NABORS INDUSTRIES LTD
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the fiscal year ended December 31, 2009 | ||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the transition period from to |
Commission File Number
001-32657
NABORS INDUSTRIES
LTD.
(Exact name of registrant as
specified in its charter)
|
Bermuda
|
980363970 | |
|
(State or
Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
|
|
Mintflower Place
8 Par-La-Ville Road Hamilton, HM08 Bermuda |
N/A
(Zip Code) |
|
|
(Address of principal executive
offices)
|
(441) 292-1510
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934:
|
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
|
Common shares, $.001 par value per share
|
The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934:
None.
None.
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES
þ
NO
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES
o
NO
þ
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
þ
NO
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months. YES
þ
NO
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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 definition of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES
o
NO
þ
The aggregate market value of the 228,620,332 common shares, par
value $.001 per share, held by non-affiliates of the registrant,
based upon the closing price of our common shares as of the last
business day of our most recently completed second fiscal
quarter, June 30, 2009, of $15.58 per share as reported on
the New York Stock Exchange, was $3,561,904,773. Common shares
held by each officer and director and by each person who owns 5%
or more of the outstanding common shares have been excluded in
that such persons may be deemed affiliates. This determination
of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of common shares, par value $.001 per share,
outstanding as of February 24, 2010 was 284,669,913.
DOCUMENTS INCORPORATED BY REFERENCE (to the extent indicated
herein)
Specified portions of the 2010 Notice of Annual Meeting of
Shareholders and the definitive Proxy
Statement to be distributed in connection with the 2010 annual meeting of shareholders (Part III).
Statement to be distributed in connection with the 2010 annual meeting of shareholders (Part III).
NABORS
INDUSTRIES LTD.
Form 10-K
Annual Report
For the
Year Ended December 31, 2009
Table of
Contents
2
Table of Contents
Our internet address is www.nabors.com. We make available free
of charge through our website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the “Exchange Act”) as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (the
“SEC”). In addition, a glossary of drilling terms used
in this document and documents relating to our corporate
governance (such as committee charters, governance guidelines
and other internal policies) can be found on our website. The
SEC maintains an internet site (www.sec.gov) that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
FORWARD-LOOKING
STATEMENTS
We often discuss expectations regarding our future markets,
demand for our products and services, and our performance in our
annual and quarterly reports, press releases, and other written
and oral statements. Statements that relate to matters that are
not historical facts are “forward-looking statements”
within the meaning of the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the
“Securities Act”) and Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”).
These “forward-looking statements” are based on an
analysis of currently available competitive, financial and
economic data and our operating plans. They are inherently
uncertain and investors should recognize that events and actual
results could turn out to be significantly different from our
expectations. By way of illustration, when used in this
document, words such as “anticipate,”
“believe,” “expect,” “plan,”
“intend,” “estimate,” “project,”
“will,” “should,” “could,”
“may,” “predict” and similar expressions are
intended to identify forward-looking statements.
You should consider the following key factors when evaluating
these forward-looking statements:
| • | fluctuations in worldwide prices of and demand for natural gas and oil; | |
| • | fluctuations in levels of natural gas and oil exploration and development activities; | |
| • | fluctuations in the demand for our services; | |
| • | the existence of competitors, technological changes and developments in the oilfield services industry; | |
| • | the existence of operating risks inherent in the oilfield services industry; | |
| • | the existence of regulatory and legislative uncertainties; | |
| • | the possibility of changes in tax laws; | |
| • | the possibility of political instability, war or acts of terrorism in any of the countries in which we do business; and | |
| • | general economic conditions including the capital and credit markets. |
Our businesses depend, to a large degree, on the level of
spending by oil and gas companies for exploration, development
and production activities. Therefore, a sustained increase or
decrease in the price of natural gas or oil, which could have a
material impact on exploration, development and production
activities, could also materially affect our financial position,
results of operations and cash flows.
The above description of risks and uncertainties is by no means
all-inclusive, but is designed to highlight what we believe are
important factors to consider. For a more detailed description
of risk factors, please refer to Part I,
Item 1A. — Risk Factors.
Unless the context requires otherwise, references in this report
to “we,” “us,” “our,” “the
Company,” or “Nabors” means Nabors Industries
Ltd. and, where the context requires, includes our subsidiaries.
3
Table of Contents
| ITEM 1. | BUSINESS |
Introduction
Nabors is the largest land drilling contractor in the world,
with approximately 542 actively marketed land drilling rigs. We
conduct oil, gas and geothermal land drilling operations in the
U.S. Lower 48 states, Alaska, Canada, South America,
Mexico, the Caribbean, the Middle East, the Far East, Russia and
Africa. We are also one of the largest land well-servicing and
workover contractors in the United States and Canada. We
actively market approximately 558 rigs for land workover and
well-servicing work in the United States, primarily in the
southwestern and western United States, and actively market
approximately 172 land workover and well-servicing rigs in
Canada. Nabors is a leading provider of offshore platform
workover and drilling rigs, and actively markets 40 platform, 13
jack-up
and
3 barge rigs in the United States and multiple international
markets. These rigs provide well-servicing, workover and
drilling services. We have a 51% ownership interest in a joint
venture in Saudi Arabia, which owns and actively markets 9 rigs
in addition to the rigs we lease to the joint venture. We also
offer a wide range of ancillary well-site services, including
engineering, transportation, construction, maintenance, well
logging, directional drilling, rig instrumentation, data
collection and other support services in select domestic and
international markets. We provide logistics services for onshore
drilling in Canada using helicopters and fixed-wing aircraft. 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 also invest in oil and
gas exploration, development and production activities and have
49-50%
ownership interests in joint ventures in the U.S., Canada and
International areas.
Nabors was formed as a Bermuda exempt company on
December 11, 2001. Through predecessors and acquired
entities, Nabors has been continuously operating in the drilling
sector since the early 1900s. Our principal executive offices
are located at Mintflower Place, 8 Par-La-Ville Road,
Hamilton, HM08, Bermuda. Our phone number at our principal
executive offices is
(441) 292-1510.
Our Fleet
of Rigs
| • | Land Rigs. A land-based drilling rig generally consists of engines, a drawworks, a mast (or derrick), pumps to circulate the drilling fluid (mud) under various pressures, blowout preventers, drill string and related equipment. The engines power the different pieces of equipment, including a rotary table or top drive that turns the drill string, causing the drill bit to bore through the subsurface rock layers. Rock cuttings are carried to the surface by the circulating drilling fluid. The intended well depth, bore hole diameter and drilling site conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling job. |
Special-purpose drilling rigs used to perform workover services
consist of a mobile carrier, which includes an engine, drawworks
and a mast, together with other standard drilling accessories
and specialized equipment for servicing wells. These rigs are
specially designed for major repairs and modifications of oil
and gas wells, including standard drilling functions. A
well-servicing rig is specially designed for periodic
maintenance of oil and gas wells for which service is required
to maximize the productive life of the wells. The primary
function of a well-servicing rig is to act as a hoist so that
pipe, sucker rods and down-hole equipment can be run into and
out of a well, although they also can perform standard drilling
functions. Because of size and cost considerations, these
specially designed rigs are used for these operations rather
than the larger drilling rigs typically used for the initial
drilling job.
Land-based drilling rigs are moved between well sites and
between geographic areas of operations by using our fleet of
cranes, loaders and transport vehicles or those from a
third-party service vendor. Well-servicing rigs are generally
self-propelled; heavier capacity workover rigs are either
self-propelled or trailer-mounted and include auxiliary
equipment, which is either transported on trailers or moved with
trucks.
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Table of Contents
| • | Platform Rigs. Platform rigs provide offshore workover, drilling and re-entry services. Our platform rigs have drilling and/or well-servicing or workover equipment and machinery arranged in modular packages that are transported to, and assembled and installed on, fixed offshore platforms owned by the customer. Fixed offshore platforms are steel tower-like structures that either stand on the ocean floor or are moored floating structures. The top portion, or platform, sits above the water level and provides the foundation upon which the platform rig is placed. | |
| • | Jack-up Rigs. Jack-up rigs are mobile, self-elevating drilling and workover platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the hull, which contains the drilling and/or workover equipment, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. The rig legs may operate independently or have a mat attached to the lower portion of the legs in order to provide a more stable foundation in soft bottom areas. Many of our jack-up rigs are of cantilever design — a feature that permits the drilling platform to be extended out from the hull, allowing it to perform drilling or workover operations over adjacent, fixed platforms. Nabors’ shallow workover jack-up rigs generally are subject to a maximum water depth of approximately 125 feet, while some of our jack-up rigs may drill in water depths as shallow as 13 feet. Nabors also has deeper water jack-up rigs that are capable of drilling at depths between eight feet and 150 to 250 feet. The water depth limit of a particular rig is determined by the length of its legs and by the operating environment. Moving a rig from one drill site to another involves lowering the hull down into the water until it is afloat and then jacking up its legs with the hull floating. The rig is then towed to the new drilling site. | |
| • | Inland Barge Rigs. One of Nabors’ barge rigs is a full-size drilling unit. We also own two workover inland barge rigs. These barges are designed to perform plugging and abandonment, well-service or workover services in shallow inland, coastal or offshore waters. Our barge rigs can operate at depths between three and 20 feet. |
Additional information regarding the geographic markets in which
we operate and our business segments can be found in
Note 21 — Segment Information in Part II,
Item 8. — Financial Statements and Supplementary
Data.
Customers:
Types of Drilling Contracts
Our customers include major oil and gas companies, foreign
national oil and gas companies and independent oil and gas
companies. No customer accounted for more than 10% of our
consolidated revenues in 2009 or 2008.
On land in the U.S. Lower 48 states and Canada, we
have historically been contracted on a single-well basis, with
extensions subject to mutual agreement on pricing and other
significant terms. Beginning in late 2004, as a result of
increasing demand for drilling services, our customers started
entering into longer term contracts with durations ranging from
one to three years. Under these contracts, our rigs are
committed to one customer over that term. Most of our recent
contracts for newly constructed rigs have three-year terms.
Contracts relating to offshore drilling and land drilling in
Alaska and international markets generally provide for longer
terms, usually from one to five years. Offshore workover
projects are often on a single-well basis. We generally are
awarded drilling contracts through competitive bidding, although
we occasionally enter into contracts by direct negotiation. Most
of our single-well contracts are subject to termination by the
customer on short notice, but some can be firm for a number of
wells or a period of time, and may provide for early termination
compensation in certain circumstances. Contract terms and rates
differ depending on a variety of factors, including competitive
conditions, the geographical area, the geological formation to
be drilled, the equipment and services to be supplied, the
on-site
drilling conditions and the anticipated duration of the work to
be performed.
In recent years, all of our drilling contracts have been daywork
contracts. A daywork contract generally provides for a basic
rate per day when drilling (the dayrate for our providing a rig
and crew) and for lower rates when the rig is moving, or when
drilling operations are interrupted or restricted by equipment
5
Table of Contents
breakdowns, adverse weather conditions or other conditions
beyond our control. In addition, daywork contracts may provide
for a lump sum fee for the mobilization and demobilization of
the rig, which in most cases approximates our incurred costs. A
daywork contract differs from a footage contract (in which the
drilling contractor is paid on the basis of a rate per foot
drilled) and a turnkey contract (in which the drilling
contractor is paid for drilling a well to a specified depth for
a fixed price).
Well-Servicing
and Workover Services
Although some wells in the United States flow oil to the surface
without mechanical assistance, most are in mature production
areas that require pumping or some other form of artificial
lift. Pumping oil wells characteristically require more
maintenance than flowing wells because of the operation of the
mechanical pumping equipment.
| • | Well-Servicing/Maintenance Services. We provide maintenance services on the mechanical apparatus used to pump or lift oil from producing wells. These services include, among other things, repairing and replacing pumps, sucker rods and tubing. They also occasionally include drilling services. We provide the rigs, equipment and crews for these tasks, which are performed on both oil and natural gas wells, but which are more commonly required on oil wells. Maintenance services typically take less than 48 hours to complete. Rigs generally are provided to customers on a call-out basis. We are paid an hourly rate and work typically is performed five days a week during daylight hours. | |
| • | Workover Services. Producing oil and natural gas wells occasionally require major repairs or modifications, called “workovers.” Workovers may be required to remedy failures, modify well depth and formation penetration to capture hydrocarbons from alternative formations, clean out and recomplete a well when production has declined, repair leaks or convert a depleted well to an injection well for secondary or enhanced recovery projects. Workovers normally are carried out with a rig that includes standard drilling accessories such as rotary drilling equipment, mud pumps, mud tanks and blowout preventers plus other specialized equipment for servicing rigs. A workover may last anywhere from a few days to several weeks. We are paid a daily rate and work is generally performed seven days a week, 24 hours a day. | |
| • | Completion Services. The kinds of activities necessary to carry out a workover operation are essentially the same as those that are required to “complete” a well when it is first drilled. The completion process may involve selectively perforating the well casing at the depth of discrete producing zones, stimulating and testing these zones and installing down-hole equipment. The completion process may take a few days to several weeks. We are paid an hourly rate and work is generally performed seven days a week, 24 hours a day. | |
| • | Production and Other Specialized Services. We also can provide other specialized services, including onsite temporary fluid storage; the supply, removal and disposal of specialized fluids used during certain completion and workover operations; and the removal and disposal of salt water that often accompanies the production of oil and natural gas. We also provide plugging services for wells from which the oil and natural gas has been depleted or further production has become uneconomical. We are paid an hourly or a per-unit rate, as applicable, for these services. |
Oil and
Gas Investments
Through our wholly owned Ramshorn business unit, we invest in
oil and gas exploration, development and production operations
in the United States, Canada and internationally. In addition,
in 2006, we entered into an agreement with First Reserve
Corporation to form select joint ventures to invest in oil and
gas exploration opportunities worldwide. During 2007, three
joint ventures were formed for operations in the United States,
Canada and International areas. We hold a 50% ownership interest
in the Canadian entity and 49.7% ownership interests in the
U.S. and international entities. We account for these
investments using the equity method of accounting. Each joint
venture pursues development and exploration projects with both
existing Nabors customers and other operators in a variety of
forms, including operated and non-operated working interests,
joint ventures, farm-outs and acquisitions. Our Ramshorn
business unit through both wholly
6
Table of Contents
owned and joint venture operations is focused on the exploration
for and the acquisition, development and production of natural
gas, oil and natural gas liquids in Alaska, Arkansas, Louisiana,
Oklahoma, Mississippi, Montana, North Dakota, Texas, Utah and
Wyoming. Outside of the United States, we and our joint ventures
own or have interests in the Canadian provinces of Alberta and
British Columbia and in Colombia.
Additional information about recent activities for this segment
can be found in Part II, Item 7. —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Oil and Gas.
Other
Services
Canrig Drilling Technology Ltd., our drilling technologies and
well services subsidiary, manufactures top drives, which are
installed on both onshore and offshore drilling rigs. We market
our top drives throughout the world. During the last three
years, approximately 41% of our top drive sales were made to
other Nabors companies. We also rent top drives and catwalks,
and provide installation, repair and maintenance services to our
customers. We also offer rig instrumentation equipment,
including proprietary
RIGWATCH
tm
software and computerized equipment that monitors a rig’s
real-time performance. Our directional drilling system,
ROCKIT
tm
,
is experiencing high growth in the marketplace. In addition, we
specialize in daily reporting software for drilling operations,
making this data available through the internet. We also provide
mudlogging services. Canrig Drilling Technology Canada Ltd., one
of our Canadian subsidiaries, manufactures catwalks which are
installed on both onshore and offshore drilling rigs. During the
last three years, approximately 63% of our equipment sales were
made to other Nabors companies. Ryan Energy Technologies, Inc.,
another one of our subsidiaries, manufactures and sells
directional drilling and rig instrumentation equipment and
provides data collection services to oil and gas exploration and
service companies. Nabors has a 50% ownership interest in Peak
Oilfield Service Company, a general partnership with a
subsidiary of Cook Inlet Region, Inc., a leading Alaskan native
corporation. Peak Oilfield Service Company provides heavy
equipment to move drilling rigs, water, other fluids and
construction materials, primarily on Alaska’s North Slope
and in the Cook Inlet region. The partnership also provides
construction and maintenance for ice roads, pads, facilities,
equipment, drill sites and pipelines. Nabors also has a 50%
membership interest in Alaska Interstate Construction, L.L.C., a
general contractor involved in the construction of roads,
bridges, dams, drill sites and other facility sites, as well as
the provision of mining support in Alaska; the other member of
Alaska Interstate Construction, L.L.C. is a subsidiary of Cook
Inlet Region, Inc. Revenues are derived from services to
companies engaged in mining and public works. Nabors Blue Sky
Ltd. leases aircraft used for logistics services for onshore
drilling in Canada using helicopters and fixed-wing aircraft.
Our
Employees
As of December 31, 2009, Nabors employed approximately
18,390 persons, of whom approximately 3,148 were employed
by unconsolidated affiliates. We believe our relationship with
our employees is generally good.
Some rig employees in Argentina and Australia are represented by
collective bargaining units.
Seasonality
Our Canadian and Alaskan drilling and workover operations are
subject to seasonal variations as a result of weather conditions
and generally experience reduced levels of activity and
financial results during the second quarter of each year. Global
warming could lengthen these periods of reduced activity, but we
cannot currently estimate to what degree. Seasonality does not
materially impact the remaining portions of our business. Our
overall financial results reflect the seasonal variations
experienced in our Canadian and Alaskan operations.
Research
and Development
Research and development constitutes a growing part of our
overall business. The effective use of technology is critical to
maintaining our competitive position within the drilling
industry. We expect to continue developing technology internally
and acquiring technology through strategic acquisitions.
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Table of Contents
Industry/Competitive
Conditions
To a large degree, Nabors’ businesses depend on the level
of capital spending by oil and gas companies for exploration,
development and production activities. A sustained increase or
decrease in the price of natural gas or oil could have a
material impact on exploration, development and production
activities by our customers and could materially affect our
financial position, results of operations and cash flows. See
Part I, Item 1A. — Risk Factors —
Fluctuations in oil and natural gas prices could adversely
affect drilling activity and our revenues, cash flows and
profitability
.
Our industry remains competitive. Historically, the number of
available rigs has exceeded demand in many of our markets. The
land drilling, workover and well-servicing market is generally
more competitive than the offshore market due to the larger
number of rigs and market participants. From 2005 through most
of 2008, demand was strong for drilling services driven by a
sustained increase in the level of commodity prices; supply of
and demand for land drilling services were in balance in the
United States and international markets, with demand actually
exceeding supply in some of our markets. This resulted in an
increase in rates being charged for rigs across our North
American, Offshore and International markets. In late 2008,
falling oil prices and the declines in natural gas prices forced
a curtailment of drilling-related expenditures by many companies
and resulted in an oversupply of rigs in the markets where we
operate. During 2009, this continued decline in drilling and
related activity impacted our key markets. Although many rigs
can be readily moved from one region to another in response to
changes in levels of activity and many of the total available
contracts are currently awarded on a bid basis, competition
increases based on the price and supply of existing and new rigs
across all of our markets.
In all of our geographic markets, we believe price and the
availability and condition of equipment are the most significant
factors in determining which drilling contractor is awarded a
job. Other factors include the availability of trained personnel
possessing the required specialized skills; the overall quality
of service and safety record; and the ability to offer ancillary
services. Increasingly, the ability to deliver rigs with new
technology and features is becoming a competitive factor. In
international markets, experience in operating in certain
environments, as well as customer alliances have been factors in
the selection of Nabors.
Certain competitors are present in more than one of Nabors’
operating regions, although no one competitor operates in all of
these areas. In the U.S. Lower 48 states, we compete
with Helmerich and Payne, Inc. and Patterson-UTI Energy, Inc.,
and several hundred other competitors with national, regional or
local rig operations. In domestic land workover and
well-servicing, we compete with Basic Energy Services, Inc., Key
Energy Services, Inc., Complete Energy Services and with
numerous other competitors having smaller regional or local rig
operations. In Canada and Offshore, we compete with many firms
of varying size, several of which have more significant
operations in those areas than Nabors. Internationally, we
compete directly with various contractors at each location where
we operate. We believe that the market for land drilling,
workover and well-servicing contracts will continue to be
competitive for the foreseeable future.
Our other operating segments represent a relatively smaller part
of our business, and we have numerous competitors in each area.
Our Canrig Drilling Technology Ltd. subsidiary is one of the
four major manufacturers of top drives. Its largest competitors
in that market are National Oilwell Varco, Tesco and MH Pyramid.
Its largest competitors in the manufacture of rig
instrumentation systems are Pason and National Oilwell
Varco’s Totco subsidiary. Mudlogging services are provided
by a number of entities that serve the oil and gas industry on a
regional basis. In the U.S. Lower 48 states, there are
hundreds of rig transportation companies in each of our
operating regions. In Alaska, Peak Oilfield Service principally
competes with Alaska Petroleum Contractors for road, pad and
pipeline maintenance, and is one of many drill site and road
construction companies, the largest of which is VECO
Corporation, and Alaska Interstate Construction principally
competes with Granite Construction Company, NANA and Pah River
Construction for the construction of roads, bridges, dams, drill
sites and other facility sites.
Our
Business Strategy
Since 1987, with the installation of our current management
team, we have adhered to a consistent strategy aimed at
positioning Nabors to grow and prosper in times of good market
conditions and to mitigate
8
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adverse effects during periods of poor market conditions. We
have maintained a financial posture that allows us to capitalize
on market weakness and strength by adding to our business base,
thereby enhancing our upside potential. The principal elements
of our strategy have been to:
| • | Maintain flexibility to respond to changing conditions. | |
| • | Maintain a conservative and flexible balance sheet. | |
| • | Build cost effectively a base of premium assets. | |
| • | Build and maintain low operating costs through economies of scale. | |
| • | Develop and maintain long-term, mutually attractive relationships with key customers and vendors. | |
| • | Build a diverse business in long-term, sustainable and worthwhile geographic markets. | |
| • | Recognize and seize opportunities as they arise. | |
| • | Continually improve safety, quality and efficiency. | |
| • | Implement leading-edge technology where cost effective to do so. | |
| • | Build shareholder value by expanding our oil and gas reserves and production. |
Our business strategy is designed to allow us to grow and remain
profitable in any market environment. The major developments in
our business in recent years illustrate our implementation of
this strategy and its continuing success. Beginning in 2005, we
took advantage of the robust rig market in the United States and
internationally to obtain a high volume of contracts for newly
constructed rigs. A large proportion of these rigs are subject
to long-term contracts with creditworthy customers with the most
significant impact occurring in our International operations.
This will not only expand our operations with the latest
state-of-the-art
rigs, which should better weather downturns in market activity,
but eventually replace the oldest and least capable rigs in our
existing fleet. However, this positive trend in the rig market
slowed in the fourth quarter of 2008 and throughout much of
2009, due to the continued steady decline in natural gas and oil
prices. As a result of lower commodity prices, many of our
customers’ drilling programs were reduced and the demand
for additional rigs was substantially reduced. Although we
expect market conditions to remain challenging during 2010, we
believe the deployment of our newer and higher margin rigs under
long-term contracts will enhance our competitive position when
market conditions improve.
Acquisitions
and Divestitures
We have grown from a land drilling business centered in the
U.S. Lower 48 states, Canada and Alaska to an
international business with operations on land and offshore in
many of the major oil, gas and geothermal markets in the world.
At the beginning of 1990, our fleet consisted of 44 actively
marketed land drilling rigs in Canada, Alaska and in various
international markets. Today, our worldwide fleet of actively
marketed rigs consists of approximately 542 land drilling
rigs, approximately 558 rigs for land workover and
well-servicing
work in the United States and 172 rigs for land workover and
well-servicing work in Canada, 40 offshore platform rigs, 13
jack-up
units, 3 barge rigs and a large component of trucks and fluid
hauling vehicles. This growth was fueled in part by strategic
acquisitions. Although Nabors continues to examine
opportunities, there can be no assurance that attractive rigs or
other acquisition opportunities will continue to be available,
that the pricing will be economical or that we will be
successful in making such acquisitions in the future.
On January 3, 2006, we completed an acquisition of 1183011
Alberta Ltd., a wholly owned subsidiary of Airborne Energy
Solutions Ltd., through the purchase of all common shares
outstanding for cash for a total purchase price of
Cdn.$41.7 million (U.S. $35.8 million). In
addition, we assumed debt, net of working capital, totaling
approximately Cdn.$10.0 million
(U.S. $8.6 million). On this date, Nabors Blue Sky
Ltd. (formerly 1183011 Alberta Ltd.) owned 42 helicopters and
fixed-wing aircraft and owned and operated a fleet of
heliportable well-service equipment. The purchase price was
allocated based on final valuations of the fair value of assets
acquired and liabilities assumed as of the acquisition date and
resulted in goodwill of approximately
U.S. $18.8 million. During 2008 and 2009, the results
of our impairment tests of goodwill and
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intangible assets indicated a permanent impairment to goodwill
and to an intangible asset of Nabors Blue Sky Ltd. As such, the
goodwill has been fully impaired as of December 31, 2009.
See Note 2 — Summary of Significant Accounting
Policies in Part II, Item 8 — Financial
Statements and Supplementary Data.
On May 31, 2006, we completed an acquisition of Pragma
Drilling Equipment Ltd.’s business, which manufactures
catwalks, iron roughnecks and other related oilfield equipment,
through an asset purchase consisting primarily of intellectual
property for a total purchase price of Cdn.$46.1 million
(U.S. $41.5 million). The purchase price has been
allocated based on final valuations of the fair market value of
assets acquired and liabilities assumed as of the acquisition
date and resulted in goodwill of approximately
U.S. $10.5 million.
On August 8, 2007, we sold our Sea Mar business which had
previously been included in Other Operating Segments. The assets
included 20 offshore supply vessels and related assets,
including a right under a vessel construction contract. The
operating results of this business for all periods presented are
accounted for as a discontinued operation in the accompanying
audited consolidated statements of income (loss).
From time to time, we may sell a subsidiary or group of assets
outside of our core markets or business, if it is economically
advantageous for us to do so.
Environmental
Compliance
Nabors does not currently anticipate that compliance with
currently applicable environmental regulations and controls will
significantly change its competitive position, capital spending
or earnings during 2010. Nabors believes it is in material
compliance with applicable environmental rules and regulations,
and the cost of such compliance is not material to the business
or financial condition of Nabors. For a more detailed
description of the environmental laws and regulations applicable
to Nabors’ operations, see Part I,
Item 1A. — Risk Factors —
Changes to
or noncompliance with governmental regulation or exposure to
environmental liabilities could adversely affect Nabors’
results of operations.
| ITEM 1A. | RISK FACTORS |
In addition to the other information set forth elsewhere in this
report, the following factors should be carefully considered
when evaluating Nabors. The risks described below are not the
only ones facing Nabors. Additional risks not presently known to
us or that we currently deem immaterial may also impair our
business operations.
Our business, financial condition or results of operations could
be materially adversely affected by any of these risks.
Uncertain
or negative global economic conditions could continue to
adversely affect our results of operations
The recent and substantial volatility and extended declines in
oil and natural gas prices in response to a weakened global
economic environment has adversely affected our results of
operations. In addition, economic conditions have resulted in
substantial uncertainty in the capital markets and both access
to and terms of available financing. Many of our customers have
curtailed their drilling programs, which, in many cases, has
resulted in a decrease in demand for drilling rigs and a
reduction in dayrates and utilization. Additionally, some
customers have terminated drilling contracts prior to the
expiration of their terms. A prolonged period of lower oil and
natural gas prices could continue to impact our industry and our
business, including our future operating results and the ability
to recover our assets, including goodwill, at their stated
values. In addition, some of our customers could experience an
inability to pay suppliers, including us, in the event they are
unable to access the capital markets to fund their business
operations. Likewise, our suppliers may be unable to sustain
their current level of operations, fulfill their commitments
and/or
fund
future operations and obligations. Each of these could adversely
affect our operations.
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Fluctuations
in oil and natural gas prices could adversely affect drilling
activity and our revenues, cash flows and
profitability
Our operations depend on the level of spending by oil and gas
companies for exploration, development and production
activities. Both short-term and long-term trends in oil and
natural gas prices affect these levels. Oil and natural gas
prices, as well as the level of drilling, exploration and
production activity, can be highly volatile. Worldwide military,
political and economic events, including initiatives by the
Organization of Petroleum Exporting Countries, affect both the
demand for, and the supply of, oil and natural gas. Weather
conditions, governmental regulation (both in the United States
and elsewhere), levels of consumer demand, the availability of
pipeline capacity, and other factors beyond our control may also
affect the supply of and demand for oil and natural gas. Recent
volatility and the effects of recent declines in oil and natural
gas prices are likely to continue in the near future, especially
given the general contraction in the world’s economy that
began during 2008. We believe that any prolonged suppression of
oil and natural gas prices could continue to depress the level
of exploration and production activity. Lower oil and natural
gas prices have also caused some of our customers to seek to
terminate, renegotiate or fail to honor our drilling contracts
and affected the fair market value of our rig fleet, which in
turn has resulted in impairments of our assets. A prolonged
period of lower oil and natural gas prices could affect our
ability to retain skilled rig personnel and affect our ability
to access capital to finance and grow our business. There can be
no assurances as to the future level of demand for our services
or future conditions in the oil and natural gas and oilfield
services industries.
We
have a substantial amount of debt outstanding
As of December 31, 2009, we had long-term debt outstanding
of approximately $3.9 billion, including $.2 million
in current maturities and $1.6 billion in long-term debt
that matures in May 2011, and cash and cash equivalents and
investments of $1.2 billion, including $100.9 million
of long-term investments and other receivables. Long-term
investments and other receivables include $92.5 million in
oil and gas financing receivables. Our ability to service our
debt obligations depends in large part upon the level of cash
flows generated by our subsidiaries’ operations and our
access to capital markets. If our 0.94% senior exchangeable
notes were exchanged before their maturity in May 2011, the
required cash payment could have a significant impact on our
level of cash and cash equivalents and investments available to
meet our other cash obligations. We calculate our leverage in
relation to our capital (i.e., shareholders’ equity)
utilizing two commonly used ratios:
| • | Gross funded debt to capital ratio, which is calculated by dividing (x) funded debt by (y) funded debt plus deferred tax liabilities (net of deferred tax assets) plus capital. Funded debt is the sum of (1) short-term borrowings, (2) the current portions of long-term debt and (3) long-term debt; and | |
| • | Net funded debt to capital ratio, which is calculated by dividing (x) net funded debt by (y) net funded debt plus deferred tax liabilities (net of deferred tax assets) plus capital. Net funded debt is funded debt minus the sum of cash and cash equivalents and short-term and long-term investments and other receivables. |
At December 31, 2009, our gross funded debt to capital
ratio was 0.41:1 and our net funded debt to capital ratio was
0.33:1.
As a
holding company, we depend on our subsidiaries to meet our
financial obligations
We are a holding company with no significant assets other than
the stock of our subsidiaries. In order to meet our financial
needs, we rely exclusively on repayments of interest and
principal on intercompany loans that we have made to our
operating subsidiaries and income from dividends and other cash
flow from our subsidiaries. There can be no assurance that our
operating subsidiaries will generate sufficient net income to
pay us dividends or sufficient cash flow to make payments of
interest and principal to us. In addition, from time to time,
our operating subsidiaries may enter into financing arrangements
that contractually restrict or prohibit these types of upstream
payments to us. There can also be adverse tax consequences
associated with paying dividends.
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Our
access to borrowing capacity could be affected by the recent
instability in the global financial markets
Our ability to access capital markets or to otherwise obtain
sufficient financing is enhanced by our senior unsecured debt
ratings as provided by Fitch Ratings, Moody’s Investor
Service and Standard & Poor’s, which are
currently “BBB+,” “Baa1” and
“BBB+”, respectively, and our historical ability to
access those markets as needed. Standard & Poor’s
recently affirmed its “BBB+” credit rating on Nabors,
but revised its outlook to negative from stable in early 2009
due primarily to worsening industry conditions. A credit
downgrade may impact our future ability to access credit
markets, which is important for purposes of both meeting our
financial obligations and funding capital requirements to
finance and grow our businesses.
We
operate in a highly competitive industry with excess drilling
capacity, which may adversely affect our results of
operations
The oilfield services industry is very competitive. Contract
drilling companies compete primarily on a regional basis, and
competition may vary significantly from region to region at any
particular time. Many drilling, workover and well-servicing rigs
can be moved from one region to another in response to changes
in levels of activity and market conditions, which may result in
an oversupply of rigs in an area. In many markets in which we
operate, the number of rigs available for use exceeds the demand
for rigs, resulting in price competition. Most drilling and
workover contracts are awarded on the basis of competitive bids,
which also results in price competition. The land drilling
market generally is more competitive than the offshore drilling
market because there are larger numbers of rigs and competitors.
The
nature of our operations presents inherent risks of loss that,
if not insured or indemnified against, could adversely affect
our results of operations
Our operations are subject to many hazards inherent in the
drilling, workover and well-servicing industries, including
blowouts, cratering, explosions, fires, loss of well control,
loss of hole, damaged or lost drilling equipment and damage or
loss from inclement weather or natural disasters. Any of these
hazards could result in personal injury or death, damage to or
destruction of equipment and facilities, suspension of
operations, environmental damage and damage to the property of
others. Our offshore operations are also subject to the hazards
of marine operations including capsizing, grounding, collision,
damage from hurricanes and heavy weather or sea conditions and
unsound ocean bottom conditions. In addition, our international
operations are subject to risks of war, civil disturbances or
other political events. Generally, drilling contracts provide
for the division of responsibilities between a drilling company
and its customer, and we seek to obtain indemnification from our
customers by contract for some of these risks. To the extent
that we are unable to transfer these risks to customers by
contract or indemnification agreements, we seek protection
through insurance. However, there is no assurance that our
insurance or indemnification agreements will adequately protect
us against liability from all of the consequences of the hazards
described above. The occurrence of an event not fully insured or
indemnified against, or the failure or inability of a customer
or insurer to meet its indemnification or insurance obligations,
could result in substantial losses. In addition, there can be no
assurance that insurance will be available to cover any or all
of these risks. Even if available, insurance may be inadequate
or insurance premiums or other costs may rise significantly in
the future making insurance prohibitively expensive. We expect
to continue to face upward pressure in our insurance renewals;
our premiums and deductibles may be higher, and some insurance
coverage may either be unavailable or more expensive than it has
been in the past. Moreover, our insurance coverage generally
provides that we assume a portion of the risk in the form of a
deductible. We may choose to increase the levels of deductibles
(and thus assume a greater degree of risk) from time to time in
order to minimize our overall costs.
Future
price declines may result in a writedown of our oil and gas
asset carrying values
We follow the successful-efforts method of accounting for our
consolidated subsidiaries’ oil and gas activities. Under
the successful-efforts method, lease acquisition costs and all
development costs are capitalized. Our provision for depletion
is based on these capitalized costs and is determined on a
property-by-property
basis using the
units-of-production
method. Proved property acquisition costs are
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amortized over total proved reserves. Costs of wells and related
equipment and facilities are amortized over the life of proved
developed reserves. Proved oil and gas properties are reviewed
when circumstances suggest the need for such a review and are
written down to their estimated fair value, if required.
Unproved properties are reviewed periodically to determine if
there has been impairment of the carrying value; any impairment
is expensed in that period. The estimated fair value of our
proved reserves generally declines when there is a significant
and sustained decline in oil and natural gas prices. During
2009, 2008 and 2007, our impairment tests on the oil and
gas-related assets of our wholly owned Ramshorn business unit
resulted in impairment charges of $205.9 million,
$21.5 million and $41.0 million, respectively. Any
sustained further decline in oil and natural gas prices or
reserve quantities could require further writedown of the value
of our proved oil and gas properties if the estimated fair value
of these properties falls below their net book value.
Our unconsolidated oil and gas joint ventures, which we account
for under the equity method of accounting, utilize the full-cost
method of accounting for costs related to oil and natural gas
properties. Under this method, all of these costs (for both
productive and nonproductive properties) are capitalized and
amortized on an aggregate basis over the estimated lives of the
properties using the
units-of-production
method. However, these capitalized costs are subject to a
ceiling test which limits the costs to the aggregate of
(i) the present value of future net revenues attributable
to proved oil and natural gas reserves, discounted at 10%, plus
(ii) the lower of cost or market value of unproved
properties. The full-cost ceiling was evaluated at
December 31, 2009 using the
12-month
average price, whereas during 2008 and 2007, the full-cost
ceiling was evaluated using year-end prices. During 2009 and
2008, our unconsolidated oil and gas joint ventures recorded
full-cost ceiling test writedowns, of which $237.1 million
and $228.3 million, respectively, represented our
proportionate share. During 2007, our joint ventures did not
record full-cost ceiling test writedowns. Any sustained further
decline in oil and natural gas prices, or other factors, without
other mitigating circumstances, could cause other future
writedowns of capitalized costs and asset impairments that could
adversely affect our results of operations.
The
profitability of our operations outside the United States could
be adversely affected by war, civil disturbance, or political or
economic turmoil, fluctuation in currency exchange rates and
local import and export controls
We derive a significant portion of our business from
international markets, including major operations in Canada,
South America, Mexico, the Caribbean, the Middle East, the Far
East, Russia and Africa. These operations are subject to various
risks, including the risk of war, civil disturbances and
governmental activities that may limit or disrupt markets,
restrict the movement of funds or result in the deprivation of
contract rights or the taking of property without fair
compensation. In certain countries, our operations may be
subject to the additional risk of fluctuating currency values
and exchange controls, such as the recent foreign currency
devaluation in Venezuela. In the international markets where we
operate, we are subject to various laws and regulations that
govern the operation and taxation of our business and the import
and export of our equipment from country to country, the
imposition, application and interpretation of which can prove to
be uncertain.
