XNYS:NBR Nabors Industries Ltd Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

Commission File Number: 001-32657

 

 

NABORS INDUSTRIES LTD.

 

 

 

Bermuda   98-0363970

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Crown House

Second Floor

4 Par-la-Ville Road

Hamilton, HM08

Bermuda

(441) 292-1510

(Address of principal executive offices)

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x

The number of common shares, par value $.001 per share, outstanding as of July 31, 2012 was 290,386,130.

 

 

 


Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

Index

 

   PART I FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011      3   
   Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011      4   
   Consolidated Statements of Other Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011      5   
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011      6   
   Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2012 and 2011      7   
   Notes to Consolidated Financial Statements      9   
   Report of Independent Registered Public Accounting Firm      40   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      41   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      56   
Item 4.    Controls and Procedures      56   
   PART II OTHER INFORMATION   
Item 1.    Legal Proceedings      57   
Item 1A.    Risk Factors      57   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      58   
Item 3.    Defaults Upon Senior Securities      58   
Item 4.    Mine Safety Disclosures      58   
Item 5.    Other Information      58   
Item 6.    Exhibits      59   
Signatures      60   

 

2


Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June  30,
2012
    December 31,
2011
 
(In thousands, except per share amounts)    (Unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 320,398      $ 398,575   

Short-term investments

     134,784        140,914   

Assets held for sale

     396,413        401,500   

Accounts receivable, net

     1,607,422        1,576,555   

Inventory

     259,943        272,852   

Deferred income taxes

     70,288        127,874   

Other current assets

     185,922        170,044   
  

 

 

   

 

 

 

Total current assets

     2,975,170        3,088,314   

Long-term investments and other receivables

     5,452        11,124   

Property, plant and equipment, net

     8,904,324        8,629,946   

Goodwill

     471,913        501,258   

Investment in unconsolidated affiliates

     165,003        371,021   

Other long-term assets

     321,610        310,477   
  

 

 

   

 

 

 

Total assets

   $ 12,843,472      $ 12,912,140   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 275,323      $ 275,326   

Trade accounts payable

     606,571        782,753   

Accrued liabilities

     604,627        744,483   
  

 

 

   

 

 

 

Total current liabilities

     1,486,521        1,802,562   

Long-term debt

     4,398,452        4,348,490   

Other long-term liabilities

     326,202        292,758   

Deferred income taxes

     834,207        797,925   
  

 

 

   

 

 

 

Total liabilities

     7,045,382        7,241,735   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Subsidiary preferred stock

     69,188        69,188   

Equity:

    

Shareholders’ equity:

    

Common shares, par value $.001 per share:

    

Authorized common shares 800,000; issued 318,719 and 317,042, respectively

     319        317   

Capital in excess of par value

     2,326,590        2,287,743   

Accumulated other comprehensive income

     318,088        321,264   

Retained earnings

     4,017,665        3,956,364   

Less: treasury shares, at cost, 28,414 and 29,414 common shares, respectively

     (944,627     (977,873
  

 

 

   

 

 

 

Total shareholders’ equity

     5,718,035        5,587,815   

Noncontrolling interest

     10,867        13,402   
  

 

 

   

 

 

 

Total equity

     5,728,902        5,601,217   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 12,843,472      $ 12,912,140   
  

 

 

   

 

 

 

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

 

3


Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In thousands, except per share amounts)    2012     2011     2012     2011  

Revenues and other income:

        

Operating revenues

   $ 1,737,114      $ 1,343,642      $ 3,627,540      $ 2,717,210   

Earnings (losses) from unconsolidated affiliates

     (134,317     9,308        (202,986     25,582   

Investment income (loss)

     5,368        (975     25,620        11,305   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     1,608,165        1,351,975        3,450,174        2,754,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and other deductions:

        

Direct costs

     1,123,256        827,450        2,308,072        1,668,558   

General and administrative expenses

     133,612        122,970        269,958        238,921   

Depreciation and amortization

     261,016        225,042        508,637        450,252   

Interest expense

     63,459        63,755        126,113        137,721   

Losses (gains) on sales and retirements of long-lived assets and other expense (income), net

     13,414        4,348        11,574        10,507   

Impairments and other charges

     147,503        —          147,503        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and other deductions

     1,742,260        1,243,565        3,371,857        2,505,959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (134,095     108,410        78,317        248,138   

Income tax expense (benefit):

        

Current

     34,698        7,849        60,704        27,538   

Deferred

     (70,890     28,924        (27,852     53,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense

        

(benefit)

     (36,192     36,773        32,852        81,199   

Subsidiary preferred stock dividend

     750        750        1,500        1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, net of tax

     (98,653     70,887        43,965        165,439   

Income (loss) from discontinued operations, net of tax

     24,690        121,167        15,895        108,771   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (73,963     192,054        59,860        274,210   

Less: Net (income) loss attributable to noncontrolling interest

     1,174        394        1,441        1,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Nabors

   $ (72,789   $ 192,448      $ 61,301      $ 275,273   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) per share:

        

Basic from continuing operations

   $ (.34   $ .25      $ .16      $ .58   

Basic from discontinued operations

     .09        .42        .05        .38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Basic

   $ (.25   $ .67      $ .21      $ .96   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted from continuing operations

   $ (.34   $ .24      $ .16      $ .57   

Diluted from discontinued operations

     .09        .41        .05        .37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Diluted

   $ (.25   $ .65      $ .21      $ .94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares outstanding:

        

Basic

     290,311        287,311        289,550        286,712   

Diluted

     290,311        294,298        292,185        293,493   

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

 

4


Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In thousands)    2012     2011     2012     2011  

Net income (loss) attributable to Nabors

   $ (72,789   $ 192,448      $ 61,301      $ 275,273   

Other comprehensive income (loss), before tax:

        

Translation adjustment attributable to Nabors

     (19,659     7,910        (2,393     39,349   

Unrealized gains/(losses) on marketable securities:

        

Unrealized gains/(losses) on marketable securities

     (5,008     (11,192     7,215        (4,884

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

     (19     2        (12,484     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains/(losses) on marketable securities

     (5,027     (11,190     (5,269     (4,885

Defined benefit pension plans:

        

Pension liability amortization

     260        149        520        300   

Pension liability adjustment

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plans

     260        149        520        300   

Unrealized gains/(losses) and amortization of (gains)/losses on cash flow hedges

     191        190        382        381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (24,235     (2,941     (6,760     35,145   

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

     140        124        (3,584     306   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (24,375     (3,065     (3,176     34,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (97,164     189,383        58,125        310,112   

Net income (loss) attributable to noncontrolling interest

     (1,174     (394     (1,441     (1,063

Translation adjustment attributable to noncontrolling interest

     (216     95        27        452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to noncontrolling interest

     (1,390     (299     (1,414     (611
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Nabors

   $ (98,554   $ 189,084      $ 56,711      $  309,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

5


Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended
June 30,
 
(In thousands)    2012     2011  

Cash flows from operating activities:

    

Net income (loss) attributable to Nabors

   $ 61,301      $ 275,273   

Adjustments to net income (loss):

    

Depreciation and amortization

     508,748        451,986   

Depletion and other exploratory expenses

     151        19,072   

Deferred income tax expense (benefit)

     (15,404     47,308   

Deferred financing costs amortization

     2,185        2,922   

Pension liability amortization and adjustments

     520        300   

Discount amortization on long-term debt

     993        26,081   

Amortization of loss on hedges

     463        464   

Impairments and other charges

     159,950        —     

Losses (gains) on long-lived assets, net

     8,335        (41,458

Losses (gains) on investments, net

     (21,400     (8,761

Losses (gains) on debt retirement, net

     —          58   

Losses (gains) on derivative instruments

     90        338   

Share-based compensation

     8,784        8,107   

Foreign currency transaction losses (gains), net

     2,285        615   

Gain on sale of oil and gas operations

     (48,486     —     

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

     202,985        (102,122

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

    

Accounts receivable

     (33,981     (82,533

Inventory

     6,636        (39,807

Other current assets

     (26,906     21,051   

Other long-term assets

     6,693        61,543   

Trade accounts payable and accrued liabilities

     (94,423     237,743   

Income taxes payable

     (33,147     (13,363

Other long-term liabilities

     15,565        5,085   
  

 

 

   

 

 

 

Net cash provided by operating activities

     711,937        869,902   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (795     (7,945

Sales and maturities of investments

     25,517        20,622   

Investment in unconsolidated affiliates

     —          (29,762

Distribution of proceeds from asset sales from unconsolidated affiliates

     —          119,207   

Capital expenditures

     (967,861     (1,003,245

Proceeds from sales of assets and insurance claims

     116,923        102,067   
  

 

 

   

 

 

 

Net cash used for investing activities

     (826,216     (799,056
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Increase (decrease) in cash overdrafts

