discussed in our 2004 Annual Report on Form 10-K. Material changes in our
exposure to market risk from that disclosed in our 2004 Annual Report on Form
10-K are discussed below.
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, which has
been designated as a fair value hedge under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Additionally, 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 the
intention of mitigating and managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting
treatment under SFAS 133 and any change in the cumulative fair value of this
transaction is reflected as a gain or loss in our consolidated statements of
income. In June 2004 we unwound $100 million of the $200 million range cap and
floor derivative instrument.
35
The fair value of our interest rate swap agreement recorded as a derivative
asset and included in other long-term assets totaled approximately $6.1 million
and $4.6 million as of June 30, 2005 and December 31, 2004, respectively. The
carrying value of our 5.375% senior notes has been increased by the same amount
as of June 30, 2005 and December 31, 2004.
The fair value of our range cap and floor transaction recorded as a
derivative asset and included in other long-term assets totaled approximately
$.2 million, $1.3 million and $.3 million as of June 30, 2005, March 31, 2005
and December 31, 2004, respectively. We recorded mark-to-market losses, included
in losses (gains) on sales of long-lived assets, impairment charges and other
expense (income), net of approximately $1.1 million and $.2 million during the
three and six months ended June 30, 2005, respectively, resulting from the
change in cumulative fair value of this derivative instrument during the three
and six months ended June 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. We maintain a set of disclosure
controls and procedures that are designed to provide reasonable assurance that
information required to be disclosed in our reports filed under the Exchange
Act, as amended, is recorded, processed, summarized, and reported within the
time periods specified in the U.S. Securities and Exchange Commission's rules
and forms. We have investments in certain unconsolidated entities that we do not
control or manage. As we do not control or manage these entities, our disclosure
controls and procedures with respect to such entities are necessarily more
limited than those we maintain with respect to our consolidated subsidiaries.
The Company's management, with the participation of the Company's Chairman
and Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chairman and Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective, at the reasonable assurance level, in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act and are effective, at the reasonable assurance level, in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the
Company's management, including the Company's Chairman and Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the most recently completed fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nabors and its subsidiaries are defendants or otherwise involved in a
number of 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.
36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS AND ISSUER
REPURCHASES OF EQUITY SECURITIES
The following table provides information relating to Nabors' repurchase of
common shares during the second quarter of 2005:
<Table>
<Caption>
APPROXIMATE DOLLAR
AVERAGE TOTAL NUMBER OF VALUE OF SHARES THAT
TOTAL NUMBER PRICE SHARES PURCHASED AS MAY YET BE
OF SHARES PAID PER PART OF PUBLICLY PURCHASED UNDER THE
PERIOD PURCHASED SHARE ANNOUNCED PROGRAM PROGRAM(1)
- ------ ------------ -------- ------------------- --------------------
May 1, 2005 - May 31,
2005...................... 1,500,000 $53.73 1,500,000 $316,943,899
</Table>
- ---------------
(1) During 2002 our Board of Directors authorized the continuation of a share
repurchase program under which we may repurchase our common shares in the
open market. Under this program we are authorized to purchase up to $400
million of our common shares. This repurchase program does not have an
expiration date.
No shares were purchased during the periods of April 1, 2005 - April 30,
2005 and June 1, 2005 - June 30, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2005 Annual General Meeting of Shareholders of Nabors Industries
Ltd. held on June 7, 2005, 132,300,461 shares were present in person or by
proxy, constituting 83.6% of the outstanding shares of Nabors entitled to vote,
which includes both common shares and the preferred share voting on behalf of
holders of common shares of Nabors Exchangeco (Canada) Inc. The matters voted
upon at the annual meeting were:
Election of Directors: The shareholders elected three Class II directors
to the Board of Directors of Nabors Industries Ltd. to serve for a three-year
term, until 2008:
<Table>
Anthony G. Petrello
Votes cast in favor: ....................................... 129,767,605
Votes withheld: ............................................ 2,532,856
Myron M. Sheinfeld
Votes cast in favor: ....................................... 122,802,526
Votes withheld: ............................................ 9,497,935
Martin J. Whitman
Votes cast in favor: ....................................... 122,799,577
Votes withheld: ............................................ 9,500,884
</Table>
Class III Directors, Eugene M. Isenberg and James C. Flores continued in
office with terms expiring in 2006. Class I Directors James L. Payne, Hans W.
Schmidt, and Alexander M. Knaster continued in office with terms expiring in
2007.
Appointment of Independent Auditors: The shareholders appointed
PricewaterhouseCoopers LLP as independent auditors of Nabors, and authorized the
Audit Committee of the Board of Directors to set the auditors' remuneration:
<Table>
Appointment of PricewaterhouseCoopers as Independent
Auditors
Votes cast in favor: ....................................... 129,731,349
Votes cast against: ........................................ 1,817,988
Votes abstaining:........................................... 751,124
</Table>
37
Management Proposal to approve an amendment to the Amended and Restated
Bye-Laws to require shareholder approval of certain dispositions of the
Company's assets: The shareholders approved the management proposal by the
following vote:
<Table>
Management Proposal
Votes cast in favor: ....................................... 110,092,299
Votes cast against: ........................................ 94,093
Votes abstaining: .......................................... 806,413
</Table>
Management Proposal to approve an amendment to the Company's 2003 Employee
Stock Plan to make nonemployee directors eligible participants under such
plan: The shareholders approved the management proposal by the following vote:
<Table>
Management Proposal
Votes cast in favor:........................................ 77,518,084
Votes cast against:......................................... 32,625,878
Votes abstaining:........................................... 844,018
</Table>
Shareholder Proposal to adopt a policy that a significant amount of future
grants to senior executives be performance-based: The shareholders rejected the
shareholder proposal by the following vote:
<Table>
Shareholder Proposal
Votes cast in favor: ....................................... 40,583,255
Votes cast against: ........................................ 69,448,050
Votes abstaining: .......................................... 956,675
</Table>
ITEM 6. EXHIBITS
(a) Exhibits
<Table>
4.1 First Amendment to Nabors Industries Ltd.'s 2003 Employee
Stock Plan.
4.2 Amended and Restated Bye-Laws of Nabors Industries Ltd.
15 Awareness Letter of Independent Accountants.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
</Table>
(b) Reports on Form 8-K
- Report on Form 8-K filed with the U.S. Securities and Exchange Commission
on June 7, 2005, with respect to the shareholder approval of an amendment
to Nabors' 2004 Employee Stock Plan on June 7, 2005.
- Report on Form 8-K furnished to the U.S. Securities and Exchange
Commission on April 27, 2005, with respect to Nabors' press release
announcing results for the first quarter ended March 31, 2005.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NABORS INDUSTRIES LTD.
Date: August 3, 2005 /s/ Anthony G. Petrello
--------------------------------------
Anthony G. Petrello
Deputy Chairman, President and
Chief Operating Officer
Date: August 3, 2005 /s/ Bruce P. Koch
--------------------------------------
Bruce P. Koch
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
39
EXHIBIT INDEX
<Table>
4.1 First Amendment to Nabors Industries Ltd.'s 2003 Employee
Stock Plan.
4.2 Amended and Restated Bye-Laws of Nabors Industries Ltd.
15 Awareness Letter of Independent Accountants.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
</Table>