The
loss of key executives could reduce our competitiveness and
prospects for future success
The successful execution of our strategies central to our future
success will depend, in part, on a few of our key executive
officers. We have entered into employment agreements with our
Chairman and Chief Executive Officer, Mr. Eugene M.
Isenberg and our Deputy Chairman, President and Chief Operating
Officer, Mr. Anthony G. Petrello, with terms through
March 30, 2013. If either Mr. Isenberg’s or
Mr. Petrello’s employment is terminated in the event
of death or disability, or without cause or in the event of a
change in control, significant cash payments up to
$100 million and $50 million, respectively, would be
made by the Company. We do not carry significant amounts of key
man insurance. The loss of Mr. Isenberg or
Mr. Petrello could have an adverse effect on our financial
condition or results of operations.
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Changes
to or noncompliance with governmental regulation or exposure to
environmental liabilities could adversely affect our results of
operations
The drilling of oil and gas wells is subject to various federal,
state and local laws, rules and regulations. Our cost of
compliance with these laws, rules and regulations may be
substantial. For example, federal law imposes on
“responsible parties” a variety of regulations related
to the prevention of oil spills, and liability for damages from
such spills. As an owner and operator of onshore and offshore
rigs and transportation equipment, we may be deemed to be a
responsible party under federal law. In addition, our
well-servicing, workover and production services operations
routinely involve the handling of significant amounts of waste
materials, some of which are classified as hazardous substances.
Various state and federal laws govern the containment and
disposal of hazardous substances, oilfield waste and other waste
materials, the use of underground storage tanks and the use of
underground injection wells.
We employ personnel responsible for monitoring environmental
compliance and arranging for remedial actions that may be
required from time to time and also use consultants to advise on
and assist with our environmental compliance efforts.
Liabilities are recorded when the need for environmental
assessments
and/or
remedial efforts become known or probable and the cost can be
reasonably estimated.
The scope of laws protecting the environment has expanded,
particularly outside the U.S., and this trend is expected to
continue. The violation of environmental laws and regulations
can lead to the imposition of administrative, civil or criminal
penalties, remedial obligations, and in some cases injunctive
relief. Violations may also result in liabilities for personal
injuries, property damage and other costs and claims. We
generally require customers to assume responsibility for
environmental liabilities. However, we are not always successful
in allocating all of these risks to customers, and there is no
assurance that customers who assume the risks will be
financially able to bear them.
Under the Comprehensive Environmental Response, Compensation and
Liability Act, also known as CERCLA or Superfund, and similar
state laws and regulations, liability for release of a hazardous
substance into the environment can be imposed jointly on the
entire group of responsible parties or separately on any one of
the responsible parties, without regard to fault or the legality
of the original conduct of any party that contributed to the
release. Liability under CERCLA may include costs of cleaning up
the hazardous substances that have been released into the
environment and damages to natural resources.
Changes in U.S. federal and state environmental regulations may
also negatively impact oil and natural gas exploration and
production companies, which in turn could have an adverse effect
on us. For example, legislation has been proposed from time to
time in the U.S. Congress that would reclassify some oil and
natural gas production wastes as hazardous wastes, which would
make the reclassified wastes subject to more stringent handling,
disposal and
clean-up
requirements. Also, regulators in the United States and other
jurisdictions in which we operate are increasingly focused on
restricting the emission of carbon dioxide, methane and other
greenhouse gases that may contribute to warming of the
Earth’s atmosphere, including the United Nations Framework
Convention on Climate Change, also known as the “Kyoto
Protocol” (an internationally applied protocol of which the
United States is not a participating member), the Regional
Greenhouse Gas Initiative in the Northeastern United States, the
Western Regional Climate Action Initiative in the Western United
States, and the 2007 U.S. Supreme Court decision in
Massachusetts, et al. v. EPA
that greenhouse gases
are an “air pollutant” under the federal Clean Air Act
and thus subject to future regulation. The enactment of such
hazardous waste legislation or future or more stringent
regulation of greenhouse gases could dramatically increase
operating costs for oil and natural gas companies and could
reduce the market for our services by making many wells
and/or
oilfields uneconomical to operate.
The U.S. Oil Pollution Act of 1990, as amended, contains
provisions specifying responsibility for removal costs and
damages resulting from discharges of oil into navigable waters
or onto the adjoining shorelines. In addition, the Outer
Continental Shelf Lands Act provides the federal government with
broad discretion in regulating the leasing of offshore oil and
gas production sites.
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Because
our option, warrant and convertible securities holders have a
considerable number of common shares available for issuance and
resale, significant issuances or resales in the future could
adversely affect the market price of our common
shares
As of February 24, 2010, we had 800,000,000 authorized
common shares, of which 284,669,913 shares were
outstanding. In addition, 40,641,861 common shares were reserved
for issuance pursuant to option and employee benefit plans, and
78,013,925 shares were reserved for issuance upon
conversion or repurchase of outstanding senior exchangeable
notes. The sale, or availability for sale, of substantial
amounts of our common shares in the public market, whether
directly by us or resulting from the exercise of warrants or
options (and, where applicable, sales pursuant to Rule 144
under the Securities Act) or the conversion into common shares,
or repurchase of debentures and notes using common shares, would
be dilutive to existing security holders, could adversely affect
the prevailing market price of our common shares and could
impair our ability to raise additional capital through the sale
of equity securities.
Provisions
in our organizational documents and executive contracts may
deter a change of control transaction and decrease the
likelihood of a shareholder receiving a change of control
premium
Our Board of Directors is divided into three classes, with each
class serving a staggered three-year term. In addition, the
Board of Directors has the authority to issue a significant
number of common shares and up to 25,000,000 preferred shares
and to determine the price, rights (including voting rights),
conversion ratios, preferences and privileges of the preferred
shares, in each case without any vote or action by the holders
of our common shares. Although we have no current plans to issue
preferred shares, our classified Board, as well as its ability
to issue preferred shares, may discourage, delay or prevent
changes in control of Nabors that are not supported by the
Board, thereby preventing some of our shareholders from
realizing a premium on their shares. In addition, the
requirement in the indenture for our 0.94% senior
exchangeable notes due 2011 to pay a make-whole premium in the
form of an increase in the exchange rate in certain
circumstances could have the effect of making a change in
control of Nabors more expensive.
We have employment agreements with our Chairman and Chief
Executive Officer, Eugene M. Isenberg, and our Deputy Chairman,
President and Chief Operating Officer, Anthony G. Petrello.
These agreements have
change-in-control
provisions that could result in significant cash payments to
Messrs. Isenberg and Petrello.
We may
have additional tax liabilities
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 under audit 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 also
possible that future changes to tax laws (including tax
treaties) could impact our ability to realize the tax savings
recorded to date.
On September 14, 2006, Nabors Drilling International
Limited, one of our wholly owned Bermuda subsidiaries
(“NDIL”), received a Notice of Assessment (the
“Notice”) from Mexico’s federal tax authorities
in connection with the audit of NDIL’s Mexican 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 and more recently that the government’s
position lacks merit. NDIL’s Mexican branch took similar
deductions for depreciation and labor expenses from 2004 to
2008. On June 30, 2009, the government proposed similar
assessments against the Mexican 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 2004
through 2008 and against NDIL II for 2007 to 2009. We believe
that the potential assessments will range from $6 million
to
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$26 million per year for the period from 2004 to 2009, and
in the aggregate, would be approximately $90 million to
$95 million. Although we believe that any assessments
related to the 2004 to 2009 years would also lack merit, a
reserve has been recorded in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”). If these additional assessments were to be
made and we ultimately did not prevail, we would be required to
recognize additional tax for the amount of the aggregate over
the current reserve.
Proposed
tax legislation could mitigate or eliminate the benefits of our
2002 reorganization as a Bermuda company
Various bills have been introduced in Congress that could reduce
or eliminate the tax benefits associated with our reorganization
as a Bermuda company. Legislation enacted by Congress in 2004
provides that a corporation that reorganized in a foreign
jurisdiction on or after March 4, 2003 be treated as a
domestic corporation for United States federal income tax
purposes. Nabors’ reorganization was completed
June 24, 2002. There have been and we expect that there may
continue to be legislation proposed by Congress from time to
time which, if enacted, could limit or eliminate the tax
benefits associated with our reorganization.
Because we cannot predict whether legislation will ultimately be
adopted, no assurance can be given that the tax benefits
associated with our reorganization will ultimately accrue to the
benefit of the Company and its shareholders. It is possible that
future changes to the 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 reorganization.
Legal
proceedings could affect our financial condition and results of
operations
We are subject to legal proceedings and governmental
investigations from time to time that include employment, tort,
intellectual property and other claims, and purported class
action and shareholder derivative actions. We are also subject
to complaints and allegations from former, current or
prospective employees from time to time, alleging violations of
employment-related laws. Lawsuits or claims could result in
decisions against us that could have an adverse effect on our
financial condition or results of operations.
Our
financial results could be affected by changes in the value of
our investment portfolio
We invest our excess cash in a variety of investment vehicles,
some of which are subject to market fluctuations resulting from
a variety of economic factors or factors associated with a
particular investment, including without limitation, overall
declines in the equity markets, currency and interest rate
fluctuations, volatility in the credit markets, exposures
related to concentrations of investments in a particular fund or
investment, exposures related to hedges of financial positions,
and the performance of a particular fund or investment managers.
As a result, events or developments that negatively affect the
value of our investments could have an adverse effect on our
results of operations.
We do
not currently intend to pay dividends
We have not paid any cash dividends on our common shares since
1982 and have no current intention to do so. However, we can
give no assurance that we will not reevaluate our position on
dividends in the future.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
Many of the international drilling rigs and some of the Alaska
rigs in our fleet are supported by mobile camps which house the
drilling crews and a significant inventory of spare parts and
supplies. In addition, we own various trucks, forklifts, cranes,
earth-moving and other construction and transportation
equipment, including various helicopters, fixed-wing aircraft
and heliportable well-service equipment, which are used to
support drilling and logistics operations.
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Nabors and its subsidiaries own or lease executive and
administrative office space in Hamilton, Bermuda (principal
executive office); Anchorage, Alaska; Romance, Arkansas; New
Iberia and Youngsville, Louisiana; Bakersfield, Coalinga, Rancho
Dominguez-Compton and Ventura, California; Duson, Houma,
Lafayette, Minden, New Iberia, Shreveport and Youngsville,
Louisiana; Laurel, Mississippi; Alice, Andrews, Big Lake, Big
Spring, Breckenridge, Bridgeport, Bryan, Corpus Christi, Crane,
Cresson, Crosby, Decator, Denver City, El Campo, Fairfield,
Fort Stockton, Haslet, Hillsboro, Houston, Iraan, Kilgore,
La Grange, Longview, Magnolia, Midland, Mission, Monohans,
Nacogdoches, Odessa, Ozona, Palestine, San Angelo, Snyder,
Sonora, Three Rivers and Victoria, Texas; Roosevelt, Utah;
Casper, Wyoming; El Reno, Enid, Hartshorne, Lindsay, Oklahoma
City, Pocola and Weatherford, Oklahoma; Baker, Billings and
Plentywood, Montana; Belfield and Williston, North Dakota;
Carlsbad, Eunice and Hobbs, New Mexico; Denver,
Fort Lupton, Fruita and Grand Junction, Colorado; Casper
and Rock Springs, Wyoming; Mendoza, Argentina; Victoria,
Australia; Santa Cruz, Bolivia; Alberta, Brooks, Clairmont,
Drayton Valley, Leduc, Lloydminster, Nisku, Slave Lake and
Whitecourt, Canada; Bogota, Colombia; Quito, Ecuador; Mumbai,
India; Dubai, U.A.E.; Dhahran, Saudi Arabia; Hassi-Messaoud,
Algeria; Atyrau and East Ahmadi, Kazakhstan; Ahmadi, Kuwait;
Tripoli, Libya; CD Del Carmen, Mexico; Azaira and Muscat, Oman;
Guanghan, Peoples Republic of China; Doha, Qatar; Luanda,
Republic of Angola; Port Gentil, Republic of Gabon; Kuala
Lumpur, Malaysia; Pointe Noire, Congo; Moscow, Russia; Ploeisti,
Romania; Maracaibo, Venezuela; Perth, Western Australia; and
Sana’a, Yemen. We also own or lease a number of facilities
and storage yards used in support of operations in each of our
geographic markets.
Nabors and its subsidiaries own certain mineral interests in
connection with their investing and operating activities.
Additional information about our properties can be found in
Notes 2 — Summary of Significant Accounting
Policies and 8 — Property, Plant and Equipment (each,
under the caption Property, Plant and Equipment) and
15 — Commitments and Contingencies (under the caption
Operating Leases) in Part II, Item 8. —
Financial Statements and Supplementary Data. The revenues and
property, plant and equipment by geographic area for the years
ended December 31, 2009, 2008 and 2007, can be found in
Note 21 — Segment Information. A description of
our rig fleet is included under the caption Introduction in
Part I, Item 1. — Business.
Management believes that our existing equipment and facilities
are adequate to support our current level of operations as well
as an expansion of drilling operations in those geographical
areas where we may expand.
| ITEM 3. | LEGAL PROCEEDINGS |
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 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. 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 one of our vendors and compliance with the Foreign
Corrupt Practices Act. The inquiry relates to transactions with
and involving Panalpina, which provides freight-forwarding and
customs-clearance services to some of our affiliates. To date,
the inquiry has 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. The Audit Committee has received
periodic updates at its regularly scheduled meetings and the
Chairman of the Audit Committee has received updates between
meetings as circumstances warrant. The investigation includes a
review of certain amounts paid to and by Panalpina in connection
with
17
Table of Contents
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
Company’s investigation. The ultimate outcome of this
investigation or the effect of implementing any further measures
that may be necessary to ensure full compliance with applicable
laws cannot be determined at this time.
A court 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
is excessive. We have asserted the lack of legally required
notice as a basis for challenging the judgment on appeal to the
Algeria Supreme Court. Based upon our understanding of
applicable law and precedent, we believe that this challenge
will be successful. We do not believe that a loss is probable
and have not accrued any amounts related to this matter.
However, the ultimate resolution and the timing thereof are
uncertain. If the Company is 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.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not applicable.
18
Table of Contents
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
STOCK
PERFORMANCE GRAPH
The following graph illustrates comparisons of five-year
cumulative total returns among Nabors, the S&P 500 Index
and the Dow Jones Oil Equipment and Services Index. Total return
assumes $100 invested on December 31, 2004 in shares of
Nabors, the S&P 500 Index, and the Dow Jones Oil Equipment
and Services Index. It also assumes reinvestment of dividends
and is calculated at the end of each calendar year,
December 31, 2005 — 2009.
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
|
Nabors Industries Ltd.
|
148 | 116 | 107 | 47 | 85 | |||||||||||||||
|
S&P 500 Index
|
105 | 121 | 128 | 81 | 102 | |||||||||||||||
|
Dow Jones Oil Equipment and Services Index
|
152 | 172 | 250 | 102 | 168 | |||||||||||||||
| I. | Market and Share Prices |
Our common shares are traded on the New York Stock Exchange
under the symbol “NBR”. At February 24, 2010,
there were approximately 1,774 shareholders of record. We
have not paid any cash dividends on our common shares since 1982
and currently have no intentions to do so. However, we can give
no assurance that we will not reevaluate our position on
dividends in the future.
19
Table of Contents
The following table sets forth the reported high and low sales
prices of our common shares as reported on the New York Stock
Exchange for the periods indicated.
| Share Price | ||||||||
|
Calendar Year
|
High | Low | ||||||
|
2008
|
||||||||
|
First quarter
|
34.14 | 23.61 | ||||||
|
Second quarter
|
50.58 | 33.06 | ||||||
|
Third quarter
|
50.35 | 22.50 | ||||||
|
Fourth quarter
|
24.88 | 9.72 | ||||||
|
2009
|
||||||||
|
First quarter
|
14.05 | 8.25 | ||||||
|
Second quarter
|
19.79 | 9.38 | ||||||
|
Third quarter
|
21.48 | 13.78 | ||||||
|
Fourth quarter
|
24.07 | 19.18 | ||||||
The following table provides information relating to
Nabors’ repurchase of common shares during the three months
ended December 31, 2009:
|
Approximate
|
||||||||||||||||
|
Total Number
|
Dollar Value of
|
|||||||||||||||
|
of Shares
|
Shares that May
|
|||||||||||||||
|
Total
|
Purchased as
|
Yet Be
|
||||||||||||||
|
Number of
|
Average
|
Part of Publicly
|
Purchased
|
|||||||||||||
|
Shares
|
Price Paid
|
Announced
|
Under the
|
|||||||||||||
|
Period
|
Purchased | per Share(1) | Program | Program(2) | ||||||||||||
|
October 1 — October 31
|
— | (1) | $ | 20.90 | — | $ | 35,458 | |||||||||
|
November 1 — November 30
|
531 | (1) | $ | 22.88 | — | $ | 35,458 | |||||||||
|
December 1 — December 31
|
1 | (1) | $ | 21.85 | — | $ | 35,458 | |||||||||
| (1) | Shares were withheld from employees to satisfy certain tax withholding obligations due in connection with grants of stock under our 2003 Employee Stock Plan and option exercises from our 1996 Employee Stock Plan. Both the 2003 Employee Stock Plan and 1996 Employee Stock Plan provide for the withholding of shares to satisfy tax obligations, but do not specify a maximum number of shares that can be withheld for this purpose. These shares were not purchased as part of a publicly announced program to purchase common shares. | |
| (2) | In July 2006 our Board of Directors authorized a share repurchase program under which we may repurchase up to $500 million of our common shares in the open market or in privately negotiated transactions. Through December 31, 2009, $464.5 million of our common shares had been repurchased under this program. As of December 31, 2009, we had the capacity to repurchase up to an additional $35.5 million of our common shares under the July 2006 share repurchase program. |
See Part III, Item 12. for a description of securities
authorized for issuance under equity compensation plans.
II. Dividend
Policy
See Part I, Item 1A. — Risk
Factors —
We do not currently intend to pay
dividends.
20
Table of Contents
III. Shareholder
Matters
Bermuda has exchange controls which apply to residents in
respect of the Bermudian dollar. As an exempt company, Nabors is
considered to be nonresident for such controls; consequently,
there are no Bermuda governmental restrictions on our ability to
make transfers and carry out transactions in all other
currencies, including currency of the United States.
There is no reciprocal tax treaty between Bermuda and the United
States regarding withholding taxes. Under existing Bermuda law
there is no Bermuda income or withholding tax on dividends paid
by Nabors to its shareholders. Furthermore, no Bermuda tax is
levied on the sale or transfer (including by gift
and/or
on
the death of the shareholder) of Nabors common shares (other
than by shareholders resident in Bermuda).
21
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA |
| Year Ended December 31, | ||||||||||||||||||||
|
Operating Data(1)(2)(3)
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| (In thousands, except per share amounts and ratio data) | ||||||||||||||||||||
|
Revenues and other income:
|
||||||||||||||||||||
|
Operating revenues
|
$ | 3,692,356 | $ | 5,511,896 | $ | 4,938,848 | $ | 4,707,289 | $ | 3,394,472 | ||||||||||
|
Earnings (losses) from unconsolidated affiliates
|
(214,681 | ) | (229,834 | ) | 17,724 | 20,545 | 5,671 | |||||||||||||
|
Investment income (loss)
|
25,756 | 21,726 | (15,891 | ) | 102,007 | 85,428 | ||||||||||||||
|
Total revenues and other income
|
3,503,431 | 5,303,788 | 4,940,681 | 4,829,841 | 3,485,571 | |||||||||||||||
|
Costs and other deductions:
|
||||||||||||||||||||
|
Direct costs
|
2,012,352 | 3,110,316 | 2,764,559 | 2,511,392 | 1,958,538 | |||||||||||||||
|
General and administrative expenses
|
429,663 | 479,984 | 436,282 | 416,610 | 247,129 | |||||||||||||||
|
Depreciation and amortization
|
668,415 | 614,367 | 469,669 | 365,357 | 285,054 | |||||||||||||||
|
Depletion
|
11,078 | 25,442 | 31,165 | 38,580 | 46,894 | |||||||||||||||
|
Interest expense
|
264,948 | 196,718 | 154,920 | 120,507 | 44,849 | |||||||||||||||
|
Losses (gains) on sales and retirements of long-lived assets and
other expense (income), net
|
12,962 | 15,027 | 11,315 | 22,204 | 44,227 | |||||||||||||||
|
Impairments and other charges
|
339,129 | 176,123 | 41,017 | — | — | |||||||||||||||
|
Total costs and other deductions
|
3,738,547 | 4,617,977 | 3,908,927 | 3,474,650 | 2,626,691 | |||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
(235,116 | ) | 685,811 | 1,031,754 | 1,355,191 | 858,880 | ||||||||||||||
|
Income tax expense (benefit)
|
(149,228 | ) | 206,147 | 201,496 | 407,282 | 219,000 | ||||||||||||||
|
Income (loss) from continuing operations, net of tax
|
(85,888 | ) | 479,664 | 830,258 | 947,909 | 639,880 | ||||||||||||||
|
Income from discontinued operations, net of tax
|
— | — | 35,024 | 27,727 | 10,540 | |||||||||||||||
|
Net income (loss)
|
(85,888 | ) | 479,664 | 865,282 | 975,636 | 650,420 | ||||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
342 | (3,927 | ) | 420 | (1,914 | ) | (1,725 | ) | ||||||||||||
|
Net income (loss) attributable to Nabors
|
$ | (85,546 | ) | $ | 475,737 | $ | 865,702 | $ | 973,722 | $ | 648,695 | |||||||||
|
Earnings (losses) per Nabors’ share:
|
||||||||||||||||||||
|
Basic from continuing operations
|
$ | (.30 | ) | $ | 1.69 | $ | 2.96 | $ | 3.25 | $ | 2.04 | |||||||||
|
Basic from discontinued operations
|
— | — | .12 | .10 | .03 | |||||||||||||||
|
Total Basic
|
$ | (.30 | ) | $ | 1.69 | $ | 3.08 | $ | 3.35 | $ | 2.07 | |||||||||
|
Diluted from continuing operations
|
$ | (.30 | ) | $ | 1.65 | $ | 2.88 | $ | 3.15 | $ | 1.97 | |||||||||
|
Diluted from discontinued operations
|
— | — | .12 | .09 | .03 | |||||||||||||||
|
Total Diluted
|
$ | (.30 | ) | $ | 1.65 | $ | 3.00 | $ | 3.24 | $ | 2.00 | |||||||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
283,326 | 281,622 | 281,238 | 291,267 | 312,667 | |||||||||||||||
|
Diluted
|
283,326 | 288,236 | 288,226 | 300,677 | 323,712 | |||||||||||||||
|
Capital expenditures and acquisitions of businesses(4)
|
$ | 990,287 | $ | 1,578,241 | $ | 1,945,932 | $ | 2,006,286 | $ | 1,003,269 | ||||||||||
|
Interest coverage ratio(5)
|
6.2:1 | 20.7:1 | 32.5:1 | 38.1:1 | 25.6:1 | |||||||||||||||
22
Table of Contents
| As of December 31, | ||||||||||||||||||||
|
Balance Sheet Data(2)(3)
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| (In thousands, except ratio data) | ||||||||||||||||||||
|
Cash, cash equivalents, short-term and long-term investments and
other receivables(6)
|
$ | 1,191,733 | $ | 826,063 | $ | 1,179,639 | $ | 1,653,285 | $ | 1,646,327 | ||||||||||
|
Working capital
|
1,568,042 | 1,037,734 | 719,674 | 1,650,496 | 1,264,852 | |||||||||||||||
|
Property, plant and equipment, net
|
7,646,050 | 7,331,959 | 6,669,013 | 5,423,729 | 3,886,924 | |||||||||||||||
|
Total assets
|
10,644,690 | 10,517,899 | 10,139,783 | 9,155,931 | 7,230,407 | |||||||||||||||
|
Long-term debt
|
3,940,605 | 3,600,533 | 2,894,659 | 3,457,675 | 1,251,751 | |||||||||||||||
|
Shareholders’ equity
|
5,167,656 | 4,904,106 | 4,801,579 | 3,889,100 | 3,758,140 | |||||||||||||||
|
Funded debt to capital ratio:
|
||||||||||||||||||||
|
Gross(7)
|
0.41:1 | 0.41:1 | 0.39:1 | 0.43:1 | 0.32:1 | |||||||||||||||
|
Net(8)
|
0.33:1 | 0.35:1 | 0.30:1 | 0.28:1 | 0.08:1 | |||||||||||||||
| (1) | All periods present the Sea Mar business as a discontinued operation. | |
| (2) | The operating data for the year ended December 31, 2005 and the balance sheet data at December 31, 2005 do not reflect the adoption of the revised provisions relating to convertible debt within the Debt with Conversions and Other Options Topic of the Accounting Standards Codification. | |
| (3) | Our acquisitions’ results of operations and financial position have been included beginning on the respective dates of acquisition and include Pragma Drilling Equipment Ltd. assets (May 2006), 1183011 Alberta Ltd. (January 2006), Sunset Well Service, Inc. (August 2005), Alexander Drilling, Inc. assets (June 2005), Phillips Trucking, Inc. assets (June 2005), and Rocky Mountain Oil Tools, Inc. assets (March 2005). | |
| (4) | Represents capital expenditures and the portion of the purchase price of acquisitions allocated to fixed assets and goodwill based on their fair market value. | |
| (5) | The interest coverage ratio is a trailing 12-month quotient of the sum of net income (loss) attributable to Nabors, interest expense, depreciation and amortization, depletion expense, impairments and other charges, income tax expense (benefit) and our proportionate share of full-cost ceiling test writedowns from our unconsolidated oil and gas joint ventures less investment income (loss) divided by cash interest expense. This ratio is a method for calculating the amount of operating cash flows available to cover interest expense. The interest coverage ratio is not a measure of operating performance or liquidity defined by GAAP and may not be comparable to similarly titled measures presented by other companies. | |
| (6) | The December 31, 2008 and 2007 amounts include $1.9 million and $53.1 million, respectively, in cash proceeds receivable from brokers from the sale of certain long-term investments that are included in other current assets. Additionally, the December 31, 2009, 2008 and 2007 amounts include $92.5 million, $224.2 million and $123.3 million, respectively, in oil and gas financing receivables that are included in long-term investments and other receivables. | |
| (7) | The gross funded debt to capital ratio is calculated by dividing (x) funded debt by (y) funded debt plus deferred tax liabilities (net of deferred tax assets) plus capital. Funded debt is the sum of (1) short-term borrowings, (2) the current portion of long-term debt and (3) long-term debt. Capital is defined as shareholders’ equity. The gross funded debt to capital ratio is not a measure of operating performance or liquidity defined by GAAP and may not be comparable to similarly titled measures presented by other companies. | |
| (8) | The net funded debt to capital ratio is calculated by dividing (x) net funded debt by (y) net funded debt plus deferred tax liabilities (net of deferred tax assets) plus capital. Net funded debt is funded debt minus the sum of cash and cash equivalents and short-term and long-term investments and other receivables. The net funded debt to capital ratio is not a measure of operating performance or liquidity defined by GAAP and may not be comparable to similarly titled measures presented by other companies. |
23
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Management
Overview
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations is intended to
help the reader understand the results of our operations and our
financial condition. This information is provided as a
supplement to, and should be read in conjunction with, our
consolidated financial statements and the accompanying notes
thereto.
Nabors is the largest land drilling contractor in the world,
with approximately 542 actively marketed land drilling rigs. We
conduct oil, gas and geothermal land drilling operations in the
U.S. Lower 48 states, Alaska, Canada, South America,
Mexico, the Caribbean, the Middle East, the Far East, Russia and
Africa. We are also one of the largest land well-servicing and
workover contractors in the United States and Canada. We
actively market approximately 558 rigs for land workover and
well-servicing work in the United States, primarily in the
southwestern and western United States, and approximately
172 rigs for land workover and well-servicing work in
Canada. Nabors is a leading provider of offshore platform
workover and drilling rigs, and actively markets 40 platform, 13
jack-up
and
3 barge rigs in the United States and multiple international
markets. These rigs provide well-servicing, workover and
drilling services. We have a 51% ownership interest in a joint
venture in Saudi Arabia, which owns and actively markets 9 rigs
in addition to the rigs we lease to the joint venture. We also
offer a wide range of ancillary well-site services, including
engineering, transportation, construction, maintenance, well
logging, directional drilling, rig instrumentation, data
collection and other support services in select domestic and
international markets. We provide logistics services for onshore
drilling in Canada using helicopters and fixed-wing aircraft. 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 also invest in oil and
gas exploration, development and production activities in the
U.S., Canada and international areas through both our wholly
owned subsidiaries and our separate joint venture entities. We
hold a 50% ownership interest in our Canadian entity and 49.7%
ownership interests in our U.S. and International entities.
Each joint venture pursues development and exploration projects
with our existing customers and with other operators in a
variety of forms, including operated and non-operated working
interests, joint ventures, farm-outs and acquisitions.
The majority of our business is conducted through our various
Contract Drilling operating segments, which include our
drilling, workover and well-servicing operations, on land and
offshore. Our oil and gas exploration, development and
production operations are included in our Oil and Gas operating
segment. Our operating segments engaged in drilling technology
and top drive manufacturing, directional drilling, rig
instrumentation and software, and construction and logistics
operations are aggregated in our Other Operating Segments.
Our businesses depend, to a large degree, on the level of
spending by oil and gas companies for exploration, development
and production activities. Therefore, a sustained increase or
decrease in the price of natural gas or oil, which could have a
material impact on exploration, development and production
activities, could also materially affect our financial position,
results of operations and cash flows.
The magnitude of customer spending on new and existing wells is
the primary driver of our business. The primary determinate of
customer spending is their cash flow and earnings which are
largely driven by natural gas prices in our U.S. Lower 48
Land Drilling and Canadian Drilling operations, while oil prices
are the primary determinate in our Alaskan, International,
U.S. Offshore (Gulf of Mexico), Canadian Well-servicing
24
Table of Contents
and U.S. Land Well-servicing operations. The following
table sets forth natural gas and oil price data per Bloomberg
for the last three years:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
|
Commodity prices:
|
||||||||||||||||||||||||||||
|
Average Henry Hub natural gas spot price ($/million cubic feet
(mcf))
|
$ | 3.94 | $ | 8.89 | $ | 6.97 | $ | (4.95 | ) | (56 | )% | $ | 1.92 | 28 | % | |||||||||||||
|
Average West Texas intermediate crude oil spot price ($/barrel)
|
$ | 61.99 | $ | 99.92 | $ | 72.23 | $ | (37.93 | ) | (38 | )% | $ | 27.69 | 38 | % | |||||||||||||
Beginning in the fourth quarter of 2008, there was a significant
reduction in the demand for natural gas and oil that was caused,
at least in part, by the significant deterioration of the global
economic environment including the extreme volatility in the
capital and credit markets. Weaker demand throughout 2009 has
resulted in sustained lower natural gas and oil prices. The
price of natural gas reached a low for 2009 of $1.83 per mcf
during September and while showing improvement remains
depressed, having averaged $3.77 per mcf during the second half
of 2009. The significant drop in the price of oil reached a low
for 2009 of $33.98 per barrel in February with continuous
recovery throughout 2009, averaging $72.08 per barrel during the
second half of 2009. These reduced prices for natural gas and
oil have led to a sharp decline in the demand for drilling and
workover services. Continued fluctuations in the demand for gas
and oil, among other factors including supply, could contribute
to continued price volatility which may continue to affect
demand for our services and could materially affect our future
financial results.
Operating revenues and Earnings (losses) from unconsolidated
affiliates for the year ended December 31, 2009 totaled
$3.5 billion, representing a decrease of $1.8 billion,
or 34% as compared to the year ended December 31, 2008.
Adjusted income derived from operating activities and net income
(loss) attributable to Nabors for the year ended
December 31, 2009 totaled $356.2 million and
$(85.5) million ($(.30) per diluted share), respectively,
representing decreases of 66% and 118%, respectively, compared
to the year ended December 31, 2008. Operating revenues and
Earnings (losses) from unconsolidated affiliates for the year
ended December 31, 2008 totaled $5.3 billion,
representing an increase of $325.5 million, or 7% as
compared to the year ended December 31, 2007. Adjusted
income derived from operating activities and net income (loss)
attributable to Nabors for the year ended December 31, 2008
totaled $1.1 billion and $475.7 million ($1.65 per
diluted share), respectively, representing decreases of 16% and
45%, respectively, compared to the year ended December 31,
2007.
During 2009 and 2008, our operating results were negatively
impacted as a result of charges arising from oil and gas
full-cost ceiling test writedowns and other impairments.
Earnings (losses) from unconsolidated affiliates includes
$(237.1) million and $(228.3) million, respectively,
for the years ended December 31, 2009 and 2008,
representing our proportionate share of full-cost ceiling test
writedowns from our unconsolidated oil and gas joint ventures
which utilize the full-cost method of accounting. During 2009,
our joint ventures used a
12-month
average price in the ceiling test calculation as required by the
revised SEC rules whereas during 2008, the ceiling test
calculation used the
single-day,
year-end commodity price that, at December 31, 2008, was
near its low point for that year. The full-cost ceiling test
writedowns are included in our Oil and Gas operating segment
results.
During 2009 and 2008, our operating results were also negatively
impacted as a result of our impairments and other charges of
$339.1 million and $176.1 million, respectively.
During 2009, impairments and other charges included recognition
of
other-than-temporary
impairments of $54.3 million relating to our
available-for-sale
securities, and impairments of $64.2 million to long-lived
assets that were retired from our U.S. Offshore, Alaska,
Canada and International contract drilling segments.
Additionally, we recorded impairment charges of
$205.9 million and $21.5 million, respectively, to our
wholly owned Ramshorn business unit under application of the
successful-efforts method of accounting for some of our oil and
gas-related assets during the years ended December 31, 2009
and 2008. During 2008, impairments and other charges included
goodwill and intangible asset impairments totaling
$154.6 million recorded by our Canada Well-servicing and
Drilling operating segment and Nabors Blue Sky Ltd., one of our
Canadian subsidiaries reported in Other
25
Table of Contents
Operating Segments. We recognized these goodwill and intangible
asset impairments to reduce the carrying value of these assets
to their estimated fair value. We consider these writedowns
necessary because of the duration of the industry downturn in
Canada and the lack of certainty regarding eventual recovery.
These impairments and other charges are reflected separately as
impairments and other charges in our consolidated statements of
income (loss) for the years ended December 31, 2009 and
2008.
Excluding these charges, our operating results were lower than
the previous year results primarily due to the continuing weak
environment in our U.S. Lower 48 Land Drilling,
U.S. Land Well-servicing, Canada and U.S. Offshore
operations where activity levels and demand for our drilling
rigs have decreased substantially in response to uncertainty in
the financial markets and commodity price deterioration.
Operating results have been further negatively impacted by
higher levels of depreciation expense due to our increased
capital expenditures in recent years.
Our operating results for 2010 are expected to approximate
levels realized during 2009 given our current expectation of the
continuation of lower commodity prices during 2010 and the
related impact on drilling and well-servicing activity and
dayrates. We expect the decrease in drilling activity and
dayrates to continue to adversely impact our U.S. Lower 48
Land Drilling and our U.S. Land Well-servicing operations
for 2010, as compared to 2009, because the number of working
rigs and average dayrates have declined. We expect our
International operations to decrease slightly during 2010 as a
result of lower drilling activity and utilization partially
offset by the deployment of new and incremental rigs under
long-term contracts and the renewal of multi-year contracts.
Although rig count is expected to be lower overall, the
reductions are primarily comprised of lower yielding assets,
leaving higher margin contracts in place partially offset by
certain contracts rolling over at lower current market rates.
Our investments in new and upgraded rigs over the past five
years have resulted in long-term contracts which we expect will
enhance our competitive position when market conditions improve.