     (2,060     11,203   

Proceeds from revolving credit facilities

     200,000        1,200,000   

Proceeds from issuance of common shares

     (5,066     11,622   

Debt issuance costs

     —          (2,188

Reduction in long-term debt

     (1,235     (1,404,247

Paydown of revolving credit facilities

     (150,000     —     

Repurchase of equity component of convertible debt

     —          (14

Purchase of restricted stock

     (2,071     (2,527

Tax benefit related to share-based awards

     (36     42   
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     39,532        (186,109

Effect of exchange rate changes on cash and cash equivalents

     (3,430     2,383   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (78,177     (112,880

Cash and cash equivalents, beginning of period

     398,575        641,702   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 320,398      $ 528,822   
  

 

 

   

 

 

 

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

 

6


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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

    Common Shares        
(In thousands)   Shares     Par
Value
    Capital in
Excess of Par
Value
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Treasury
Shares
    Non-
controlling
Interest
    Total Equity  

Balances, December 31, 2011

    317,042      $ 317      $ 2,287,743      $ 321,264      $ 3,956,364      $ (977,873   $ 13,402      $ 5,601,217   

Net income (loss)

            61,301          (1,441     59,860   

Comprehensive income (loss), net of tax

          (3,176         27        (3,149

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

    999        1        (5,067             (5,066

Capital contribution from forgiveness of liability, net of tax

        62,734                62,734   

Issuance of treasury shares, net of tax benefit

        (25,496         33,246          7,750   

Other

        (2,107           (1,121     (3,228

Share-based compensation

    678        1        8,783                8,784   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, June 30, 2012

    318,719      $ 319      $ 2,326,590      $ 318,088      $ 4,017,665      $ (944,627   $ 10,867      $ 5,728,902   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

7


Table of Contents

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

    Common Shares        
(In thousands)   Shares     Par
Value
    Capital in
Excess of Par
Value
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Treasury
Shares
    Non-
controlling
Interest
    Total Equity  

Balances, December 31, 2010

    315,034      $ 315      $ 2,255,787      $ 342,052      $ 3,707,881      $ (977,873   $ 14,701      $ 5,342,863   

Net income (loss)

            275,273          (1,063     274,210   

Comprehensive income, net of tax

          34,839            452        35,291   

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

    956        1        11,621                11,622   

Other

    868          (2,499           (1,119     (3,618

Share-based compensation

        8,107                8,107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, June 30, 2011

    316,858      $ 316      $ 2,273,016      $ 376,891      $ 3,983,154      $ (977,873   $ 12,971      $ 5,668,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

 

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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 and one of the largest land well-servicing and workover contractors in the United States and Canada:

 

   

We actively market approximately 513 land drilling rigs for oil and gas land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central America, Mexico, the Middle East, the Far East, the South Pacific, Russia and Africa.

 

   

We actively market approximately 424 rigs for land well-servicing and workover work in the United States and approximately 176 rigs for land well-servicing and workover work in Canada.

We are also a leading provider of offshore platform workover and drilling rigs, and actively market 40 platform, 12 jackup and four barge rigs in the United States, including the Gulf of Mexico, and multiple international markets.

In addition to the foregoing services:

 

   

We provide completion and production services, including hydraulic fracturing, cementing, nitrogen and acid pressure pumping services with over 805,000 hydraulic horsepower in key basins throughout the United States and Canada.

 

   

We offer a wide range of ancillary well-site services, including engineering, transportation and disposal, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in select U.S. and international markets.

 

   

We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment and rig reporting software.

 

   

We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets nine rigs in addition to the rigs we lease to the joint venture.

 

   

We have invested in oil and gas exploration, development and production activities through both our wholly owned subsidiaries and our oil and gas joint ventures in which we hold 49-50% ownership interests.

The majority of our business is conducted through our Drilling and Rig Services and our Completion and Production business lines. Our Drilling and Rig Services business line includes our drilling operations for oil and natural gas wells, on land and offshore, and companies engaged in drilling technology, top drive manufacturing, directional drilling, construction services, and rig instrumentation and software. Our Completion and Production Services business line includes our well-servicing, fluid logistics, workover operations and our pressure pumping services. In addition to these two primary business lines, we have an Oil and Gas operating segment. Our oil and gas exploration, development and production operations are included in our Oil and Gas operating segment, or in discontinued operations in some cases.

Unless the context requires otherwise, references in this report and in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations to “we,” “us,” “our,” “Company” or “Nabors” mean Nabors Industries Ltd., together with our subsidiaries where the context requires, including Nabors Industries, Inc., a Delaware corporation (“Nabors Delaware”).

 

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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 (“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 Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Therefore, these financial statements should be read along with our annual report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”). In management’s opinion, the consolidated financial statements contain all adjustments necessary to present fairly our financial position as of June 30, 2012, the results of our operations and other comprehensive income for the three and six months ended June 30, 2012 and 2011, and cash flows and changes in equity for the six months ended June 30, 2012 and 2011, in accordance with GAAP. Interim results for the three and six months ended June 30, 2012 may not be indicative of results that will be realized for the full year ending December 31, 2012.

Our independent registered public accounting firm has reviewed 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, as amended (the “Securities Act”) this report should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of such Act.

Principles of Consolidation

Our consolidated financial statements include the accounts of Nabors, as well as all majority-owned and nonmajority-owned subsidiaries required to be consolidated under GAAP. Our consolidated financial statements exclude majority-owned entities for which we do not have either (1) the ability to control the operating and financial decisions and policies of that entity or (2) a controlling financial interest in a variable interest entity. All significant intercompany accounts and transactions are eliminated in consolidation.

Investments in operating entities where we have the ability to exert significant influence, but where we do not control operating and financial policies, are accounted for using the equity method. Our share of the net income (loss) of these entities is recorded as earnings (losses) from unconsolidated affiliates in our consolidated statements of income (loss), and our investment in these entities is included in both investment in unconsolidated affiliates and assets held for sale in our consolidated balance sheets. The portion of such investments included in investments in unconsolidated affiliates totaled $165.0 million and $371.0 million as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012 and December 31, 2011, the portion of such investments included in assets held for sale totaled $13.7 million. See Note 4 – Discontinued Operations for additional information.

We have investments in offshore funds, which are classified as long-term investments and are accounted for using the equity method of accounting based on our ownership interest in each fund.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method and includes the cost of materials, labor and manufacturing overhead. Inventory included the following:

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Raw materials

   $ 136,734       $ 133,480   

Work-in-progress

     43,799         50,951   

Finished goods

     79,410         88,421   
  

 

 

    

 

 

 
   $ 259,943       $ 272,852   
  

 

 

    

 

 

 

 

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Goodwill

We determined it was necessary to perform our annual goodwill impairment test, a level 3 fair value measurement, during the second quarter of 2012. The impairment test compares the estimated fair value of the reporting unit to its carrying amount. If the carrying amount exceeds the fair value, a second step is required to measure the goodwill impairment loss. This second step compares the implied fair value of the reporting unit’s goodwill to its carrying amount. If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to the excess. Our goodwill impairment test results required the second step measurement for two reporting units.

The fair values calculated in these impairment tests were determined using discounted cash flow models involving assumptions based on our utilization of rigs or other oil and gas service equipment, revenues and earnings from affiliates, as well as direct costs, general and administrative costs, depreciation, applicable income taxes, capital expenditures and working capital requirements. Our discounted cash flow projections for each reporting unit were based on financial forecasts. The future cash flows were discounted to present value using discount rates determined to be appropriate for each reporting unit. Terminal values for each reporting unit were calculated using a Gordon Growth methodology with a long-term growth rate of 3%.

Our estimated fair values of our reporting units incorporate judgment and the use of estimates by management. Potential factors requiring assessment include a further or sustained decline in our stock price, declines in natural gas and oil prices, a variance in results of operations from forecasts, and additional transactions in the oil and gas industry. Another factor in determining whether impairment has occurred is the relationship between our market capitalization and our book value. As part of our annual review, we compared the sum of our reporting units’ estimated fair value, which included the estimated fair value of non-operating assets and liabilities, less debt, to our market capitalization and assessed the reasonableness of our estimated fair value. Any of the above-mentioned factors may cause us to re-evaluate goodwill during any quarter throughout the year.

