Nabors: Q1 Results – Q1 Costs Drag Numbers
Nabors Industries Ltd. (“Nabors” or the “Company”) (NYSE: NBR) today reported first quarter 2018 operating revenue of $734 million, compared to operating revenue of $708 million in the prior quarter. Net income from continuing operations attributable to Nabors for the quarter was a loss of $144 million, or $0.46 per share, compared to a loss of $116 million, or $0.40 per share, in the fourth quarter of 2017. Results for the first quarter included transaction charges of $7.4 million, or $0.02 per share and a sequential increase in non-cash tax expense of $46 million, or $0.15 per share.
Anthony Petrello, Nabors Chairman and CEO, commented, “Our first quarter results showed continued improvement, primarily attributable to the outstanding performance of our US Drilling segment. Canada Drilling also contributed meaningfully with the higher activity of the winter drilling season. Our Drilling Solutions segment continued to achieve solid growth and remains on track to meet its annualized fourth quarter 2018 adjusted EBITDA objective of $100 million. Internationally, our results declined slightly with lower average margins partially offset by four additional rigs working. Rig Technologies came in well short of our expectations, principally due to delayed completion and shipment into April of numerous third-party legacy Tesco capital equipment orders. The related logistics and manufacturing issues are resolved at our Tesco Calgary facility and we do not expect them to recur in the second quarter. We anticipate further improvements in all of our non-seasonal segments in the coming quarters.”
Consolidated and Segment Results
Adjusted operating income for the Company was a loss of $45 million during the quarter, as compared to a loss of $52 million in the fourth quarter of 2017. Quarterly consolidated adjusted EBITDA represented an increase at $168 million, compared to $163 million in the fourth quarter. During the first quarter, the Company averaged 228 rigs operating at an average gross margin of $11,470 per rig day. This compares to 211 rigs at $10,963 per rig day in the fourth quarter of 2017.
The U.S. Drilling segment posted a 36% sequential increase in adjusted EBITDA, which equaled $73.1 million for the quarter. This was driven by an increase of 6 rigs working and a 27% increase in average gross margin per rig day. Virtually all of this increase in gross margin was attributable to the performance of the US lower 48 operation, which achieved an increase of approximately $2,000 per rig day. The majority of this increase in lower 48 margins was attributable to reduced costs. An increase in average dayrates also contributed meaningfully to the margin improvement. In addition, on April 1, our MODS-400 deepwater platform rig commenced full operating rate on the Bigfoot deepwater offshore in the U.S. Gulf of Mexico. This together with a recent contract award for an existing offshore platform rig and prospects for more should significantly boost near-term results.
International Drilling adjusted EBITDA decreased sequentially by $4.9 million to $124 million. This decrease arose from the net effects of a quarterly increase in rig activity that was more than offset by lower average margins. Average rig margins per day decreased by $594 largely attributable to a significant amount of previously announced long-term contract renewals at rates closer to market. The quarterly average rig count increased by four to 94.6, representing the first significant increase in five quarters. This appears to mark the beginning of a significant ramp up in activity over the course of the year. Rig activity has been expanding with eight additional rigs scheduled to start before year-end and a number of proposals submitted or in process. The market for higher spec international rigs is tightening and we expect rates for these rigs to increase as the year progresses.
Canada Drilling operations posted a seasonal high in adjusted EBITDA of $9.3 million amounting to a 120% sequential increase. The quarter’s results also represented an increase of nearly 50% over the seasonally high first quarter of the prior year. The sequential improvement was attributable to higher rig activity, while the year-over-year growth arose from an increase in average per rig day margins on a flat rig count. The Company expects a similar degree of improvement in adjusted EBITDA for the full year 2018.
In Drilling Solutions, adjusted EBITDA of $14.7 million represented a 17% quarterly increase. The results reflected higher activity across nearly all of the segment’s product lines during the quarter, as well as increased contribution from Tesco’s casing running services. The segment again increased its penetration on both Nabors and third party rigs. During the quarter, it also achieved two significant milestones that bolster the Company’s expectations for the future. Specifically, it conducted the first commercial operations for two key customers with its Navigator™ and Rockit® Pilot software, which facilitates directional drilling automation. Additionally, Drilling Solutions worked with Canrig on the first successful field test of the rotary steerable system on a customer well. This segment remains on track to achieve its annualized fourth-quarter 2018 goal of $100 million in adjusted EBITDA.
In the Rig Technologies segment, first quarter adjusted EBITDA was a loss of $8.7 million, down by $4.4 million compared to the fourth quarter. This shortfall was principally attributable to manufacturing issues, which induced delays in completing and shipping several capital equipment items – primarily six top drives – from the Calgary facility. Most of these delayed units were completed and shipped in the first month of the second quarter. The company expects the traditional capital equipment portion of the segment to return to positive adjusted EBITDA in the second quarter. Meanwhile, both the robotics and rotary steerable developmental product lines achieved significant milestones during the quarter. The robotics group received a contract for engineering work in advance of what it expects will be its first commercial order for a complete offshore rig floor automation system. The award is from a large North Sea operator and encompasses the planning required to retrofit an offshore platform in mid-2019. The rotary steerable group successfully conducted its first field test on a customer’s well in South Texas for a large US E&P operator. We believe commercialization of both product lines remains on track for late 2018.
William Restrepo, Nabors Chief Financial Officer, stated, “In general, our results continued the trends of the fourth quarter with strong overall drilling results, particularly in North America, and continued growth in NDS. Our International rig count is picking up fast, although pricing still lags. Finally, sluggish shipments of drilling equipment provided a temporary headwind.
“Net debt increased by $200 million in the first quarter, which was $100 million more than anticipated due to cash outlays that should not recur in the second quarter. Among these were an increase of working capital associated with the initiation of SANAD operations, transaction costs and slower collections related to the Tesco acquisition, the customary first quarter spike in payroll expense, and fees associated with our bond issuance. The timing of our semiannual major interest payments also weighed on the first quarter’s cash flow. We expect to generate positive cash flow in the second quarter exclusive of any proceeds from the potential sale of the first tranche of our Middle East jackups. Further, we expect the increasing growth in consolidated adjusted EBITDA, along with other positive developments will lead to positive cash flow for the full year 2018.”
Mr. Petrello concluded, “This quarter represents the first full quarter of operations by SANAD, our land drilling joint venture in Saudi Arabia. I would like to express how pleased our entire organization is with the efficiency of the integration and most importantly, the level of cooperation from our partner, Saudi Aramco.
“Regarding the other facets of our operations, I am particularly pleased with the substantial progress achieved in improving the profitability of our US lower 48 operations. Our expectation of continued progress, in combination with the increasingly favorable outlook for all of our other segments, reinforces our confidence in achieving our vision 2020 goals of reducing our leverage and restoring returns on capital. The near-term presents some challenges. But absent a sharp contraction in oil prices, I believe as the year progresses we could experience each of our operations growing concurrently, a rather rare occurrence during my time at Nabors.”