The following tables set forth certain information with respect
to our reportable segments and rig activity:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Reportable segments:
|
||||||||||||||||||||||||||||
|
Operating revenues and Earnings (losses) from unconsolidated
affiliates from continuing operations:(1)
|
||||||||||||||||||||||||||||
|
Contract Drilling:(2)
|
||||||||||||||||||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 1,082,531 | $ | 1,878,441 | $ | 1,710,990 | $ | (795,910 | ) | (42 | )% | $ | 167,451 | 10 | % | |||||||||||||
|
U.S. Land Well-servicing
|
412,243 | 758,510 | 715,414 | (346,267 | ) | (46 | )% | 43,096 | 6 | % | ||||||||||||||||||
|
U.S. Offshore
|
157,305 | 252,529 | 212,160 | (95,224 | ) | (38 | )% | 40,369 | 19 | % | ||||||||||||||||||
|
Alaska
|
204,407 | 184,243 | 152,490 | 20,164 | 11 | % | 31,753 | 21 | % | |||||||||||||||||||
|
Canada
|
298,653 | 502,695 | 545,035 | (204,042 | ) | (41 | )% | (42,340 | ) | (8 | )% | |||||||||||||||||
|
International
|
1,265,097 | 1,372,168 | 1,094,802 | (107,071 | ) | (8 | )% | 277,366 | 25 | % | ||||||||||||||||||
|
Subtotal Contract Drilling(3)
|
3,420,236 | 4,948,586 | 4,430,891 | (1,528,350 | ) | (31 | )% | 517,695 | 12 | % | ||||||||||||||||||
|
Oil and Gas(4)(5)
|
(209,091 | ) | (151,465 | ) | 152,320 | (57,626 | ) | (38 | )% | (303,785 | ) | (199 | )% | |||||||||||||||
|
Other Operating Segments(6)(7)
|
446,282 | 683,186 | 588,483 | (236,904 | ) | (35 | )% | 94,703 | 16 | % | ||||||||||||||||||
|
Other reconciling items(8)
|
(179,752 | ) | (198,245 | ) | (215,122 | ) | 18,493 | 9 | % | 16,877 | 8 | % | ||||||||||||||||
|
Total
|
$ | 3,477,675 | $ | 5,282,062 | $ | 4,956,572 | $ | (1,804,387 | ) | (34 | )% | $ | 325,490 | 7 | % | |||||||||||||
26
Table of Contents
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Adjusted income (loss) derived from operating activities from
continuing operations:(1)(9)
|
||||||||||||||||||||||||||||
|
Contract Drilling:
|
||||||||||||||||||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 294,679 | $ | 628,579 | $ | 596,302 | $ | (333,900 | ) | (53 | )% | $ | 32,277 | 5 | % | |||||||||||||
|
U.S. Land Well-servicing
|
28,950 | 148,626 | 156,243 | (119,676 | ) | (81 | )% | (7,617 | ) | (5 | )% | |||||||||||||||||
|
U.S. Offshore
|
30,508 | 59,179 | 51,508 | (28,671 | ) | (48 | )% | 7,671 | 15 | % | ||||||||||||||||||
|
Alaska
|
62,742 | 52,603 | 37,394 | 10,139 | 19 | % | 15,209 | 41 | % | |||||||||||||||||||
|
Canada
|
(7,019 | ) | 61,040 | 87,046 | (68,059 | ) | (111 | )% | (26,006 | ) | (30 | )% | ||||||||||||||||
|
International
|
365,566 | 407,675 | 332,283 | (42,109 | ) | (10 | )% | 75,392 | 23 | % | ||||||||||||||||||
|
Subtotal Contract Drilling(3)
|
775,426 | 1,357,702 | 1,260,776 | (582,276 | ) | (43 | )% | 96,926 | 8 | % | ||||||||||||||||||
|
Oil and Gas(4)(5)
|
(256,535 | ) | (206,490 | ) | 97,150 | (50,045 | ) | (24 | )% | (303,640 | ) | (313 | )% | |||||||||||||||
|
Other Operating Segments(7)(8)
|
34,120 | 68,572 | 35,273 | (34,452 | ) | (50 | )% | 33,299 | 94 | % | ||||||||||||||||||
|
Other reconciling items(10)
|
(196,844 | ) | (167,831 | ) | (138,302 | ) | (29,013 | ) | (17 | )% | (29,529 | ) | (21 | )% | ||||||||||||||
|
Total
|
$ | 356,167 | $ | 1,051,953 | $ | 1,254,897 | $ | (695,786 | ) | (66 | )% | $ | (202,944 | ) | (16 | )% | ||||||||||||
|
Interest expense
|
(264,948 | ) | (196,718 | ) | (154,920 | ) | (68,230 | ) | (35 | )% | (41,798 | ) | (27 | )% | ||||||||||||||
|
Investment income (loss)
|
25,756 | 21,726 | (15,891 | ) | 4,030 | 19 | % | 37,617 | 237 | % | ||||||||||||||||||
|
Gains (losses) on sales and retirements of long-lived assets and
other income (expense), net
|
(12,962 | ) | (15,027 | ) | (11,315 | ) | 2,065 | 14 | % | (3,712 | ) | (33 | )% | |||||||||||||||
|
Impairments and other charges(11)
|
(339,129 | ) | (176,123 | ) | (41,017 | ) | (163,006 | ) | (93 | )% | (135,106 | ) | (329 | )% | ||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
(235,116 | ) | 685,811 | 1,031,754 | (920,927 | ) | (134 | )% | (345,943 | ) | (34 | )% | ||||||||||||||||
|
Income tax expense (benefit)
|
(149,228 | ) | 206,147 | 201,496 | (355,375 | ) | (172 | )% | (4,651 | ) | (2 | )% | ||||||||||||||||
|
Income (loss) from continuing operations, net of tax
|
(85,888 | ) | 479,664 | 830,258 | (565,552 | ) | (118 | )% | (350,594 | ) | (42 | )% | ||||||||||||||||
|
Income from discontinued operations, net of tax
|
— | — | 35,024 | — | — | (35,024 | ) | (100 | )% | |||||||||||||||||||
|
Net income (loss)
|
(85,888 | ) | 479,664 | 865,282 | (565,552 | ) | (118 | )% | (385,618 | ) | (45 | )% | ||||||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
342 | (3,927 | ) | 420 | 4,269 | 109 | % | (4,347 | ) | N/M | (15) | |||||||||||||||||
|
Net income (loss) attributable to Nabors
|
$ | (85,546 | ) | $ | 475,737 | $ | 865,702 | $ | (561,283 | ) | (118 | )% | $ | (389,965 | ) | (45 | )% | |||||||||||
27
Table of Contents
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Rig activity:
|
||||||||||||||||||||||||||||
|
Rig years:(12)
|
||||||||||||||||||||||||||||
|
U.S. Lower 48 Land Drilling
|
149.4 | 247.9 | 229.4 | (98.5 | ) | (40 | )% | 18.5 | 8 | % | ||||||||||||||||||
|
U.S. Offshore
|
11.0 | 17.6 | 15.8 | (6.6 | ) | (38 | )% | 1.8 | 11 | % | ||||||||||||||||||
|
Alaska
|
10.0 | 10.9 | 8.7 | (0.9 | ) | (8 | )% | 2.2 | 25 | % | ||||||||||||||||||
|
Canada
|
19.7 | 35.5 | 36.7 | (15.8 | ) | (45 | )% | (1.2 | ) | (3 | )% | |||||||||||||||||
|
International(13)
|
100.2 | 120.5 | 115.2 | (20.3 | ) | (17 | )% | 5.3 | 5 | % | ||||||||||||||||||
|
Total rig years
|
290.3 | 432.4 | 405.8 | (142.1 | ) | (33 | )% | 26.6 | 7 | % | ||||||||||||||||||
|
Rig hours:(14)
|
||||||||||||||||||||||||||||
|
U.S. Land Well-servicing
|
590,878 | 1,090,511 | 1,119,497 | (499,633 | ) | (46 | )% | (28,986 | ) | (3 | )% | |||||||||||||||||
|
Canada Well-servicing
|
143,824 | 248,032 | 283,471 | (104,208 | ) | (42 | )% | (35,439 | ) | (13 | )% | |||||||||||||||||
|
Total rig hours
|
734,702 | 1,338,543 | 1,402,968 | (603,841 | ) | (45 | )% | (64,425 | ) | (5 | )% | |||||||||||||||||
| (1) | All segment information excludes the Sea Mar business, which has been classified as a discontinued operation. | |
| (2) | These segments include our drilling, workover and well-servicing operations, on land and offshore. | |
| (3) | Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $9.7 million, $5.8 million and $5.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (4) | Represents our oil and gas exploration, development and production operations. Includes our proportionate share of full-cost ceiling test writedowns recorded by our unconsolidated oil and gas joint ventures of $(237.1) million and $(228.3) million for the years ended December 31, 2009 and 2008, respectively. | |
| (5) | Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(241.9) million, $(241.4) million and $(3.9) million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (6) | Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. | |
| (7) | Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $17.5 million, $5.8 million and $16.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (8) | Represents the elimination of inter-segment transactions. | |
| (9) | Adjusted income (loss) derived from operating activities is computed by subtracting direct costs, general and administrative expenses, depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings (losses) from unconsolidated affiliates. Such amounts should not be used as a substitute for those amounts reported under GAAP. However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that these financial measures are an accurate reflection of the ongoing profitability of our Company. A reconciliation of this non-GAAP measure to income (loss) before income taxes, which is a GAAP measure, is provided within the above table. | |
| (10) | Represents the elimination of inter-segment transactions and unallocated corporate expenses. | |
| (11) | Represents impairments and other charges recorded during the years ended December 31, 2009 and 2008, respectively. | |
| (12) | Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a measure of the number of |
28
Table of Contents
| equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years. | ||
| (13) | International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 2.5 years, 3.5 years and 4.0 years during the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (14) | Rig hours represents the number of hours that our well-servicing rig fleet operated during the year. | |
| (15) | The percentage is so large that is not meaningful. |
Segment
Results of Operations
Contract
Drilling
Our Contract Drilling operating segments contain one or more of
the following operations: drilling, workover and well-servicing,
on land and offshore.
U.S. Lower 48 Land Drilling.
The results
of operations for this reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 1,082,531 | $ | 1,878,441 | $ | 1,710,990 | $ | (795,910 | ) | (42 | )% | $ | 167,451 | 10 | % | |||||||||||||
|
Adjusted income derived from operating activities
|
$ | 294,679 | $ | 628,579 | $ | 596,302 | $ | (333,900 | ) | (53 | )% | $ | 32,277 | 5 | % | |||||||||||||
|
Rig years
|
149.4 | 247.9 | 229.4 | (98.5 | ) | (40 | )% | 18.5 | 8 | % | ||||||||||||||||||
Operating results decreased from 2008 to 2009 primarily due to a
decline in drilling activity, driven by lower natural gas prices
beginning in the fourth quarter of 2008 and diminished demand as
customers released rigs and delayed drilling projects in
response to the significant drop in natural gas prices and the
tightening of the credit markets. Operating results were further
negatively impacted by higher depreciation expense related to
capital expansion projects completed in recent years.
The increase in operating results from 2007 to 2008 was due to
overall
year-over-year
increases in rig activity and increases in average dayrates,
driven by higher natural gas prices throughout 2007 and most of
2008. This increase was only partially offset by higher
operating costs and an increase in depreciation expense related
to capital expansion projects.
U.S. Land Well-servicing.
The results of
operations for this reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 412,243 | $ | 758,510 | $ | 715,414 | $ | (346,267 | ) | (46 | )% | $ | 43,096 | 6 | % | |||||||||||||
|
Adjusted income derived from operating activities
|
$ | 28,950 | $ | 148,626 | $ | 156,243 | $ | (119,676 | ) | (81 | )% | $ | (7,617 | ) | (5 | )% | ||||||||||||
|
Rig hours
|
590,878 | 1,090,511 | 1,119,497 | (499,633 | ) | (46 | )% | (28,986 | ) | (3 | )% | |||||||||||||||||
Operating results decreased from 2008 to 2009 primarily due to
lower rig utilization and price erosion, driven by lower
customer demand for our services due to relatively lower oil
prices caused by the U.S. economic recession and reduced
end product demand. Operating results were further negatively
impacted by higher depreciation expense related to capital
expansion projects completed in recent years.
Operating revenues and Earnings from unconsolidated affiliates
increased from 2007 to 2008 primarily as a result of higher
average dayrates
year-over-year,
driven by high oil prices during 2007 and the majority of
29
Table of Contents
2008 as well as market expansion. Higher average dayrates were
partially offset by lower rig utilization. Adjusted income
derived from operating activities decreased from 2007 to 2008
despite higher revenues due primarily to higher depreciation
expense related to capital expansion projects and, to a lesser
extent, higher operating costs.
U.S. Offshore.
The results of operations
for this reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 157,305 | $ | 252,529 | $ | 212,160 | $ | (95,224 | ) | (38 | )% | $ | 40,369 | 19 | % | |||||||||||||
|
Adjusted income derived from operating activities
|
$ | 30,508 | $ | 59,179 | $ | 51,508 | $ | (28,671 | ) | (48 | )% | $ | 7,671 | 15 | % | |||||||||||||
|
Rig years
|
11.0 | 17.6 | 15.8 | (6.6 | ) | (38 | )% | 1.8 | 11 | % | ||||||||||||||||||
The decrease in operating results from 2008 to 2009 primarily
resulted from lower average dayrates and utilization for the
SuperSundowner
tm
platform rigs, workover
jack-up
rigs, barge drilling and workover rigs, and
Sundowner
®
platform rigs, partially offset by higher utilization of our
MODS
®
rigs inclusive of a significant term contract for a
MODS
®
rig deployed in January 2009.
The increase in operating results from 2007 to 2008 primarily
resulted from higher average dayrates and increased drilling
activity driven by high oil prices during the majority of 2008,
especially in the Sundowner and Super Sundowner platform
workover and re-drilling rigs and the
MASE
®
platform drilling rigs. The increase in 2008 was partially
offset by higher operating costs and increased depreciation
expense relating to new rigs added to the fleet in early 2007.
Alaska.
The results of operations for this
reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 204,407 | $ | 184,243 | $ | 152,490 | $ | 20,164 | 11 | % | $ | 31,753 | 21 | % | ||||||||||||||
|
Adjusted income derived from operating activities
|
$ | 62,742 | $ | 52,603 | $ | 37,394 | $ | 10,139 | 19 | % | $ | 15,209 | 41 | % | ||||||||||||||
|
Rig years
|
10.0 | 10.9 | 8.7 | (0.9 | ) | (8 | )% | 2.2 | 25 | % | ||||||||||||||||||
The increases in operating results from 2008 to 2009 and from
2007 to 2008 were primarily due to increases in average dayrates
and drilling activity. Although drilling activity levels
decreased slightly during 2009, operating results reflect the
higher average margins as a result of the addition of some high
specification rig work. Drilling activity levels increased in
2008 as a result of the deployment and utilization of rigs added
to the fleet in late 2007 under long-term contracts. The
increases during 2009 and 2008 have been partially offset by
higher operating costs and increased depreciation expense as
well as increased labor and repairs and maintenance costs in
2009 and 2008 as compared to prior years.
30
Table of Contents
Canada.
The results of operations for this
reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 298,653 | $ | 502,695 | $ | 545,035 | $ | (204,042 | ) | (41 | )% | $ | (42,340 | ) | (8 | )% | ||||||||||||
|
Adjusted income (loss) derived from operating activities
|
$ | (7,019 | ) | $ | 61,040 | $ | 87,046 | $ | (68,059 | ) | (111 | )% | $ | (26,006 | ) | (30 | )% | |||||||||||
|
Rig years — Drilling
|
19.7 | 35.5 | 36.7 | (15.8 | ) | (45 | )% | (1.2 | ) | (3 | )% | |||||||||||||||||
|
Rig hours — Well-servicing
|
143,824 | 248,032 | 283,471 | (104,208 | ) | (42 | )% | (35,439 | ) | (13 | )% | |||||||||||||||||
Operating results decreased from 2008 to 2009 primarily as a
result of an overall decrease in drilling and well-servicing
activity due to lower natural gas prices driving a significant
decline of customer demand for drilling and well-servicing
operations. Our operating results for 2009 were further
negatively impacted by the economic uncertainty in the Canadian
drilling market and financial market instability. The Canadian
dollar began 2009 in a weak position versus the
U.S. dollar, during a period of time when drilling and
well-servicing activity was typically at its seasonal peak,
which also had an overall negative impact on operating results.
These decreases in operating results were partially offset by
cost reductions in direct costs, general and administrative
expenses and depreciation.
The decrease in operating results from 2007 to 2008 resulted
from
year-over-year
decreases in drilling and well-servicing activity and decreases
in average dayrates for drilling and well-servicing operations
as a result of economic uncertainty and Alberta’s tight
labor market which led to a number of projects being delayed.
Our operating results were further negatively impacted by
proposed changes to the Alberta royalty and tax regime causing
customers to assess the impact of such changes. The
strengthening of the Canadian dollar versus the U.S. dollar
during 2007 and throughout the majority of 2008 positively
impacted operating results, but negatively impacted demand for
our services as much of our customers’ revenue is
denominated in U.S. dollars while their costs are
denominated in Canadian dollars. Additionally, operating results
were negatively impacted by increased operating expenses,
including depreciation expense related to capital expansion
projects.
International.
The results of operations for
this reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages and rig activity) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 1,265,097 | $ | 1,372,168 | $ | 1,094,802 | $ | (107,071 | ) | (8 | )% | $ | 277,366 | 25 | % | |||||||||||||
|
Adjusted income derived from operating activities
|
$ | 365,566 | $ | 407,675 | $ | 332,283 | $ | (42,109 | ) | (10 | )% | $ | 75,392 | 23 | % | |||||||||||||
|
Rig years
|
100.2 | 120.5 | 115.2 | (20.3 | ) | (17 | )% | 5.3 | 5 | % | ||||||||||||||||||
The decrease in operating results from 2008 to 2009 resulted
primarily from
year-over-year
decreases in average dayrates and lower utilization of rigs in
Mexico, Libya, Argentina and Colombia, driven by weakening
customer demand for drilling services stemming from the drop in
oil prices in the fourth quarter of 2008 which continued
throughout 2009. Operating results were further negatively
impacted by higher depreciation expense related to capital
expansion projects completed in recent years. These decreases
were partially offset by higher average dayrates from two
jack-up
rigs
deployed in Saudi Arabia, increases in average dayrates for our
new and incremental rigs added and deployed during 2008 and a
start-up
floating, drilling, production, storage and offloading vessel
off the coast of the Republic of the Congo.
The increase in operating results from 2007 to 2008 primarily
resulted from
year-over-year
increases in average dayrates and drilling activities,
reflecting strong customer demand for drilling services,
stemming from
31
Table of Contents
sustained higher oil prices throughout 2007. Operating results
during 2007 and most of 2008 were also positively impacted by an
expansion of our rig fleet and continuing renewal of existing
multi-year contracts at higher average dayrates. These increases
were partially offset by increased operating expenses, including
depreciation expense related to capital expenditures for new and
refurbished rigs deployed throughout 2007 and 2008.
Oil and Gas.
The results of operations for
this reportable segment are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings (losses) from unconsolidated
affiliates
|
$ | (209,091 | ) | $ | (151,465 | ) | $ | 152,320 | $ | (57,626 | ) | (38 | )% | $ | (303,785 | ) | (199 | )% | ||||||||||
|
Adjusted income (loss) derived from operating activities
|
$ | (256,535 | ) | $ | (206,490 | ) | $ | 97,150 | $ | (50,045 | ) | (24 | )% | $ | (303,640 | ) | (313 | )% | ||||||||||
Our operating results decreased from 2008 to 2009 primarily as a
result of full-cost ceiling test writedowns recorded during 2009
by our unconsolidated joint ventures. During 2009, our U.S.,
international and Canadian oil and gas joint ventures recorded
full-cost ceiling test writedowns, of which our proportionate
share totaled $237.1 million. These writedowns resulted
from the application of the full-cost method of accounting for
costs related to oil and natural gas properties. The full-cost
ceiling test limits the carrying value of the capitalized cost
of the properties to the present value of future net revenues
attributable to proved oil and natural gas reserves, discounted
at 10%, plus the lower of cost or market value of unproved
properties. The full-cost ceiling test was evaluated using the
12-month
average commodity price as required by the revised SEC rules.
Operating results further decreased from 2008 to 2009 due to
declines in natural gas prices and production volumes from our
Ramshorn and joint venture operations. Additionally, operating
results for 2008 included a $12.3 million gain recorded on
the sale of leasehold interests.
Our operating results decreased from 2007 to 2008 as a result of
full-cost ceiling test writedowns recorded during 2008 by our
unconsolidated oil and gas joint ventures. During 2008, our
U.S., international and Canadian oil and gas joint ventures
recorded full-cost ceiling test writedowns, of which our
proportionate share totaled $228.3 million. The full-cost
ceiling test was determined using the
single-day,
year-end price as required by SEC rules at the time.
Additionally during 2008, our proportionate share of losses from
our unconsolidated oil and gas joint ventures included
$10.0 million of depletion charges from
lower-than-expected
performance of certain oil and gas developmental wells and
$5.8 million of
mark-to-market
unrealized losses from derivative instruments representing
forward gas sales through swaps and price floor guarantees
utilizing puts. Beginning in May 2008 our U.S. joint
venture began to apply hedge accounting to its forward contracts
to minimize the volatility in reported earnings caused by market
price fluctuations of the underlying hedged commodities. These
losses were partially offset by income from our production
volumes and oil and gas production sales as a result of higher
oil and natural gas prices throughout most of 2008 and a
$12.3 million gain on the sale of leasehold interests in
2008.
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Other
Operating Segments
These operations include our drilling technology and top-drive
manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations. The results
of operations for these operating segments are as follows:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Operating revenues and Earnings from unconsolidated affiliates
|
$ | 446,282 | $ | 683,186 | $ | 588,483 | $ | (236,904 | ) | (35 | )% | $ | 94,703 | 16 | % | |||||||||||||
|
Adjusted income derived from operating activities
|
$ | 34,120 | $ | 68,572 | $ | 35,273 | $ | (34,452 | ) | (50 | )% | $ | 33,299 | 94 | % | |||||||||||||
The decreases in operating results from 2008 to 2009 primarily
resulted from (i) lower demand in the U.S. and
Canadian drilling markets for rig instrumentation and data
collection services from oil and gas exploration companies,
(ii) decreases in customer demand for our construction and
logistics services in Alaska and (iii) decreased capital
equipment unit volumes and lower service and rental activity as
a result of the slowdown in the oil and gas industry.
The increase in operating results from 2007 to 2008 primarily
resulted from
year-over-year
increases in third-party sales and higher margins on top drives
occasioned by the strengthening of the oil drilling market,
increased equipment sales, increased market share in Canada and
increased demand in the U.S. directional drilling market.
Results were also improved in 2008 due to increases in customer
demand for our construction and logistics services in Alaska.
Discontinued
Operations
In 2007, we sold our Sea Mar business which had previously been
included in Other Operating Segments to an unrelated third
party. The assets included 20 offshore supply vessels and some
related assets, including rights under a vessel construction
contract. We have not had any continuing involvement subsequent
to the sale of this business and have accounted for the Sea Mar
business as discontinued operations in the accompanying audited
consolidated statements of income (loss). Our condensed
statement of income from discontinued operations related to the
Sea Mar business for the year ended December 31, 2007 was
as follows:
|
Year Ended
|
||||
| December 31, 2007 | ||||
| (In thousands, except percentages) | ||||
|
Revenues
|
$ | 58,887 | ||
|
Income from discontinued operations, net of tax
|
$ | 35,024 | ||
OTHER
FINANCIAL INFORMATION
General
and administrative expenses
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
General and administrative expenses
|
$ | 429,663 | $ | 479,984 | $ | 436,282 | $ | (50,321 | ) | (10 | )% | $ | 43,702 | 10 | % | |||||||||||||
|
General and administrative expenses as a percentage of operating
revenues
|
11.6 | % | 8.7 | % | 8.8 | % | 2.9 | % | 33 | % | (.1 | )% | (1 | %) | ||||||||||||||
General and administrative expenses decreased from 2008 to 2009
primarily as a result of significant decreases in wage-related
expenses and other cost-reduction efforts across all business
units, partially offset by an increase of approximately
$61.2 million in stock compensation expense. During 2009,
share-based compensation expense included $72.1 million of
compensation expense related to previously granted restricted
stock and option awards held by Messrs. Isenberg and
Petrello that was unrecognized as of April 1, 2009. The
recognition of this expense resulted from provisions of their
respective new employment agreements that
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effectively eliminated the risk of forfeiture of such awards.
There is no remaining unrecognized expense related to their
outstanding restricted stock and option awards. General and
administrative expenses as a percentage of operating revenues
increased primarily due to lower revenues.
General and administrative expenses increased from 2007 to 2008
primarily as a result of increases in wages and wage-related
expenses for a majority of our operating segments compared to
each prior year, which resulted from an increase in the number
of employees required to support higher activity levels. The
increase was also driven by higher compensation expense,
primarily resulting from higher bonuses and non-cash
compensation expenses recorded for restricted stock awards
during 2007 and 2008.
Depreciation
and amortization, and depletion expense
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Depreciation and amortization expense
|
$ | 668,415 | $ | 614,367 | $ | 469,669 | $ | 54,048 | 9 | % | $ | 144,698 | 31 | % | ||||||||||||||
|
Depletion expense
|
$ | 11,078 | $ | 25,442 | $ | 31,165 | $ | (14,364 | ) | (56 | )% | $ | (5,723 | ) | (18 | )% | ||||||||||||
Depreciation and amortization
expense.
Depreciation and amortization expense
increased from 2008 to 2009 and from 2007 to 2008 primarily as a
result of projects completed in recent years under our expanded
capital expenditure program that commenced in early 2005.
Depletion expense.
Depletion expense decreased
from 2008 to 2009 and from 2007 to 2008 primarily as a result of
decreased natural gas production volumes during each year.
Interest
expense
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Interest expense
|
$ | 264,948 | $ | 196,718 | $ | 154,920 | $ | 68,230 | 35 | % | $ | 41,798 | 27 | % | ||||||||||||||
Interest expense increased from 2008 to 2009 as a result of the
interest expense related to our January 2009 issuance of
9.25% senior notes due January 2019. The increase was
partially offset by a reduction to interest expense due to our
repurchases of approximately $1.1 billion par value of
0.94% senior exchangeable notes during 2008 and 2009.
Interest expense increased from 2007 to 2008 as a result of the
additional interest expense related to our February 2008 and
July 2008 issuances of 6.15% senior notes due February 2018
in the amounts of $575 million and $400 million,
respectively.
Investment
income (loss)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Investment income (loss)
|
$ | 25,756 | $ | 21,726 | $ | (15,891 | ) | $ | 4,030 | 19 | % | $ | 37,617 | 237 | % | |||||||||||||
Investment income during 2009 was $25.8 million compared to
$21.7 million during the prior year. Investment income in
2009 included net unrealized gains of $9.8 million from our
trading securities and interest and dividend income of
$15.9 million from our cash, other short-term and long-term
investments.
Investment income during 2008 was $21.7 million compared to
a net investment loss of $15.9 million during the prior
year. Investment income in 2008 included net unrealized gains of
$8.5 million from our trading securities and interest and
dividend income of $40.5 million from our short-term and
long-term investments, partially offset by losses of
$27.4 million from our actively managed funds classified as
long-term investments.
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Investment income (loss) during 2007 included a net loss of
$61.4 million from our actively managed funds classified as
long-term investments inclusive of substantial gains from sales
of our marketable equity securities. This net loss was offset by
interest and dividend income of $45.5 million from our
short-term investments.
Gains
(losses) on sales and retirements of long-lived assets and other
income (expense), net
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Gains(losses) on sales and retirements of long-lived assets and
other income (expense), net
|
$ | (12,962 | ) | $ | (15,027 | ) | $ | (11,315 | ) | $ | 2,065 | 14 | % | $ | (3,712 | ) | (33 | )% | ||||||||||
The amount of gains (losses) on sales and retirements of
long-lived assets and other income(expense), net for 2009
represents a net loss of $13.0 million and includes:
(i) foreign currency exchange losses of approximately
$8.4 million, (ii) increases of litigation expenses of
$11.5 million, and (iii) net losses on sales and
retirements of long-lived assets of approximately
$5.9 million. These losses were partially offset by pre-tax
gains of $11.5 million recognized on purchases of
$964.8 million par value of our 0.94% senior
exchangeable notes due 2011.
The amount of gains (losses) on sales and retirements of
long-lived assets and other income(expense), net for 2008
represents a net loss of $15.0 million and includes:
(i) losses on derivative instruments of approximately
$14.6 million, including a $9.9 million loss on a
three-month written put option and a $4.7 million loss on
the fair value of our range-cap-and-floor derivative,
(ii) losses on retirements on long-lived assets of
approximately $13.2 million, inclusive of involuntary
conversion losses on long-lived assets of approximately
$12.0 million, net of insurance recoveries, related to
damage sustained from Hurricanes Gustav and Ike during 2008, and
(iii) increases of litigation expenses of
$3.5 million. These losses were partially offset by a
$12.2 million pre-tax gain recognized on our purchase of
$100 million par value of 0.94% senior exchangeable
notes due 2011.
The amount of gains (losses) on sales and retirements of
long-lived assets and other income(expense), net for 2007
represents a net loss of $11.3 million and includes:
(i) losses on retirements and impairment charges on
long-lived assets of approximately $40.0 million and
(ii) increases of litigation expenses of $9.6 million.
These losses were partially offset by the $38.6 million
gain on the sale of three accommodation
jack-up
rigs
in the second quarter of 2007.
Impairments
and Other Charges
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||
|
Goodwill impairments
|
$ | 14,689 | $ | 150,008 | $ | — | $ | (135,319 | ) | (90 | )% | $ | 150,008 | 100 | % | |||||||||||||
|
Impairment of long-lived assets to be disposed of other than by
sale
|
64,229 | — | — | 64,229 | 100 | % | — | — | ||||||||||||||||||||
|
Impairment of other intangible assets
|
— | 4,578 | — | (4,578 | ) | (100 | )% | 4,578 | 100 | % | ||||||||||||||||||
|
Impairment of oil and gas- related assets
|
205,897 | 21,537 | 41,017 | 184,360 | 856 | % | (19,480 | ) | (47 | )% | ||||||||||||||||||
|
Other-than-temporary
impairment on securities
|
54,314 | — | — | 54,314 | 100 | % | — | — | ||||||||||||||||||||
|
Total
|
$ | 339,129 | $ | 176,123 | $ | 41,017 | $ | 163,006 | 93 | % | $ | 135,106 | 329 | % | ||||||||||||||
During the years ended December 31, 2009 and 2008, we
recognized goodwill impairments of approximately
$14.7 million and $150.0 million, respectively,
related to our Canadian operations. During 2008, we
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impaired the entire goodwill balance of $145.4 million of
our Canada Well-servicing and Drilling operating segment and
recorded an impairment of $4.6 million to Nabors Blue Sky
Ltd., one of our Canadian subsidiaries reported in our Other
Operating segments. During 2009, we impaired the remaining
goodwill balance of $14.7 million of Nabors Blue Sky Ltd.
The impairment charges resulted from of our annual impairment
tests on goodwill which compared the estimated fair value of
each of our reporting units to its carrying value. The estimated
fair value of these business units was determined using
discounted cash flow models involving assumptions based on our
utilization of rigs or aircraft, revenues and earnings from
affiliates, as well as direct costs, general and administrative
costs, depreciation, applicable income taxes, capital
expenditures and working capital requirements. The impairment
charges were deemed necessary due to the continued downturn in
the oil and gas industry in Canada and the lack of certainty
regarding eventual recovery in the value of these operations.
This downturn has led to reduced capital spending by some of our
customers and has diminished demand for our drilling services
and for immediate access to remote drilling sites. A
significantly prolonged period of lower oil and natural gas
prices could 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. See Critical
Accounting Policies below and Note 2 — Summary of
Significant Accounting Policies (included under the caption
“Goodwill”) in Part II, Item 8. —
Financial Statements and Supplementary Data.
During the year ended December 31, 2009, we retired some
rigs and rig components in our U.S. Offshore, Alaska,
Canada and International Contract Drilling segments and reduced
their aggregate carrying value from $69.0 million to their
estimated aggregate salvage value, resulting in impairment
charges of approximately $64.2 million. The retirements
included inactive workover
jack-up
rigs
in our U.S. Offshore and International operations, the
structural frames of some incomplete coiled tubing rigs in our
Canada operations and miscellaneous rig components in our Alaska
operations. The impairment charges resulted from the continued
deterioration and longer than expected downturn in the demand
for oil and gas drilling activities. 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.
Also in 2009, we recorded impairments totaling
$205.9 million to some of the oil and gas-related assets of
our wholly owned Ramshorn business unit. We recorded an
impairment of $149.1 million to one of our oil and gas
financing receivables, which reduced the carrying value of our
oil and gas financing receivables recorded as long-term
investments to $92.5 million. The impairment resulted
primarily from commodity price deterioration and the lower price
environment lasting longer than expected. This prolonged period
of lower prices has significantly reduced demand for future gas
production and development in the Barnett Shale area of north
central Texas, which has influenced our decision not to expend
capital to develop on some of the undeveloped acreage. The
impairment was determined using discounted cash flow models
involving assumptions based on estimated cash flows for proved
and probable reserves, undeveloped acreage value, and current
and expected natural gas prices. We believe the estimates used
provide a reasonable estimate of current fair value. A further
protraction or continued period of lower commodity prices could
result in recognition of future impairment charges. During the
years ended December 31, 2009, 2008 and 2007, our
impairment tests on the oil and gas properties of our wholly
owned Ramshorn business unit resulted in impairment charges of
$56.8 million, $21.5 million and $41.0 million,
respectively. The impairments recognized during 2009 were
primarily the result of a write down of the carrying value of
some acreage in the U.S. and Canada because we do not have
future plans to develop. The impairments recognized during 2008
were primarily due to the significant decline in oil and natural
gas prices at the end of 2008. The impairments recognized during
2007 were necessary from lower than expected performance of some
oil and gas development wells. Additional discussion of our
policy pertaining to the calculations of these impairments is
set forth in “Oil and Gas Properties” under Critical
Accounting Estimates below in this section or in
Note 2 — Summary of Significant Accounting
Policies in Part II Item 8. — Financial
Statements and Supplementary Data.
In 2009, we recorded
other-than-temporary
impairments to our
available-for-sale
securities totaling $54.3 million. Of this,
$35.6 million was related to an investment in a corporate
bond that was downgraded to
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non-investment grade level by Standard and Poor’s and
Moody’s Investors Service during the year. Our
determination that the impairment was other than temporary was
based on a variety of factors, including the length of time and
extent to which the market value had been less than cost, the
financial condition of the issuer of the security, and the
credit ratings and recent reorganization of the issuer. The
remaining $18.7 million related to an equity security of a
public company whose operations are driven in large measure by
the price of oil and in which we invested approximately
$46 million during the second and third quarters of 2008.
During late 2008, demand for oil and gas began to diminish
significantly as part of the general deterioration of the global
economic environment, causing a broad decline in value of nearly
all oil and gas-related equity securities. Because the trading
price per share of this security remained below our cost basis
for an extended period, we determined the investment was other
than temporarily impaired and it was appropriate to write down
the investment’s carrying value to its current estimated
fair value of approximately $27.0 million at
December 31, 2009.
Income
tax rate
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 to 2008 | 2008 to 2007 | ||||||||||||||||||||||||
|
Effective income tax rate from continuing operations
|
64 | % | 30 | % | 20 | % | 34 | % | 113 | % | 10 | % | 50 | % | ||||||||||||||
Our effective income tax rate for 2009 reflects the disparity
between losses in our U.S. operations (attributable
primarily to impairments) and income in our other operations
primarily in lower tax jurisdictions. Because the
U.S. income tax rate is higher than that of other
jurisdictions, the tax benefit from our U.S. losses was not
proportionately reduced by the tax expense from our other
operations. The result is a net tax benefit that represents a
significant percentage (63.5%) of our consolidated loss before
income taxes. Because of the manner in which this number is
derived, we do not believe it presents a meaningful basis for
comparing our 2009 effective income tax rate to our 2008
effective income tax rate.
The increase in our effective income tax rate from 2007 to 2008
resulted from (1) our goodwill impairments which had no
associated tax benefit, (2) the reversal of certain tax
reserves during 2007 in the amount of $25.5 million,
(3) a decrease in 2007 tax expense of approximately
$16.0 million resulting from a reduction in Canada’s
tax rate, and (4) a higher proportion of our 2008 taxable
income being generated in the United States, which generally
imposes a higher tax rate than the other jurisdictions in which
we operate.
We are subject to income taxes in the U.S. and numerous
other jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. One of the
most volatile factors in this determination is the relative
proportion of our income or loss being recognized in high versus
low tax jurisdictions. In the ordinary course of our business,
there are many transactions and calculations for which the
ultimate tax determination is uncertain. We are regularly under
audit by tax authorities. Although we believe our tax estimates
are reasonable, the final outcome of tax audits and any related
litigation could be materially different than what is reflected
in our income tax provisions and accruals. The results of an
audit or litigation could materially affect our financial
position, income tax provision, net income, or cash flows.
Various bills have been introduced in Congress that could reduce
or eliminate the tax benefits associated with our reorganization
as a Bermuda company. Legislation enacted by Congress in 2004
provides that a corporation that reorganized in a foreign
jurisdiction on or after March 4, 2003 be treated as a
domestic corporation for United States federal income tax
purposes. Nabors’ reorganization was completed
June 24, 2002. There have been and we expect that there may
continue to be legislation proposed by Congress from time to
time which, if enacted, could limit or eliminate the tax
benefits associated with our reorganization.
Because we cannot predict whether legislation will ultimately be
adopted, no assurance can be given that the tax benefits
associated with our reorganization will ultimately accrue to the
benefit of the Company and its shareholders. It is possible that
future changes to the tax laws (including tax treaties) could
impact on our ability to realize the tax savings recorded to
date as well as future tax savings resulting from our
reorganization.
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Liquidity
and Capital Resources
Cash
Flows
Our cash flows depend, to a large degree, on the level of
spending by oil and gas companies for exploration, development
and production activities. Sustained increases or decreases in
the price of natural gas or oil could have a material impact on
these activities, and could also materially affect our cash
flows. Certain sources and uses of cash, such as the level of
discretionary capital expenditures, purchases and sales of
investments, issuances and repurchases of debt and of our common
shares are within our control and are adjusted as necessary
based on market conditions. The following is a discussion of our
cash flows for the years ended December 31, 2009 and 2008.
Operating Activities.
Net cash provided by
operating activities totaled $1.6 billion during 2009
compared to net cash provided by operating activities of
$1.5 billion during 2008. Net cash provided by operating
activities (“operating cash flows”) is our primary
source of capital and liquidity. Factors affecting changes in
operating cash flows are largely the same as those that affect
net earnings, with the exception of non-cash expenses such as
depreciation and amortization, depletion, impairments,
share-based compensation, deferred income taxes and our
proportionate share of earnings or losses from unconsolidated
affiliates. Net income (loss) adjusted for non-cash components
was approximately $1.1 billion and $1.7 billion for
the years ended December 31, 2009 and 2008, respectively.
Additionally, changes in working capital items such as
collection of receivables can be a significant component of
operating cash flows. Changes in working capital items provided
$471.9 million in cash flows for the year ended
December 31, 2009 and required $278.6 million in cash
flows for the year ended December 31, 2008.
Investing Activities.
Net cash used for
investing activities totaled $1.2 billion during 2009
compared to net cash used for investing activities of
$1.5 billion during 2008. During 2009 and 2008, cash was
used primarily for capital expenditures totaling
$1.1 billion and $1.5 billion, respectively, and
investments in unconsolidated affiliates totaling
$125.1 million and $271.3 million, respectively.