The carrying amounts and change of goodwill for our operating segments as of and for the six months ended June 30, 2012 were as follows:

 

     Balance as of
December 31,
2011
     Acquisitions
and
Purchase
Price
Adjustments
     Disposals
and
Impairments
    Cumulative
Translation
Adjustment
    Balance as of
June 30, 2012
 
     (In thousands)  

Drilling and Rig Services:

            

U.S. Lower 48 Land Drilling

   $ 30,154       $ —         $ —        $ —        $ 30,154   

U.S. Offshore

     7,296         —           7,296 (1)      —          —     

Alaska

     19,995         —           —          —          19,995   

International

     18,983         —           18,983  (1)      —          —     

Other Rig Services

     34,766         —           3,035 (2)      (31     31,700   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal Drilling and Rig Services

     111,194         —           29,314        (31     81,849   

Completion and Production Services:

            

U.S. Land Well-servicing

     55,072         —           —          —          55,072   

Pressure Pumping

     334,992         —           —          —          334,992   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal Completion and Production Services

     390,064         —           —          —          390,064   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 501,258       $ —         $ 29,314      $ (31   $ 471,913   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)

Represents the impairment of goodwill associated with our U.S. Offshore and International reporting units. As of June 30, 2012, these reporting units had no recorded goodwill. The impairments were deemed necessary due to the prolonged uncertainty of utilization of some of our rigs as a result of changes in our

 

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  customers’ plans for future drilling operations in the Gulf of Mexico as well as our international markets. A significantly prolonged period of lower natural gas prices or changes in laws and regulations could continue to adversely affect the demand for and prices of our services, which could result in future goodwill impairment charges for other reporting units due to the potential impact on our estimate of our future operating results.
(2) Represents the removal of goodwill in connection with our sale of Peak USA to an unrelated third party for $13.5 million cash during the second quarter of 2012. Peak USA, a subsidiary included in our Other Rig Services reporting unit, provided trucking and logistics services to the oilfield service market in the U.S. Lower 48 states.

Note 3 Impairments and Other Charges

Impairments and other charges included the following:

 

     Three Months Ended
June 30,
 
(In thousands)    2012      2011  

Goodwill impairment

   $ 26,279       $ —     

Intangible asset impairment (1)

     74,960         —     

Provision for retirement of assets: (2)

     

Canada

     15,095         —     

U.S. Well-servicing

     4,628         —     

Pressure Pumping

     26,541         —     
  

 

 

    

 

 

 

Total impairments and other charges

   $ 147,503       $ —     
  

 

 

    

 

 

 

 

(1) Represents $75.0 million related to the impairment of the Superior trade name. The Superior trade name was initially classified as a ten-year intangible asset at the date of acquisition in September 2010. The impairment is a result of the decision to cease using the Superior trade name to reduce confusion in the marketplace and enhance the Nabors brand.
(2) During the three months ended June 30, 2012, we recorded a provision for retirement of long-lived assets totaling $46.2 million in multiple operating segments, which reduced the carrying value of some assets to their salvage value. The retirements in our Canada operations included functionally inoperable rigs and other drilling equipment. Our U.S. Well-servicing operations related to retirements of rigs and vehicles that would require significant repair to return to work. We recorded retirements of some non-core assets as we have begun the process to streamline our operations and consolidate our Pressure Pumping and U.S. Well-servicing segments into one business line, Nabors Completion and Production Services. As a result, we decided to retire these assets. As we continue to streamline our lines of business, there could be future retirement or impairment charges, which could have a potential impact on our future operating results. In addition, a prolonged period of lower natural gas and oil prices and its potential impact on our utilization and dayrates could result in the recognition of future impairment charges to additional assets if future cash flow estimates, based upon information then available to management, indicate that the carrying value of those assets may not be recoverable.

Note 4 Discontinued Operations

Assets held for sale included the following:

 

(In thousands)    June 30,
2012
     December 31,
2011
 

Assets Held for Sale

     

Oil and Gas

   $ 385,047       $ 385,414   

Other Rig Services

     11,366         16,086   
  

 

 

    

 

 

 

Assets Held for Sale

   $ 396,413       $ 401,500   
  

 

 

    

 

 

 

 

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Table of Contents

Our condensed statements of income (loss) from discontinued operations for the three and six months ended June 30, 2012 and 2011 were as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In thousands)  

Operating revenues and Earnings (losses) from unconsolidated affiliates

        

Oil and Gas

   $ 2,919      $ 9,397      $ 6,220      $ 20,816   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Rig Services (1)

   $ 5,554      $ 7,245      $ 10,416      $ 11,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from Oil and Gas discontinued operations:

        

Income (loss) from discontinued operations

   $ (2,476   $ 77,356      $ (7,921   $ 60,140   

Gain (loss) on sale of wholly owned assets

     41,282        42,717        36,110        42,717   

Less: income tax expense (benefit)

     7,042        (2,223     4,227        (8,563
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from Oil and Gas discontinued operations, net of tax

   $ 31,764      $ 122,296      $ 23,962      $ 111,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from Other Rig Services discontinued operations: (1)

        

Income (loss) from discontinued operations

   $ (4,190   $ (1,506   $ (5,519   $ (3,533

Gain (loss) on sale of assets

     (5,242     —          (5,242     —     

Less: income tax expense (benefit)

     (2,358     (377     (2,694     (884
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from Other Rig Services discontinued operations, net of tax

   $ (7,074   $ (1,129   $ (8,067   $ (2,649
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents our aircraft logistics operations in Canada included in our Other Rig Services operating segment.

In April 2012, we sold our remaining wholly owned oil and gas business in Colombia to an unrelated third party for a cash purchase price of $72.6 million, which resulted in a pre-tax gain of approximately $48.5 million. These assets were included in our assets held for sale as part of our Oil and Gas operating segment.

In May 2012, we sold some of our U.S. wholly owned oil and gas business in the Fayetteville Shale, Floyd Shale, and Barnett Shale areas to unrelated third parties for cumulative cash receipts of $5.7 million, which did not result in any gain or loss. These assets were included in our assets held for sale as part of our Oil and Gas operating segment. Based on current market conditions and our assessment of the sales price, we adjusted the carrying value of our U.S. wholly owned oil and gas business by $7.2 million in the second quarter of 2012 to reflect their estimated sales price or current fair value.

Our contracts with pipeline companies include pipeline transmission commitments in the Horn River Basin. During the year ended December 31, 2011, we evaluated current production levels, natural gas prices and the anticipated sales cycle related to the sale of properties corresponding to these commitments. As a result, we recorded liabilities for excess pipeline capacity. Our consolidated balance sheets included current liabilities related to discontinued operations of $63.9 million and $54.3 million that were included in accrued liabilities and noncurrent liabilities related to discontinued operations of $35.3 million and $71.4 million that were included in other long-term liabilities at June 30, 2012 and December 31, 2011, respectively. These amounts represent our best estimate of the excess capacity of the pipeline, based upon the estimated sales date of the properties, as compared to the contractual commitments. Our commitments beyond December 31, 2013 could approximate $265.4 million if the related properties are not sold or developed. Decreases in actual production, natural gas prices or a change in the estimated sales date could result in future charges related to excess capacity of the pipeline that may materially impact our results of operations.

Based on current market conditions and our assessment of the sales price, we adjusted the carrying value of our aircraft logistics assets by $5.2 million in the second quarter of 2012 to reflect their estimated sales price or current fair value.

 

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Note 5 Cash and Cash Equivalents and Short-term Investments

Our cash and cash equivalents and short-term investments consisted of the following:

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Cash and cash equivalents

   $ 320,398       $ 398,575   

Short-term investments:

     

Trading equity securities

     19,049         11,600   

Available-for-sale equity securities

     77,993         71,433   

Available-for-sale debt securities

     37,742         57,881   
  

 

 

    

 

 

 

Total short-term investments

   $ 134,784       $ 140,914   
  

 

 

    

 

 

 

Certain information related to our cash and cash equivalents and short-term investments follows:

 

     June 30, 2012     December 31, 2011  
     Fair
Value
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
    Fair
Value
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
 
     (In thousands)  

Cash and cash equivalents

   $ 320,398       $ —         $ —        $ 398,575       $ —         $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Short-term investments:

                

Trading equity securities

     19,049         13,325         —          11,600         5,876         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Available-for-sale equity securities

     77,993         41,014         (1,379     71,433         33,075         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Available-for-sale debt securities:

                

Commercial paper and CDs

     673         —           —          1,230         —           —     

Corporate debt securities

     32,400         11,819         (3,310     51,300         22,494         (2,095

Mortgage-backed debt securities

     261         15         —          309         10         —     

Mortgage-CMO debt securities

     2,343         11         (12     2,547         13         (15

Asset-backed debt securities

     2,065         —           (180     2,495         —           (238
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available-for-sale debt securities

     37,742         11,845         (3,502     57,881         22,517         (2,348
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     115,735         52,859         (4,881     129,314         55,592         (2,348
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total short-term investments

     134,784         66,184         (4,881     140,914         61,468         (2,348
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total cash, cash equivalents and short-term investments

   $ 455,182       $ 66,184       $ (4,881   $ 539,489       $ 61,468       $ (2,348
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Certain information related to the gross unrealized losses of our cash and cash equivalents and short-term investments follows:

 