During 2009 and 2008, cash was derived from sales of
investments, net of purchases, totaling $24.4 million and
$251.6 million, respectively.
Financing Activities.
Net cash provided by
financing activities totaled $19.4 million during 2009
compared to net cash used for financing activities of
$89.2 million during 2008. During 2009, cash was derived
from the receipt of $1.1 billion in proceeds, net of debt
issuance costs, from the January 2009 issuance of
9.25% senior notes due 2019. Also during 2009, cash
totaling $862.6 million was used to purchase
$964.8 million par value of 0.94% senior exchangeable
notes due 2011 and cash totaling $225.2 million was used to
redeem the 4.875% senior notes. During 2008, cash totaling
$836.5 million was used to redeem Nabors Delaware’s
zero coupon senior exchangeable notes due 2023 and zero coupon
senior convertible debentures due 2021 and for the purchase of
$100 million par value of 0.94% senior exchangeable
notes due 2011 in the open market. During 2008, cash was used to
repurchase our common shares in the open market for
$281.1 million. Also during 2008, cash was provided by the
receipt of $955.6 million in net proceeds from the February
and July 2008 issuances of the 6.15% senior notes due 2018,
net of debt issuance costs. During 2009 and 2008, cash was
provided by our receipt of proceeds totaling $11.2 million
and $56.6 million, respectively, from the exercise by our
employees of options to acquire our common shares.
Future
Cash Requirements
As of December 31, 2009, we had long-term debt, including
current maturities, of $3.9 billion and cash and
investments of $1.2 billion, including $100.9 million
of long-term investments and other receivables. Long-term
investments and other receivables include $92.5 million in
oil and gas financing receivables.
Our 0.94% senior exchangeable notes mature in May 2011.
During 2008 and 2009 collectively, we purchased
$1.1 billion par value of these notes in the open market
for cash totaling $938.4 million, leaving approximately
$1.7 billion par value outstanding. The balance of these
notes will be reclassified to current debt in the second quarter
of 2010. We believe our positive cash flow from operations in
combination with our
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ability to access the capital markets will be sufficient to
enable us to satisfy the payment obligation due in May 2011.
Our 0.94% senior exchangeable notes due 2011 provide that
upon an exchange of these notes, we will be required to pay
holders of the notes cash up to the principal amount of the
notes and our common shares for any amount that the exchange
value of the notes exceeds the principal amount of the notes.
The notes cannot be exchanged until the price of our shares
exceeds approximately $59.57 for at least 20 trading days during
the period of 30 consecutive trading days ending on the last
trading day of the previous calendar quarter; or during the five
business days immediately following any ten consecutive trading
day period in which the trading price per note for each day of
that period was less than 95% of the product of the sale price
of Nabors’ common shares and the then applicable exchange
rate for the notes; or upon the occurrence of specified
corporate transactions set forth in the indenture. On
February 24, 2010, the closing market price for our common
stock was $21.92 per share. If any of the events described above
were to occur and the notes were exchanged at a purchase price
equal to 100% of the principal amount of the notes before
maturity in May 2011, the required cash payment could have a
significant impact on our level of cash and cash equivalents and
investments available to meet our other cash obligations.
Management believes that in the event the price of our shares
were to exceed $59.57 for the required period of time, the
holders of these notes would not be likely to exchange the notes
as it would be more economically beneficial to them if they sold
the notes to other investors on the open market. However, there
can be no assurance that the holders would not exchange the
notes.
As of December 31, 2009, we had outstanding purchase
commitments of approximately $152.4 million, primarily for
rig-related enhancements, construction and sustaining capital
expenditures and other operating expenses. Capital expenditures
over the next twelve months, including these outstanding
purchase commitments, are currently expected to total
approximately $.6 — $.8 billion, including
currently planned rig-related enhancements, construction and
sustaining capital expenditures. This amount could change
significantly based on market conditions and new business
opportunities. The level of our outstanding purchase commitments
and our expected level of capital expenditures over the next
twelve months represent a number of capital programs that are
currently underway. These programs, which are nearing an end,
have resulted in an expansion in the number of drilling and
well-servicing rigs that we own and operate and consist
primarily of land drilling and well-servicing rigs. The
expansion of our capital expenditure programs to build new
state-of-the-art
drilling rigs has impacted a majority of our operating segments,
most significantly within our U.S. Lower 48 Land Drilling,
U.S. Land Well-servicing, Alaska, Canada and International
operations.
We have historically completed a number of acquisitions and will
continue to evaluate opportunities to acquire assets or
businesses to enhance our operations. Several of our previous
acquisitions were funded through issuances of our common shares.
Future acquisitions may be paid for using existing cash or
issuing debt or Nabors shares. Such capital expenditures and
acquisitions will depend on our view of market conditions and
other factors.
See our discussion of guarantees issued by Nabors that could
have a potential impact on our financial position, results of
operations or cash flows in future periods included below under
Off-Balance Sheet Arrangements (Including Guarantees).
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The following table summarizes our contractual cash obligations
as of December 31, 2009:
| Payments Due by Period | ||||||||||||||||||||
| Total | < 1 Year | 1-3 Years | 3-5 Years | Thereafter | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Contractual cash obligations:
|
||||||||||||||||||||
|
Long-term debt:(1)
|
||||||||||||||||||||
|
Principal
|
$ | 4,061,255 | $ | 163 | $ | 1,961,002 | (2) | $ | 90 | $ | 2,100,000 | (3) | ||||||||
|
Interest
|
1,566,550 | 194,679 | 365,645 | 328,076 | 678,150 | |||||||||||||||
|
Operating leases(4)
|
35,550 | 15,498 | 13,705 | 4,840 | 1,507 | |||||||||||||||
|
Purchase commitments(5)
|
152,387 | 151,097 | 1,290 | — | — | |||||||||||||||
|
Employment contracts(4)
|
35,442 | 10,723 | 21,330 | 3,389 | — | |||||||||||||||
|
Pension funding obligations(6)
|
450 | 450 | — | — | — | |||||||||||||||
|
Total contractual cash obligations
|
$ | 5,851,634 | $ | 372,610 | $ | 2,362,972 | $ | 336,395 | $ | 2,779,657 | ||||||||||
The table above excludes liabilities for unrecognized tax
benefits totaling $107.5 million as of December 31,
2009 because we are unable to make reasonably reliable estimates
of the timing of cash settlements with the respective taxing
authorities. Further details on the unrecognized tax benefits
can be found in Note 12 — Income Taxes in
Part II, Item 8. — Financial Statements and
Supplementary Data.
| (1) | See Note 11 — Debt in Part II, Item 8. — Financial Statements and Supplementary Data. | |
| (2) | Includes the remaining portion of Nabors Delaware’s 0.94% senior exchangeable notes due May 2011 and 5.375% senior notes due August 2012. | |
| (3) | Represents Nabors Delaware’s aggregate 6.15% senior notes due February 2018 and 9.25% senior notes due January 2019. | |
| (4) | See Note 16 — Commitments and Contingencies in Part II, Item 8. - Financial Statements and Supplementary Data. | |
| (5) | Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transaction. | |
| (6) | See Note 14 — Pension, Postretirement and Postemployment Benefits in Part II, Item 8. — Financial Statements and Supplementary Data. |
We may from time to time seek to retire or purchase our
outstanding debt through cash purchases
and/or
exchanges for equity securities, both in open-market purchases,
privately negotiated transactions or otherwise. Such repurchases
or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material.
In July 2006 our Board of Directors authorized a share
repurchase program under which we may repurchase up to
$500 million of our common shares in the open market or in
privately negotiated transactions. Through December 31,
2009, $464.5 million of our common shares had been
repurchased under this program. As of December 31, 2009, we
had the capacity to repurchase up to an additional
$35.5 million of our common shares under the July
2006 share repurchase program.
See Note 16 — Commitments and Contingencies in
Part II, Item 8. — Financial Statements and
Supplementary Data for discussion of commitments and
contingencies relating to (i) new employment agreements,
effective April 1, 2009, that could result in significant
cash payments of $100 million and $50 million to
Messrs. Isenberg and Petrello, respectively, by the Company
if their employment is terminated in the event of death or
disability or cash payments of $100 million and
$45 million to Messrs. Isenberg and Petrello,
respectively, by the Company if their employment is terminated
without cause or in the event of a change in control and
(ii) off-balance sheet arrangements (including guarantees).
40
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Financial
Condition and Sources of Liquidity
Our primary sources of liquidity are cash and cash equivalents,
short-term and long-term investments and cash generated from
operations. As of December 31, 2009, we had cash and
investments of $1.2 billion (including $100.9 million
of long-term investments and other receivables, inclusive of
$92.5 million in oil and gas financing receivables) and
working capital of $1.6 billion. Oil and gas financing
receivables are classified as long-term investments. These
receivables represent our financing agreements for certain
production payment contracts in our Oil and Gas segment. This
compares to cash and investments of $824.2 million
(including $240.0 million of long-term investments and
other receivables, inclusive of $224.2 million in oil and
gas financing receivables) and working capital of
$1.0 billion as of December 31, 2008.
Our gross funded debt to capital ratio was 0.41:1 as of each
December 31, 2009 and 2008. Our net funded debt to capital
ratio was 0.33:1 as of December 31, 2009 and 0.35:1 as of
December 31, 2008.
The gross funded debt to capital ratio is calculated by dividing
(x) funded debt by (y) funded debt
plus
deferred tax liabilities (net of deferred tax assets)
plus
capital. Funded debt is the sum of
(1) short-term borrowings, (2) the current portion of
long-term debt and (3) long-term debt. Capital is
shareholders’ equity.
The net funded debt to capital ratio is calculated by dividing
(x) net funded debt by (y) net funded debt
plus
deferred tax liabilities (net of deferred tax assets)
plus
capital. Net funded debt is funded debt
minus
the sum of cash and cash equivalents and short-term and
long-term investments and other receivables. Both of these
ratios are used to calculate a company’s leverage in
relation to its capital. Neither ratio measures operating
performance or liquidity as defined by GAAP and, therefore, may
not be comparable to similarly titled measures presented by
other companies.
Our interest coverage ratio was 6.2:1 as of December 31,
2009 and 20.7:1 as of December 31, 2008. The interest
coverage ratio is a trailing
12-month
quotient of the sum of net income (loss) attributable to Nabors,
interest expense, depreciation and amortization, depletion
expense, impairments and other charges, income tax expense
(benefit) and our proportionate share of writedowns from our
unconsolidated oil and gas joint ventures
less
investment
income (loss) divided by cash interest expense. This ratio is a
method for calculating the amount of operating cash flows
available to cover cash interest expense. The interest coverage
ratio is not a measure of operating performance or liquidity
defined by GAAP and may not be comparable to similarly titled
measures presented by other companies.
We had four letter of credit facilities with various banks as of
December 31, 2009. Availability under our credit facilities
as of December 31, 2009 was as follows:
| (In thousands) | ||||
|
Credit available
|
$ | 245,442 | ||
|
Letters of credit outstanding, inclusive of financial and
|
||||
|
performance guarantees
|
(71,389 | ) | ||
|
Remaining availability
|
$ | 174,053 | ||
Our ability to access capital markets or to otherwise obtain
sufficient financing is enhanced by our senior unsecured debt
ratings as provided by Fitch Ratings, Moody’s Investors
Service and Standard & Poor’s, which are
currently “BBB+”, “Baa1” and
“BBB+”, respectively, and our historical ability to
access those markets as needed. While there can be no assurances
that we will be able to access these markets in the future, we
believe that we will be able to access capital markets or
otherwise obtain financing in order to satisfy any payment
obligation that might arise upon exchange or purchase of our
notes and that any cash payment due of this magnitude, in
addition to our other cash obligations, would not ultimately
have a material adverse impact on our liquidity or financial
position. In addition, Standard & Poor’s recently
affirmed its BBB+ credit rating, but revised its outlook to
negative from stable in early 2009 due primarily to worsening
industry conditions. A credit downgrade may impact our ability
to access credit markets.
Our current cash and investments and projected cash flows from
operations are expected to adequately finance our purchase
commitments, our scheduled debt service requirements, and all
other expected cash requirements for the next twelve months.
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See our discussion of the impact of changes in market conditions
on our derivative financial instruments discussed under
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
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. We have also guaranteed payment of
contingent consideration in conjunction with an acquisition in
2005. Potential contingent consideration is based on future
operating results of the acquired business. 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 and guarantees representing contingent
consideration in connection with a business combination:
| Maximum Amount | ||||||||||||||||||||
| 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Financial standby letters of credit and other financial surety
instruments
|
$ | 66,182 | $ | 10,808 | $ | 277 | $ | — | $ | 77,267 | ||||||||||
|
Contingent consideration in acquisition
|
— | 4,250 | — | — | 4,250 | |||||||||||||||
|
Total
|
$ | 66,182 | $ | 15,058 | $ | 277 | $ | — | $ | 81,517 | ||||||||||
Other
Matters
Recent
Legislation and Actions
In February 2009, Congress enacted the American Recovery and
Reinvestment Act of 2009 (the “Stimulus Act”). The
Stimulus Act is intended to provide a stimulus to the
U.S. economy, including relief to companies related to
income on debt repurchases and exchanges at a discount,
expansion of unemployment benefits to former employees and other
social welfare provisions. The Stimulus Act has not had a
significant impact on our consolidated financial statements.
A court 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
is excessive. We have asserted the lack of legally required
notice as a basis for challenging the judgment on appeal to the
Algeria Supreme Court. Based upon our understanding of
applicable law and precedent, we believe that this challenge
will be successful. We do not believe that a loss is probable
and have not accrued any amounts related to this matter.
However, the ultimate resolution and the timing thereof are
uncertain. If the Company is 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.
Recent
Accounting Pronouncements
On July 1, 2009, the Financial Accounting Standards Board
(“FASB”) released the Accounting Standards
Codification (“ASC”). The ASC became the single source
of authoritative nongovernmental GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The
ASC is not intended to change GAAP, but changes the approach by
42
Table of Contents
referencing authoritative literature by topic (each, a
“Topic”) rather than by type of standard. Accordingly,
references in the Notes to Consolidated Financial Statements to
former FASB positions, statements, interpretations, opinions,
bulletins or other pronouncements are now presented as
references to the corresponding Topic in the ASC.
Effective January 1, 2009, Nabors changed its method of
accounting for certain of its convertible debt instruments in
accordance with the revised provisions of the Debt with
Conversions and Other Options Topic of the ASC. Additionally,
Nabors changed its method for calculating its basic and diluted
earnings per share using the two-class method in accordance with
the revised provisions of the Earnings Per Share Topic of the
ASC. As required by the Accounting Changes and Error Corrections
Topic of the ASC, financial information and earnings per share
calculations for prior periods have been adjusted to reflect
retrospective application.
The revised provisions of the Debt with Conversions and Other
Options Topic clarify that convertible debt instruments that may
be settled in cash upon conversion are accounted for with a
liability component based on the fair value of a similar
nonconvertible debt instrument and an equity component based on
the excess of the initial proceeds from the convertible debt
instrument over the liability component. Such excess represents
proceeds related to the conversion option and is recorded as
capital in excess of par value. The liability is recorded at a
discount, which is then amortized as additional non-cash
interest expense over the convertible debt instrument’s
expected life. The retrospective application and impact of these
provisions on our consolidated financial statements is described
in Note 11 — Debt in Part II
Item 8. — Financial Statements and Supplementary
Data.
The revised provisions relating to use of the two-class method
for calculating earnings per share within the Earnings Per Share
Topic provide that securities which are granted in share-based
transactions are “participating securities” prior to
vesting if they have a nonforfeitable right to participate in
any dividends, and such securities therefore should be included
in computing basic earnings per share. Our awards of restricted
stock are considered participating securities under this
definition. The retrospective application and impact of these
provisions on our consolidated financial statements is set forth
in Note 17 — Earnings (Losses) Per Share in
Part II Item 8. — Financial Statements and
Supplementary Data.
Effective January 1, 2008, we adopted and applied the
provisions of the Fair Value Measurements and Disclosures Topic
of the ASC to our financial assets and liabilities and on
January 1, 2009 applied the same provisions to our
nonfinancial assets and liabilities. Effective April 1,
2009, we adopted the provisions of this Topic relating to fair
value measures in inactive markets. The provisions provide
additional guidance for determining whether a market for a
financial asset is not active and a transaction is not
distressed for fair value measurements. The application of these
provisions did not have a material impact on our consolidated
financial statements. Our fair value disclosures are provided in
Note 5 — Fair Value Measurements in Part II
Item 8. — Financial Statements and Supplementary
Data.
Effective January 1, 2009, we adopted the revised
provisions of the Business Combinations Topic of the ASC and
will apply those provisions on a prospective basis to
acquisitions. The revised provisions retain the fundamental
requirement that the acquisition method of accounting be used
for all business combinations and expands the use of the
acquisition method to all transactions and other events in which
one entity obtains control over one or more other businesses or
assets at the acquisition date and in subsequent periods. The
revised provisions require measurement at the acquisition date
of the fair value of assets acquired, liabilities assumed and
any noncontrolling interests. Additionally, acquisition-related
costs, including restructuring costs, are recognized as expense
separately from the acquisition.
Effective January 1, 2009, new provisions relating to
noncontrolling interests of a subsidiary within the Identifiable
Assets and Liabilities, and Any Noncontrolling Interest Topic of
the ASC were released. The provisions establish the accounting
and reporting standards for a noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The
provisions clarify that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. Our consolidated financial statements reflect the
adoption and have been adjusted to reflect retrospective
application. The application of these provisions did not have a
material impact on our consolidated financial statements.
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Table of Contents
Effective January 1, 2009, we adopted the revised
provisions relating to expanded disclosures of derivatives
within the Derivatives and Hedging Topic of the ASC. The revised
provisions are intended to improve financial reporting about
derivative instruments and hedging activities by requiring
enhanced qualitative and quantitative disclosures regarding such
instruments, gains and losses thereon and their effects on an
entity’s financial position, financial performance and cash
flows. The application of these provisions did not have a
material impact on our consolidated financial statements.
In December 2008, the SEC issued a Final Rule,
“Modernization of Oil and Gas Reporting.” This rule
revises some of the oil and gas reporting disclosures in
Regulation S-K
and
Regulation S-X
under the Securities Act and the Exchange Act, as well as
Industry Guide 2. Effective December 31, 2009, the FASB
issued revised guidance that substantially aligned the oil and
gas accounting disclosures with the SEC’s Final Rule. The
amendments are designed to modernize and update oil and gas
disclosure requirements to align them with current practices and
changes in technology. Additionally, this new accounting
standard requires that entities use
12-month
average natural gas and oil prices when calculating the
quantities of proved reserves and performing the full-cost
ceiling test calculation. The new standard also clarified that
an entity’s equity method investments must be considered in
determining whether it has significant oil and gas activities.
The disclosure requirements are effective for registration
statements filed on or after January 1, 2010 and for annual
financial statements filed on or after January 1, 2010. The
FASB provided a one-year deferral of the disclosure requirements
if an entity became subject to the requirements because of a
change to the definition of significant oil and gas activities.
When operating results from our wholly owned oil and gas
activities are considered with operating results from our
unconsolidated oil and gas joint ventures, which we account for
under the equity method of accounting, we have significant oil
and gas activities under the new definition. In line with the
one-year deferral, we will provide the oil and gas disclosures
in annual periods beginning after December 31, 2009.
Effective April 1, 2009, we adopted the provisions in the
Investments of Debt and Equity Securities Topic of the ASC
relating to recognition and presentation of other-than-temporary
impairments to debt securities. The impact of these provisions
is provided in Notes 3 — Impairments and Other
Charges and 4 — Cash, Cash Equivalents and Investments
in Part II Item 8. — Financial Statements
and Supplementary Data.
Effective June 30, 2009, we adopted the provisions in the
Financial Instruments Topic of the ASC relating to quarterly
disclosure of the fair value of financial instruments. The
disclosures required by this Topic are provided in
Note 5 — Fair Value Measurements in Part II
Item 8. — Financial Statements and Supplementary
Data.
Effective June 30, 2009, we adopted the revised provisions
in the Subsequent Events Topic of the ASC and evaluated
subsequent events through the date of the release of our
financial statements. The adoption of the Subsequent Events
Topic of the ASC did not have any impact on our financial
position, results of operations or cash flows.
Related-Party
Transactions
Nabors and its Chairman and Chief Executive Officer, its Deputy
Chairman, President and Chief Operating Officer, and certain
other key employees entered into split-dollar life insurance
agreements, pursuant to which we paid a portion of the premiums
under life insurance policies with respect to these individuals
and, in some instances, members of their families. These
agreements provide that we are reimbursed the premium payments
upon the occurrence of specified events, including the death of
an insured individual. Any recovery of premiums paid by Nabors
could be limited to the cash surrender value of the policies
under certain circumstances. As such, the values of these
policies are recorded at their respective cash surrender values
in our consolidated balance sheets. We have made premium
payments to date totaling $11.7 million related to these
policies. The cash surrender value of these policies of
approximately $9.3 million and $8.4 million is
included in other long-term assets in our consolidated balance
sheets as of December 31, 2009 and 2008, respectively.
Under the Sarbanes-Oxley Act of 2002, the payment of premiums by
Nabors under the agreements with our Chairman and Chief
Executive Officer and with our Deputy Chairman, President and
Chief Operating
44
Table of Contents
Officer could be deemed to be prohibited loans by us to these
individuals. Consequently, we have paid no premiums related to
our agreements with these individuals since the adoption of the
Sarbanes-Oxley Act.
In the ordinary course of business, we enter into various rig
leases, rig transportation and related oilfield services
agreements with our unconsolidated affiliates at market prices.
Revenues from business transactions with these affiliated
entities totaled $327.3 million, $285.3 million and
$153.4 million for the years ended December 31, 2009,
2008 and 2007, respectively. Expenses from business transactions
with these affiliated entities totaled $9.8 million,
$9.6 million and $6.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Additionally, we had accounts receivable from these affiliated
entities of $104.2 million and $107.5 million as of
December 31, 2009 and 2008, respectively. We had accounts
payable to these affiliated entities of $14.8 million and
$10.0 million as of December 31, 2009 and 2008,
respectively, and long-term payables with these affiliated
entities of $.8 million and $7.8 million as of
December 31, 2009 and 2008, respectively, which is included
in other long-term liabilities.
We own an interest in Shona Energy Company, LLC
(“Shona”), a company of which Mr. Payne, an
independent member of our Board of Directors, is the Chairman
and Chief Executive Officer. During the fourth quarter of 2008,
we purchased 1.8 million common shares of Shona for
$.9 million. During the first quarter of 2010, we purchased
shares of Shona’s preferred stock and warrants to purchase
additional common shares for $.9 million. After these
transactions, we hold a minority interest of approximately 11%
of the issued and outstanding shares of Shona.
Critical
Accounting Estimates
The preparation of our financial statements in conformity with
GAAP requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosures of contingent
assets and liabilities at the balance sheet date and the amounts
of revenues and expenses recognized during the reporting period.
We analyze our estimates based on our historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. However, actual results could differ from our
estimates. The following is a discussion of our critical
accounting estimates. Management considers an accounting
estimate to be critical if:
| • | it requires assumptions to be made that were uncertain at the time the estimate was made; and | |
| • | changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated financial position or results of operations. |
For a summary of all of our significant accounting policies, see
Note 2 — Summary of Significant Accounting
Policies in Part II, Item 8. — Financial
Statements and Supplementary Data.
Financial Instruments.
As defined in the ASC,
fair value is the price that would be received upon a sale of an
asset or paid upon a transfer of a liability in an orderly
transaction between market participants at the measurement date
(exit price). We utilize market data or assumptions that market
participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily
observable, market-corroborated, or generally unobservable. We
primarily apply the market approach for recurring fair value
measurements and endeavor to utilize the best information
available. Accordingly, we employ valuation techniques that
maximize the use of observable inputs and minimize the use of
unobservable inputs. The use of unobservable inputs is intended
to allow for fair value determinations in situations where there
is little, if any, market activity for the asset or liability at
the measurement date. We are able to classify fair value
balances utilizing a fair-value hierarchy based on the
observability of those inputs. Under the fair-value hierarchy
| • | Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market; | |
| • | Level 2 measurements include quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those |
45
Table of Contents
| that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and |
| • | Level 3 measurements include those that are unobservable and of a highly subjective measure. |
As part of adopting fair value measurement reporting on
January 1, 2008, we did not have a transition adjustment to
our retained earnings. Our enhanced disclosures are included in
Note 5 — Fair Value Measurements in Part II,
Item 8. — Financial Statements and Supplementary
Data.
Depreciation of Property, Plant and
Equipment.
The drilling, workover and
well-servicing industries are very capital intensive. Property,
plant and equipment represented 72% of our total assets as of
December 31, 2009, and depreciation constituted 18% of our
total costs and other deductions for the year ended
December 31, 2009.
Depreciation for our primary operating assets, drilling and
workover rigs, is calculated based on the units-of-production
method. For each day a rig is operating, we depreciate it over
an approximate 4,900-day period, with the exception of our
jack-up
rigs
which are depreciated over an 8,030-day period, after provision
for salvage value. For each day a rig asset is not operating, it
is depreciated over an assumed depreciable life of
20 years, with the exception of our
jack-up
rigs, where a
30-year
depreciable life is typically used, after provision for salvage
value.
Depreciation on our buildings, well-servicing rigs, oilfield
hauling and mobile equipment, marine transportation and supply
vessels, aircraft equipment, and other machinery and equipment
is computed using the straight-line method over the estimated
useful life of the asset after provision for salvage value
(buildings — 10 to 30 years; well-servicing
rigs — 3 to 15 years; marine transportation and
supply vessels — 10 to 25 years; aircraft
equipment — 5 to 20 years; oilfield hauling and
mobile equipment and other machinery and equipment — 3
to 10 years).
These depreciation periods and the salvage values of our
property, plant and equipment were determined through an
analysis of the useful lives of our assets and based on our
experience with the salvage values of these assets.
Periodically, we review our depreciation periods and salvage
values for reasonableness given current conditions. Depreciation
of property, plant and equipment is therefore based upon
estimates of the useful lives and salvage value of those assets.
Estimation of these items requires significant management
judgment. Accordingly, management believes that accounting
estimates related to depreciation expense recorded on property,
plant and equipment are critical.
There have been no factors related to the performance of our
portfolio of assets, changes in technology or other factors that
indicate that these estimates do not continue to be appropriate.
Accordingly, for the years ended December 31, 2009, 2008
and 2007, no significant changes have been made to the
depreciation rates applied to property, plant and equipment, the
underlying assumptions related to estimates of depreciation, or
the methodology applied. However, certain events could occur
that would materially affect our estimates and assumptions
related to depreciation. Unforeseen changes in operations or
technology could substantially alter management’s
assumptions regarding our ability to realize the return on our
investment in operating assets and therefore affect the useful
lives and salvage values of our assets.
Impairment of Long-Lived Assets.
As discussed
above, the drilling, workover and well-servicing industry is
very capital intensive. We review our assets for impairment when
events or changes in circumstances indicate that the carrying
amounts of property, plant and equipment may not be recoverable.
An impairment loss is recorded in the period in which it is
determined that the sum of estimated future cash flows, on an
undiscounted basis, is less than the carrying amount of the
long-lived asset. Such determination requires us to make
judgments regarding long-term forecasts of future revenues and
costs related to the assets subject to review in order to
determine the future cash flows associated with the assets.
These long-term forecasts are uncertain because they require
assumptions about demand for our products and services, future
market conditions, technological advances in the industry, and
changes in regulations governing the industry. Significant and
unanticipated changes to the assumptions could result in future
impairments. As the determination of whether impairment charges
should be recorded on our long-lived assets is subject to
significant management judgment and an impairment of these
assets could result in a material charge on our consolidated
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statements of income (loss), management believes that accounting
estimates related to impairment of long-lived assets are
critical.
Assumptions made in the determination of future cash flows are
made with the involvement of management personnel at the
operational level where the most specific knowledge of market
conditions and other operating factors exists. For the years
ended December 31, 2009, 2008 and 2007, no significant
changes have been made to the methodology utilized to determine
future cash flows.
Given the nature of the evaluation of future cash flows and the
application to specific assets and specific times, it is not
possible to reasonably quantify the impact of changes in these
assumptions. A significantly prolonged period of lower oil and
natural gas prices could continue to adversely affect the demand
for and prices of our services, which could result in future
impairment charges.
Impairment of Goodwill and Intangible
Assets.
Goodwill represented 1.5% of our total
assets as of December 31, 2009. We review goodwill and
intangible assets with indefinite lives for impairment annually
or more frequently if events or changes in circumstances
indicate that the carrying amount of such goodwill and
intangible assets exceed their fair value. We perform our
impairment tests of goodwill and intangible assets for ten
reporting units within our operating segments. These reporting
units consist of our six contract drilling segments:
U.S. Lower 48 Land Drilling, U.S. Land Well-servicing,
U.S. Offshore, Alaska, Canada and International; our oil
and gas segment; and three of our other operating segments:
Canrig Drilling Technology Ltd., Ryan Energy Technologies and
Nabors Blue Sky Ltd. The impairment test involves comparing the
estimated fair value of the reporting unit to its carrying
amount. If the carrying amount of the reporting unit exceeds its
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 the carrying
amount of that goodwill. If the carrying amount of the reporting
unit’s goodwill exceeds the implied fair value of the
goodwill, an impairment loss is recognized in an amount equal to
the excess. Our impairment test results required the second step
measurement for one of our ten reporting units during 2009 and
two of our ten reporting units during 2008.
The fair values calculated in these impairment tests are
determined using discounted cash flow models involving
assumptions based on our utilization of rigs or aircraft,
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
that are 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%. We
believe the fair value estimated for purposes of these tests
represent a Level 3 fair value measurement.
During the years ended December 31, 2009 and 2008, we
recognized goodwill impairments of approximately
$14.7 million and $150.0 million, respectively, both
related to our Canadian operations. During 2008, we impaired the
entire goodwill balance of $145.4 million of our Canada
Well-servicing and Drilling operating segment and recorded an
impairment of $4.6 million to Nabors Blue Sky Ltd., one of
our Canadian subsidiaries reported in our Other Operating
segments. During 2009, we impaired the remaining goodwill
balance of $14.7 million of Nabors Blue Sky Ltd. The
impairment charges were deemed necessary due to the continued
downturn in the oil and gas industry in Canada and the lack of
certainty regarding eventual recovery in the value of these
operations. This downturn has led to reduced capital spending by
our customers and diminished demand for our drilling services
and for immediate access to remote drilling sites. A
significantly prolonged period of lower oil and natural gas
prices 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.
For the year ended December 31, 2007, our annual impairment
test indicated the fair value of our reporting unit’s
goodwill and intangible assets exceeded carrying amounts.
Oil and Gas Properties.
We follow the
successful-efforts method of accounting for our consolidated
subsidiaries’ oil and gas activities. Under the
successful-efforts method, lease acquisition costs and all
development costs are capitalized. Our provision for depletion
is based on these capitalized costs and is
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determined on a
property-by-property
basis using the units-of-production method. Proved property
acquisition costs are amortized over total proved reserves.
Costs of wells and related equipment and facilities are
amortized over the life of proved developed reserves. Estimated
fair value of proved and unproved properties includes the
estimated present value of all reasonably expected future
production, prices, and costs. Proved oil and gas properties are
reviewed when circumstances suggest the need for such a review
and, are written down to their estimated fair value, if
required. Unproved properties are reviewed to determine if there
has been impairment of the carrying value and when circumstances
suggest an impairment has occurred, are written down to their
estimated fair value in that period. The estimated fair value of
our proved reserves generally declines when there is a
significant and sustained decline in oil and natural gas prices.
For the years ended December 31, 2009, 2008 and 2007, our
impairment tests on the oil and gas-related assets of our wholly
owned Ramshorn business unit resulted in impairment charges of
$205.9 million, $21.5 million and $41.0 million,
respectively. As discussed above in
Recent Accounting
Pronouncements
, we adopted new guidance relating to the
manner in which our oil and gas reserves are estimated as of
December 31, 2009.
Exploratory drilling costs are capitalized until the results are
determined. If proved reserves are not discovered, the
exploratory drilling costs are expensed. Interest costs related
to financing major oil and gas projects in progress are
capitalized until the projects are evaluated or until the
projects are substantially complete and ready for their intended
use if the projects are evaluated as successful. Other
exploratory costs are expensed as incurred.
Our unconsolidated oil and gas joint ventures, which we account
for under the equity method of accounting, utilize the full-cost
method of accounting for costs related to oil and natural gas
properties. Under this method, all such costs (for both
productive and nonproductive properties) are capitalized and
amortized on an aggregate basis over the estimated lives of the
properties using the units-of-production method. However, these
capitalized costs are subject to a ceiling test which limits
such pooled costs to the aggregate of the present value of
future net revenues attributable to proved oil and natural gas
reserves, discounted at 10%, plus the lower of cost or market
value of unproved properties. As discussed above in
Recent
Accounting Pronouncements
and in relation to the full-cost
ceiling test, our unconsolidated oil and gas joint ventures
changed the manner in which their oil and gas reserves are
estimated and the manner in which they calculate the ceiling
limit on capitalized oil and gas costs as of December 31,
2009. Under the new guidance, future revenues for purposes of
the ceiling test are valued using a
12-month
average price, adjusted for the impact of derivatives accounted
for as cash flow hedges as prescribed by the SEC rules. For the
year ended December 31, 2009, our unconsolidated oil and
gas joint ventures’ application of the full-cost ceiling
test resulted in impairment charges, of which
$237.1 million represented our proportionate share.
For the years ended December 31, 2008 and 2007, our
unconsolidated oil and gas joint ventures evaluated the
full-cost ceiling using then-current prices for oil and natural
gas, adjusted for the impact of derivatives accounted for as
cash flow hedges. Our U.S., international and Canadian joint
ventures’ application of the full-cost ceiling test
resulted in impairment charges during 2008, of which
$228.3 million represented our proportionate share. There
were no ceiling test impairment charges recorded by our
unconsolidated oil and gas joint ventures during 2007.
A significantly prolonged period of lower oil and natural gas
prices or reserve quantities could continue to adversely affect
the demand for and prices of our services, which could result in
future impairment charges due to the potential impact on our
estimate of our future operating results.
Income Taxes.
Deferred taxes represent a
substantial liability for Nabors. For financial reporting
purposes, management determines our current tax liability as
well as those taxes incurred as a result of current operations
yet deferred until future periods. In accordance with the
liability method of accounting for income taxes as specified in
the Income Taxes Topic of the ASC, the provision for income
taxes is the sum of income taxes both currently payable and
deferred. Currently payable taxes represent the liability
related to our income tax return for the current year while the
net deferred tax expense or benefit represents the change in the
balance of deferred tax assets or liabilities reported on our
consolidated balance sheets. The tax effects of unrealized gains
and losses on investments and derivative financial instruments
are recorded through accumulated other comprehensive income
(loss) within equity. The changes in deferred tax assets or
liabilities are
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determined based upon changes in differences between the basis
of assets and liabilities for financial reporting purposes and
the basis of assets and liabilities for tax purposes as measured
by the enacted tax rates that management estimates will be in
effect when these differences reverse. Management must make
certain assumptions regarding whether tax differences are
permanent or temporary and must estimate the timing of their
reversal, and whether taxable operating income in future periods
will be sufficient to fully recognize any gross deferred tax
assets. Valuation allowances are established to reduce deferred
tax assets when it is more likely than not that some portion or
all of the deferred tax assets will not be realized. In
determining the need for valuation allowances, management has
considered and made judgments and estimates regarding estimated
future taxable income and ongoing prudent and feasible tax
planning strategies. These judgments and estimates are made for
each tax jurisdiction in which we operate as the calculation of
deferred taxes is completed at that level. Further, under
U.S. federal tax law, the amount and availability of loss
carryforwards (and certain other tax attributes) are subject to
a variety of interpretations and restrictive tests applicable to
Nabors and our subsidiaries. The utilization of such
carryforwards could be limited or effectively lost upon certain
changes in ownership. Accordingly, although we believe
substantial loss carryforwards are available to us, no assurance
can be given concerning the realization of such loss
carryforwards, or whether or not such loss carryforwards will be
available in the future. These loss carryforwards are also
considered in our calculation of taxes for each jurisdiction in
which we operate. Additionally, we record reserves for uncertain
tax positions that are subject to a significant level of
management judgment related to the ultimate resolution of those
tax positions. Accordingly, management believes that the
estimate related to the provision for income taxes is critical
to our results of operations. See Part I,
Item 1A. — Risk Factors —
We may
have additional tax liabilities
and Note 12 —
Income Taxes in Part II, Item 8. — Financial
Statements and Supplementary Data for additional discussion.
Effective January 1, 2007, we adopted the revised
provisions of the Income Taxes Topic in the ASC relating to
uncertain tax positions. In connection with that adoption, we
recognized increases to our tax reserves for uncertain tax
positions along with interest and penalties as an increase to
other long-term liabilities and as a reduction to retained
earnings at January 1, 2007. See Note 12 —
Income Taxes in Part II, Item 8. — Financial
Statements and Supplementary Data for additional discussion.
We are subject to income taxes in both the United States and
numerous foreign 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 under audit 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 that reflected in historical 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.
However, certain events could occur that would materially affect
management’s estimates and assumptions regarding the
deferred portion of our income tax provision, including
estimates of future tax rates applicable to the reversal of tax
differences, the classification of timing differences as
temporary or permanent, reserves recorded for uncertain tax
positions, and any valuation allowance recorded as a reduction
to our deferred tax assets. Management’s assumptions
related to the preparation of our income tax provision have
historically proved to be reasonable in light of the ultimate
amount of tax liability due in all taxing jurisdictions.
For the year ended December 31, 2009, our provision for
income taxes from continuing operations was
$(149.2) million, consisting of $69.5 million of
current tax expense and $(218.7) million of deferred tax
expense. Changes in management’s estimates and assumptions
regarding the tax rate applied to deferred tax assets and
liabilities, the ability to realize the value of deferred tax
assets, or the timing of the reversal of tax basis differences
could potentially impact the provision for income taxes and
could potentially change the effective tax rate. A 1% change in
the effective tax rate from 63.5% to 62.5% would increase the
current year income tax provision by approximately
$2.4 million.
Self-Insurance Reserves.
Our operations are
subject to many hazards inherent in the drilling, workover and
well-servicing industries, including blowouts, cratering,
explosions, fires, loss of well control, loss of hole, damaged
or lost drilling equipment and damage or loss from inclement
weather or natural disasters. Any of these hazards could result
in personal injury or death, damage to or destruction of
equipment and facilities,
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suspension of operations, environmental damage and damage to the
property of others. Generally, drilling contracts provide for
the division of responsibilities between a drilling company and
its customer, and we seek to obtain indemnification from our
customers by contract for certain of these risks. To the extent
that we are unable to transfer such risks to customers by
contract or indemnification agreements, we seek protection
through insurance. However, there is no assurance that such
insurance or indemnification agreements will adequately protect
us against liability from all of the consequences of the hazards
described above. Moreover, our insurance coverage generally
provides that we assume a portion of the risk in the form of a
deductible or self-insured retention.
Based on the risks discussed above, it is necessary for us to
estimate the level of our liability related to insurance and
record reserves for these amounts in our consolidated financial
statements. Reserves related to self-insurance are based on the
facts and circumstances specific to the claims and our past
experience with similar claims. The actual outcome of
self-insured claims could differ significantly from estimated
amounts. We maintain actuarially determined accruals in our
consolidated balance sheets to cover self-insurance retentions
for workers’ compensation, employers’ liability,
general liability and automobile liability claims. These
accruals are based on certain assumptions developed utilizing
historical data to project future losses. Loss estimates in the
calculation of these accruals are adjusted based upon actual
claim settlements and reported 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.
Because the determination of our liability for self-insured
claims is subject to significant management judgment and in
certain instances is based on actuarially estimated and
calculated amounts, and because such liabilities could be
material in nature, management believes that accounting
estimates related to self-insurance reserves are critical.
For the years ended December 31, 2009, 2008 and 2007, no
significant changes have been made to the methodology utilized
to estimate insurance reserves. For purposes of earnings
sensitivity analysis, if the December 31, 2009 reserves for
insurance were adjusted (increased or decreased) by 10%, total
costs and other deductions would change by $13.9 million,
or .4%.
Fair Value of Assets Acquired and Liabilities
Assumed.
We have completed a number of
acquisitions in recent years as discussed in
Note 5 — Fair Value Measurements in Part II,
Item 8. — Financial Statements and Supplementary
Data. In conjunction with our accounting for these acquisitions,
it was necessary for us to estimate the values of the assets
acquired and liabilities assumed in the various business
combinations using various assumptions. These estimates may be
affected by such factors as changing market conditions,
technological advances in the industry or changes in regulations
governing the industry. The most significant assumptions, and
the ones requiring the most judgment, involve the estimated fair
values of property, plant and equipment, and the resulting
amount of goodwill, if any. Unforeseen changes in operations or
technology could substantially alter management’s
assumptions and could result in lower estimates of values of
acquired assets or of future cash flows. This could result in
impairment charges being recorded in our consolidated statements
of income (loss). As the determination of the fair value of
assets acquired and liabilities assumed is subject to
significant management judgment and a change in purchase price
allocations could result in a material difference in amounts
recorded in our consolidated financial statements, management
believes that accounting estimates related to the valuation of
assets acquired and liabilities assumed are critical.
The determination of the fair value of assets and liabilities is
based on the market for the assets and the settlement value of
the liabilities. These estimates are made by management based on
our experience with similar assets and liabilities. For the
years ended December 31, 2009, 2008 and 2007, no
significant changes have been made to the methodology utilized
to value assets acquired or liabilities assumed. Our estimates
of the fair values of assets acquired and liabilities assumed
have proved to be reliable in the past.
Given the nature of the evaluation of the fair value of assets
acquired and liabilities assumed and the application to specific
assets and liabilities, it is not possible to reasonably
quantify the impact of changes in these assumptions.
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Share-Based Compensation.
We have historically
compensated our executives and employees, in part, with stock
options and restricted stock. Based on the requirements of the
Stock Compensation Topic of the ASC, we accounted for stock
option and restricted stock awards in 2007, 2008 and 2009 using
a fair-value based method, resulting in compensation expense for
stock-based awards being recorded in our consolidated statements
of income (loss). Determining the fair value of stock-based
awards at the grant date requires judgment, including estimating
the expected term of stock options, the expected volatility of
our stock and expected dividends. In addition, judgment is
required in estimating the amount of stock-based awards that are
expected to be forfeited. Because the determination of these
various assumptions is subject to significant management
judgment and different assumptions could result in material
differences in amounts recorded in our consolidated financial
statements, management believes that accounting estimates
related to the valuation of stock-based awards are critical.
The assumptions used to estimate the fair market value of our
stock options are based on historical and expected performance
of our common shares in the open market, expectations with
regard to the pattern with which our employees will exercise
their options and the likelihood that dividends will be paid to
holders of our common shares. For the years ended
December 31, 2009, 2008 and 2007, no significant changes
have been made to the methodology utilized to determine the
assumptions used in these calculations.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We may be exposed to certain market risks arising from the use
of financial instruments in the ordinary course of business.
This risk arises primarily as a result of potential changes in
the fair market value of financial instruments due to adverse
fluctuations in foreign currency exchange rates, credit risk,
interest rates, and marketable and non-marketable security
prices as discussed below.
Foreign Currency Risk.
We operate in a number
of international areas and are involved in transactions
denominated in currencies other than U.S. dollars, which
exposes us to foreign exchange rate risk and foreign currency
devaluation risk. The most significant exposures arise in
connection with our operations in Venezuela and Canada, which
usually are substantially unhedged.
At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer
contracts and foreign exchange contracts to selectively hedge
our exposure to exchange rate fluctuations in connection with
monetary assets, liabilities, cash flows and commitments
denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an
agreement to exchange different currencies at a given future
date and at a specified rate. A hypothetical 10% decrease in the
value of all our foreign currencies relative to the
U.S. dollar as of December 31, 2009 would result in a
$8.2 million decrease in the fair value of our net monetary
assets denominated in currencies other than U.S. dollars.
Credit Risk.
Our financial instruments that
potentially subject us to concentrations of credit risk consist
primarily of cash equivalents, investments and marketable and
non-marketable securities, oil and gas financing receivables,
accounts receivable and our range-cap-and-floor derivative
instrument. Cash equivalents such as deposits and temporary cash
investments are held by major banks or investment firms. Our
investments in marketable and non-marketable securities are
managed within established guidelines which limit the amounts
that may be invested with any one issuer and provide guidance as
to issuer credit quality. We believe that the credit risk in our
cash and investment portfolio is minimized as a result of the
mix of our investments. In addition, our trade receivables are
with a variety of U.S., international and foreign-country
national oil and gas companies. Management considers this credit
risk to be limited due to the financial resources of these
companies. We perform ongoing credit evaluations of our
customers and we generally do not require material collateral.
We do occasionally require prepayment of amounts from customers
whose creditworthiness is in question prior to providing
services to them. We maintain reserves for potential credit
losses, and these losses historically have been within
management’s expectations.
Interest Rate, and Marketable and Non-marketable Security
Price Risk.
Our financial instruments that are
potentially sensitive to changes in interest rates include the
0.94% senior exchangeable notes, our 5.375%, 6.15% and
9.25% senior notes, our range-cap-and-floor derivative
instrument, our investments in debt
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securities (including corporate, asset-backed,
U.S.-government,
foreign-government, mortgage-backed debt and mortgage-CMO debt
securities) and our investments in overseas funds that invest
primarily in a variety of public and private U.S. and
non-U.S. securities
(including asset-backed and mortgage-backed securities, global
structured-asset securitizations, whole-loan mortgages, and
participations in whole loans and whole-loan mortgages), which
are classified as non-marketable securities.
We may utilize derivative financial instruments that are
intended to manage our exposure to interest rate risks. We
account for derivative financial instruments under the
Derivatives Topic of the ASC. The use of derivative financial
instruments could expose us to further credit risk and market
risk. Credit risk in this context is the failure of a
counterparty to perform under the terms of the derivative
contract. When the fair value of a derivative contract is
positive, the counterparty would owe us, which can create credit
risk for us. When the fair value of a derivative contract is
negative, we would owe the counterparty, and therefore, we would
not be exposed to credit risk. We attempt to minimize credit
risk in derivative instruments by entering into transactions
with major financial institutions that have a significant asset
base. Market risk related to derivatives is the adverse effect
on the value of a financial instrument that results from changes
in interest rates. We try to manage market risk associated with
interest-rate contracts by establishing and monitoring
parameters that limit the type and degree of market risk that we
undertake.
On October 21, 2002, we entered into an interest rate swap
transaction with a third-party financial institution to hedge
our exposure to changes in the fair value of $200 million
of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge. Additionally on that
date, we purchased a LIBOR range-cap and sold a LIBOR floor, in
the form of a cashless collar, with the same third-party
financial institution with the intention of mitigating and
managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify
for hedge accounting treatment and any change in the cumulative
fair value of this transaction is reflected as a gain or loss in
our consolidated statements of income (loss). In June 2004, we
unwound $100 million of the $200 million
range-cap-and-floor derivative instrument. During the fourth
quarter of 2005, we unwound the interest rate swap resulting in
a loss of $2.7 million, which has been deferred and will be
recognized as an increase to interest expense over the remaining
life of our 5.375% senior notes due 2012. During the year
ended December 31, 2005, we recorded interest savings of
$2.7 million related to our interest rate swap agreement
accounted for as a fair value hedge, which served to reduce
interest expense.
The fair value of our range-cap-and-floor transaction is
recorded as a derivative liability and included in other
long-term liabilities. It totaled approximately
$3.3 million and $4.7 million as of December 31,
2009 and 2008, respectively. We recorded a gain of approximately
$1.4 million for the year ended December 31, 2009 and
losses of approximately $4.7 million and $1.3 million
for the years ended December 31, 2008 and 2007,
respectively, related to this derivative instrument; these
amounts are included in losses (gains) on sales and retirements
of long-lived assets and other expense (income), net in our
consolidated statements of income (loss).
A hypothetical 10% adverse shift in quoted interest rates as of
December 31, 2009 would decrease the fair value of our
range-cap-and-floor derivative instrument by approximately
$.3 million.
In September 2008 we entered into a three-month written put
option for one million of our common shares with a strike price
of $25 per share. We settled this contract during the fourth
quarter of 2008 and paid cash of $22.6 million, net of the
premium received, and recognized a loss of $9.9 million
which is included in losses (gains) on sales and retirements of
long-lived assets and other expense (income), net in our
consolidated statements of income (loss).
Fair Value of Financial Instruments.
As of
January 1, 2008, we adopted the provisions of the Fair
Value Measurements and Disclosures Topic of the ASC and have
estimated the fair value of our financial instruments in
accordance with this framework. The fair value of our fixed rate
long-term debt is estimated based on
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quoted market prices or prices quoted from third-party financial
institutions. The carrying and fair values of our long-term
debt, including the current portion, are as follows:
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
|
Effective
|
Carrying
|
Fair
|
Effective
|
Carrying
|
Fair
|
|||||||||||||||||||
| Interest Rate | Value | Value | Interest Rate | Value | Value | |||||||||||||||||||
| (In thousands, except interest rates) | ||||||||||||||||||||||||
|
0.94% senior exchangeable notes due May 2011(1)
|
6.13 | % | $ | 1,576,480 | $ | 1,668,368 | 6.13 | % | $ | 2,362,822 | $ | 2,199,500 | ||||||||||||
|
6.15% senior notes due February 2018
|
6.42 | % | 965,066 | 992,531 | 6.42 | % | 963,859 | 835,244 | ||||||||||||||||
|
9.25% senior notes due January 2019
|
9.40 | % | 1,125,000 | 1,403,719 | — | — | — | |||||||||||||||||
|
5.375% senior notes due August 2012(3)
|
5.69 | % | 273,350 | 289,072 | 5.69 | %(2) | 272,724 | 262,411 | ||||||||||||||||
|
4.875% senior notes due August 2009
|
— | — | — | 5.10 | % | 224,829 | 227,239 | |||||||||||||||||
|
Other
|
4.50 | % | 872 | 872 | 4.50 | % | 1,329 | 1,329 | ||||||||||||||||
| $ | 3,940,768 | $ | 4,354,562 | $ | 3,825,563 | $ | 3,525,723 | |||||||||||||||||
| (1) | During 2009 and 2008, we purchased $964.8 million and $100 million, respectively, par value of these notes in the open market. | |
| (2) | Includes the effect of interest savings realized from the interest-rate swap executed on October 21, 2002. | |
| (3) | Includes $1.1 million and $1.5 million as of December 31, 2009 and 2008, respectively, related to the unamortized loss on the interest rate swap that was unwound during the fourth quarter of 2005. |
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The fair values of our cash equivalents, trade receivables and
trade payables approximate their carrying values due to the
short-term nature of these instruments. Our cash, cash
equivalents, short-term and long-term investments and other
receivables are included in the table below:
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||||||
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||
| Fair Value | Rates | Life (Years) | Fair Value | Rates | Life (Years) | |||||||||||||||
| (In thousands, except interest rates) | ||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 927,815 | 0%-1.55% | 0.00 | $ | 442,087 | .51%-2.0% | 0.00 | ||||||||||||
|
Short-term investments:
|
||||||||||||||||||||
|
Trading equity securities
|
24,014 | — | — | 14,263 | — | — | ||||||||||||||
|
Available-for-sale equity securities
|
93,651 | — | — | 55,453 | — | — | ||||||||||||||
|
Available-for-sale debt securities:
|
||||||||||||||||||||
|
Commercial paper and CDs
|
1,284 | .25% | .6 | 1,119 | 2.75% | .6 | ||||||||||||||
|
Corporate debt securities
|
33,852 | .38%-14.00% | 2.6 | 40,302 | 1.5%-14.00% | 3.5 | ||||||||||||||
|
U.S.-government
debt securities
|
— | — | — | 1,816 | 6.0% | .1 | ||||||||||||||
|
Mortgage-backed debt securities
|
861 | 5.15%-5.18% | 3.0 | 7,619 | 3.98%-5.42% | .9 | ||||||||||||||
|
Mortgage-CMO debt securities
|
5,411 | 2.58%-6.23% | 1.9 | 15,326 | 1.58%-8.73% | .9 | ||||||||||||||
|
Asset-backed debt securities
|
3,963 | 2.64%-6.22% | 2.1 | 6,260 | .51%-5.19% | 6.3 | ||||||||||||||
|
Total available-for-sale debt securities
|
45,371 | 72,442 | ||||||||||||||||||
|
Total available-for-sale securities
|
139,022 | 127,895 | ||||||||||||||||||
|
Total short-term investments
|
163,036 | 142,158 | ||||||||||||||||||
|
Long-term investments and other receivables:
|
||||||||||||||||||||
|
Actively managed funds
|
8,341 | N/A | 15,710 | N/A | ||||||||||||||||
|
Oil and gas financing receivables
|
92,541 | 13.10%-13.52% | 224,242 | 13.10%-13.52% | ||||||||||||||||
|
Total long-term investments and other receivables
|
100,882 | 239,952 | ||||||||||||||||||
|
Total cash, cash equivalents, short-term and long-term
investments and other receivables
|
$ | 1,191,733 | $ | 824,197 | ||||||||||||||||
Our investments in debt securities listed in the above table and
a portion of our long-term investments are sensitive to changes
in interest rates. Additionally, our investment portfolio of
debt and equity securities, which are carried at fair value,
exposes us to price risk. A hypothetical 10% decrease in the
market prices for all securities as of December 31, 2009
would decrease the fair value of our trading securities and
available-for-sale securities by $2.4 million and
$13.9 million, respectively.
54
Table of Contents
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Nabors Industries
Ltd.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income (loss), changes in
equity and cash flows present fairly, in all material respects,
the financial position of Nabors Industries Ltd. and its
subsidiaries at December 31, 2009 and 2008, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule and on the Company’s internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for convertible debt instruments and participating securities
included in the computation of earnings per share as of
January 1, 2009. Additionally, as discussed in Note 2
to the consolidated financial statements, the Company changed
the manner in which its oil and gas reserves are estimated, and
its unconsolidated oil and gas joint ventures changed the manner
in which their oil and gas reserves are estimated as well as the
manner in which prices are determined to calculate the ceiling
limit on capitalized oil and gas costs as of December 31,
2009.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Houston, Texas
February 26, 2010
56
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands, except per share amounts) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 927,815 | $ | 442,087 | ||||
|
Short-term investments
|
163,036 | 142,158 | ||||||
|
Accounts receivable, net
|
724,040 | 1,160,768 | ||||||
|
Inventory
|
100,819 | 150,118 | ||||||
|
Deferred income taxes
|
125,163 | 28,083 | ||||||
|
Other current assets
|
135,791 | 243,379 | ||||||
|
Total current assets
|
2,176,664 | 2,166,593 | ||||||
|
Long-term investments and other receivables
|
100,882 | 239,952 | ||||||
|
Property, plant and equipment, net
|
7,646,050 | 7,331,959 | ||||||
|
Goodwill
|
164,265 | 175,749 | ||||||
|
Investment in unconsolidated affiliates
|
306,608 | 411,727 | ||||||
|
Other long-term assets
|
250,221 | 191,919 | ||||||
|
Total assets
|
$ | 10,644,690 | $ | 10,517,899 | ||||
| LIABILITIES AND EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Current portion of long-term debt
|
$ | 163 | $ | 225,030 | ||||
|
Trade accounts payable
|
226,423 | 424,908 | ||||||
|
Accrued liabilities
|
346,337 | 367,393 | ||||||
|
Income taxes payable
|
35,699 | 111,528 | ||||||
|
Total current liabilities
|
608,622 | 1,128,859 | ||||||
|
Long-term debt
|
3,940,605 | 3,600,533 | ||||||
|
Other long-term liabilities
|
240,057 | 247,560 | ||||||
|
Deferred income taxes
|
673,427 | 622,523 | ||||||
|
Total liabilities
|
5,462,711 | 5,599,475 | ||||||
|
Commitments and contingencies (Note 16)
|
||||||||
|
Equity:
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Common shares, par value $.001 per share:
|
||||||||
|
Authorized common shares 800,000; issued 313,915 and 312,343,
respectively
|
314 | 312 | ||||||
|
Capital in excess of par value
|
2,239,323 | 2,129,415 | ||||||
|
Accumulated other comprehensive income
|
292,706 | 53,520 | ||||||
|
Retained earnings
|
3,613,186 | 3,698,732 | ||||||
|
Less: treasury shares, at cost, 29,414 common shares
|
(977,873 | ) | (977,873 | ) | ||||
|
Total shareholders’ equity
|
5,167,656 | 4,904,106 | ||||||
|
Noncontrolling interest
|
14,323 | 14,318 | ||||||
|
Total equity
|
5,181,979 | 4,918,424 | ||||||
|
Total liabilities and equity
|
$ | 10,644,690 | $ | 10,517,899 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
57
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Revenues and other income:
|
||||||||||||
|
Operating revenues
|
$ | 3,692,356 | $ | 5,511,896 | $ | 4,938,848 | ||||||
|
Earnings (losses) from unconsolidated affiliates
|
(214,681 | ) | (229,834 | ) | 17,724 | |||||||
|
Investment income (loss)
|
25,756 | 21,726 | (15,891 | ) | ||||||||
|
Total revenues and other income
|
3,503,431 | 5,303,788 | 4,940,681 | |||||||||
|
Costs and other deductions:
|
||||||||||||
|
Direct costs
|
2,012,352 | 3,110,316 | 2,764,559 | |||||||||
|
General and administrative expenses
|
429,663 | 479,984 | 436,282 | |||||||||
|
Depreciation and amortization
|
668,415 | 614,367 | 469,669 | |||||||||
|
Depletion
|
11,078 | 25,442 | 31,165 | |||||||||
|
Interest expense
|
264,948 | 196,718 | 154,920 | |||||||||
|
Losses (gains) on sales and retirements of long-lived assets and
other expense (income), net
|
12,962 | 15,027 | 11,315 | |||||||||
|
Impairments and other charges
|
339,129 | 176,123 | 41,017 | |||||||||
|
Total costs and other deductions
|
3,738,547 | 4,617,977 | 3,908,927 | |||||||||
|
Income (loss) from continuing operations before income taxes
|
(235,116 | ) | 685,811 | 1,031,754 | ||||||||
|
Income tax expense (benefit):
|
||||||||||||
|
Current
|
69,532 | 188,832 | 227,951 | |||||||||
|
Deferred
|
(218,760 | ) | 17,315 | (26,455 | ) | |||||||
|
Total income tax expense (benefit)
|
(149,228 | ) | 206,147 | 201,496 | ||||||||
|
Income (loss) from continuing operations, net of tax
|
(85,888 | ) | 479,664 | 830,258 | ||||||||
|
Income from discontinued operations, net of tax
|
— | — | 35,024 | |||||||||
|
Net income (loss)
|
(85,888 | ) | 479,664 | 865,282 | ||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
342 | (3,927 | ) | 420 | ||||||||
|
Net income (loss) attributable to Nabors
|
$ | (85,546 | ) | $ | 475,737 | $ | 865,702 | |||||
|
Earnings (losses) per Nabors share:
|
||||||||||||
|
Basic from continuing operations
|
$ | (.30 | ) | $ | 1.69 | $ | 2.96 | |||||
|
Basic from discontinued operations
|
— | — | .12 | |||||||||
|
Total Basic
|
$ | (.30 | ) | $ | 1.69 | $ | 3.08 | |||||
|
Diluted from continuing operations
|
$ | (.30 | ) | $ | 1.65 | $ | 2.88 | |||||
|
Diluted from discontinued operations
|
— | — | .12 | |||||||||
|
Total Diluted
|
$ | (.30 | ) | $ | 1.65 | $ | 3.00 | |||||
|
Weighted-average number of common shares outstanding:
|
||||||||||||
|
Basic
|
283,326 | 281,622 | 281,238 | |||||||||
|
Diluted
|
283,326 | 288,236 | 288,226 | |||||||||
The details of credit-related impairments to investments is
presented below:
| (In thousands) | ||||
|
Other-than-temporary
impairment on debt security
|
$ | 40,300 | ||
|
Less:
other-than-temporary
impairment recognized in accumulated other comprehensive income
(loss)
|
(4,651 | ) | ||
|
Credit-related impairment on investment(1)
|
$ | 35,649 | ||
| (1) | Included in Impairments and other charges (Note 3) |
The accompanying notes are an integral part of these
consolidated financial statements.
58
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss) attributable to Nabors
|
$ | (85,546 | ) | $ | 475,737 | $ | 865,702 | |||||
|
Adjustments to net income (loss):
|
||||||||||||
|
Depreciation and amortization
|
668,415 | 614,367 | 474,016 | |||||||||
|
Depletion
|
11,078 | 25,442 | 31,165 | |||||||||
|
Deferred income tax expense (benefit)
|
(218,760 | ) | 17,315 | (62,893 | ) | |||||||
|
Deferred financing costs amortization
|
6,133 | 7,661 | 8,352 | |||||||||
|
Pension liability amortization and adjustments
|
844 | 160 | 277 | |||||||||
|
Discount amortization on long-term debt
|
86,802 | 123,739 | 127,887 | |||||||||
|
Amortization of loss on hedges
|
580 | 548 | 551 | |||||||||
|
Impairments and other charges
|
339,129 | 176,123 | 41,017 | |||||||||
|
Losses on long-lived assets, net
|
12,339 | 9,644 | 4,318 | |||||||||
|
Losses (gains) on investments, net
|
(9,954 | ) | 18,736 | 61,395 | ||||||||
|
Gains on debt retirement, net
|
(11,197 | ) | (12,248 | ) | — | |||||||
|
Gain on disposition of Sea Mar business
|
— | — | (49,500 | ) | ||||||||
|
Losses on derivative instruments
|
338 | 4,783 | 1,347 | |||||||||
|
Share-based compensation
|
106,725 | 45,401 | 30,176 | |||||||||
|
Foreign currency transaction losses (gains), net
|
8,372 | (2,718 | ) | (3,223 | ) | |||||||
|
Equity in (earnings) losses of unconsolidated affiliates, net of
dividends
|
229,813 | 236,763 | (5,136 | ) | ||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
||||||||||||
|
Accounts receivable
|
450,530 | (157,697 | ) | 93,490 | ||||||||
|
Inventory
|
52,995 | (26,774 | ) | (28,668 | ) | |||||||
|
Other current assets
|
205,108 | (81,764 | ) | (47,959 | ) | |||||||
|
Other long-term assets
|
(22,233 | ) | (85,231 | ) | (117,237 | ) | ||||||
|
Trade accounts payable and accrued liabilities
|
(146,470 | ) | 38,129 | 4,501 | ||||||||
|
Income taxes payable
|
(62,535 | ) | 24,043 | (80,692 | ) | |||||||
|
Other long-term liabilities
|
(5,534 | ) | 10,665 | 46,023 | ||||||||
|
Net cash provided by operating activities
|
1,616,972 | 1,462,824 | 1,394,909 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchases of investments
|
(32,674 | ) | (269,983 | ) | (378,318 | ) | ||||||
|
Sales and maturities of investments
|
57,033 | 521,613 | 860,385 | |||||||||
|
Cash paid for acquisition of businesses, net
|
— | (287 | ) | (8,391 | ) | |||||||
|
Investment in unconsolidated affiliates
|
(125,076 | ) | (271,309 | ) | (278,100 | ) | ||||||
|
Capital expenditures
|
(1,093,435 | ) | (1,506,979 | ) | (2,039,180 | ) | ||||||
|
Proceeds from sales of assets and insurance claims
|
31,375 | 69,842 | 162,055 | |||||||||
|
Proceeds from sale of Sea Mar business
|
— | — | 194,332 | |||||||||
|
Net cash used for investing activities
|
(1,162,777 | ) | (1,457,103 | ) | (1,487,217 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Increase (decrease) in cash overdrafts
|
(18,157 | ) | 23,858 | (38,416 | ) | |||||||
|
Proceeds from long-term debt
|
1,124,978 | 962,901 | — | |||||||||
|
Debt issuance costs
|
(8,832 | ) | (7,324 | ) | — | |||||||
|
Proceeds from issuance of common shares
|
11,249 | 56,630 | 61,620 | |||||||||
|
Reduction in long-term debt
|
(1,081,801 | ) | (836,511 | ) | — | |||||||
|
Repurchase of equity component of convertible debt
|
(6,586 | ) | — | — | ||||||||
|
Repurchase of common shares
|
— | (281,101 | ) | (102,451 | ) | |||||||
|
Purchase of restricted stock
|
(1,515 | ) | (13,061 | ) | (1,811 | ) | ||||||
|
Tax benefit related to
share-based
awards
|
37 | 5,369 | 2,159 | |||||||||
|
Net cash provided by (used for) financing activities
|
19,373 | (89,239 | ) | (78,899 | ) | |||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
12,160 | (5,701 | ) | 1,964 | ||||||||
|
Net increase in cash and cash equivalents
|
485,728 | (89,219 | ) | (169,243 | ) | |||||||
|
Cash and cash equivalents, beginning of period
|
442,087 | 531,306 | 700,549 | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 927,815 | $ | 442,087 | $ | 531,306 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
59
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
|
Accumulated Other Comprehensive
|
||||||||||||||||||||||||||||||||||||||||
| Income (Loss) | ||||||||||||||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||||||||||||||
|
Common
|
Gains
|
|||||||||||||||||||||||||||||||||||||||
| Shares |
Capital in
|
(Losses) on
|
Cumulative
|
|||||||||||||||||||||||||||||||||||||
|
Par
|
Excess of
|
Marketable
|
Translation
|
Retained
|
Treasury
|
Noncontrolling
|
Total
|
|||||||||||||||||||||||||||||||||
| Shares | Value | Par Value | Securities | Adjustment | Other | Earnings | Shares | Interest | Equity | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Balances, December 31, 2006
|
299,333 | $ | 299 | $ | 2,060,747 | $ | 33,400 | $ | 171,160 | $ | (3,299 | ) | $ | 2,402,277 | $ | (775,484 | ) | $ | 14,971 | $ | 3,904,071 | |||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
865,702 | (420 | ) | 865,282 | ||||||||||||||||||||||||||||||||||||
|
Translation adjustment
|
153,487 | 2,243 | 155,730 | |||||||||||||||||||||||||||||||||||||
|
Unrealized gains/(losses) on marketable securities, net of
income taxes of $704
|
14,164 | 14,164 | ||||||||||||||||||||||||||||||||||||||
|
Less: reclassification adjustment for (gains)/losses included in
net income, net of income taxes of $2,664
|
(47,283 | ) | (47,283 | ) | ||||||||||||||||||||||||||||||||||||
|
Pension liability amortization, net of income taxes of $101
|
176 | 176 | ||||||||||||||||||||||||||||||||||||||
|
Pension liability adjustment, net of income taxes of $319
|
679 | 679 | ||||||||||||||||||||||||||||||||||||||
|
Amortization of loss on cash flow hedges
|
151 | 151 | ||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income (loss)
|
— | — | — | (33,119 | ) | 153,487 | 1,006 | 865,702 | — | (1,823 | ) | 988,899 | ||||||||||||||||||||||||||||
|
Cumulative effect of adoption for uncertain tax positions
|
(44,984 | ) | (44,984 | ) | ||||||||||||||||||||||||||||||||||||
|
Investment in noncontrolling interest
|
33 | 33 | ||||||||||||||||||||||||||||||||||||||
|
Distributions from noncontrolling interest
|
(2,908 | ) | (2,908 | ) | ||||||||||||||||||||||||||||||||||||
|
Disposition of operations relating to Sea Mar business from
noncontrolling interest
|
549 | 549 | ||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares for stock options exercised, net of
surrender of unexercised stock options
|
4,521 | 5 | 61,615 | 61,620 | ||||||||||||||||||||||||||||||||||||
|
Nabors Exchangeco shares exchanged
|
51 | — | ||||||||||||||||||||||||||||||||||||||
|
Repurchase of 3,782 treasury shares
|
(102,451 | ) | (102,451 | ) | ||||||||||||||||||||||||||||||||||||
|
Tax benefit related to share-based awards
|
(17,147 | ) | (17,147 | ) | ||||||||||||||||||||||||||||||||||||
|
Restricted stock awards, net
|
1,553 | 1 | (1,812 | ) | (1,811 | ) | ||||||||||||||||||||||||||||||||||
|
Share-based compensation, net of tender offer for stock options
|
30,176 | 30,176 | ||||||||||||||||||||||||||||||||||||||
|
Subtotal
|
6,125 | 6 | 72,832 | — | — | — | (44,984 | ) | (102,451 | ) | (2,326 | ) | (76,923 | ) | ||||||||||||||||||||||||||
|
Balances, December 31, 2007
|
305,458 | $ | 305 | $ | 2,133,579 | $ | 281 | $ | 324,647 | $ | (2,293 | ) | $ | 3,222,995 | $ | (877,935 | ) | $ | 14,468 | $ | 4,816,047 | |||||||||||||||||||
60
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY —
(Continued)
| Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||||||||||||||
|
Common
|
Gains
|
|||||||||||||||||||||||||||||||||||||||
| Shares |
Capital in
|
(Losses) on
|
Cumulative
|
|||||||||||||||||||||||||||||||||||||
|
Par
|
Excess of
|
Marketable
|
Translation
|
Retained
|
Treasury
|
Noncontrolling
|
Total
|
|||||||||||||||||||||||||||||||||
| Shares | Value | Par Value | Securities | Adjustment | Other | Earnings | Shares | Interest | Equity | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Balances, December 31, 2007
|
305,458 | $ | 305 | $ | 2,133,579 | $ | 281 | $ | 324,647 | $ | (2,293 | ) | $ | 3,222,995 | $ | (877,935 | ) | $ | 14,468 | $ | 4,816,047 | |||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||||||
|
Net income
|
475,737 | 3,927 | 479,664 | |||||||||||||||||||||||||||||||||||||
|
Translation adjustment
|
(228,865 | ) | (2,537 | ) | (231,402 | ) | ||||||||||||||||||||||||||||||||||
|
Unrealized gains/(losses) on marketable securities, net of
income tax benefit of $4,374
|
(37,190 | ) | (37,190 | ) | ||||||||||||||||||||||||||||||||||||
|
Less: reclassification adjustment for (gains)/ losses included
in net income, net of income taxes of $129
|
(51 | ) | (51 | ) | ||||||||||||||||||||||||||||||||||||
|
Pension liability amortization, net of income taxes of $56
|
104 | 104 | ||||||||||||||||||||||||||||||||||||||
|
Pension liability adjustment, net of income tax benefit of $1,915
|
(3,009 | ) | (3,009 | ) | ||||||||||||||||||||||||||||||||||||
|
Unrealized gain/(loss) and amortization of (gains)/losses on
cash flow hedges, net of income taxes of $163
|
(104 | ) | (104 | ) | ||||||||||||||||||||||||||||||||||||
|
Total comprehensive income (loss)
|
— | — | — | (37,241 | ) | (228,865 | ) | (3,009 | ) | 475,737 | — | (1,390 | ) | 208,012 | ||||||||||||||||||||||||||
|
Issuance of common shares for stock options exercised
|
2,480 | 2 | 56,628 | 56,630 | ||||||||||||||||||||||||||||||||||||
|
Distributions from noncontrolling interest
|
(1,540 | ) | (1,540 | ) | ||||||||||||||||||||||||||||||||||||
|
Nabors Exchangeco shares exchanged
|
16 | — | ||||||||||||||||||||||||||||||||||||||
|
Issuance of 5,246 treasury shares related to conversion of notes
|
(181,163 | ) | 181,163 | — | ||||||||||||||||||||||||||||||||||||
|
Repurchase of 8,538 treasury shares
|
(281,101 | ) | (281,101 | ) | ||||||||||||||||||||||||||||||||||||
|
Repurchase of equity component of convertible debt
|
(35 | ) | (35 | ) | ||||||||||||||||||||||||||||||||||||
|
Tax benefit related to the redemption of convertible debt
|
81,789 | 81,789 | ||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to share-based awards
|
6,282 | 6,282 | ||||||||||||||||||||||||||||||||||||||
|
Restricted stock awards, net
|
4,389 | 5 | (13,066 | ) | (13,061 | ) | ||||||||||||||||||||||||||||||||||
|
Share-based compensation
|
45,401 | 45,401 | ||||||||||||||||||||||||||||||||||||||
|
Subtotal
|
6,885 | 7 | (4,164 | ) | — | — | — | — | (99,938 | ) | (1,540 | ) | (105,635 | ) | ||||||||||||||||||||||||||
|
Balances, December 31, 2008
|
312,343 | $ | 312 | $ | 2,129,415 | $ | (36,960 | ) | $ | 95,782 | $ | (5,302 | ) | $ | 3,698,732 | $ | (977,873 | ) | $ | 14,318 | $ | 4,918,424 | ||||||||||||||||||
61
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY —
(Continued)
| Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||||||||||||||
|
Common
|
Gains
|
|||||||||||||||||||||||||||||||||||||||
| Shares |
Capital in
|
(Losses) on
|
Cumulative
|
|||||||||||||||||||||||||||||||||||||
|
Par
|
Excess of
|
Marketable
|
Translation
|
Retained
|
Treasury
|
Noncontrolling
|
Total
|
|||||||||||||||||||||||||||||||||
| Shares | Value | Par Value | Securities | Adjustment | Other | Earnings | Shares | Interest | Equity | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Balances, December 31, 2008
|
312,343 | $ | 312 | $ | 2,129,415 | $ | (36,960 | ) | $ | 95,782 | $ | (5,302 | ) | $ | 3,698,732 | $ | (977,873 | ) | $ | 14,318 | $ | 4,918,424 | ||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
(85,546 | ) | (342 | ) | (85,888 | ) | ||||||||||||||||||||||||||||||||||
|
Translation adjustment
|
150,290 | 2,024 | 152,314 | |||||||||||||||||||||||||||||||||||||
|
Unrealized gains/(losses) on marketable securities, net of
income tax benefit of $839
|
36,727 | 36,727 | ||||||||||||||||||||||||||||||||||||||
|
Unrealized gains/(losses) on adjusted basis for marketable debt
security, net of income taxes of $1,199
|
1,956 | 1,956 | ||||||||||||||||||||||||||||||||||||||
|
Less: reclassification adjustment for (gains)/losses included in
net income, net of income tax benefit of $4,921
|
49,386 | 49,386 | ||||||||||||||||||||||||||||||||||||||
|
Pension liability amortization, net of income taxes of $325
|
519 | 519 | ||||||||||||||||||||||||||||||||||||||
|
Pension liability adjustment, net of income taxes of $89
|
130 | 130 | ||||||||||||||||||||||||||||||||||||||
|
Amortization of (gains)/ losses on cash flow hedges, net of
income tax benefit of $18
|
178 | 178 | ||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income (loss)
|
— | — | — | 88,069 | 150,290 | 827 | (85,546 | ) | — | 1,682 | 155,322 | |||||||||||||||||||||||||||||
|
Issuance of common shares for stock options exercised, net of
surrender of unexercised stock options
|
1,476 | 2 | 11,247 | 11,249 | ||||||||||||||||||||||||||||||||||||
|
Distributions from noncontrolling interest
|
(1,677 | ) | (1,677 | ) | ||||||||||||||||||||||||||||||||||||
|
Nabors Exchangeco shares exchanged
|
105 | — | ||||||||||||||||||||||||||||||||||||||
|
Repurchase of equity component of convertible debt
|
(6,586 | ) | (6,586 | ) | ||||||||||||||||||||||||||||||||||||
|
Tax benefit related to stock option exercises
|
37 | 37 | ||||||||||||||||||||||||||||||||||||||
|
Restricted stock awards, net
|
(9 | ) | (1,515 | ) | (1,515 | ) | ||||||||||||||||||||||||||||||||||
|
Share-based compensation
|
106,725 | 106,725 | ||||||||||||||||||||||||||||||||||||||
|
Subtotal
|
1,572 | 2 | 109,908 | — | — | — | — | — | (1,677 | ) | 108,233 | |||||||||||||||||||||||||||||
|
Balances, December 31, 2009
|
313,915 | $ | 314 | $ | 2,239,323 | $ | 51,109 | $ | 246,072 | $ | (4,475 | ) | $ | 3,613,186 | $ | (977,873 | ) | $ | 14,323 | $ | 5,181,979 | |||||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
62
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
Nabors is the largest land drilling contractor in the world,
with approximately 542 actively marketed land drilling rigs. We
conduct oil, gas and geothermal land drilling operations in the
U.S. Lower 48 states, Alaska, Canada, South America,
Mexico, the Caribbean, the Middle East, the Far East, Russia and
Africa. We are also one of the largest land well-servicing and
workover contractors in the United States and Canada. We
actively market approximately 558 rigs for land workover and
well-servicing work in the United States, primarily in the
southwestern and western United States, and approximately 172
rigs for land workover and well-servicing work in Canada. Nabors
is a leading provider of offshore platform workover and drilling
rigs, and actively markets 40 platform, 13
jack-up
and
3 barge rigs in the United States and multiple international
markets. These rigs provide well-servicing, workover and
drilling services. We have a 51% ownership interest in a joint
venture in Saudi Arabia, which owns and actively markets 9 rigs
in addition to the rigs we lease to the joint venture. We also
offer a wide range of ancillary well-site services, including
engineering, transportation, construction, maintenance, well
logging, directional drilling, rig instrumentation, data
collection and other support services in select domestic and
international markets. We provide logistics services for onshore
drilling in Canada using helicopters and fixed-wing aircraft. 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 also invest in oil and
gas exploration, development and production activities in the
U.S., Canada and international areas through both our wholly
owned subsidiaries and our separate joint venture entities. We
hold a 50% ownership interest in our Canadian entity and 49.7%
ownership interests in our U.S. and International entities.