     As of June 30, 2012  
     Less Than 12 Months      More Than 12 Months  
     Fair Value      Gross
Unrealized
Loss
     Fair Value      Gross
Unrealized
Loss
 
     (In thousands)  

Available-for-sale equity securities

   $ 17,516       $ 1,379       $ —         $ —     

Available-for-sale debt securities:

           

Corporate debt securities (1)

     —           —           16,500         3,310   

Mortgage-CMO debt securities (2)

     2,069         9         62         3   

Asset-backed debt securities (2)

     2,065         180         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale debt securities

     4,134         189         16,562         3,313   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,650       $ 1,568       $ 16,562       $ 3,313   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

(1) Our unrealized loss on corporate debt securities relates to our investment in NFR Energy LLC’s 9.75% senior notes. This investment is in addition to our equity interest in NFR Energy LLC. The senior notes mature in 2017 and interest is paid semi-annually on February 15 and August 15. We do not intend to sell this investment, and it is less likely than not that we will be required to sell it to satisfy our own cash flow and working capital requirements. We believe that we will continue to collect all amounts due according to the contractual terms of the investment and, therefore, do not consider the decline in value of the investment to be other-than-temporary at June 30, 2012. See Note 8 Investments in Unconsolidated Affiliates for additional discussion of our equity investment.
(2) Our unrealized losses on available-for-sale debt securities held for more than one year are comprised of various types of securities. Each of these securities has a rating ranging from “A” to “AAA” from Standard & Poor’s and ranging from “A2” to “Aaa” from Moody’s Investors Service and is considered of high credit quality. In each case, we do not intend to sell these investments, and it is less likely than not that we will be required to sell them to satisfy our own cash flow and working capital requirements. We believe that we will be able to collect all amounts due according to the contractual terms of each investment and, therefore, do not consider the decline in value of these investments to be other-than-temporary at June 30, 2012.

The estimated fair values of our corporate, mortgage-backed, mortgage-CMO and asset-backed debt securities at June 30, 2012, classified by time to contractual maturity, are shown below. Expected maturities differ from contractual maturities because the issuers of the securities may have the right to repay obligations without prepayment penalties and we may elect to sell the securities prior to the contractual maturity date.

 

     Estimated
Fair Value
June 30, 2012
 
     (In thousands)  

Debt securities:

  

Due in one year or less

   $ 673   

Due after one year through five years

     16,500   

Due in more than five years

     20,569   
  

 

 

 

Total debt securities

   $ 37,742   
  

 

 

 

Certain information regarding our debt and equity securities is presented below:

 

     Six Months Ended
June 30,
 
     2012      2011  
     (In thousands)  

Available-for-sale:

     

Proceeds from sales and maturities

   $ 19,233       $ 782   

Realized gains (losses), net

     12,484         (7

Note 6 Fair Value Measurements

The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that are accounted for at fair value on a recurring basis as of June 30, 2012. Our debt securities could transfer into or out of a Level 1 or 2 measure depending on the availability of independent and current pricing at the end of each quarter. During the three months ended June 30, 2012, there were no transfers of our financial assets and liabilities between Level 1 and Level 2 measures. Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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Table of Contents

Recurring Fair Value Measurements

 

     Fair Value as of June 30, 2012  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Short-term investments:

           

Available-for-sale equity securities – energy industry

   $ 71,054       $ 6,939       $ —         $ 77,993   

Available-for-sale debt securities

           

Commercial paper and CDs

     673         —           —           673   

Corporate debt securities

     —           32,400         —           32,400   

Mortgage-backed debt securities

     —           261         —           261   

Mortgage-CMO debt securities

     —           2,343         —           2,343   

Asset-backed debt securities

     2,065         —           —           2,065   

Trading securities – energy industry

     19,049         —           —           19,049   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 92,841       $ 41,943       $ —         $ 134,784   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative contract

   $ —         $ 268       $ —         $ 268   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonrecurring Fair Value Measurements

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would primarily consist of goodwill, intangible assets and other long-lived assets, assets acquired and liabilities assumed in a business combination, and asset retirement obligations.

Fair Value of Financial Instruments

The fair value of our financial instruments has been estimated in accordance with GAAP. We measure the estimated fair value of our long-term debt, subsidiary preferred stock and revolving credit facilities using significant other observable inputs, which represent Level 2 fair value measurements, including quoted market prices or prices quoted from third-party financial institutions as well as the terms and credit spreads for such instruments. The carrying and fair values of these liabilities were as follows:

 

     June 30, 2012      December 31, 2011  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (In thousands)  

5.375% senior notes due August 2012 (1)

   $ 274,918       $ 277,475       $ 274,604       $ 281,188   

6.15% senior notes due February 2018

     968,098         1,125,365         967,490         1,113,986   

9.25% senior notes due January 2019

     1,125,000         1,457,741         1,125,000         1,419,514   

5.00% senior notes due September 2020

     697,495         750,792         697,343         734,475   

4.625% senior notes due September 2021

     697,787         706,776         697,667         708,176   

Subsidiary preferred stock

     69,188         68,625         69,188         68,625   

Revolving credit facilities

     910,000         910,000         860,000         860,000   

Other

     477         477         1,712         1,712   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,742,963       $ 5,297,251       $ 4,693,004       $ 5,187,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $.1 million and $.3 million as of June 30, 2012 and December 31, 2011, respectively, related to the unamortized loss on the interest rate swap that was unwound during the fourth quarter of 2005.

The fair values of our cash equivalents, trade receivables and trade payables approximate their carrying values due to the short-term nature of these instruments.

 

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Table of Contents

As of June 30, 2012, our short-term investments were carried at fair market value and included $115.7 million and $19.0 million in securities classified as available-for-sale and trading, respectively. As of December 31, 2011, our short-term investments were carried at fair market value and included $129.3 million and $11.6 million in securities classified as available-for-sale and trading, respectively.

Note 7 Share-Based Compensation

We have several share-based employee compensation plans, which are more fully described in Note 8 Share-Based Compensation in our 2011 Annual Report. Total share-based compensation expense, which includes both stock options and restricted stock, totaled $4.3 million and $4.1 million for the three months ended June 30, 2012 and 2011, respectively, and $8.8 million and $8.1 million for the six months ended June 30, 2012 and 2011, respectively. Total share-based compensation is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Share-based compensation expense has been allocated to our various operating segments. See Note 15 – Segment Information.

During the six months ended June 30, 2012 and 2011, we awarded 923,131 and 1,029,157 shares of restricted stock, respectively, vesting over periods up to four years, to our employees and directors. These awards had an aggregate value at their grant date of $19.2 million and $28.8 million, respectively. The fair value of restricted stock that vested during the six months ended June 30, 2012 and 2011 was $9.3 million and $15.9 million, respectively.

The total intrinsic value of stock options exercised during the six months ended June 30, 2012 and 2011 was $5.1 million and $15.1 million, respectively. Additionally, the intrinsic value of stock options surrendered during the six months ended June 30, 2012 was $17.9 million. The total fair value of stock options that vested during the six months ended June 30, 2012 and 2011 was $7.6 million and $5.1 million, respectively.

Note 8 Investments in Unconsolidated Affiliates

We have several unconsolidated affiliates that are integral to our operations. For a full description, refer to Note 10 – Investments in Unconsolidated Affiliates in our 2011 Annual Report.

At June 30, 2012 and December 31, 2011, our consolidated balance sheets reflect our investments in unconsolidated affiliates accounted for using the equity method totaling $165.0 million and $371.0 million, respectively. In addition, assets held for sale include investments in unconsolidated affiliates accounted for using the equity method totaling $13.7 million at June 30, 2012 and December 31, 2011.

Presented below is summarized income statement (loss) information for our unconsolidated U.S. oil and gas joint venture:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  
     (In thousands)  

Gross revenues

   $ 74,140      $ 65,840       $ 125,469      $ 103,752   

Gross margin

   $ 45,421      $ 52,418       $ 83,057      $ 82,817   

Net income (loss)

   $ (282,403   $ 39,217       $ (409,512   $ 38,491   

Nabors’ earnings (losses) from our U.S. oil and gas joint venture (1)

   $ (140,434   $ 6,216       $ (202,996   $ 21,376   

 

(1) During the three and six months ended June 30, 2012, our unconsolidated U.S. oil and gas joint venture recorded full-cost ceiling test writedowns, of which our proportionate share was $145.5 million and $213.7 million, respectively. The writedowns are included in our Oil and Gas operating segment. If the average of the historical unweighted first-day-of-the-month natural gas prices for the prior 12-month periods remain at current levels or decline further through the end of the third and fourth quarters of 2012 due to price declines, there could be further reductions in our joint venture’s asset carrying value for oil and gas properties.