Each joint venture pursues development and exploration projects
with our existing customers and with other operators in a
variety of forms, including operated and non-operated working
interests, joint ventures, farm-outs and acquisitions.
The majority of our business is conducted through our various
Contract Drilling operating segments, which include our
drilling, workover and well-servicing operations, on land and
offshore. Our oil and gas exploration, development and
production operations are included in our Oil and Gas operating
segment. Our operating segments engaged in drilling technology
and top drive manufacturing, directional drilling, rig
instrumentation and software, and construction and logistics
operations are aggregated in our Other Operating Segments.
During the third quarter of 2007 we sold our Sea Mar business to
an unrelated third party. Accordingly, the accompanying
consolidated statements of income (loss), and certain
accompanying notes to the consolidated financial statements,
have been updated to retroactively reclassify the operating
results of the Sea Mar business, previously included in Other
Operating Segments, as a discontinued operation for all periods
presented. See Note 20 — Discontinued Operation
for additional discussion.
The accompanying consolidated financial statements and related
footnotes are presented in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”). Certain reclassifications have been made to
prior periods to conform to the current period presentation,
with no effect on our consolidated financial position, results
of operations or cash flows.
As used in the Report, “we,” “us,”
“our,” “the Company” and “Nabors”
means Nabors Industries Ltd. and, where the context requires,
includes our subsidiaries and “Nabors Delaware” means
Nabors Industries, Inc., a Delaware corporation, and our
subsidiaries.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
Nabors, as well as all majority owned and non-majority owned
subsidiaries required to be consolidated under GAAP. Our
consolidated financial statements exclude majority owned
entities for which we do not have either (1) the ability to
control the
63
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 as a single amount
in our consolidated balance sheets. Investments in
unconsolidated affiliates accounted for using the equity method
totaled $305.7 million and $410.8 million and
investments in unconsolidated affiliates accounted for using the
cost method totaled $.9 million as of each
December 31, 2009 and 2008, respectively. Similarly,
investments in certain offshore funds classified as
non-marketable are accounted for using the equity method of
accounting based on our ownership interest in each fund.
Cash
and Cash Equivalents
Cash and cash equivalents include demand deposits and various
other short-term investments with original maturities of three
months or less.
Investments
Short-term
investments
Short-term investments consist of equity securities,
certificates of deposit, corporate debt securities,
U.S.-government
debt securities, foreign-government debt securities,
mortgage-backed debt securities and asset-backed debt
securities. Securities classified as
available-for-sale
or trading are stated at fair value. Unrealized holding gains
and temporary losses for
available-for-sale
securities are excluded from earnings and, until realized, are
reported net of taxes in a separate component of equity.
Unrealized holding losses are included in earnings during the
period for which the loss is determined to be
other-than-temporary.
Gains and losses from changes in the market value of securities
classified as trading are reported in earnings currently.
In computing realized gains and losses on the sale of equity
securities, the specific-identification method is used. In
accordance with this method, the cost of the equity securities
sold is determined using the specific cost of the security when
originally purchased.
Long-term
investments and other receivables
Our oil and gas financing receivables are classified as
long-term investments. These receivables represent our financing
agreements for certain production payment contracts in our Oil
and Gas segment. We have also invested in overseas funds that
invest primarily in a variety of public and private
U.S. and
non-U.S. securities
(including asset-backed and mortgage-backed securities, global
structured-asset securitizations, whole-loan mortgages, and
participations in whole loans and whole-loan mortgages). These
investments are classified as non-marketable, because they do
not have published fair values. We account for these funds under
the equity method of accounting based on our percentage
ownership interest and recognize gains or losses, as investment
income (loss), currently based on changes in the net asset value
of our investment during the current period.
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.
64
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Property,
Plant and Equipment
Property, plant and equipment, including renewals and
betterments, are stated at cost, while maintenance and repairs
are expensed currently. Interest costs applicable to the
construction of qualifying assets are capitalized as a component
of the cost of such assets. We provide for the depreciation of
our drilling and workover rigs using the
units-of-production
method. For each day a rig is operating, we depreciate it over
an approximate 4,900-day period, with the exception of our
jack-up
rigs
which are depreciated over an 8,030-day period, after provision
for salvage value. For each day a rig asset is not operating, it
is depreciated over an assumed depreciable life of
20 years, with the exception of our
jack-up
rigs, where a
30-year
depreciable life is used, after provision for salvage value.
Depreciation on our buildings, well-servicing rigs, oilfield
hauling and mobile equipment, marine transportation and supply
vessels, aircraft equipment, and other machinery and equipment
is computed using the straight-line method over the estimated
useful life of the asset after provision for salvage value
(buildings — 10 to 30 years; well-servicing
rigs — 3 to 15 years; marine transportation and
supply vessels — 10 to 25 years; aircraft
equipment — 5 to 20 years; oilfield hauling and
mobile equipment and other machinery and equipment — 3
to 10 years). Amortization of capitalized leases is
included in depreciation and amortization expense. Upon
retirement or other disposal of fixed assets, the cost and
related accumulated depreciation are removed from the respective
accounts and any gains or losses are included in our results of
operations.
We review our assets for impairment when events or changes in
circumstances indicate that the carrying amounts of property,
plant and equipment may not be recoverable. An impairment loss
is recorded in the period in which it is determined that the sum
of estimated future cash flows, on an undiscounted basis, is
less than the carrying amount of the long-lived asset.
Impairment charges are recorded using discounted cash flows
which requires the estimation of dayrates and utilization, and
such estimates can change based on market conditions,
technological advances in the industry or changes in regulations
governing the industry. Significant and unanticipated changes to
the assumptions could result in future impairments. A
significantly prolonged period of lower oil and natural gas
prices could continue to adversely affect the demand for and
prices of our services, which could result in future impairment
charges. As the determination of whether impairment charges
should be recorded on our long-lived assets is subject to
significant management judgment and an impairment of these
assets could result in a material charge on our consolidated
statements of income (loss), management believes that accounting
estimates related to impairment of long-lived assets are
critical.
Oil
and Gas Properties
We follow the successful-efforts method of accounting for our
consolidated subsidiaries’ oil and gas activities. Under
the successful-efforts method, lease acquisition costs and all
development costs are capitalized. Our provision for depletion
is based on these capitalized costs and is determined on a
property-by-property
basis using the
units-of-production
method. Proved property acquisition costs are amortized over
total proved reserves. Costs of wells and related equipment and
facilities are amortized over the life of proved developed
reserves. Estimated fair value of proved and unproved properties
includes the estimated present value of all reasonably expected
future production, prices, and costs. Proved oil and gas
properties are reviewed when circumstances suggest the need for
such a review and, are written down to their estimated fair
value, if required. Unproved properties are reviewed to
determine if there has been impairment of the carrying value and
when circumstances suggest an impairment has occurred, are
written down to their estimated fair value in that period. We
consider the fair value estimates a Level 3 fair value
measurement. The estimated fair value of our proved reserves
generally declines when there is a significant and sustained
decline in oil and natural gas prices. For the years ended
December 31, 2009, 2008 and 2007, our impairment tests on
the oil and gas-related assets of our wholly owned Ramshorn
business unit resulted in impairment charges of
$205.9 million, $21.5 million and $41.0 million,
respectively. As further discussed below in
Recent
Accounting
65
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pronouncements
, we adopted new guidance relating to the
manner in which our oil and gas reserves are estimated as of
December 31, 2009.
Exploratory drilling costs are capitalized until the results are
determined. If proved reserves are not discovered, the
exploratory drilling costs are expensed. Interest costs related
to financing major oil and gas projects in progress are
capitalized until the projects are evaluated or until the
projects are substantially complete and ready for their intended
use if the projects are evaluated as successful. Other
exploratory costs are expensed as incurred.
Our unconsolidated oil and gas joint ventures, which we account
for under the equity method of accounting, utilize the full-cost
method of accounting for costs related to oil and natural gas
properties. Under this method, all such costs (for both
productive and nonproductive properties) are capitalized and
amortized on an aggregate basis over the estimated lives of the
properties using the
units-of-production
method. However, these capitalized costs are subject to a
ceiling test which limits pooled costs to the aggregate of the
present value of future net revenues attributable to proved oil
and natural gas reserves, discounted at 10%, plus the lower of
cost or market value of unproved properties. As further
discussed below in
Recent Accounting Pronouncements
and
in relation to the full-cost ceiling test, our unconsolidated
oil and gas joint ventures changed the manner in which their oil
and gas reserves are estimated and the manner in which they
calculate the ceiling limit on capitalized oil and gas costs as
of December 31, 2009. Under the new guidance, future
revenues for purposes of the ceiling test are valued using a
12-month
average price, adjusted for the impact of derivatives accounted
for as cash flow hedges as prescribed by the Securities and
Exchange Commission (“SEC”) rules. For the year ended
December 31, 2009, our unconsolidated oil and gas joint
ventures’ application of the full-cost ceiling test
resulted in impairment charges, of which $237.1 million
represented our proportionate share.
For the years ended December 31, 2008 and 2007, our
unconsolidated oil and gas joint ventures evaluated the
full-cost ceiling using then-current prices for oil and natural
gas, adjusted for the impact of derivatives accounted for as
cash flow hedges. Our unconsolidated oil and gas joint
ventures’ application of the
full-cost
ceiling test resulted in impairment charges during 2008, of
which $228.3 million represented our proportionate share.
There were no ceiling test impairment charges recorded by our
unconsolidated oil and gas joint ventures during 2007.
A significantly prolonged period of lower oil and natural gas
prices or a reduction to the estimation of reserve quantities
could continue to result in future impairment charges to our oil
and gas properties.
Goodwill
Goodwill represents the cost in excess of fair value of the net
assets of companies acquired. We review goodwill and intangible
assets with indefinite lives for impairment annually or more
frequently if events or changes in circumstances indicate that
the carrying amount of the reporting unit exceeds its fair
value. A significantly prolonged period of lower oil and natural
gas prices 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. See Note 3 — Impairments and Other
Charges for discussion of goodwill impairments.
66
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The change in the carrying amount of goodwill for our various
Contract Drilling segments and our Other Operating Segments for
the years ended December 31, 2009 and 2008 was as follows:
|
Acquisitions and
|
Cumulative
|
|||||||||||||||||||
|
Balance as of
|
Purchase Price
|
Translation
|
Balance as of
|
|||||||||||||||||
| December 31, 2007 | Adjustments | Impairments | Adjustment | December 31, 2008 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Contract Drilling:
|
||||||||||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 30,154 | $ | — | $ | — | $ | — | $ | 30,154 | ||||||||||
|
U.S. Land Well-servicing
|
50,839 | — | — | — | 50,839 | |||||||||||||||
|
U.S. Offshore
|
18,003 | — | — | — | 18,003 | |||||||||||||||
|
Alaska
|
19,995 | — | — | — | 19,995 | |||||||||||||||
|
Canada
|
181,267 | — | (145,447 | )(1) | (35,820 | ) | — | |||||||||||||
|
International
|
18,983 | — | — | 18,983 | ||||||||||||||||
|
Subtotal Contract Drilling
|
319,241 | — | (145,447 | ) | (35,820 | ) | 137,974 | |||||||||||||
|
Other Operating Segments
|
49,191 | 284 | (4,561 | )(2) | (7,139 | ) | 37,775 | |||||||||||||
|
Total
|
$ | 368,432 | $ | 284 | $ | (150,008 | ) | $ | (42,959 | ) | $ | 175,749 | ||||||||
|
Acquisitions and
|
Cumulative
|
|||||||||||||||||||
|
Balance as of
|
Purchase Price
|
Translation
|
Balance as of
|
|||||||||||||||||
| December 31, 2008 | Adjustments | Impairments | Adjustment | December 31, 2009 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Contract Drilling:
|
||||||||||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 30,154 | $ | — | $ | — | $ | — | $ | 30,154 | ||||||||||
|
U.S. Land Well-servicing
|
50,839 | — | — | — | 50,839 | |||||||||||||||
|
U.S. Offshore
|
18,003 | — | — | — | 18,003 | |||||||||||||||
|
Alaska
|
19,995 | — | — | — | 19,995 | |||||||||||||||
|
International
|
18,983 | — | — | — | 18,983 | |||||||||||||||
|
Subtotal Contract Drilling
|
137,974 | — | — | — | 137,974 | |||||||||||||||
|
Other Operating Segments
|
37,775 | — | (14,689 | )(2) | 3,205 | 26,291 | ||||||||||||||
|
Total
|
$ | 175,749 | $ | — | $ | (14,689 | ) | $ | 3,205 | $ | 164,265 | |||||||||
| (1) | Represents goodwill impairment associated with our Canada Well-servicing and Drilling segment primarily relating to acquisitions of Enserco Energy Services Company, Inc. in 2002 and Command Drilling Corporation in 2001. As of December 31, 2009, Canada Well-servicing and Drilling segment no longer had any recorded goodwill. | |
| (2) | Represents goodwill impairment associated with Nabors Blue Sky Ltd., a Canadian subsidiary, included in our Other Operating segment. The impairment charges to Nabors Blue Sky were deemed necessary due to the continued deterioration of the downturn in the oil and gas industry in Canada which has led to |
67
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| diminished demand for immediate heliportable access to remote drilling sites. As of December 31, 2009, Nabors Blue Sky Ltd has no recorded goodwill. |
Our Oil and Gas segment does not have any goodwill. Goodwill for
the consolidated company, totaling approximately
$6.2 million, is expected to be deductible for tax purposes.
Derivative
Financial Instruments
We record derivative financial instruments (including certain
derivative instruments embedded in other contracts) in our
consolidated balance sheets at fair value as either assets or
liabilities. The accounting for changes in the fair value of a
derivative instrument depends on the intended use of the
derivative and the resulting designation, which is established
at the inception of a derivative. Accounting for derivatives
qualifying as fair value hedges allows a derivative’s gains
and losses to offset related results on the hedged item in the
statement of income. For derivative instruments designated as
cash flow hedges, changes in fair value, to the extent the hedge
is effective, are recognized in other comprehensive income until
the hedged item is recognized in earnings. Hedge effectiveness
is measured quarterly based on the relative cumulative changes
in fair value between the derivative contract and the hedged
item over time. Any change in fair value resulting from
ineffectiveness is recognized immediately in earnings. Any
change in fair value of derivative financial instruments that
are speculative in nature and do not qualify for hedge
accounting treatment is also recognized immediately in earnings.
Proceeds received upon termination of derivative financial
instruments qualifying as fair value hedges are deferred and
amortized into income over the remaining life of the hedged item
using the effective interest rate method.
Litigation
and Insurance Reserves
We estimate our reserves related to litigation and insurance
based on the facts and circumstances specific to the litigation
and insurance claims and our past experience with similar
claims. We maintain actuarially determined accruals in our
consolidated balance sheets to cover self-insurance retentions.
See Note 16 — Commitments and Contingencies
regarding self-insurance accruals. 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 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.
Revenue
Recognition
We recognize revenues and costs on daywork contracts daily as
the work progresses. For certain contracts, we receive lump-sum
payments for the mobilization of rigs and other drilling
equipment. We defer revenue related to mobilization periods and
recognize the revenue over the term of the related drilling
contract. Costs incurred related to a mobilization period for
which a contract is secured are deferred and recognized over the
term of the related drilling contract. Costs incurred to
relocate rigs and other drilling equipment to areas in which a
contract has not been secured are expensed as incurred. We defer
recognition of revenue on amounts received from customers for
prepayment of services until those services are provided.
We recognize revenue for top drives and instrumentation systems
we manufacture when the earnings process is complete. This
generally occurs when products have been shipped, title and risk
of loss have been transferred, collectibility is probable, and
pricing is fixed and determinable.
We recognize, as operating revenue, proceeds from business
interruption insurance claims in the period that the applicable
proof of loss documentation is received. Proceeds from casualty
insurance settlements in excess of the carrying value of damaged
assets are recognized in losses (gains) on sales and retirements
of
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
long-lived assets and other expense (income), net in the period
that the applicable proof of loss documentation is received.
Proceeds from casualty insurance settlements that are expected
to be less than the carrying value of damaged assets are
recognized at the time the loss is incurred and recorded in
losses (gains) on sales and retirements of long-lived assets and
other expense (income), net.
We recognize reimbursements received for
out-of-pocket
expenses incurred as revenues and account for
out-of-pocket
expenses as direct costs.
We recognize revenue on our interests in oil and gas properties
as production occurs and title passes. We also recognize, as
operating revenues, gains on sales of our interests in oil and
gas properties when title passes and on our earnings associated
with production contracts when realized.
Share-Based
Compensation
We record compensation expense for all share-based awards
granted. The amount of compensation expense recognized is based
on the grant-date fair value. Note 6 —
Share-Based Compensation for additional discussion.
Income
Taxes
We are a Bermuda exempt company and are not subject to income
taxes in Bermuda. Consequently, income taxes have been provided
based on the tax laws and rates in effect in the countries in
which our operations are conducted and income is earned. The
income taxes in these jurisdictions vary substantially. Our
effective tax rate for financial statement purposes will
continue to fluctuate from year to year because our operations
are conducted in different taxing jurisdictions.
Effective January 1, 2007, we adopted the revised
provisions of the Income Taxes Topic in the ASC relating to
uncertain tax positions. In connection with that adoption, we
recognized increases to our tax reserves for uncertain tax
positions along with interest and penalties as an increase to
other long-term liabilities and as a reduction to retained
earnings at January 1, 2007.
For U.S. and other jurisdictional income tax purposes, we
have net operating and other loss carryforwards that we are
required to assess quarterly for potential valuation allowances.
We consider the sufficiency of existing temporary differences
and expected future earnings levels in determining the amount,
if any, of valuation allowance required against such
carryforwards and against deferred tax assets.
We do not provide for U.S. or foreign income or withholding
taxes on unremitted earnings of all U.S. and certain
foreign entities, as these earnings are considered permanently
reinvested. Unremitted earnings, represented by tax basis
accumulated earnings and profits, totaled approximately
$105.0 million, $537.7 million and $477.6 million
as of December 31, 2009, 2008 and 2007, respectively. It is
not practicable to estimate the amount of deferred income taxes
associated with these unremitted earnings.
Nabors realizes an income tax benefit associated with certain
awards issued under our stock plans. We recognize the benefits
related to tax deductions up to the amount of the compensation
expense recorded for the award in the consolidated statements of
income (loss). Any excess tax benefit (i.e., tax deduction in
excess of compensation expense) is reflected as an increase in
capital in excess of par. Any shortfall is recorded as a
reduction to capital in excess of par to the extent of our
aggregate accumulated pool of windfall benefits, beyond which
the shortfall would be recognized in the consolidated statements
of income (loss).
Foreign
Currency Translation
For certain of our foreign subsidiaries, such as those in Canada
and Argentina, the local currency is the functional currency,
and therefore translation gains or losses associated with
foreign-denominated monetary accounts are accumulated in a
separate section of the consolidated statements of changes in
equity. For our
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
other international subsidiaries, the U.S. dollar is the
functional currency, and therefore local currency transaction
gains and losses, arising from remeasurement of payables and
receivables denominated in local currency, are included in our
consolidated statements of income (loss).
Cash
Flows
We treat the redemption price, including accrued original issue
discount, on our convertible debt instruments as a financing
activity for purposes of reporting cash flows in our
consolidated statements of cash flows.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and
liabilities at the balance sheet date and the amounts of
revenues and expenses recognized during the reporting period.
Actual results could differ from such estimates. Areas where
critical accounting estimates are made by management include:
| • | financial instruments; | |
| • | depreciation and amortization of property, plant and equipment; | |
| • | impairment of long-lived assets; | |
| • | impairment of goodwill and intangible assets; | |
| • | impairment of oil and gas properties; | |
| • | income taxes; | |
| • | litigation and self-insurance reserves; | |
| • | fair value of assets acquired and liabilities assumed; and | |
| • | share-based compensation. |
Recent
Accounting Pronouncements
On July 1, 2009, the Financial Accounting Standards Board
(“FASB”) released the Accounting Standards
Codification (“ASC”). The ASC became the single source
of authoritative nongovernmental GAAP. Rules and interpretive
releases of the Securities and Exchange Commission
(“SEC”) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The ASC
is not intended to change GAAP, but changes the approach by
referencing authoritative literature by topic (each, a
“Topic”) rather than by type of standard. Accordingly,
references in the Notes to Consolidated Financial Statements to
former FASB positions, statements, interpretations, opinions,
bulletins or other pronouncements are now presented as
references to the corresponding Topic in the ASC.
Effective January 1, 2009, Nabors changed its method of
accounting for certain of its convertible debt instruments in
accordance with the revised provisions of the Debt with
Conversions and Other Options Topic of the ASC. Additionally,
Nabors changed its method for calculating its basic and diluted
earnings per share using the two-class method in accordance with
the revised provisions of the Earnings Per Share Topic of the
ASC. As required by the Accounting Changes and Error Corrections
Topic of the ASC, financial information and earnings per share
calculations for prior periods have been adjusted to reflect
retrospective application.
The revised provisions of the Debt with Conversions and Other
Options Topic clarify that convertible debt instruments that may
be settled in cash upon conversion are accounted for with a
liability component based on
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the fair value of a similar nonconvertible debt instrument and
an equity component based on the excess of the initial proceeds
from the convertible debt instrument over the liability
component. Such excess represents proceeds related to the
conversion option and is recorded as capital in excess of par
value. The liability is recorded at a discount, which is then
amortized as additional non-cash interest expense over the
convertible debt instrument’s expected life. The
retrospective application and impact of these provisions on our
consolidated financial statements is described in
Note 11 — Debt.
The revised provisions relating to use of the two-class method
for calculating earnings per share within the Earnings Per Share
Topic provide that securities that are granted in share-based
transactions are “participating securities” prior to
vesting if they have a nonforfeitable right to participate in
any dividends, and such securities therefore should be included
in computing basic earnings per share. Our awards of restricted
stock are considered participating securities under this
definition. The retrospective application and impact of these
provisions on our consolidated financial statements is set forth
in Note 17 — Earnings (Losses) Per Share.
Effective January 1, 2008, we adopted and applied the
provisions of the Fair Value Measurements and Disclosures Topic
of the ASC to our financial assets and liabilities and on
January 1, 2009 applied the same provisions to our
nonfinancial assets and liabilities. Effective April 1,
2009, we adopted the provisions of this Topic relating to fair
value measures in inactive markets. These provisions provide
additional guidance for determining whether a market for a
financial asset is not active and a transaction is not
distressed for fair value measurements. The application of these
provisions did not have a material impact on our consolidated
financial statements. Our fair value disclosures are provided in
Note 5 — Fair Value Measurements.
Effective January 1, 2009, we adopted the revised
provisions of the Business Combinations Topic of the ASC and
will apply those provisions on a prospective basis to
acquisitions. The revised provisions retain the fundamental
requirement that the acquisition method of accounting be used
for all business combinations and expands the use of the
acquisition method to all transactions and other events in which
one entity obtains control over one or more other businesses or
assets at the acquisition date and in subsequent periods. The
revised provisions require measurement at the acquisition date
of the fair value of assets acquired, liabilities assumed and
any noncontrolling interests. Additionally, acquisition-related
costs, including restructuring costs, are recognized as expense
separately from the acquisition.
Effective January 1, 2009, new provisions relating to
noncontrolling interests of a subsidiary within the Identifiable
Assets and Liabilities, and Any Noncontrolling Interest Topic of
the ASC were released. The provisions establish the accounting
and reporting standards for a noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The
provisions clarify that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. Our consolidated financial statements reflect the
adoption and have been adjusted to reflect retrospective
application. The application of these provisions did not have a
material impact on our consolidated financial statements.
Effective January 1, 2009, we adopted the revised
provisions relating to expanded disclosures of derivatives
within the Derivatives and Hedging Topic of the ASC. The revised
provisions are intended to improve financial reporting about
derivative instruments and hedging activities by requiring
enhanced qualitative and quantitative disclosures regarding such
instruments, gains and losses thereon and their effects on an
entity’s financial position, financial performance and cash
flows. The application of these provisions did not have a
material impact on our consolidated financial statements.
In December 2008, the SEC issued a Final Rule,
“Modernization of Oil and Gas Reporting.” This rule
revises some of the oil and gas reporting disclosures in
Regulation S-K
and
Regulation S-X
under the Securities Act and the Securities Exchange Act of 1934
(the “Exchange Act”), as well as Industry Guide 2.
Effective December 31, 2009, the FASB issued revised
guidance that substantially aligned the oil and gas
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accounting disclosures with the SEC’s Final Rule. The
amendments are designed to modernize and update oil and gas
disclosure requirements to align them with current practices and
changes in technology. Additionally, this new accounting
standard requires that entities use
12-month
average natural gas and oil prices when calculating the
quantities of proved reserves and performing the full-cost
ceiling test calculation. The new standard also clarified that
an entity’s equity method investments must be considered in
determining whether it has significant oil and gas activities.
The disclosure requirements are effective for registration
statements filed on or after January 1, 2010 and for annual
financial statements filed on or after December 31, 2009.
The FASB provided a one-year deferral of the disclosure
requirements if an entity became subject to the requirements
because of a change to the definition of significant oil and gas
activities. When operating results from our wholly owned oil and
gas activities are considered with operating results from our
unconsolidated oil and gas joint ventures, which we account for
under the equity method of accounting, we have significant oil
and gas activities under the new definition. In line with the
one-year deferral, we will provide the oil and gas disclosures
in annual periods beginning after December 31, 2009.
Effective April 1, 2009, we adopted the provisions in the
Investments of Debt and Equity Securities Topic of the ASC
relating to recognition and presentation of
other-than-temporary
impairments to debt securities. The impact of these provisions
is set forth in Notes 3 — Impairments and Other
Charges and 4 — Cash and Cash Equivalents and
Investments.
Effective June 30, 2009, we adopted the provisions in the
Financial Instruments Topic of the ASC relating to quarterly
disclosure of the fair value of financial instruments. The
disclosures required by this Topic are provided in
Note 5 — Fair Value Measurements.
Effective June 30, 2009, we adopted the revised provisions
in the Subsequent Events Topic of the ASC and evaluated
subsequent events through the date of the release of our
financial statements. The adoption of the Subsequent Events
Topic of the ASC did not have any impact on our financial
position, results of operations or cash flows.
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table provides the components of impairments and
other charges recorded during the years ended December 31,
2009, 2008 and 2007:
| Year Ended December 31, | ||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||
| (In thousands) | ||||||||||||||||
|
Goodwill impairments
|
$ | 14,689 | $ | 150,008 | $ | — | ||||||||||
|
Impairment of long-lived assets to be disposed of other than by
sale:
|
||||||||||||||||
|
U.S. Offshore
|
$ | 28,062 | ||||||||||||||
|
Alaska
|
15,000 | |||||||||||||||
|
Canada
|
17,930 | |||||||||||||||
|
International
|
3,237 | |||||||||||||||
|
Total impairment of long-lived assets to be disposed of other
than by sale
|
$ | 64,229 | 64,229 | — | — | |||||||||||
|
Impairment of other intangible assets
|
— | 4,578 | — | |||||||||||||
|
Impairment of oil and gas-related assets:
|
||||||||||||||||
|
Oil and gas financing receivable
|
$ | 149,115 | ||||||||||||||
|
Oil and gas properties
|
56,782 | |||||||||||||||
|
Total impairment of oil and gas-related assets
|
$ | 205,897 | 205,897 | 21,537 | 41,017 | |||||||||||
|
Other-than-temporary
impairment on equity security
|
18,665 | — | — | |||||||||||||
|
Other-than-temporary
impairment on debt security
|
$ | 40,300 | ||||||||||||||
|
Less
other-than-temporary
impairment recognized in accumulated other comprehensive income
(loss)
|
(4,651 | ) | ||||||||||||||
|
Credit-related impairment on investment
|
$ | 35,649 | 35,649 | — | — | |||||||||||
|
Impairments and other charges
|
$ | 339,129 | $ | 176,123 | $ | 41,017 | ||||||||||
During the years ended December 31, 2009 and 2008, we
recognized goodwill impairments of approximately
$14.7 million and $150.0 million, respectively,
related to our Canadian operations. During 2008, we impaired the
entire goodwill balance of $145.4 million of our Canada
Well-servicing and Drilling operating segment and recorded an
impairment of $4.6 million to Nabors Blue Sky Ltd., one of
our Canadian subsidiaries reported in our Other Operating
segments. During 2009, we impaired the remaining goodwill
balance of $14.7 million of Nabors Blue Sky Ltd. The
impairment charges resulted from our annual impairment tests on
goodwill which compared the estimated fair value of each of our
reporting units to its carrying value. The estimated fair value
of these business units was determined using discounted cash
flow models involving assumptions based on our utilization of
rigs or aircraft, revenues and earnings from affiliates, as well
as direct costs, general and administrative costs, depreciation,
applicable income taxes, capital expenditures and working
capital requirements. We determined that the fair value
estimated for purposes of this test represented a Level 3
fair value measurement. The impairment charges were deemed
necessary due to the continued downturn in the oil and gas
industry in Canada and the lack of certainty regarding eventual
recovery in the value of these operations. This downturn has led
to reduced capital spending by some of our customers and has
diminished demand for our drilling services and for immediate
access to remote drilling sites. A significantly prolonged
period of lower oil and natural gas prices could 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. See Note 2 — Summary of
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant Accounting Policies (included under the caption
“Goodwill”) for amounts of goodwill related to each of
our reporting units.
During the year ended December 31, 2009, we retired some
rigs and rig components in our U.S. Offshore, Alaska,
Canada and International Contract Drilling segments and reduced
their aggregate carrying value from $69.0 million to their
estimated aggregate salvage value, resulting in impairment
charges of approximately $64.2 million. The retirements
included inactive workover
jack-up
rigs
in our U.S. Offshore and International operations, the
structural frames of some incomplete coiled tubing rigs in our
Canada operations and miscellaneous rig components in our Alaska
operations. The impairment charges resulted from the continued
deterioration and longer than expected downturn in the demand
for oil and gas drilling activities. 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.
Also in 2009, we recorded impairments totaling
$205.9 million to some of the oil and gas-related assets of
our wholly owned Ramshorn business unit. We recorded an
impairment of $149.1 million to one of our oil and gas
financing receivables, which reduced the carrying value of our
oil and gas financing receivables recorded as long-term
investments to $92.5 million. The impairment resulted
primarily from commodity price deterioration and the lower price
environment lasting longer than expected. This prolonged period
of lower prices has significantly reduced demand for future gas
production and development in the Barnett Shale area of north
central Texas, which has influenced our decision not to expend
capital to develop on some of the undeveloped acreage. The
impairment was determined using discounted cash flow models
involving assumptions based on estimated cash flows for proved
and probable reserves, undeveloped acreage value, and current
and expected natural gas prices. We believe the estimates used
provide a reasonable estimate of current fair value. We
determined that this represented a Level 3 fair value
measurement. A further protraction or continued period of lower
commodity prices could result in recognition of future
impairment charges. During the years ended December 31,
2009, 2008 and 2007, our impairment tests on the oil and gas
properties of our wholly owned Ramshorn business unit resulted
in impairment charges of $56.8 million, $21.5 million
and $41.0 million, respectively. The impairments recognized
during 2009 were primarily the result of a write down of the
carrying value of some acreage in the U.S. and Canada
because we do not have future plans to develop. The impairments
recognized during 2008 were primarily due to the significant
decline in oil and natural gas prices at the end of 2008. The
impairments recognized during 2007 were necessary from lower
than expected performance of some oil and gas development wells.
Additional discussion of our policy pertaining to the
calculations of these impairments is set forth in
Note 2 — Summary of Significant Accounting
Policies.
In 2009, we recorded
other-than-temporary
impairments to our
available-for-sale
securities totaling $54.3 million. Of this,
$35.6 million was related to an investment in a corporate
bond that was downgraded to non-investment grade level by
Standard and Poor’s and Moody’s Investors Service
during the year. Our determination that the impairment was other
than temporary was based on a variety of factors, including the
length of time and extent to which the market value had been
less than cost, the financial condition of the issuer of the
security, and the credit ratings and recent reorganization of
the issuer. The remaining $18.7 million related to an
equity security of a public company whose operations are driven
in large measure by the price of oil and in which we invested
approximately $46 million during the second and third
quarters of 2008. During late 2008, demand for oil and gas began
to diminish significantly as part of the general deterioration
of the global economic environment, causing a broad decline in
value of nearly all oil and gas-related equity securities.
Because the trading price per share of this security remained
below our cost basis for an extended period of time, we
determined the investment was other than temporarily impaired
and it was appropriate to write down the investment’s
carrying value to its current estimated fair value of
approximately $27.0 million at December 31, 2009.
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our cash and cash equivalents, short-term and long-term
investments and other receivables consisted of the following:
|
December 31,
|
December 31,
|
|||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Cash and cash equivalents
|
$ | 927,815 | $ | 442,087 | ||||
|
Short-term investments:
|
||||||||
|
Trading equity securities
|
24,014 | 14,263 | ||||||
|
Available-for-sale
equity securities
|
93,651 | 55,453 | ||||||
|
Available-for-sale
debt securities
|
45,371 | 72,442 | ||||||
|
Total short-term investments
|
163,036 | 142,158 | ||||||
|
Long-term investments and other receivables
|
100,882 | 239,952 | ||||||
|
Total
|
$ | 1,191,733 | $ | 824,197 | ||||
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain information related to our cash and cash equivalents and
short-term investments follows:
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||
|
Fair
|
Holding
|
Holding
|
Fair
|
Holding
|
Holding
|
|||||||||||||||||||
| Value | Gains | Losses | Value | Gains | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 927,815 | $ | — | $ | — | $ | 442,087 | $ | — | $ | — | ||||||||||||
|
Short-term investments:
|
||||||||||||||||||||||||
|
Trading equity securities
|
24,014 | 18,290 | — | 14,263 | 8,538 | — | ||||||||||||||||||
|
Available-for-sale
equity securities
|
93,651 | 50,211 | (357 | ) | 55,453 | 23,440 | (30,449 | ) | ||||||||||||||||
|
Available-for-sale
debt securities:
|
||||||||||||||||||||||||
|
Commercial paper and CDs
|
1,284 | — | — | 1,119 | — | — | ||||||||||||||||||
|
Corporate debt securities
|
33,852 | 3,162 | — | 40,302 | — | (32,322 | ) | |||||||||||||||||
|
U.S.-government
debt securities
|
— | — | — | 1,816 | — | — | ||||||||||||||||||
|
Mortgage-backed debt securities
|
861 | 23 | (20 | ) | 7,619 | 13 | (152 | ) | ||||||||||||||||
|
Mortgage-CMO debt securities
|
5,411 | 71 | (182 | ) | 15,326 | 160 | (782 | ) | ||||||||||||||||
|
Asset-backed debt securities
|
3,963 | — | (803 | ) | 6,260 | — | (1,150 | ) | ||||||||||||||||
|
Total
available-for-sale
debt securities
|
45,371 | 3,256 | (1,005 | ) | 72,442 | 173 | (34,406 | ) | ||||||||||||||||
|
Total
available-for-sale
securities
|
139,022 | 53,467 | (1,362 | ) | 127,895 | 23,613 | (64,855 | ) | ||||||||||||||||
|
Total short-term investments
|
163,036 | 71,757 | (1,362 | ) | 142,158 | 32,151 | (64,855 | ) | ||||||||||||||||
|
Total cash, cash equivalents and short-term investments
|
$ | 1,090,851 | $ | 71,757 | $ | (1,362 | ) | $ | 584,245 | $ | 32,151 | $ | (64,855 | ) | ||||||||||
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain information related to the gross unrealized losses of
our cash and cash equivalents and short-term investments follows:
| As of December 31, 2009 | ||||||||||||||||
| Less Than 12 Months | More Than 12 Months | |||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Unrealized
|
Unrealized
|
|||||||||||||||
| Fair Value | Loss | Fair Value | Loss | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Available-for-sale
equity securities
|
$ | — | $ | — | $ | 727 | $ | 357 | ||||||||
|
Available-for-sale
debt securities:(1)
|
||||||||||||||||
|
Mortgage-backed debt securities
|
— | — | 234 | 20 | ||||||||||||
|
Mortgage-CMO debt securities
|
— | — | 2,296 | 182 | ||||||||||||
|
Asset-backed debt securities
|
— | — | 3,922 | 803 | ||||||||||||
|
Total
available-for-sale
debt securities
|
— | — | 6,452 | 1,005 | ||||||||||||
|
Total
|
$ | — | $ | — | $ | 7,179 | $ | 1,362 | ||||||||
| (1) | 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 have 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 December 31, 2009. |
The estimated fair values of our corporate, mortgage-backed,
mortgage-CMO and asset-backed debt securities at
December 31, 2009, 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 | ||||
|
December 31,
|
||||
| 2009 | ||||
| (In thousands) | ||||
|
Debt securities:
|
||||
|
Due in one year or less
|
$ | 7,187 | ||
|
Due after one year through five years
|
12 | |||
|
Due in more than five years
|
38,172 | |||
|
Total debt securities
|
$ | 45,371 | ||
Certain information regarding our debt and equity securities is
presented below:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Available-for-sale:
|
||||||||||||
|
Proceeds from sales and maturities
|
$ | 23,411 | $ | 202,382 | $ | 531,230 | ||||||
|
Realized gains (losses), net
|
(54,314 | )(1) | 180 | 49,947 | ||||||||
| (1) | Includes other-than-temporary impairments of $18.7 million related to an equity security and a $35.6 million credit-related impairment to a corporate debt security. |
77
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Effective January 1, 2008, we provided enhanced disclosures
about our assets and liabilities carried at fair value as
required by the provisions of the Fair Value Measurements and
Disclosures Topic of the ASC.