 

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Note 9 Debt

Long-term debt consisted of the following:

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

5.375% senior notes due August 2012

   $ 274,918       $ 274,604   

6.15% senior notes due February 2018

     968,098         967,490   

9.25% senior notes due January 2019

     1,125,000         1,125,000   

5.00% senior notes due September 2020

     697,495         697,343   

4.625% senior notes due September 2021

     697,787         697,667   

Revolving credit facilities

     910,000         860,000   

Other

     477         1,712   
  

 

 

    

 

 

 
     4,673,775         4,623,816   

Less: current portion

     275,323         275,326   
  

 

 

    

 

 

 
   $ 4,398,452       $ 4,348,490   
  

 

 

    

 

 

 

5.375% Senior Notes Due August 2012

At June 30, 2012, the current portion of our long-term debt included Nabors Delaware’s 5.375% senior notes of $274.9 million. We intend to utilize cash on hand and capacity under our revolving credit facilities to meet this obligation.

Revolving Credit Facilities

At June 30, 2012, we had $490 million of remaining availability from a combined total of $1.4 billion under our existing revolving credit facilities. The existing revolving credit facilities mature in September 2014, and can be used for general corporate purposes, including capital expenditures and working capital. The weighted average interest rate on borrowings at June 30, 2012 was 1.75%. We fully and unconditionally guarantee the obligations under all of these credit facilities.

The revolving credit facilities contain various covenants and restrictive provisions that limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain a net funded indebtedness to total capitalization ratio, as defined in each agreement. We were in compliance with all covenants under the agreements at June 30, 2012 and December 31, 2011. If we should fail to perform our obligations under the covenants, the revolving credit commitments could be terminated and any outstanding borrowings under the relevant facility could be declared immediately due and payable.

Note 10 Common Shares

During the six months ended June 30, 2012, our employees exercised vested options and surrendered unexercised vested stock options to acquire 1.0 million of our common shares. We received proceeds of $15.9 million from exercised vested options and used approximately $21.0 million, the value of the unexercised vested options that were surrendered, to satisfy some of the option exercise price and related tax withholding obligations pursuant to stock option share settlements and exercises by some of the employees. During the six months ended June 30, 2011, our employees exercised vested options to acquire 1.0 million of our common shares, resulting in proceeds of $11.6 million. For each of the six months ended June 30, 2012 and 2011, we withheld .1 million of our common shares with a fair value of $2.1 million and $2.5 million, respectively, to satisfy tax withholding obligations in connection with the vesting of all stock awards.

At December 31, 2011, accrued liabilities included a provision of $100 million for a contingent liability related to the change of our Chief Executive Officer that occurred in October 2011. In February 2012, our former

 

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Chief Executive Officer elected to forego triggering that payment. In connection with that development, we announced plans to make charitable contributions to benefit the needs of our employees and other community-based causes. During the first quarter of 2012, we contributed one million of our treasury shares to the Nabors Charitable Foundation, a 501(c)(3) organization, in support of this objective. We consider the former Chief Executive Officer to be a significant shareholder of the Company and, therefore, have recorded these transactions as equity. We recorded the release of the contingent liability, net of tax, through capital in excess of par as a forgiveness of liability from a beneficial owner. We recorded the donation of the treasury shares at their weighted-average cost, net of tax, through capital in excess of par.

Shareholder Rights Plan

On July 16, 2012, the Board of Directors declared the issuance of one preferred share purchase right (a “Right”) for each Common Share issued and outstanding on July 27, 2012 (the “Record Date”) to the shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a Series A Junior Participating Preferred Share, par value US$0.001 per share (the “Preferred Shares”), of the Company, at a price of $70.00 per one one-thousandth of a Preferred Share (the “Purchase Price”), subject to adjustment.

Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership (including derivative positions) of 10% or more of the issued and outstanding Common Shares (or, in the event an exchange is effected in accordance with Section 24 of the Rights Agreement and the Board of Directors determines that a later date is advisable, then such later date that is not more than 20 days after such public announcement) or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 10% or more of the issued and outstanding Common Shares (the earlier of such dates being called the “Distribution Date”), the Rights will be evidenced, with respect to any of the Common Share certificates issued and outstanding as of the Record Date, by such Common Share certificate with a copy of the Summary of Rights attached as Exhibit C to the Rights Agreement.

The Rights are not exercisable until the Distribution Date. The Rights will expire on July 16, 2013 (the “Final Expiration Date”), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by the Company, in each case.

Note 11 Subsidiary Preferred Stock

During the three months ended June 30, 2012, dividends of $.75 million on outstanding shares of preferred stock had been declared and paid in full.

Note 12 Commitments and Contingencies

Commitments

Employment Contracts

The employment agreement for Mr. Petrello currently provides for a term through March 30, 2015, with automatic one-year extensions each April 1, unless either party gives notice of nonrenewal. In the event of Mr. Petrello’s termination without cause or constructive termination without cause, he would be entitled to receive three times the average of his base salary and annual bonus during the three fiscal years preceding the termination. If, by way of example, Mr. Petrello were terminated without cause subsequent to June 30, 2012, his payment would be approximately $31.1 million. The formula will be further reduced to two times the average stated above in April 1, 2015. In the event of his death or disability, either he or his estate would be entitled to receive within 30 days thereafter a payment of $50 million.

 

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We do not have insurance to cover, and we have not recorded an expense or accrued a liability relating to, this potential obligation. See Note 18 Commitments and Contingencies to our 2011 Annual Report for additional discussion and description of Mr. Petrello’s employment agreement.

Contingencies

Income Tax Contingencies

We are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly audited by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than what is reflected in income tax provisions and accruals. An audit or litigation could materially affect our financial position, income tax provision, net income, or cash flows in the period or periods challenged.

It is possible that future changes to tax laws (including tax treaties) could impact our ability to realize the tax savings recorded to date as well as future tax savings, resulting from our 2002 corporate reorganization. See Note 13 – Income Taxes to our 2011 Annual Report for additional discussion.

On September 14, 2006, Nabors Drilling International Limited, one of our wholly owned Bermuda subsidiaries (“NDIL”), received a Notice of Assessment from Mexico’s federal tax authorities in connection with the audit of NDIL’s Mexico branch for 2003. The notice proposes to deny depreciation expense deductions relating to drilling rigs operating in Mexico in 2003. The notice also proposes to deny a deduction for payments made to an affiliated company for the procurement of labor services in Mexico. The amount assessed was approximately $19.8 million (including interest and penalties). Nabors and its tax advisors previously concluded that the deductions were appropriate. NDIL’s Mexico branch took similar deductions for depreciation and labor expenses from 2004 to 2008. On June 30, 2009, the government proposed similar assessments against the Mexico branch of another wholly owned Bermuda subsidiary, Nabors Drilling International II Ltd. (“NDIL II”) for 2006. We anticipate that a similar assessment will eventually be proposed against NDIL for 2005 through 2008 and against NDIL II for 2007 to 2010. We believe that the potential assessments will range from $6 million to $26 million per year for the period from 2005 to 2009, and in the aggregate, would be approximately $90 million to $95 million. Although Nabors and our tax advisors previously concluded that the deductions were appropriate for the 2003 and 2005 to 2010 years, a reserve has been recorded in accordance with GAAP. The statute of limitations for NDIL’s 2004 tax year expired. Accordingly, during the fourth quarter of 2010, we released $7.4 million from our tax reserves, which represented the reserve recorded for that tax year. If these additional assessments were made and we ultimately did not prevail, we would be required to recognize additional tax for the amount in excess of the current reserve.

Self-Insurance

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

Effective April 1, 2012, our workers’ compensation claims are subject to a $2.0 million per-occurrence deductible, and our automobile claims are subject to a $1.0 million per-occurrence deductible.

Litigation

Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated

 

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liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ from our estimates. For matters where an unfavorable outcome is reasonably possible and significant, we disclose the nature of the matter and a range of potential exposure, unless an estimate cannot be made at the time of disclosure. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.

On July 5, 2007, we received an inquiry from the U.S. Department of Justice relating to its investigation of one of our vendors and compliance with the Foreign Corrupt Practices Act. The inquiry relates to transactions with and involving Panalpina, which provided freight forwarding and customs clearance services to some of our affiliates. The inquiry focused on transactions in Kazakhstan, Saudi Arabia, Algeria and Nigeria. The Audit Committee of our Board of Directors engaged outside counsel to review some of our transactions with this vendor, received periodic updates at its regularly scheduled meetings, and the Chairman of the Audit Committee received updates between meetings as circumstances warranted. The investigation included a review of certain amounts paid to and by Panalpina in connection with obtaining permits for the temporary importation of equipment and clearance of goods and materials through customs. Both the SEC and the Department of Justice have been advised of the results of our investigation. The SEC has advised us that it concluded its review of this matter and does not intend to recommend any enforcement action against us. Although the Department of Justice has not concluded its inquiry, we do not anticipate that its final determination will have an adverse effect on the Company.