As defined in the ASC, fair value is the price that would be
received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants
at the measurement date (exit price). We utilize market data or
assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and the
risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market-corroborated, or
generally unobservable. We primarily apply the market approach
for recurring fair value measurements and endeavor to utilize
the best information available. Accordingly, we employ valuation
techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. The use of unobservable
inputs is intended to allow for fair value determinations in
situations where there is little, if any, market activity for
the asset or liability at the measurement date. We are able to
classify fair value balances utilizing a fair value hierarchy
based on the observability of those inputs. Under the fair value
hierarchy
| • | Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market; | |
| • | Level 2 measurements include quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and | |
| • | Level 3 measurements include those that are unobservable and of a subjective measure. |
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
December 31, 2009. 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.
| Fair Value as of December 31, 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Recurring Fair Value Measurements
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Short-term investments:
|
||||||||||||||||
|
Available-for-sale
equity securities
|
$ | 93,651 | $ | — | $ | — | $ | 93,651 | ||||||||
|
Available-for-sale
debt securities
|
9,898 | 35,473 | — | 45,371 | ||||||||||||
|
Trading securities
|
24,014 | — | — | 24,014 | ||||||||||||
|
Total investments
|
$ | 127,563 | $ | 35,473 | $ | — | $ | 163,036 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative contract
|
$ | — | $ | 3,322 | $ | — | $ | 3,322 | ||||||||
Nonrecurring
Fair Value Measurements
Effective January 1, 2009, fair value measurements were
applied with respect to our nonfinancial assets and liabilities
measured on a nonrecurring basis, which consists primarily of
goodwill, oil and gas financing receivables, intangible assets
and other long-lived assets, assets acquired and liabilities
assumed in a business combination, and asset retirement
obligations. Refer to Note 3 — Impairments and
Other Charges for additional discussion.
78
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fair
Value of Financial Instruments
The fair value of our financial instruments has been estimated
in accordance with GAAP. The fair value of our fixed rate
long-term debt is estimated based on quoted market prices or
prices quoted from third-party financial institutions. The
carrying and fair values of our long-term debt, including the
current portion, are as follows:
| December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
0.94% senior exchangeable notes due May 2011
|
$ | 1,576,480 | $ | 1,668,368 | $ | 2,362,822 | $ | 2,199,500 | ||||||||
|
6.15% senior notes due February 2018
|
965,066 | 992,531 | 963,859 | 835,244 | ||||||||||||
|
9.25% senior notes due January 2019
|
1,125,000 | 1,403,719 | — | — | ||||||||||||
|
5.375% senior notes due August 2012(1)
|
273,350 | 289,072 | 272,724 | 262,411 | ||||||||||||
|
4.875% senior notes due August 2009
|
— | — | 224,829 | 227,239 | ||||||||||||
|
Other
|
872 | 872 | 1,329 | 1,329 | ||||||||||||
| $ | 3,940,768 | $ | 4,354,562 | $ | 3,825,563 | $ | 3,525,723 | |||||||||
| (1) | Includes $1.1 million and $1.5 million as of December 31, 2009 and 2008, 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.
As of December 31, 2009, our short-term investments were
carried at fair market value and included $139.0 million
and $24.0 million in securities classified as
available-for-sale
and trading, respectively. As of December 31, 2008, our
short-term investments were carried at fair market value and
included $127.9 million and $14.3 million in
securities classified as
available-for-sale
and trading, respectively. The carrying values of our long-term
investments that are accounted for using the equity method of
accounting approximate fair value. The fair value of these
long-term investments totaled $8.3 million and
$15.7 million as of December 31, 2009 and 2008,
respectively. The carrying value of our oil and gas financing
receivables included in long-term investments approximate fair
value. The fair value of our oil and gas financing receivables
totaled $92.5 million and $224.2 million as of
December 31, 2009 and 2008, respectively. Income and gains
associated with our oil and gas financing receivables are
recognized as operating revenues.
Total share-based compensation expense, which includes both
stock options and restricted stock, totaled $106.7 million,
$45.4 million and $33.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Compensation expense related to awards of restricted stock
totaled $88.9 million, $44.6 million and
$26.4 million for the years ended December 31, 2009,
2008 and 2007, respectively, and 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 21 — Segment Information. Total share-based
compensation expense for 2009 includes the recognition of
$72.1 million of compensation expense related to previously
granted restricted stock and option awards held by
Messrs. Isenberg and Petrello that was unrecognized as of
April 1, 2009. The recognition of this expense resulted
from provisions of their respective new employment agreements
which effectively eliminated the risk of forfeiture of such
awards. See Note 16 — Commitments and
Contingencies for additional information.
79
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The cash flows resulting from tax deductions in excess of the
compensation cost recognized for share-based awards (excess tax
benefits) are classified as financing cash flows. The actual tax
benefit realized from share-based awards during the years ended
December 31, 2009, 2008 and 2007 was $.3 million,
$7.6 million and $3.3 million, respectively.
Stock
Option Plans
As of December 31, 2009, we had several stock plans under
which options to purchase our common shares could be granted to
key officers, directors and managerial employees of Nabors and
its subsidiaries. Options granted under the plans generally are
at prices equal to the fair market value of the shares on the
date of the grant. Options granted under the plans generally are
exercisable in varying cumulative periodic installments after
one year. In the case of certain key executives, options granted
under the plans are subject to accelerated vesting related to
targeted common share prices, or may vest immediately on the
grant date. Options granted under the plans cannot be exercised
more than ten years from the date of grant. Options to purchase
12.0 million and 15.6 million Nabors common shares
remained available for grant as of December 31, 2009 and
2008, respectively. Of the common shares available for grant as
of December 31, 2009, approximately 11.1 million of
these shares are also available for issuance in the form of
restricted shares.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model which uses
assumptions for the risk-free interest rate, volatility,
dividend yield and the expected term of the options. The
risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time of grant for a period equal to the
expected term of the option. Expected volatilities are based on
implied volatilities from traded options on Nabors’ common
shares, historical volatility of Nabors’ common shares, and
other factors. We do not assume any dividend yield, since we do
not pay dividends. We use historical data to estimate the
expected term of the options and employee terminations within
the option-pricing model; separate groups of employees that have
similar historical exercise behavior are considered separately
for valuation purposes. The expected term of the options
represents the period of time that the options granted are
expected to be outstanding.
We also consider an estimated forfeiture rate for these option
awards, and we recognize compensation cost only for those shares
that are expected to vest, on a straight-line basis over the
requisite service period of the award, which is generally the
vesting term of three to five years. The forfeiture rate is
based on historical experience. Estimated forfeitures have been
adjusted to reflect actual forfeitures during 2009.
80
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock option transactions under our various stock-based employee
compensation plans are presented below:
|
Weighted-Average
|
Aggregate
|
|||||||||||||||
|
Weighted-Average
|
Remaining
|
Intrinsic
|
||||||||||||||
| Shares | Exercise Price | Contractual Term | Value | |||||||||||||
|
Options
|
||||||||||||||||
| (In thousands, except exercise price) | ||||||||||||||||
|
Options outstanding as of December 31, 2008
|
25,858 | $ | 21.99 | |||||||||||||
|
Granted
|
10,016 | 9.58 | ||||||||||||||
|
Exercised
|
(1,476 | ) | 11.40 | |||||||||||||
|
Surrendered
|
(531 | ) | 12.38 | |||||||||||||
|
Forfeited
|
(451 | ) | 20.92 | |||||||||||||
|
Options outstanding as of December 31, 2009
|
33,416 | $ | 18.90 | 5.00 years | $ | 179,736 | ||||||||||
|
Options exercisable as of December 31, 2009
|
27,242 | $ | 21.04 | 4.06 years | $ | 102,898 | ||||||||||
Of the options outstanding, 27.2 million, 25.9 million
and 27.8 million were exercisable at weighted-average
exercise prices of $21.04, $21.99 and $22.03, as of
December 31, 2009, 2008 and 2007, respectively. There were
no options granted during the years ended December 31, 2008
or 2007.
During the year ended December 31, 2009, we awarded options
vesting over periods up to four years to purchase 10,015,883 of
our common shares to our employees, executive officers and
directors. This included options to purchase 3,000,000 and
1,698,427 shares, with grant date fair values of
$8.8 million and $5.0 million, granted to
Messrs. Isenberg and Petrello, respectively, in February
2009, and an option to purchase 1,726 shares, with a grant
date fair value of $.01 million, to Mr. Petrello in
September 2009 in lieu of certain portions of their cash
compensation.
The fair value of stock options granted during 2009 was
calculated using the Black-Scholes option pricing model and the
following weighted-average assumptions:
|
Weighted average fair value of options granted:
|
$ | 2.85 | ||
|
Weighted average risk free interest rate:
|
1.75% | |||
|
Dividend yield:
|
0% | |||
|
Volatility:(1)
|
34.78% | |||
|
Expected life:
|
4.0 years |
| (1) | Expected volatilities are based on implied volatilities from publicly traded options to purchase Nabors’ common shares, historical volatility of Nabors’ common shares and other factors. |
81
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of our unvested stock options as of December 31,
2009, and the changes during the year then ended is presented
below:
|
Weighted-Average
|
||||||||
|
Grant-Date Fair
|
||||||||
| Outstanding | Value | |||||||
| Unvested Stock Options | ||||||||
| (In thousands, except fair values) | ||||||||
|
Unvested as of December 31, 2008
|
— | $ | — | |||||
|
Granted
|
10,016 | 2.85 | ||||||
|
Vested
|
(3,699 | ) | 2.92 | |||||
|
Forfeited
|
(143 | ) | 2.73 | |||||
|
Unvested as of December 31, 2009
|
6,174 | $ | 2.82 | |||||
The total intrinsic value of options exercised during the years
ended December 31, 2009, 2008 and 2007 was
$19.7 million, $43.6 million and $76.2 million,
respectively. The total fair value of options that vested during
the years ended December 31, 2009, 2008 and 2007 was
$10.8 million, $4.3 million and $11.9 million,
respectively.
As of December 31, 2009, there was $9.5 million of
total future compensation cost related to unvested options which
are expected to vest. That cost is expected to be recognized
over a weighted-average period of 1.6 years.
Restricted
Stock and Restricted Stock Units
Our stock plans allow grants of restricted stock. Restricted
stock is issued on the grant date, but cannot be sold or
transferred. Restricted stock vests in varying periodic
installments ranging from three to five years.
A summary of our restricted stock as of December 31, 2009,
and the changes during the year then ended, is presented below:
|
Weighted-Average
|
||||||||
|
Grant-Date Fair
|
||||||||
| Outstanding | Value | |||||||
| Restricted Stock | ||||||||
| (In thousands, except fair values) | ||||||||
|
Unvested as of December 31, 2008
|
5,958 | $ | 22.25 | |||||
|
Granted
|
85 | 11.55 | ||||||
|
Vested
|
(2,355 | ) | 23.59 | |||||
|
Forfeited
|
(56 | ) | 31.43 | |||||
|
Unvested as of December 31, 2009
|
3,632 | $ | 20.99 | |||||
During 2009, we awarded 84,000 shares of restricted stock
to our directors. These awards had an aggregate value at their
date of grant of $1.0 million and were scheduled to vest
over a period of three years. The fair value of restricted stock
that vested during the year ended December 31, 2009, 2008
and 2007 was $23.9 million, $39.6 million and
$13.2 million, respectively.
As of December 31, 2009, there was $14.6 million of
total future compensation cost related to unvested restricted
stock awards which are expected to vest. That cost is expected
to be recognized over a weighted-average period of approximately
one year.
82
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On August 8, 2007, we sold our Sea Mar business which had
previously been included in Other Operating Segments. The assets
included 20 offshore supply vessels and certain related assets,
including a right under a vessel construction contract. See
Note 20 — Discontinued Operations for operating
results which have been accounted for as a discontinued
operation.
From time to time, we may sell a subsidiary or group of assets
outside of our core markets or business if it is economically
advantageous for us to do so.
| Note 8 | Property, Plant and Equipment |
The major components of our property, plant and equipment are as
follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Land
|
$ | 9,251 | $ | 22,958 | ||||
|
Buildings
|
93,874 | 79,094 | ||||||
|
Drilling, workover and well-servicing rigs, and related equipment
|
9,515,677 | 8,557,616 | ||||||
|
Marine transportation and supply vessels
|
13,663 | 13,663 | ||||||
|
Oilfield hauling and mobile equipment
|
533,518 | 501,163 | ||||||
|
Other machinery and equipment
|
202,389 | 115,074 | ||||||
|
Oil and gas properties
|
752,809 | 633,537 | ||||||
|
Construction in process(1)
|
314,493 | 444,878 | ||||||
| 11,435,674 | 10,367,983 | |||||||
|
Less: accumulated depreciation and amortization
|
(3,453,193 | ) | (2,758,940 | ) | ||||
|
accumulated depletion on oil and gas properties
|
(336,431 | ) | (277,084 | ) | ||||
| $ | 7,646,050 | $ | 7,331,959 | |||||
| (1) | Relates to amounts capitalized for new or substantially new drilling, workover and well-servicing rigs that were under construction and had not yet been placed in service as of December 31, 2009 or 2008. |
Repair and maintenance expense included in direct costs in our
consolidated statements of income (loss) totaled
$282.1 million, $476.6 million and $438.0 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
Interest costs of $29.9 million, $29.8 million and
$34.6 million were capitalized during the years ended
December 31, 2009, 2008 and 2007, respectively.
Our principal investments in unconsolidated affiliates accounted
for using the equity method include a construction and logistics
operation in Alaska (50% ownership), drilling and workover
operations located in Saudi Arabia (51% ownership) and oil and
gas exploration, development and production joint ventures in
the U.S. and international (49.7% ownership) and Canada
(50% ownership). These unconsolidated affiliates are integral to
our operations in those locations. During 2008, our
U.S. oil and gas joint venture was deemed a significant
subsidiary. See Part IV — Item 15. Exhibits,
Financial Statement Schedules for Schedule III —
Financial Statements and Notes for NFR Energy LLC and see
Note 15 — Related-Party Transactions for a
discussion of transactions with all of these related parties.
83
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2009 and 2008, our investments in
unconsolidated affiliates accounted for using the equity method
totaled $305.7 million and $410.8 million,
respectively, and our investments in unconsolidated affiliates
accounted for using the cost method totaled $.9 million.
Combined condensed financial data for investments in
unconsolidated affiliates is summarized as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Current assets
|
$ | 354,504 | $ | 408,960 | ||||
|
Long-term assets
|
1,005,605 | 916,191 | ||||||
|
Current liabilities
|
313,317 | 294,701 | ||||||
|
Long-term liabilities
|
283,945 | 185,281 | ||||||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Gross revenues
|
$ | 960,823 | $ | 827,044 | $ | 589,923 | ||||||
|
Gross margin
|
223,005 | 142,763 | 94,952 | |||||||||
|
Net income (loss)
|
(462,613 | ) | (444,470 | ) | 35,332 | |||||||
|
Nabors’ earnings (losses) from unconsolidated affiliates
|
(214,681 | ) | (229,834 | ) | 17,724 | |||||||
Cumulative undistributed (losses) earnings of our unconsolidated
affiliates included in our retained earnings as of
December 31, 2009 and 2008 totaled approximately
$(387.5) million and $(157.7) million, respectively.
Our Earnings (losses) from unconsolidated affiliates line in our
consolidated statements of income (loss) for the years ended
December 31, 2009 and 2008 includes our proportionate share
of full-cost ceiling test writedowns of $237.1 million and
$228.3 million, respectively, from our unconsolidated oil
and gas joint ventures. These writedowns are included in our Oil
and Gas operating segment results.
We may be exposed to certain market risks arising from the use
of financial instruments in the ordinary course of business.
These risks arise primarily as a result of potential changes in
the fair market value of financial instruments that would result
from adverse fluctuations in foreign currency exchange rates,
credit risk, interest rates, and marketable and non-marketable
security prices as discussed below.
Foreign
Currency Risk
We operate in a number of international areas and are involved
in transactions denominated in currencies other than
U.S. dollars, which exposes us to foreign exchange rate
risk or foreign currency devaluation risk. The most significant
exposures arise in connection with our operations in Venezuela
and Canada, which usually are substantially unhedged.
At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer
contracts and foreign exchange contracts to selectively hedge
our exposure to exchange rate fluctuations in connection with
monetary assets, liabilities, cash flows and commitments
denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an
agreement to exchange different currencies at a given future
date and at a specified rate.
Credit
Risk
Our financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash
equivalents, investments in marketable and non-marketable
securities, oil and gas financing receivables,
84
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accounts receivable and our range-cap-and-floor derivative
instrument. Cash equivalents such as deposits and temporary cash
investments are held by major banks or investment firms. Our
investments in marketable and non-marketable securities are
managed within established guidelines which limit the amounts
that may be invested with any one issuer and provide guidance as
to issuer credit quality. We believe that the credit risk in our
cash and investment portfolio is minimized as a result of the
mix of our investments. In addition, our trade receivables are
with a variety of U.S., international and foreign-country
national oil and gas companies. Management considers this credit
risk to be limited due to the financial resources of these
companies. We perform ongoing credit evaluations of our
customers and we generally do not require material collateral.
We do occasionally require prepayment of amounts from customers
whose creditworthiness is in question prior to providing
services to them. We maintain reserves for potential credit
losses, and these losses historically have been within
management’s expectations.
Interest
Rate and Marketable and Non-marketable Security Price
Risk
Our financial instruments that are potentially sensitive to
changes in interest rates include our 0.94% senior
exchangeable notes, our 5.375%, 6.15% and 9.25% senior
notes, our range-cap-and-floor derivative instrument, our
investments in debt securities (including corporate,
asset-backed,
U.S.-government,
foreign government, mortgage-backed debt and mortgage-CMO debt
securities) and our investments in overseas funds that invest
primarily in a variety of public and private U.S. and
non-U.S. securities
(including asset-backed and mortgage-backed securities, global
structured-asset securitizations, whole-loan mortgages, and
participations in whole loans and whole-loan mortgages), which
are classified as non-marketable securities.
We may utilize derivative financial instruments that are
intended to manage our exposure to interest rate risks. The use
of derivative financial instruments could expose us to further
credit risk and market risk. Credit risk in this context is the
failure of a counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative
contract is positive, the counterparty would owe us, which can
create credit risk for us. When the fair value of a derivative
contract is negative, we would owe the counterparty, and
therefore, we would not be exposed to credit risk. We attempt to
minimize credit risk in derivative instruments by entering into
transactions with major financial institutions that have a
significant asset base. Market risk related to derivatives is
the adverse effect on the value of a financial instrument that
results from changes in interest rates. We try to manage market
risk associated with interest-rate contracts by establishing and
monitoring parameters that limit the type and degree of market
risk that we undertake.
On October 21, 2002, we entered into an interest rate swap
transaction with a third-party financial institution to hedge
our exposure to changes in the fair value of $200 million
of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge. Additionally on that
date, we purchased a LIBOR range-cap and sold a LIBOR floor, in
the form of a cashless collar, with the same third-party
financial institution with the intention of mitigating and
managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify
for hedge accounting treatment, and any change in the cumulative
fair value of this transaction will be reflected as a gain or
loss in our consolidated statements of income (loss). In June
2004, we unwound $100 million of the $200 million
range-cap-and-floor derivative instrument. During the fourth
quarter of 2005, we unwound the interest rate swap resulting in
a loss of $2.7 million, which has been deferred and will be
recognized as an increase to interest expense over the remaining
life of our 5.375% senior notes due 2012. During the year
ended December 31, 2005, we recorded interest savings of
$2.7 million related to our interest rate swap agreement
accounted for as a fair value hedge, which served to reduce
interest expense.
The fair value of our range-cap-and-floor transaction is
recorded as a derivative liability and included in other
long-term liabilities. It totaled approximately
$3.3 million and $4.7 million as of December 31,
2009 and 2008, respectively. We recorded a gain of approximately
$1.4 million for the year ended December 31, 2009 and
losses of approximately $4.7 million and $1.3 million
for the years ended December 31, 2008 and 2007,
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
respectively, related to this derivative instrument; these
amounts are included in losses (gains) on sales and retirements
of long-lived assets and other expense (income), net in our
consolidated statements of income (loss).
In September 2008 we entered into a three-month written put
option for one million of our common shares with a strike price
of $25 per share. We settled this contract during the fourth
quarter of 2008 and paid cash of $22.6 million, net of the
premium received on this contract, and recognized a loss of
$9.9 million which is included in losses (gains) on sales
and retirements of long-lived assets and other expense (income),
net in our consolidated statements of income (loss).
Long-term debt consists of the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
0.94% senior exchangeable notes due May 2011
|
$ | 1,576,480 | $ | 2,362,822 | ||||
|
6.15% senior notes due February 2018
|
965,066 | 963,859 | ||||||
|
9.25% senior notes due January 2019
|
1,125,000 | — | ||||||
|
5.375% senior notes due August 2012
|
273,350 | 272,724 | ||||||
|
4.875% senior notes due August 2009
|
— | 224,829 | ||||||
|
Other
|
872 | 1,329 | ||||||
| 3,940,768 | 3,825,563 | |||||||
|
Less: current portion
|
163 | 225,030 | ||||||
| $ | 3,940,605 | $ | 3,600,533 | |||||
As of December 31, 2009, the maturities of our primary debt
for each of the five years after 2009 and thereafter are as
follows:
| Paid at Maturity | ||||
| (In thousands) | ||||
|
2010
|
$ | — | ||
|
2011
|
1,685,220 | (1) | ||
|
2012
|
275,000 | (2) | ||
|
2013
|
— | |||
|
2014
|
— | |||
|
Thereafter
|
2,100,000 | (3) | ||
| $ | 4,060,220 | |||
| (1) | Represents our 0.94% senior exchangeable notes due May 2011. | |
| (2) | Represents our 5.375% senior notes due August 2012. | |
| (3) | Represents our 6.15% senior notes due February 2018 and 9.25% senior notes due January 2019. |
0.94% Senior
Exchangeable Notes Due May 2011
On May 23, 2006, Nabors Delaware completed a private
placement of $2.5 billion aggregate principal amount of
0.94% senior exchangeable notes due 2011 that are fully and
unconditionally guaranteed by Nabors. On June 8, 2006, the
initial purchasers exercised their option to purchase an
additional $250 million par value
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of the 0.94% senior exchangeable notes due 2011, increasing
the aggregate issuance of such notes to $2.75 billion.
Nabors Delaware sold the notes to the initial purchasers in
reliance on the exemption from registration provided by
Section 4(2) of the Securities Act. The notes were
reoffered by the initial purchasers of the notes to qualified
institutional buyers under Rule 144A of the Securities Act.
Nabors and Nabors Delaware filed a registration statement on
Form S-3
pursuant to the Securities Act with respect to resale of the
notes and shares received in exchange for the notes on
August 21, 2006. The notes bear interest at a rate of 0.94%
per year payable semi-annually on May 15 and November 15,
beginning on November 15, 2006. Debt issuance costs of
$28.7 million were capitalized in connection with the
issuance of the notes in other long-term assets in our
consolidated balance sheet and are being amortized through May
2011.
During 2009 and 2008 collectively, we purchased
$1.1 billion par value of Nabors Delaware’s
0.94% senior exchangeable notes due 2011 in the open market
for cash of $938.4 million and recognized pre-tax gains of
$11.5 million and $12.2 million which are included in
losses (gains) on sales and retirements of long-lived assets and
other expense (income), net in our consolidated statements of
income (loss) for the year ended December 31, 2009 and
2008, respectively.
The notes are exchangeable into cash and, if applicable,
Nabors’ common shares based on an exchange rate of the
equivalent value of 21.8221 our common shares per $1,000
principal amount of notes (which is equal to an initial exchange
price of approximately $45.83 per share), subject to adjustment
during the 30 calendar days ending at the close of business on
the business day immediately preceding the maturity date and
prior thereto only under the following circumstances:
(1) during any calendar quarter (and only during such
calendar quarter), if the closing price of Nabors’ common
shares for at least 20 trading days in the 30 consecutive
trading days ending on the last trading day of the immediately
preceding calendar quarter is more than 130% of the applicable
exchange rate; (2) during the five business day period
after any ten consecutive trading day period in which the
trading price per note for each day of that period was less than
95% of the product of the closing sale price of Nabors’
common shares and the exchange rate of the note; or
(3) upon the occurrence of specified corporate transactions
set forth in the indenture.
The notes are unsecured and are effectively junior in right of
payment to any of Nabors Delaware’s future secured debt.
The notes rank equally with any of Nabors Delaware’s other
existing and future unsubordinated debt and are senior in right
of payment to any of Nabors Delaware’s future subordinated
debt. Our guarantee of the notes is unsecured and ranks equal in
right of payment to all of our unsecured and unsubordinated
indebtedness from time to time outstanding. Holders of the notes
who exchange their notes in connection with a change in control,
as defined in the indenture, may be entitled to a make-whole
premium in the form of an increase in the exchange rate.
Additionally, in the event of a change in control, noteholders
may require Nabors Delaware to purchase all or a portion of
their notes at a purchase price equal to 100% of the principal
amount of notes, plus accrued and unpaid interest, if any. Upon
exchange of the notes, a holder will receive for each note
exchanged an amount in cash equal to the lesser of
(i) $1,000 or (ii) the exchange value, determined in
the manner set forth in the indenture. In addition, if the
exchange value exceeds $1,000 on the exchange date, a holder
will also receive a number of Nabors’ common shares for the
exchange value in excess of $1,000 equal to such excess divided
by the exchange price.
In connection with the sale of the notes in May 2006, Nabors
Delaware entered into exchangeable note hedge transactions with
respect to our common shares. The call options are designed to
cover, subject to customary anti-dilution adjustments, the net
number of our common shares that would be deliverable to
exchanging noteholders in the event of an exchange of the notes.
Nabors Delaware paid an aggregate amount of approximately
$583.6 million of the proceeds from the sale of the notes
to acquire the call options.
Nabors also entered into separate warrant transactions at the
time of the sale of the notes whereby we sold warrants that give
the holders the right to acquire approximately 60.0 million
of our common shares at a strike price of $54.64 per share. On
exercise of the warrants, we have the option to deliver cash or
our common shares equal to the difference between the then
market price and strike price. All of the warrants will
87
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
be exercisable and will expire on August 15, 2011. We
received aggregate proceeds of approximately $421.2 million
from the sale of the warrants and used $353.4 million of
the proceeds to purchase 10.0 million of our common shares.
The purchased call options and sold warrants are separate
contracts entered into by Nabors and Nabors Delaware with two
financial institutions and are not part of the terms of the
notes and do not affect the holders’ rights under the
notes. The purchased call options are expected to offset the
potential dilution upon exchange of the notes in the event the
market value of a share of our common shares at the time of
exercise is greater than the strike price of the purchased call
options, which corresponds to the initial exchange price of the
notes, subject to customary adjustments. The warrants
effectively increase the exchange price of the notes to $54.64
per common share from the perspective of Nabors, representing a
55% premium over the last reported bid price of $35.25 per share
on May 17, 2006. We recorded the exchangeable note hedge
and warrants in capital in excess of par value as of the
transaction date, and do not recognize subsequent changes in
fair value. We also recognized a deferred tax asset of
$215.9 million in the second quarter of 2006 for the effect
of the future tax benefits related to the exchangeable note
hedge. See Convertible Debt Accounting below for impact to our
deferred tax asset in the 2009 adoption of accounting rules
relating to convertible debt.
6.15% Senior
Notes Due February 2018
On February 20, 2008, Nabors Delaware completed a private
placement of $575 million aggregate principal amount of
6.15% senior notes due 2018 with registration rights, which
are unsecured and are fully and unconditionally guaranteed by
us. On July 22, 2008, Nabors Delaware completed a private
placement of $400 million aggregate principal amount of
6.15% senior notes due 2018 with registration rights, which
are unsecured and are fully and unconditionally guaranteed by
us. These new senior notes were an additional issuance under the
indenture pursuant to which Nabors Delaware issued
$575 million 6.15% senior notes due 2018 on
February 20, 2008 described above and are subject to the
same rates, terms and conditions and together will be treated as
a single class of debt securities under the indenture (together
$975 million 6.15% senior notes due 2018). The issue
of senior notes was resold by the initial purchasers to
qualified institutional buyers under Rule 144A of the
Securities Act and to certain investors outside of the United
States under Regulation S of the Securities Act. The senior
notes bear interest at a rate of 6.15% per year, payable
semi-annually on February 15 and August 15 of each year,
beginning August 15, 2008. The senior notes will mature on
February 15, 2018.
The senior notes are unsecured and are effectively junior in
right of payment to any of Nabors Delaware’s future secured
debt. The senior notes rank equally with any of Nabors
Delaware’s other existing and future unsubordinated debt
and are senior in right of payment to any of Nabors
Delaware’s future senior subordinated debt. Our guarantee
of the senior notes is unsecured and ranks equal in right of
payment to all of our unsecured and unsubordinated indebtedness
from time to time outstanding. The senior notes are subject to
redemption by Nabors Delaware, in whole or in part, at any time
at a redemption price equal to the greater of (i) 100% of
the principal amount of the senior notes then outstanding to be
redeemed; or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest,
determined in the manner set forth in the indenture. In the
event of a change in control triggering event, as defined in the
indenture, the holders of senior notes may require Nabors
Delaware to purchase all or any part of each senior note in cash
equal to 101% of the principal amount plus accrued and unpaid
interest, if any, to the date of purchase, except to the extent
Nabors Delaware has exercised its right to redeem the senior
notes. Nabors Delaware used the proceeds of the offering of the
senior notes for general corporate purposes, including the
repayment of debt.
On August 20, 2008, we and Nabors Delaware filed a
registration statement on Amendment No. 1 to
Form S-4
with the SEC with respect to an offer to exchange the combined
$975 million aggregate principal amount of
6.15% senior notes due 2018 for other notes that would be
registered and have terms substantially
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
identical in all material respects to these notes pursuant to
the applicable registration rights agreement, including being
fully and unconditionally guaranteed by us. On September 2,
2008, the registration statement was declared effective by the
SEC and the exchange offer expired on October 9, 2008. On
October 16, 2008, Nabors Delaware issued $974,965,000 of
notes pursuant to the registration statement in exchange for an
equal amount of the original notes due 2018 that were properly
tendered.
9.25% Senior
Notes Due January 2019
On January 12, 2009, Nabors Delaware completed a private
placement of $1.125 billion aggregate principal amount of
9.25% senior notes due 2019 with registration rights, which
are unsecured and are fully and unconditionally guaranteed by
us. The issue of senior notes was resold by the initial
purchasers to qualified institutional buyers under
Rule 144A and to certain investors outside of the United
States under Regulation S of the Securities Act. The senior
notes bear interest at a rate of 9.25% per year, payable
semi-annually on January 15 and July 15 of each year, beginning
July 15, 2009. The senior notes will mature on
January 15, 2019.
The senior notes are unsecured and are junior in right of
payment to any of Nabors Delaware’s future secured debt.
The senior notes rank equally with any of Nabors Delaware’s
other existing and future unsubordinated debt and are senior in
right of payment to any of Nabors Delaware’s future senior
subordinated debt. Our guarantee of the senior notes is
unsecured and ranks equal in right of payment to all of our
unsecured and unsubordinated indebtedness from time to time
outstanding. The senior notes are subject to redemption by
Nabors Delaware, in whole or in part, at any time at a
redemption price equal to the greater of (i) 100% of the
principal amount of the senior notes then outstanding to be
redeemed; or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest,
determined in the manner set forth in the applicable indenture.
In the event of a change in control triggering event, as defined
in the indenture, the holders of senior notes may require Nabors
Delaware to purchase all or any part of each senior note in cash
equal to 101% of the principal amount plus accrued and unpaid
interest, if any, to the date of purchase, except to the extent
Nabors Delaware has exercised its right to redeem the senior
notes. Nabors Delaware is using the proceeds of the offering of
the senior notes for the repayment or repurchase of indebtedness
and general corporate purposes.
On March 30, 2009, we and Nabors Delaware filed a
registration statement on
Form S-4
under the Securities Act. The registration statement related to
the exchange offer to noteholders required under the
registration rights agreement related to the 9.25% senior
notes. On May 11, 2009 the registration statement was
declared effective by the SEC. On July 23, 2009 Nabors
Delaware issued $1,069,392,000 of notes pursuant to the
registration statement in exchange for an equal amount of the
original notes due 2019 that were properly tendered.
5.375% Senior
Notes Due August 2012
On August 22, 2002, Nabors Delaware issued
$275 million aggregate principal amount of
5.375% senior notes due 2012, which are fully and
unconditionally guaranteed by Nabors. The senior notes were
resold by a placement agent to qualified institutional buyers
under Rule 144A of the Securities Act of 1933. Interest on
the senior notes is payable semi-annually on February 15 and
August 15 of each year.
The notes are unsecured and are effectively junior in right of
payment to any of Nabors Delaware’s future secured debt.
The notes rank equal in right of payment with any of Nabors
Delaware’s future unsubordinated debt and are senior in
right of payment to any of Nabors Delaware’s subordinated
debt. The guarantee of Nabors with respect to the senior notes
issued by Nabors Delaware, is similarly unsecured and has a
similar ranking to the series of senior notes so guaranteed.
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Subject to certain qualifications and limitations, the
indentures governing the senior notes issued by Nabors Delaware
limit the ability of Nabors and its subsidiaries to incur liens
and to enter into sale and lease-back transactions. In addition,
the indentures limit our ability to enter into mergers,
consolidations or transfers of all or substantially all of our
assets unless the successor company assumes their obligations
under the applicable indenture.
Other
Debt Transactions
In January and February 2009, Nabors Holdings 1, ULC, one of our
wholly owned subsidiaries (“Nabors Holdings”),
repurchased $56.6 million par value of the
$225 million principal amount of its 4.875% senior
notes due August 2009 in the open market for cash totaling
$56.8 million. In August 2009, Nabors Holdings paid
$168.4 million to redeem the remaining notes. The
redemption resulted in no gain or loss as the notes were
redeemed at a price equal to their carrying value.
In July 2008, Nabors Delaware paid $60.6 million in cash to
redeem its zero coupon senior convertible debentures due 2021
which equaled the issue price of $50.4 million plus accrued
original issue discount of $10.2 million. The redemption of
the debentures did not result in any gain or loss since they
were redeemed at a price equal to their carrying value on
July 7, 2008.
In June and July 2008, Nabors Delaware paid cash of
$171.8 million and $528.2 million to redeem all of its
zero coupon senior exchangeable notes due 2023. In addition to
$700 million in cash, we issued approximately
5.25 million of our common shares, with a fair value of
$249.8 million, the price equal to the principal amount of
the notes plus the excess of the exchange value of the notes
over their principal amount. Nabors Delaware was required to pay
noteholders cash up to the principal amount of the notes and at
its option, either cash or common shares for any amount above
the principal amount of the notes. The number of common shares
issued equaled the amount in excess of the principal of the
notes divided by the average of the volume-weighted average
price of our common shares for the five or ten trading day
period beginning on the second business day following the day
the notes were surrendered for exchange. The notes were
exchangeable into the equivalent value of 28.5306 common shares
per $1,000 principal amount of the notes. The redemption of the
notes did not result in any gain or loss since the amount of
cash paid for redemption of the notes was equal to their
carrying amount. The excess of the exchange value of the notes
over the carrying amount was recorded as a reduction to capital
in excess of par value in our consolidated statement of changes
in equity. A deferred tax liability of $81.8 million
recorded during the five-year period that the notes were
outstanding was reclassified to and increased our capital in
excess of par value account. This reclassification reflects the
permanent income tax savings to the Company relating to the
notes.