In 2009, the Court of Ouargla (in Algeria) entered a judgment of approximately $19.7 million against us related to alleged customs infractions in 2009. We believe we did not receive proper notice of the judicial proceedings, and that the amount of the judgment was excessive in any case. We asserted the lack of legally required notice as a basis for challenging the judgment on appeal to the Algeria Supreme Court. On May 31, 2012, that court reversed the lower court and remanded the case to the Ouargla Court of Appeals for treatment consistent with the Supreme Court’s ruling. Based upon our understanding of applicable law and precedent, we continue to believe that we will prevail. We do not believe that a loss is probable and have not accrued any amounts related to this matter. If we are ultimately required to pay a fine or judgment related to this matter, the amount of the loss could range from approximately $140,000 to $19.7 million.

In March 2011, the Court of Ouargla entered a judgment of approximately $39.1 million against us relating to alleged violations of Algeria’s foreign currency exchange controls, which require that goods and services provided locally be invoiced and paid in local currency. The case relates to certain foreign currency payments made to us by CEPSA, a Spanish operator, for wells drilled in 2006. Approximately $7.5 million of the total contract amount was paid offshore in foreign currency, and approximately $3.2 million was paid in local currency. The judgment includes fines and penalties of approximately four times the amount at issue, and is not payable pending appeal. We have appealed the ruling based on our understanding that the law in question applies only to resident entities incorporated under Algerian law. An intermediate court of appeals has upheld the lower court’s ruling, and we have appealed the matter to the Algeria Supreme Court. While our payments were consistent with our historical operations in the country and, we believe, those of other multinational corporations there, and interpretations of the law by the Central Bank of Algeria, the ultimate resolution of this matter could result in a loss of up to $31.1 million in excess of amounts accrued.

On September 21, 2011, we received an informal inquiry from the SEC related to perquisites and personal benefits received by the officers and directors of Nabors, including their use of non-commercial aircraft. Our Audit Committee and Board of Directors have been apprised of this inquiry and we are cooperating with the SEC. The ultimate outcome of this process cannot be determined at this time.

Nabors Industries Ltd. and its Board of Directors were sued in three separate purported shareholder derivative lawsuits filed in federal and state court in Houston, Texas. The cases were filed on November 18, 2011, January 9, 2012, and November 30, 2011, respectively, before Judges Ewing Werlein and Gray Miller in the United States

 

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Southern District of Texas, Houston Division, and Judge Mike Miller of the 11th Judicial District Court of Harris County, Texas. As previously disclosed, the case pending before Judge Gray Miller was voluntarily dismissed on January 31, 2012. On July 30, 2012, Judge Werlein entered a final judgment, dismissing the case pending in United States Southern District of Texas finding that plaintiffs lacked standing to sue and failed to state a claim for which relief could be granted. Judge Werlein also denied the plaintiffs’ request for leave to replead their claim. The other case in the 11th Judicial District Court of Harris County, Texas remains pending. The allegations of each lawsuit were substantially similar, alleging that the members of the Board breached their fiduciary duties to the Company, wasted corporate assets, and committed oppressive conduct against the shareholders by agreeing to acquiesce to certain compensation arrangements with two senior officers of the Company, Eugene M. Isenberg and Anthony G. Petrello. The remaining lawsuit seeks relief that includes an award of monetary damages in an unspecified amount, disgorgement by Messrs. Isenberg and Petrello of allegedly excessive compensation in an unspecified amount of at least $90 million, and equitable relief to reform Nabors’ compensations practices. Nabors intends to vigorously defend the remaining lawsuit. The ultimate outcome of these lawsuits cannot be determined at this time.

On March 9, 2012, Nabors Global Holdings II Limited (“NGH2L”) signed a contract with ERG Resources, LLC (“ERG”) relating to the sale of all of the Class A shares of NGH2L’s wholly owned subsidiary, Ramshorn International Limited, an oil and gas exploration company. When ERG failed to meet its closing obligations, NGH2L terminated the transaction on March 19, 2012 and, as contemplated in the agreement, retained ERG’s $3 million escrow deposit. ERG filed suit the following day in the 61st Judicial District Court of Harris County, Texas, in a case styled ERG Resources, LLC v. Nabors Global Holdings II Limited, Ramshorn International Limited, and Parex Resources, Inc.; Cause No. 2012-16446, seeking injunctive relief to halt any sale of the shares to a third party, specifically naming as defendant Parex Resources, Inc. (“Parex”). The lawsuit also seeks monetary damages of up to $100 million based on an alleged breach of contract by NGH2L and tortious interference with contractual relations by Parex. Nabors successfully defeated ERG’s effort to obtain a temporary restraining order from the Texas court on March 20, 2012. On March 23, 2012, ERG filed and obtained an ex parte stay from the Supreme Court of Bermuda (Commercial Court), in a case styled as ERG Resources LLC v. Nabors Global Holdings II Limited, Case No. 2012: No. 110. Nabors challenged the stay and, following a series of oral hearings on the matter, the Bermuda court discharged the stay by a ruling dated April 5, 2012. Nabors completed the sale of Ramshorn’s Class A shares to a Parex affiliate on April 12, 2012, which mooted ERG’s application for a temporary injunction that was scheduled for hearing by the Texas court on April 13, 2012. ERG retains its causes of action for monetary damages, but Nabors believes the claims are foreclosed by the terms of the agreement and are without factual or legal merit. While Nabors intends to vigorously defend the lawsuit, the ultimate outcome of the lawsuit cannot be determined at this time.

Off-Balance Sheet Arrangements (Including Guarantees)

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

Management believes the likelihood that we would be required to perform or otherwise incur any material losses associated with any of these guarantees is remote. The following table summarizes the total maximum amount of financial guarantees issued by Nabors:

 

     Maximum Amount  
     Remainder
of

2012
     2013      2014      Thereafter      Total  
     (In thousands)  

Financial standby letters of credit and other financial surety instruments

   $ 48,158       $ 60,580       $ 75       $ —         $ 108,813   

 

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Note 13 Earnings (Losses) Per Share

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012      2011  
     (In thousands, except per share amounts)  

Net income (loss) (numerator):

       

Income (loss) from continuing operations, net of tax

   $ (98,653   $ 70,887       $ 43,965       $ 165,439   

Less: net (income) loss attributable to noncontrolling interest

     1,174        394         1,441         1,063   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

     (97,479     71,281         45,406         166,502   

Add: interest expense on assumed conversion of our 0.94% senior exchangeable notes, net of tax (1)

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

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

     (97,479     71,281         45,406         166,502   

Income (loss) from discontinued operations, net of tax

     24,690        121,167         15,895         108,771   
  

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted net income (loss) attributable to Nabors

     (72,789     192,448         61,301         275,273   
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings (losses) per share:

          

Basic from continuing operations

   $ (.34   $ .25       $ .16       $ .58   

Basic from discontinued operations

     .09        .42         .05         .38   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Basic

   $ (.25   $ .67       $ .21       $ .96   

Diluted from continuing operations

   $ (.34   $ .24       $ .16       $ .57   

Diluted from discontinued operations

     .09        .41         .05         .37   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Diluted

   $ (.25   $ .65       $ .21       $ .94   

Shares (denominator):

          

Weighted-average number of shares outstanding — basic

     290,311        287,311         289,550         286,712   

Net effect of dilutive stock options, warrants and restricted stock awards based on the if-converted method

     —          6,987         2,635         6,781   

Assumed conversion of our 0.94% senior exchangeable notes due 2011 (1)

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted-average number of shares outstanding — diluted

     290,311        294,298         292,185         293,493   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) At maturity in May 2011, we redeemed the remaining aggregate principal amount of $1.4 billion of our 0.94% senior exchangeable notes. Prior to maturity, we had purchased $1.4 billion par value of these notes in the open market for cash of $1.2 billion.

For all periods presented, the computation of diluted earnings (losses) per Nabors’ share excludes outstanding stock options and warrants with exercise prices greater than the average market price of Nabors’ common shares because their inclusion would be anti-dilutive and because they are not considered participating securities. The average number of options and warrants that were excluded from diluted earnings (losses) per share that would potentially dilute earnings per share in the future was 17,635,173 and 5,494,895 shares during the three months ended June 30, 2012 and 2011, respectively, and 13,395,935 and 6,381,967 shares during the six months ended June 30, 2012 and 2011, respectively. 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 (losses) per share computation using the if-converted method of accounting. Restricted stock will be included in our basic and diluted earnings (losses) per share computation using the two-class method of accounting in all periods because such stock is considered a participating security.

 

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Note 14 Supplemental Balance Sheet, Income Statement and Cash Flow Information

Accrued liabilities include the following:

 

    June 30,      December 31,  
    2012      2011  
    (In thousands)  

Accrued compensation

  $ 145,927       $ 173,732   

Deferred revenue

    194,699         172,578   

Other taxes payable

    43,546         44,652   

Workers’ compensation liabilities

    22,645         22,645   

Interest payable

    97,223         99,869   

Due to joint venture partners

    —           6,041   

Warranty accrual

    7,086         5,237   

Litigation reserves

    26,451         23,687   

Provision for termination payment

    —           100,000   

Current liability to discontinued operations

    63,912         54,287   

Professional fees

    3,452         6,413   

Income taxes payable

    (8,539      27,710   

Current deferred tax liability

    —           269   

Other accrued liabilities

    8,225         7,363   
 

 

 

    

 

 

 
  $ 604,627       $ 744,483   
 

 

 

    

 

 

 

Investment income (loss) includes the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012     2011  
     (In thousands)  

Interest and dividend income

   $ 3,594       $ 1,948      $ 4,949      $ 3,773   

Gains (losses) on investments, net (1)

     1,774         (2,923     20,671  (2)      7,532  (3) 

 

(1) Includes net unrealized gains/(losses) of $1.4 million and $(3.4) million, during the three months ended June 30, 2012 and 2011, respectively, and $7.4 million and $(6.7) million during the six months ended June 30, 2012 and 2011, respectively, from our trading securities.
(2) Includes $12.5 million realized gain related to debt securities in addition to unrealized gains discussed above.
(3) Includes $12.9 million realized gain related to one of our overseas fund investments classified as long-term investments, partially offset by unrealized losses discussed above.

Losses (gains) on sales and retirements of long-lived assets and other expense (income), net includes the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In thousands)  

Losses (gains) on sales, retirements and involuntary conversions of long-lived assets

   $ 5,962      $ (959   $ 4,180      $ 134   

Litigation expenses

     4,996        4,007        5,536        9,926   

Foreign currency transaction losses (gains)

     2,710        998        2,255        446   

Losses (gains) on derivative instruments

     (551     (350     (1,013     (861

Losses (gains) on debt extinguishment

     —          —          —          58   

Other losses (gains)

     297        652        616        804   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 13,414      $ 4,348      $ 11,574      $ 10,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 15 Segment Information

The following table sets forth financial information with respect to our reportable segments:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (In thousands)  

Operating revenues and earnings (losses) from unconsolidated affiliates from continuing operations: (1)

        

Drilling and Rig Services:

        

U.S. Lower 48 Land Drilling

   $ 494,371      $ 404,984      $ 990,068      $ 783,552   

U.S. Offshore

     71,978        40,284        141,093        70,738   

Alaska

     32,416        32,336        94,709        73,651   

Canada

     92,390        87,974        284,683        260,417   

International

     304,622        265,231        611,087        527,708   

Other Rig Services (2)

     228,614        155,246        470,372        272,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Drilling and Rig Services (3)

     1,224,391        986,055        2,592,012        1,988,101   

Completion and Production Services:

        

U.S. Land Well-servicing

     214,005        164,140        423,706        314,396   

Pressure Pumping

     387,663        265,930        785,699        523,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Completion and Production Services

     601,668        430,070        1,209,405        838,185   

Oil and Gas (4)

     (140,434     6,216        (202,996     21,376   

Other reconciling items (5)

     (82,828     (69,391     (173,867     (104,870
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,602,797      $ 1,352,950      $ 3,424,554      $ 2,742,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted income (loss) derived from operating activities from continuing operations: (1)(6)

        

Drilling and Rig Services:

        

U.S. Lower 48 Land Drilling

   $ 126,532      $ 99,231      $ 258,113      $ 179,326   

U.S. Offshore

     9,924        (1,059     17,656        (5,036

Alaska

     8,895        8,288        36,315        19,307   

Canada

     (3,718     (2,512     45,569        36,480   

International

     16,401        35,851        37,539        71,348   

Other Rig Services (2)

     28,179        13,946        58,025        22,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Drilling and Rig Services (3)

     186,213        153,745        453,217        323,715   

Completion and Production Services:

        

U.S. Land Well-servicing

     28,599        16,526        50,487        27,649   

Pressure Pumping

     46,144        43,888        111,004        87,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Completion and Production Services

     74,743        60,414        161,491        115,252   

Oil and Gas (7)

     5,066        6,216        10,716        21,376   

Other reconciling items (8)

     (35,609     (42,887     (73,825     (75,282
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted income derived from operating activities

     230,413        177,488        551,599        385,061   

Full-cost ceiling test writedowns

     (145,500     —          (213,712     —     

Interest expense

     (63,459     (63,755     (126,113     (137,721

Investment income (loss)

     5,368        (975     25,620        11,305   

Gains (losses) on sales and retirements of long-lived assets and other income (expense), net

     (13,414     (4,348     (11,574     (10,507

Impairments and other charges

     (147,503     —          (147,503     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (134,095     108,410        78,317        248,138   

Income tax expense (benefit)

     (36,192     36,773        32,852        81,199   

Subsidiary preferred stock dividend

     750        750        1,500        1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, net of tax

     (98,653     70,887        43,965        165,439   

Income (loss) from discontinued operations, net of tax

     24,690        121,167        15,895        108,771   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (73,963     192,054        59,860        274,210   

Less: Net income (loss) attributable to noncontrolling interest

     1,174        394        1,441        1,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Nabors

   $ (72,789   $ 192,448      $ 61,301      $ 275,273   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents
     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Total assets:

     

Drilling and Rig Services:

     

U.S. Lower 48 Land Drilling

   $ 3,487,357       $ 3,216,803   

U.S. Offshore

     445,956         402,506   

Alaska

     272,956         288,253   

Canada

     837,694         962,239   

International

     3,713,632         3,702,611   

Other Rig Services (2)

     677,803         720,775   
  

 

 

    

 

 

 

Subtotal Drilling and Rig Services (9)

     9,435,398         9,293,187   

Completion and Production Services:

     

U.S. Well-servicing

     840,616         812,049   

Pressure Pumping

     1,477,427         1,503,298   
  

 

 

    

 

 

 

Subtotal Completion and Production Services

     2,318,043         2,315,347   

Oil and Gas (10)

     582,981         796,327   

Other reconciling items (8)

     507,050         507,279   
  

 

 

    

 

 

 

Total assets

   $ 12,843,472       $ 12,912,140   
  

 

 

    

 

 

 

 

(1) All periods present the operating activities of our wholly owned oil and gas business in the United States, Canada and Colombia, including equity interests in joint ventures in Canada and Colombia, as well as our aircraft logistics operations in Canada as discontinued operations.
(2) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction services. These services represent our other companies that are not aggregated into a reportable operating segment.
(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $6.1 million and $3.1 million for the three months ended June 30, 2012 and 2011, respectively, and $4.2 million for the six months ended June 30, 2011.
(4) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(140.4) million and $6.2 million for the three months ended June 30, 2012 and 2011, respectively, and $(203.0) million and $21.4 million for the six months ended June 30, 2012 and 2011, respectively.
(5) Represents the elimination of inter-segment transactions.
(6) Adjusted income (loss) derived from operating activities is computed by subtracting direct costs, general and administrative expenses, and depreciation and amortization from Operating revenues and then adding Earnings (losses) from unconsolidated affiliates (excluding our proportionate share of full-cost ceiling test writedowns recorded by our oil and gas joint venture). These amounts should not be used as a substitute for those amounts reported in accordance with 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 these financial measures accurately reflect our ongoing profitability. A reconciliation of this non-GAAP measure to income (loss) from continuing operations before income taxes, which is a GAAP measure, is provided in the above table.
(7) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $5.1 million (excluding $145.5 million, which represents our proportionate share of full-cost ceiling test writedowns by our oil and gas joint venture) and $6.2 million for the three months ended June 30, 2012 and 2011, respectively, and $10.7 million (excluding $213.7 million, which represents our proportionate share of full-cost ceiling test writedowns by our oil and gas joint venture) and $21.4 million, for the six months ended June 30, 2012 and 2011, respectively.
(8) Represents the elimination of inter-segment transactions and unallocated corporate expenses and assets.
(9) Includes $70.9 million and $76.9 million of investments in unconsolidated affiliates accounted for using the equity method as of June 30, 2012 and December 31, 2011, respectively.
(10) Includes $94.1 million and $294.1 million of investments in unconsolidated affiliates accounted for using the equity method as of June 30, 2012 and December 31, 2011, respectively.

 

26


Table of Contents

Note 16 Condensed Consolidating Financial Information

Nabors has fully and unconditionally guaranteed all of the issued public debt securities of Nabors Delaware. The following condensed consolidating financial information is included so that separate financial statements of Nabors Delaware are not required to be filed with the SEC. 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, 2012 and December 31, 2011, statements of income (loss) and statements of other comprehensive income for the three and six months ended June 30, 2012 and 2011, and statements of cash flows for the six months ended June 30, 2012 and 2011, of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt securities guaranteed by Nabors, (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate Nabors and its subsidiaries and (e) Nabors on a consolidated basis.

 

27


Table of Contents

Condensed Consolidating Balance Sheets

 

     June 30, 2012  
(In thousands)    Nabors
(Parent/
Guarantor)
     Nabors
Delaware
(Issuer/
Guarantor)
     Other
Subsidiaries
(Non-
Guarantors)
     Consolidating
Adjustments
    Consolidated
Total
 
ASSETS   

Current assets:

             

Cash and cash equivalents

   $ 828       $ 6,946       $ 312,624       $ —        $ 320,398   

Short-term investments

     —           —           134,784         —          134,784   

Assets held for sale

     —           —           396,413         —          396,413   

Accounts receivable, net

     —           —           1,607,422         —          1,607,422   

Inventory

     —           —           259,943         —          259,943   

Deferred income taxes

     —           —           70,288         —          70,288   

Other current assets

     50         671         185,201         —          185,922   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     878         7,617         2,966,675         —          2,975,170   

Long-term investments and other receivables

     —           —           5,452         —          5,452   

Property, plant and equipment, net

     —           39,042         8,865,282         —          8,904,324   

Goodwill

     —           —           471,913         —          471,913   

Intercompany receivables

     169,994         —           537,881         (707,875     —     

Investment in unconsolidated affiliates

     5,549,273         6,165,994         1,604,915         (13,155,179     165,003   

Other long-term assets

     —           29,688         291,922         —          321,610   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,720,145       $ 6,242,341       $ 14,744,040       $ (13,863,054   $ 12,843,472   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

             

Current portion of long-term debt

   $ —         $ 274,918       $ 405       $ —        $ 275,323   

Trade accounts payable

     86         23         606,462         —          606,571   

Accrued liabilities

     2,024         97,305         505,298         —          604,627   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     2,110         372,246         1,112,165         —          1,486,521   

Long-term debt

     —           4,398,381         71         —          4,398,452   

Other long-term liabilities

     —           32,132         294,070         —          326,202   

Deferred income taxes

     —           11,319         822,888         —          834,207   

Intercompany payable

     —           336,350         371,525         (707,875     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     2,110         5,150,428         2,600,719         (707,875     7,045,382   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subsidiary preferred stock

     —           —           69,188         —          69,188   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Shareholders’ equity

     5,718,035         1,091,913         12,063,266         (13,155,179     5,718,035   

Noncontrolling interest

     —           —           10,867         —          10,867   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     5,718,035         1,091,913         12,074,133         (13,155,179     5,728,902   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,720,145       $ 6,242,341       $ 14,744,040       $ (13,863,054   $ 12,843,472   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

28


Table of Contents
     December 31, 2011  
(In thousands)    Nabors
(Parent/
Guarantor)
     Nabors
Delaware
(Issuer/
Guarantor)
     Other
Subsidiaries
(Non-
Guarantors)
     Consolidating
Adjustments
    Consolidated
Total
 
ASSETS   

Current assets:

             

Cash and cash equivalents

   $ 203       $ 21       $ 398,351       $ —        $ 398,575   

Short-term investments

     —           —           140,914         —          140,914   

Assets held for sale

     —           —           401,500         —          401,500   

Accounts receivable, net

     —           —           1,576,555         —          1,576,555   

Inventory

     —           —           272,852         —          272,852   

Deferred income taxes

     —           —           127,874         —          127,874   

Other current assets

     50         671         169,323         —          170,044   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     253         692         3,087,369         —          3,088,314   

Long-term investments and other receivables

     —           —           11,124         —          11,124   

Property, plant and equipment, net

     —           40,792         8,589,154         —          8,629,946   

Goodwill

     —           —           501,258         —          501,258   

Intercompany receivables

     164,760         —           537,881         (702,641     —     

Investment in unconsolidated affiliates

     5,429,029         6,084,868         1,843,654         (12,986,530     371,021   

Other long-term assets

     —           32,037         278,440         —          310,477   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,594,042       $ 6,158,389       $ 14,848,880       $ (13,689,171   $ 12,912,140   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

             

Current portion of long-term debt

   $ —         $ 274,604       $ 722       $ —        $ 275,326   

Trade accounts payable

     42         23         782,688         —          782,753   

Accrued liabilities

     6,185         100,101         638,197         —          744,483   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     6,227         374,728         1,421,607         —          1,802,562   

Long-term debt

     —           4,297,500         50,990         —          4,348,490   

Other long-term liabilities

     —           32,303         260,454         —          292,757   

Deferred income taxes

     —           11,221         786,705         —          797,926   

Intercompany payable

     —           379,400         323,241         (702,641     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     6,227         5,095,152         2,842,997         (702,641     7,241,735   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subsidiary preferred stock

     —           —           69,188         —          69,188   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Shareholders’ equity

     5,587,815         1,063,237         11,923,293         (12,986,530     5,587,815   

Noncontrolling interest

     —           —           13,402         —          13,402   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     5,587,815         1,063,237         11,936,695         (12,986,530     5,601,217   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,594,042       $ 6,158,389       $ 14,848,880       $ (13,689,171   $ 12,912,140   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

Condensed Consolidating Statements of Income (Loss)

 

     Three Months Ended June 30, 2012  
(In thousands)    Nabors
(Parent/
Guarantor)
    Nabors
Delaware
(Issuer/
Guarantor)
    Other
Subsidiaries
(Non—
Guarantors)
    Consolidating
Adjustments
    Consolidated
Total
 

Revenues and other income:

          

Operating revenues

   $ —        $ —        $ 1,737,114      $ —        $ 1,737,114   

Earnings (losses) from unconsolidated affiliates

     —          —          (134,317     —          (134,317

Earnings (losses) from consolidated affiliates

     (70,408     (35,150     (61,938     167,496        —     

Investment income (loss)

     —          16        5,352        —          5,368   

Intercompany interest income

     —          17,078        —          (17,078     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     (70,408     (18,056     1,546,211        150,418        1,608,165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and other deductions:

          

Direct costs

     —          —          1,123,256        —          1,123,256   

General and administrative expenses

     2,022        50        131,899        (359     133,612   

Depreciation and amortization

     —          903        260,113        —          261,016   

Interest expense

     —          68,268        (4,809     —          63,459   

Intercompany interest expense

     —          —          17,078        (17,078     —     

Losses (gains) on sales and retirements of long-lived assets and other expense (income), net

     359        (546     13,242        359        13,414   

Impairments and other charges

     —          —          147,503        —          147,503   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and other deductions

     2,381        68,675        1,688,282        (17,078     1,742,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (72,789     (86,731     (142,071     167,496        (134,095

Income tax expense (benefit)

     —          (19,085     (17,107     —          (36,192

Subsidiary preferred stock dividend

     —          —          750        —          750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, net of tax

     (72,789     (67,646     (125,714     167,496        (98,653

Income (loss) from discontinued operations, net of tax

     —          —          24,690        —          24,690   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (72,789     (67,646     (101,024     167,496        (73,963

Less: Net (income) loss attributable to noncontrolling interest

     —          —          1,174        —          1,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Nabors

   $ (72,789   $ (67,646   $ (99,850   $ 167,496      $ (72,789
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents
     Three Months Ended June 30, 2011  
(In thousands)    Nabors
(Parent/
Guarantor)
     Nabors
Delaware
(Issuer/
Guarantor)
    Other
Subsidiaries
(Non—
Guarantors)
    Consolidating
Adjustments
    Consolidated
Total
 

Revenues and other income:

           

Operating revenues

   $ —         $ —        $ 1,343,642      $ —        $ 1,343,642   

Earnings (losses) from unconsolidated affiliates

     —           —          9,308        —          9,308   

Earnings (losses) from consolidated affiliates

     195,770         18,971        (7,481     (207,260     —     

Investment income (loss)

     1         68        (1,044     —          (975

Intercompany interest income

     —           17,405        —          (17,405     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     195,771         36,444        1,344,425        (224,665     1,351,975   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Costs and other deductions:

           

Direct costs

     —           —          827,450        —          827,450   

General and administrative expenses

     3,120         49        120,005        (204     122,970   

Depreciation and amortization

     —           871        224,171        —          225,042   

Interest expense

     —           69,059        (5,304     —          63,755   

Intercompany interest expense

     —           —          17,405        (17,405     —     

Losses (gains) on sales and retirements of long-lived assets and other expense (income), net

     203         (344     4,285        204        4,348   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and other deductions

     3,323         69,635        1,188,012        (17,405     1,243,565   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     192,448         (33,191     156,413        (207,260     108,410   

Income tax expense (benefit)

     —           (19,300     56,073        —          36,773   

Subsidiary preferred stock dividend

     —           —          750        —          750   
  

 

 

    

&nbs