Short-Term
Borrowings
We had four
letter-of-credit
facilities with various banks as of December 31, 2009. We
did not have any short-term borrowings outstanding at
December 31, 2009 or 2008. Availability and borrowings
under our credit facilities are as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Credit available
|
$ | 245,442 | $ | 295,045 | ||||
|
Letters of credit outstanding, inclusive of financial and
performance guarantees
|
(71,389 | ) | (174,156 | ) | ||||
|
Remaining availability
|
$ | 174,053 | $ | 120,889 | ||||
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Convertible
Debt Accounting
Prior to January 1, 2009, separate accounting for the
embedded conversion option in our convertible long-term debt was
not required when the conversion spread feature did not qualify
for accounting as a derivative instrument.
Effective January 1, 2009, we account for our convertible
debt instruments with a liability component based on the fair
value of a similar nonconvertible debt instrument and an equity
component based on the excess of the initial proceeds from the
convertible debt instrument over the liability component. Such
excess represents proceeds related to the conversion option and
is recorded as capital in excess of par value. The liability is
recorded at a discount, which is then amortized as additional
non-cash interest expense over the convertible debt
instrument’s expected life. We have accounted for our
convertible debt instruments on a retrospective basis in all
past periods presented for all convertible debt instruments
required to be accounted for in this manner. Both our
0.94% senior exchangeable notes issued May 2006 and our
zero coupon senior exchangeable notes issued June 2003 have been
presented in this manner.
The following assumptions were made in our accounting change:
|
Zero coupon senior
|
0.94% senior
|
|||||||
|
Assumptions
|
exchangeable notes | exchangeable notes | ||||||
|
Date of issue
|
June 2003 | May 2006 | ||||||
|
Expected maturity date
|
June 2008 | May 2011 | ||||||
|
Amortization period
|
5 years | 5 years | ||||||
|
Nonconvertible debt borrowing rate
|
2.8% | 6.1% | ||||||
|
Tax rate over term of debt
|
37% | 37% | ||||||
|
Conversion Triggers
|
||
| Zero coupon senior exchangeable notes | In May 2008 Nabors Delaware called for redemption of all of its zero coupon senior exchangeable notes due 2023. The total consideration exchanged to effect the redemption and related exchange was $700 million in cash and approximately 5.25 million of our common shares, with a fair value of $249.8 million, which represents the principal amount of the notes plus the excess of the exchange value of the notes over their principal amount. | |
| 0.94% senior exchangeable notes | The notes are exchangeable into cash and, if applicable, Nabors common shares based on an exchange rate equal to 21.8221 common shares per $1,000 principal amount of notes (equating to an initial exchange price of approximately $45.83 per share), subject to adjustment during the 30 calendar days ending at the close of business on the business day immediately preceding the maturity date. | |
| Upon exchange, we would be required to issue only incremental shares above the principal amount of the notes, since we are required to pay cash up to the principal amount of the notes exchanged. There would be an if-converted value in excess of the principal amount of the notes only when the price of our shares exceeds $45.83 as of the last trading day of the quarter and the average price of our shares for the ten consecutive trading days beginning on the third business day after the last trading day of the quarter exceeds $45.83. |
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effect of the accounting change on our previously reported
consolidated balance sheet is as follows:
| December 31, 2008 | ||||||||||||
|
As Previously
|
Effect of
|
As Currently
|
||||||||||
| Reported | Change | Reported | ||||||||||
| (In thousands) | ||||||||||||
|
Increase (Decrease)
|
||||||||||||
|
Property, plant and equipment, net
|
$ | 7,282,042 | $ | 49,917 | $ | 7,331,959 | ||||||
|
Long-term debt
|
3,887,711 | (287,178 | ) | 3,600,533 | ||||||||
|
Deferred income tax liability
|
497,415 | 125,108 | 622,523 | |||||||||
|
Capital in excess of par value
|
1,705,907 | 423,508 | 2,129,415 | |||||||||
|
Retained earnings
|
3,910,253 | (211,521 | ) | 3,698,732 | ||||||||
The increase to deferred income tax liabilities related
partially to the reduction of a deferred tax asset of
$215.9 million (which was recorded during the second
quarter of 2006) for the effect of the future tax benefits
related to the exchangeable note hedge.
The effect of the accounting change on our previously reported
consolidated statements of income (loss) is as follows:
| Years Ended December 31, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
|
As
|
As
|
As
|
As
|
|||||||||||||||||||||
|
Previously
|
Effect of
|
Currently
|
Previously
|
Effect of
|
Currently
|
|||||||||||||||||||
| Reported | Change | Reported | Reported | Change | Reported | |||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||
|
Increase (Decrease):
|
||||||||||||||||||||||||
|
Depreciation expense
|
611,066 | 3,301 | 614,367 | 467,730 | 1,939 | 469,669 | ||||||||||||||||||
|
Interest expense
|
91,620 | 105,098 | 196,718 | 53,702 | 101,218 | 154,920 | ||||||||||||||||||
|
Income tax expense
|
250,451 | (44,304 | ) | 206,147 | 239,664 | (38,168 | ) | 201,496 | ||||||||||||||||
|
Net income attributable to Nabors
|
551,173 | (75,436 | ) | 475,737 | 930,691 | (64,989 | ) | 865,702 | ||||||||||||||||
|
Earnings per share — diluted
|
$ | 1.93 | $ | (.28 | ) | $ | 1.65 | $ | 3.25 | $ | (.25 | ) | $ | 3.00 | ||||||||||
|
Weighted-average number of shares outstanding
|
285,285 | 2,951 | (1) | 288,236 | (1) | 286,606 | 1,620 | (1) | 288,226 | (1) | ||||||||||||||
| (1) | Includes accounting change related to earnings per share calculation. See Note 17 — Earnings (Losses) Per Share. |
The following information illustrates the effect of the
accounting change on our convertible debt instruments. The
balances of the liability and equity components as of
December 31, 2009 and 2008 are as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Equity component — net carrying value
|
$ | 576,626 | $ | 583,212 | ||||
|
Liability component:
|
||||||||
|
Face amount due at maturity
|
$ | 1,685,220 | $ | 2,650,000 | ||||
|
Less: Unamortized discount
|
(108,740 | ) | (287,178 | ) | ||||
|
Liability component — net carrying value
|
$ | 1,576,480 | $ | 2,362,822 | ||||
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The remaining debt discount is being amortized into interest
expense over the expected remaining life of the convertible debt
instruments using the effective interest rate. Interest expense
related to the convertible debt instruments was recognized as
follows:
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Interest expense on convertible debt instruments:
|
||||||||||||
|
Contractual coupon interest
|
$ | 18,290 | $ | 25,693 | $ | 25,850 | ||||||
|
Amortization of debt discount
|
85,232 | 121,916 | 125,929 | |||||||||
|
Total interest expense
|
$ | 103,522 | $ | 147,609 | $ | 151,779 | ||||||
Effective January 1, 2007, we adopted the revised
provisions of the Income Taxes Topic in the ASC relating to
uncertain tax positions. We recognized increases of
$24 million and $21 million to our tax reserves for
uncertain tax positions and interest and penalties,
respectively. These increases were accounted for as an increase
to other long-term liabilities and as a reduction to retained
earnings at January 1, 2007. The change in our unrecognized
tax benefits for years ended December 31, 2009, 2008 and
2007 are as follows:
| Year Ended December 31, | ||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||
| (In thousands) | ||||||||||||||||
|
Balance as of January 1,
|
$ | 51,819 | $ | 55,627 | $ | 84,294 | ||||||||||
|
Additions based on tax positions related to the current year
|
4,787 | 3,990 | 3,298 | |||||||||||||
|
Additions for tax positions of prior years
|
12,889 | 4,168 | 9,873 | |||||||||||||
|
Reductions for tax positions of prior years
|
(447 | ) | (10,966 | ) | (41,838 | ) | ||||||||||
|
Settlements
|
— | (1,000 | ) | — | ||||||||||||
|
Balance as of December 31,
|
$ | 69,048 | $ | 51,819 | $ | 55,627 | ||||||||||
The balance also represents the amount of unrecognized tax
benefits that, if recognized, would favorably impact the
effective income tax rate in future periods. As of
December 31, 2009, 2008 and 2007, we had approximately
$38.5 million, $18.6 million and $28.4 million,
respectively, of interest and penalties related to our total
gross unrecognized tax benefits. During the years ended
December 31, 2009, 2008 and 2007, we accrued and recognized
estimated interest related to unrecognized tax benefits and
penalties of approximately $5.2 million, $5.3 million
and $6.9 million, respectively. We recognize interest and
penalties related to income tax matters in the income tax
expense line item in our consolidated statements of income
(loss).
We are subject to income taxes in the United States and numerous
other jurisdictions. Internationally, a number of our income tax
returns from 1995 through 2007 are currently under audit
examination. We anticipate that several of these audits could be
finalized within 12 months. It is possible that the benefit
that relates to our unrecognized tax positions could
significantly increase or decrease within 12 months.
However, based on the current status of examinations, and the
protocol for finalizing audits with the relevant tax
authorities, which could include formal legal proceedings, it is
not possible to estimate the future impact of the amount of
changes, if any, to recorded uncertain tax positions at
December 31, 2009.
93
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income (loss) from continuing operations before income taxes was
comprised of the following:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
United States and Other Jurisdictions:
|
||||||||||||
|
United States
|
$ | (716,694 | ) | $ | 313,704 | $ | 513,431 | |||||
|
Other jurisdictions
|
481,578 | 372,107 | 518,323 | |||||||||
|
Income (loss) before income taxes from continuing operations
|
$ | (235,116 | ) | $ | 685,811 | $ | 1,031,754 | |||||
Income taxes have been provided based upon the tax laws and
rates in the countries in which operations are conducted and
income is earned. We are a Bermuda-exempt company. Bermuda does
not impose corporate income taxes. Our U.S. subsidiaries
are subject to a U.S. federal tax rate of 35%.
Income tax expense (benefit) from continuing operations
consisted of the following:
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
U.S. federal
|
$ | (15,434 | ) | $ | 59,914 | $ | 116,456 | |||||
|
Outside the U.S.
|
84,220 | 119,889 | 97,489 | |||||||||
|
State
|
746 | 9,029 | 14,006 | |||||||||
| 69,532 | 188,832 | 227,951 | ||||||||||
|
Deferred:
|
||||||||||||
|
U.S. federal
|
(148,188 | ) | 57,845 | 6,740 | ||||||||
|
Outside the U.S.
|
(61,887 | ) | (48,164 | ) | (41,166 | ) | ||||||
|
State
|
(8,685 | ) | 7,634 | 7,971 | ||||||||
| (218,760 | ) | 17,315 | (26,455 | ) | ||||||||
|
Income tax expense (benefit)
|
$ | (149,228 | ) | $ | 206,147 | $ | 201,496 | |||||
94
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Nabors is not subject to tax in Bermuda. A reconciliation of the
differences between taxes on income (loss) before income taxes
computed at the appropriate statutory rate and our reported
provision for income taxes follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Income tax provision at statutory rate (Bermuda rate of 0)%
|
$ | — | $ | — | $ | — | ||||||
|
Taxes on U.S. and other international earnings (losses) at
greater than the Bermuda rate
|
(146,032 | ) | 186,953 | 214,021 | ||||||||
|
Increase in valuation allowance
|
6,062 | 6,604 | 8,144 | |||||||||
|
Effect of change in tax rate
|
(9,248 | ) | (5,406 | ) | (17,119 | ) | ||||||
|
Establishment of a deferred tax asset, net of valuation allowance
|
— | 1,990 | — | |||||||||
|
Tax reserves and interest
|
14,652 | (657 | ) | (25,527 | ) | |||||||
|
State income taxes
|
(14,662 | ) | 16,663 | 21,977 | ||||||||
|
Income tax expense (benefit)
|
$ | (149,228 | ) | $ | 206,147 | $ | 201,496 | |||||
|
Effective tax rate
|
64 | % | 30 | % | 20 | % | ||||||
Our effective income tax rate for 2009 reflects the disparity
between losses in our U.S. operations (attributable
primarily to impairments) and income in our other operations
primarily in lower tax jurisdictions. Because the
U.S. income tax rate is higher than that of other
jurisdictions, the tax benefit from our U.S. losses was not
proportionately reduced by the tax expense from our other
operations. The result is a net tax benefit that represents a
significant percentage (63.5%) of our consolidated GAAP loss.
The increase in our effective income tax rate from 2007 to 2008
resulted from (1) our goodwill impairments which had no
associated tax benefit, (2) the reversal of certain tax
reserves during 2007 in the amount of $25.5 million,
(3) a decrease in 2007 tax expense of approximately
$16.0 million resulting from a reduction in Canada’s
tax rate, and (4) a higher proportion of our 2008 taxable
income being generated in the United States, which generally
imposes a higher tax rate than the other jurisdictions in which
we operate.
95
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The significant components of our deferred tax assets and
liabilities were as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Net operating loss carryforwards
|
$ | 1,852,829 | $ | 178,082 | ||||
|
Equity compensation
|
23,340 | 29,206 | ||||||
|
Deferred revenue
|
30,944 | 24,698 | ||||||
|
Tax credit and other attribute carryforwards
|
17,521 | 28,336 | ||||||
|
Insurance loss reserve
|
13,173 | 22,521 | ||||||
|
Other
|
114,520 | 113,086 | ||||||
|
Subtotal
|
2,052,327 | 395,929 | ||||||
|
Valuation allowance
|
(1,570,890 | ) | (132,262 | ) | ||||
|
Deferred tax assets
|
$ | 481,437 | $ | 263,667 | ||||
| (In thousands) | ||||||||
|
Deferred tax liabilities:
|
||||||||
|
Depreciation, amortization and depletion for tax in excess of
book expense
|
$ | 950,318 | $ | 799,542 | ||||
|
Variable interest investments
|
3,064 | 1,055 | ||||||
|
Other
|
47,553 | 57,510 | ||||||
|
Deferred tax liability
|
1,000,935 | 858,107 | ||||||
|
Net deferred assets (liabilities)
|
$ | (519,498 | ) | $ | (594,440 | ) | ||
|
Balance Sheet Summary
|
||||||||
|
Net current deferred asset
|
$ | 125,163 | $ | 28,083 | ||||
|
Net noncurrent deferred asset(1)
|
37,559 | — | ||||||
|
Net current deferred liability(2)
|
(8,793 | ) | — | |||||
|
Net noncurrent deferred liability
|
(673,427 | ) | (622,523 | ) | ||||
|
Net deferred asset (liability)
|
$ | (519,498 | ) | $ | (594,440 | ) | ||
| (1) | This amount is included in other long-term assets. | |
| (2) | This amount is included in accrued liabilities. |
For U.S. federal income tax purposes, we have net operating
loss (“NOL”) carryforwards of approximately
$715.7 million that, if not utilized, will expire during
2017 to 2018. The NOL carryforwards for alternative minimum tax
purposes are approximately $12.8 million. Additionally, we
have NOL carryforwards in other jurisdictions of approximately
$5.8 billion of which $219.9 million that, if not
utilized, will expire at various times from 2010 to 2029. We
provide a valuation allowance against NOL carryforwards in
various tax jurisdictions based on our consideration of existing
temporary differences and expected future earning levels in
those jurisdictions. We have recorded a deferred tax asset of
approximately $1.53 billion as of December 31, 2009
relating to NOL carryforwards that have an indefinite life in
several non-U.S. jurisdictions. A valuation allowance of
approximately $1.52 billion has been recognized because we
believe it is more likely than not that substantially all of the
deferred tax asset will not be realized.
96
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The NOL carryforwards by year of expiration:
|
Year Ended December 31,
|
Total | U.S. Federal | Non-U.S | |||||||||
| (In thousands) | ||||||||||||
|
2010
|
$ | 2,132 | $ | — | $ | 2,132 | ||||||
|
2011
|
1,264 | — | 1,264 | |||||||||
|
2012
|
13,849 | — | 13,849 | |||||||||
|
2013
|
1,372 | — | 1,372 | |||||||||
|
2014
|
7,858 | — | 7,858 | |||||||||
|
2015
|
26 | — | 26 | |||||||||
|
2016
|
28,239 | — | 28,239 | |||||||||
|
2017
|
53,065 | 9,662 | 43,403 | |||||||||
|
2018
|
49,098 | 17,722 | 31,376 | |||||||||
|
2019
|
31,452 | — | 31,452 | |||||||||
|
2025
|
16,331 | 16,331 | — | |||||||||
|
2026
|
6,904 | 655 | 6,249 | |||||||||
|
2027
|
18,345 | 1 | 18,344 | |||||||||
|
2028
|
32,328 | 5,433 | 26,895 | |||||||||
|
2029
|
673,367 | 665,933 | 7,434 | |||||||||
|
Subtotal: expiring NOLs
|
935,630 | 715,737 | 219,893 | |||||||||
|
Non-expiring NOLs
|
5,583,913 | — | 5,583,913 | |||||||||
|
Total
|
$ | 6,519,543 | $ | 715,737 | $ | 5,803,806 | ||||||
In addition, for state income tax purposes, we have net
operating loss carryforwards of approximately $280 million
that, if not utilized, will expire at various times from 2010 to
2029.
Under U.S. federal tax law, the amount and availability of
loss carryforwards (and certain other tax attributes) are
subject to a variety of interpretations and restrictive tests
applicable to Nabors and our subsidiaries. The utilization of
these carryforwards could be limited or effectively lost upon
certain changes in our shareholder base. Accordingly, although
we believe substantial loss carryforwards are available to us,
no assurance can be given concerning these loss carryforwards,
or whether or not they will be available in the future.
Various bills have been introduced in Congress that could reduce
or eliminate the tax benefits associated with our reorganization
as a Bermuda company. Legislation enacted by Congress in 2004
provides that a corporation that reorganized in a foreign
jurisdiction on or after March 4, 2003 be treated as a
domestic corporation for United States federal income tax
purposes. Nabors’ reorganization was completed
June 24, 2002. There has been and we expect that there may
continue to be legislation proposed in Congress from time to
time which, if enacted, could limit or eliminate the tax
benefits associated with our reorganization.
Because we cannot predict whether legislation will ultimately be
adopted, no assurance can be given that the tax benefits
associated with our reorganization will ultimately accrue to the
benefit of the Company and its shareholders. 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 reorganization.
97
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our authorized share capital consists of 800 million common
shares, par value $.001 per share, and 25 million preferred
shares, par value $.001 per share. Common shares issued were
313,915,220 and 312,343,407 at $.001 par value as of
December 31, 2009 and 2008, respectively.
For the years ended December 31, 2008 and 2007, we
repurchased 8.5 million and 3.8 million, respectively,
of our common shares in the open market for $281.1 million
and $102.5 million, respectively, all of which are held in
treasury. No shares were purchased in the open market during
2009. From time to time, treasury shares may be reissued. When
shares are reissued, we use the weighted-average-cost method for
determining cost. The difference between the cost of the shares
and the issuance price is added to or deducted from our capital
in excess of par value account.
During 2008 we entered into a three-month written put option for
1 million of our common shares with a strike price of $25
per common share. We settled this contract during the fourth
quarter of 2008 and paid cash of $22.6 million, net of the
premium, and recognized a loss of $9.9 million which is
included in losses (gains) on sales and retirements of
long-lived assets and other expense (income), net in our
consolidated statements of income (loss).
During 2009 our outstanding shares increased by 218,835 pursuant
to a share settlement of stock options exercised by Nabors’
Deputy Chairman, President and Chief Operating Officer, Anthony
G. Petrello. As part of the transaction, Mr. Petrello
surrendered 531,165 unexercised vested stock options to the
Company with a value of approximately $5.6 million to
satisfy the option exercise price and related income taxes.
During 2007 our outstanding shares increased by 729,866 pursuant
to a share settlement of stock options exercised by Nabors’
Chairman and Chief Executive Officer, Eugene M. Isenberg. As
part of the transaction, Mr. Isenberg surrendered 4,142,812
unexercised vested stock options to the Company with a value of
approximately $29.7 million to satisfy the option exercise
price and related income taxes.
For the years ended December 31, 2009, 2008 and 2007 the
Compensation Committee of our Board of Directors granted
restricted stock awards to some of our executive officers, other
key employees, and independent directors. We awarded 85,000,
4,982,536 and 1,744,627 restricted shares at an average market
price of $11.55, $20.68 and $30.18 to these individuals for
2009, 2008 and 2007, respectively. See Note 6 —
Share-Based Compensation for a summary of our restricted stock
and option awards as of December 31, 2009.
For the years ended December 31, 2009, 2008 and 2007 our
employees exercised vested options to acquire 1.5 million,
2.5 million and 4.5 million of our common shares,
respectively, resulting in proceeds of $11.2 million,
$56.6 million and $61.6 million, respectively.
During 2008 in connection with the redemption of the zero coupon
senior exchangeable notes due 2023, we issued 5.25 million
of our treasury shares with a fair value of $249.8 million
to satisfy the obligation to the noteholders to pay the excess
over the principal amount of the notes that were exchanged. The
treasury shares issued in connection with the redemption of the
zero coupon senior exchangeable notes had a cost basis of
$181.2 million. See Note 11 — Debt for
additional discussion.
In conjunction with our acquisition of Ryan Energy Technologies
Inc. in October 2002 and our acquisition of Enserco Energy
Services Company Inc. in April 2002, we issued 760,528 and
7,098,164 exchangeable shares of Nabors Exchangeco (Canada)
Inc., one of our wholly owned Canadian subsidiaries
(“Nabors Exchangeco”), respectively. During 2009 we
redeemed the exchangeable shares of Nabors Exchangeco for
Nabors’ common shares on a
one-for-one
basis.
98
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pension
Plans
In conjunction with our acquisition of Pool Energy Services Co.
(“Pool”) in November 1999, we acquired the assets and
liabilities of a defined benefit pension plan, the Pool Company
Retirement Income Plan (the “Pool Pension Plan”).
Benefits under the Pool Pension Plan are frozen and participants
were fully vested in their accrued retirement benefit on
December 31, 1998.
Summarized information on the Pool Pension Plan is as follows:
| Pension Benefits | ||||||||||||
| 2009 | 2008 | |||||||||||
| (In thousands) | ||||||||||||
|
Change in benefit obligation:
|
||||||||||||
|
Benefit obligation at beginning of year
|
$ | 17,781 | $ | 16,631 | ||||||||
|
Interest cost
|
1,093 | 1,066 | ||||||||||
|
Actuarial loss (gain)
|
590 | 610 | ||||||||||
|
Benefit payments
|
(599 | ) | (526 | ) | ||||||||
|
Benefit obligation at end of year(1)
|
$ | 18,865 | $ | 17,781 | ||||||||
|
Change in plan assets:
|
||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 12,113 | $ | 15,309 | ||||||||
|
Actual (loss) return on plan assets
|
1,902 | (3,248 | ) | |||||||||
|
Employer contribution
|
642 | 578 | ||||||||||
|
Benefit payments
|
(599 | ) | (526 | ) | ||||||||
|
Fair value of plan assets at end of year
|
$ | 14,058 | $ | 12,113 | ||||||||
|
Funded status:
|
||||||||||||
|
Underfunded status at end of year
|
$ | (4,807 | ) | $ | (5,668 | ) | ||||||
|
Amounts recognized in consolidated balance sheets:
|
||||||||||||
|
Other long-term liabilities
|
$ | (4,807 | ) | $ | (5,668 | ) | ||||||
|
Components of net periodic benefit cost (recognized in our
consolidated statements of income):
|
||||||||||||
|
Interest cost
|
$ | 1,093 | $ | 1,066 | ||||||||
|
Expected return on plan assets
|
(794 | ) | (1,001 | ) | ||||||||
|
Recognized net actuarial loss
|
545 | 95 | ||||||||||
|
Net periodic benefit cost
|
$ | 844 | $ | 160 | ||||||||
|
Weighted-average assumptions:
|
||||||||||||
|
Weighted-average discount rate
|
6.00 | % | 6.25 | % | ||||||||
|
Expected long-term rate of return on plan assets
|
6.50 | % | 6.50 | % | ||||||||
| (1) | As of December 31, 2009 and 2008, the accumulated benefit obligation was the same as the projected benefit obligation. |
For the years ended December 31, 2009, 2008 and 2007, the
net actuarial loss amounts included in accumulated other
comprehensive income (loss) in the consolidated statements of
changes in equity were approximately $(6.3) million,
$(7.4) million and $(2.6) million, respectively. There
were no other components,
99
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
such as prior service costs or transition obligations relating
to pension costs recorded within accumulated other comprehensive
income (loss) during 2009, 2008 and 2007.
The amount included in accumulated other comprehensive income
(loss) in the consolidated statements of changes in equity that
is expected to be recognized as a component of net periodic
benefit cost during 2010 is approximately $.4 million.
We analyze the historical performance of investments in equity
and debt securities, together with current market factors such
as inflation and interest rates to help us make assumptions
necessary to estimate a long-term rate of return on plan assets.
Once this estimate is made, we review the portfolio of plan
assets and make adjustments thereto that we believe are
necessary to reflect a diversified blend of investments in
equity and debt securities that is capable of achieving the
estimated long-term rate of return without assuming an
unreasonable level of investment risk.
The following table sets forth, by level within the fair value
hierarchy, the investments in the Pool Pension Plan as of
December 31, 2009. The investments’ fair value
measurement level within the fair value hierarchy is classified
in its entirety based on the lowest level of input that is
significant to the measurement.
| Fair Value as of December 31, 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
|
$ | 450 | $ | — | $ | — | $ | 450 | ||||||||
|
Short-term investments:(1)
|
||||||||||||||||
|
Available-for-sale
equity securities(2)
|
— | 7,764 | — | 7,764 | ||||||||||||
|
Available-for-sale
debt securities(3)
|
— | 5,844 | — | 5,844 | ||||||||||||
|
Total investments
|
— | 13,608 | — | 13,608 | ||||||||||||
|
Total
|
$ | 450 | $ | 13,608 | $ | $ | 14,058 | |||||||||
| (1) | Includes investments in collective trust funds which are valued based on the fair value of the underlying investments using quoted prices in active markets or other significant inputs that are deemed observable. | |
| (2) | Includes funds that invest primarily in U.S. common stocks and foreign equity securities. | |
| (3) | Includes funds that invest primarily in investment grade debt. |
The measurement date used to determine pension measurements for
the plan is December 31.
Our weighted-average asset allocations as of December 31,
2009 and 2008, by asset category are as follows:
| Pension Benefits | ||||||||
| 2009 | 2008 | |||||||
|
Cash
|
3 | % | 0 | % | ||||
|
Equity securities
|
55 | % | 55 | % | ||||
|
Debt securities
|
42 | % | 45 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
We invest plan assets based on a total return on investment
approach, pursuant to which the plan assets include a
diversified blend of investments in equity and debt securities
toward a goal of maximizing the long-term rate of return without
assuming an unreasonable level of investment risk. We determine
the level of risk based on an analysis of plan liabilities, the
extent to which the value of the plan assets satisfies the plan
100
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liabilities and our financial condition. Our investment policy
includes target allocations approximating 55% investment in
equity securities and 45% investment in debt securities. The
equity portion of the plan assets represents growth and value
stocks of small, medium and large companies. We measure and
monitor the investment risk of the plan assets both on a
quarterly basis and annually when we assess plan liabilities.
We expect to contribute approximately $.5 million to the
Pool Pension Plan in 2010. This is based on the sum of
(1) the minimum contribution for the 2009 plan year that
will be made in 2010 and (2) the estimated minimum required
quarterly contributions for the 2010 plan year. We made
contributions to the Pool Pension Plan in 2009 and 2008 totaling
$.6 million, respectively.
As of December 31, 2009, we expect that benefits to be paid
in each of the next five years after 2009 and in the aggregate
for the five years thereafter will be as follows:
| (In thousands) | ||||
|
2010
|
$ | 639 | ||
|
2011
|
712 | |||
|
2012
|
779 | |||
|
2013
|
879 | |||
|
2014
|
1,007 | |||
|
2015 — 2019
|
6,409 | |||
Some of our employees are covered by defined contribution plans.
Our contributions to the plans totaled $19.8 million and
$17.5 million for the years ended December 31, 2009
and 2008, respectively. Nabors does not provide postemployment
benefits to its employees.
Postretirement
Benefits Other Than Pensions
Prior to the date of our acquisition, Pool provided certain
postretirement healthcare and life insurance benefits to
eligible retirees who had attained specific age and years of
service requirements. Nabors terminated this plan at the date of
acquisition (November 24, 1999). A liability of
approximately $.2 million is recorded in our consolidated
balance sheets as of December 31, 2009 and 2008,
respectively, to cover the estimated costs of beneficiaries
covered by the plan at the date of acquisition.
Nabors and its Chairman and Chief Executive Officer, its Deputy
Chairman, President and Chief Operating Officer, and certain
other key employees entered into split-dollar life insurance
agreements, pursuant to which we pay a portion of the premiums
under life insurance policies with respect to these individuals
and, in some instances, members of their families. These
agreements provide that we are reimbursed for the premium
payments upon the occurrence of specified events, including the
death of an insured individual. Any recovery of premiums paid by
Nabors could be limited to the cash surrender value of the
policies under certain circumstances. As such, the values of
these policies are recorded at their respective cash surrender
values in our consolidated balance sheets. We have made premium
payments to date totaling $11.7 million related to these
policies. The cash surrender value of these policies of
approximately $9.3 million and $8.4 million is
included in other long-term assets in our consolidated balance
sheets as of December 31, 2009 and 2008, respectively.
Under the Sarbanes-Oxley Act of 2002, the payment of premiums by
Nabors under the agreements with our Chairman and Chief
Executive Officer and with our Deputy Chairman, President and
Chief Operating Officer could be deemed to be prohibited loans
by us to these individuals. Consequently, we have paid no
premiums related to our agreements with these individuals since
the adoption of the Sarbanes-Oxley Act.
101
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In the ordinary course of business, we enter into various rig
leases, rig transportation and related oilfield services
agreements with our unconsolidated affiliates at market prices.
Revenues from business transactions with these affiliated
entities totaled $327.3 million, $285.3 million and
$153.4 million for the years ended December 31, 2009,
2008 and 2007, respectively. Expenses from business transactions
with these affiliated entities totaled $9.8 million,
$9.6 million and $6.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Additionally, we had accounts receivable from these affiliated
entities of $104.2 million and $107.5 million as of
December 31, 2009 and 2008, respectively. We had accounts
payable to these affiliated entities of $14.8 million and
$10.0 million as of December 31, 2009 and 2008,
respectively, and long-term payables with these affiliated
entities of $.8 million and $7.8 million as of
December 31, 2009 and 2008, respectively, which are
included in other long-term liabilities.
We own an interest in Shona Energy Company, LLC
(“Shona”), a company of which Mr. Payne, an
independent member of our Board of Directors, is the Chairman
and Chief Executive Officer. During the fourth quarter of 2008,
we purchased 1.8 million common shares of Shona for
$.9 million. During the first quarter of 2010, we purchased
shares of Shona’s preferred stock and warrants to purchase
additional common shares for $.9 million. After these
transactions, we hold a minority interest of approximately 11%
of the issued and outstanding shares of Shona.
Commitments
Operating
Leases
Nabors and its subsidiaries occupy various facilities and lease
certain equipment under various lease agreements. The minimum
rental commitments under non-cancelable operating leases, with
lease terms in excess of one year subsequent to
December 31, 2009, are as follows:
| (In thousands) | ||||
|
2010
|
$ | 15,498 | ||
|
2011
|
10,812 | |||
|
2012
|
2,893 | |||
|
2013
|
2,525 | |||
|
2014
|
2,315 | |||
|
Thereafter
|
1,507 | |||
| $ | 35,550 | |||
The above amounts do not include property taxes, insurance or
normal maintenance that the lessees are required to pay. Rental
expense relating to operating leases with terms greater than
30 days amounted to $25.5 million, $29.4 million
and $25.9 million for the years ended December 31,
2009, 2008 and 2007, respectively.
102
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Employment
Contracts
We have entered into employment contracts with certain of our
employees. Our minimum salary and bonus obligations under these
contracts as of December 31, 2009 are as follows:
| (In thousands) | ||||
|
2010
|
$ | 10,723 | ||
|
2011
|
10,665 | |||
|
2012
|
10,665 | |||
|
2013
|
3,070 | |||
|
2014 and thereafter
|
319 | |||
| $ | 35,442 | |||
Nabors’ Chairman and Chief Executive Officer, Eugene M.
Isenberg, and its Deputy Chairman, President and Chief Operating
Officer, Anthony G. Petrello, had employment agreements
(“prior employment agreements”) in effect through the
first quarter of 2009. Effective April 1, 2009, the Company
entered into amended and restated employment agreements
(“new employment agreements”) with them which extended
the terms through March 30, 2013.
For the three months ended March 31, 2009, the prior
employment agreements provided for annual cash bonuses in an
amount equal to 6% and 2%, for Messrs. Isenberg and
Petrello, respectively, of Nabors’ net cash flow (as
defined in the respective employment agreements) in excess of
15% of the average shareholders’ equity for each fiscal
year. Mr. Petrello’s bonus was subject to a minimum of
$700,000 per year.
Effective April 1, 2009, the new employment agreements for
Messrs. Isenberg and Petrello amend and restate the prior
employment agreements. The new employment agreements provide for
an extension of the employment term through March 30, 2013,
with automatic one-year extensions beginning April 1, 2011,
unless either party gives notice of non-renewal. The base
salaries for Messrs. Isenberg and Petrello were increased
to $1.3 million and $1.1 million, respectively.
Mr. Isenberg has agreed to donate the after-tax proceeds of
his base salary to an educational fund intended to benefit
Company employees or other worthy candidates.
On June 29, 2009, the new employment agreements for
Messrs. Isenberg and Petrello were amended to provide for a
reduction in the annual rate of base salary payable to each of
Messrs. Isenberg and Petrello to $1.17 million per
year and $990,000 per year, respectively, for the period from
June 29, 2009 to December 27, 2009. On
December 28, 2009, the agreements were further amended to
extend through June 27, 2010 the previously agreed salary
reduction.
In addition to a base salary, the new employment agreements
provide for annual cash bonuses in an amount equal to 2.25% and
1.5%, for Messrs. Isenberg and Petrello, respectively, of
Nabors’ net cash flow (as defined in the respective
employment agreements) in excess of 15% of the average
shareholders’ equity for each fiscal year. The new
employment agreements also provide a quarterly deferred bonus of
$.6 million and $.25 million, respectively, to the
accounts of Messrs. Isenberg and Petrello under
Nabors’ executive deferred compensation plan for each
quarter they are employed beginning June 30, 2009 and, in
Mr. Petrello’s case, ending March 30, 2019.
For 2009, the annual cash bonuses for Messrs. Isenberg and
Petrello pursuant to the formulas described in their employment
agreements were $15.4 million and $4.9 million,
respectively, for the first quarter of 2009 in accordance with
the prior employment agreement provisions and $4.5 million
and $3.0 million, respectively, for the second through
fourth quarter of 2009 in accordance with the new employment
agreement provisions.
Messrs. Isenberg and Petrello also are eligible for awards
under Nabors’ equity plans, may participate in annual
long-term incentive programs and pension and welfare plans on
the same basis as other executives, and may receive special
bonuses from time to time as determined by the Board of
Directors. The new employment
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
agreements effectively eliminated the risk of forfeiture of
outstanding stock awards. Accordingly, we recognized
compensation expense during the second quarter with respect to
all previously granted unvested awards to Messrs. Isenberg
and Petrello. As a result, as of December 31, 2009, there
was no unrecognized compensation expense related to restricted
stock and stock option awards for either Mr. Isenberg or
Mr. Petrello.
Termination in the event of death, disability, or
termination without cause (including in the event of a Change in
Control)
. The new employment agreements provide for
severance payments in the event that either
Mr. Isenberg’s or Mr. Petrello’s employment
agreement is terminated (i) upon death or disability,
(ii) by Nabors prior to the expiration date of the
employment agreement for any reason other than for Cause (as
defined in the respective employment agreements), or
(iii) by either individual for Constructive Termination
Without Cause, each as defined in the respective employment
agreements. Termination in the event of a Change in Control (as
defined in the respective employment agreements) is considered a
Constructive Termination Without Cause. Mr. Isenberg would
be entitled to receive within 30 days of any such
triggering event a payment of $100 million.
Mr. Petrello would be entitled to receive within
30 days of his death or disability a payment of
$50 million or in the event of Termination Without Cause or
Constructive Termination Without Cause, a payment based on a
formula of three times the average of his base salary and annual
bonus (calculated as though the bonus formula under the new
employment agreement had been in effect) paid during the three
fiscal years preceding the termination. If, by way of example,
Mr. Petrello were Terminated Without Cause subsequent to
December 31, 2009, his payment would be approximately
$45 million. The formula will be further reduced to two
times the average stated above effective April 1, 2015.
The Company does not have insurance to cover its obligations in
the event of death, disability, or termination without cause for
either Messrs. Isenberg or Petrello and the Company has not
recorded an expense or accrued a liability relating to these
potential obligations.
In addition, under the new employment agreements, the affected
individual would be entitled to receive (a) any unvested
restricted stock or stock options outstanding, which would
immediately and fully vest; (b) any amounts earned, accrued
or owing to the executive but not yet paid (including executive
benefits, life insurance, disability benefits and reimbursement
of expenses and perquisites), which would be continued through
the later of the expiration date or three years after the
termination date; (c) continued participation in medical,
dental and life insurance coverage until the executive received
equivalent benefits or coverage through a subsequent employer or
until the death of the executive or his spouse, whichever were
later; and (d) any other or additional benefits in
accordance with applicable plans and programs of Nabors. The
vesting of unvested equity awards would not result in the
recognition of any additional compensation expense, as all
compensation expense related to Messrs. Isenberg’s and
Petrello’s outstanding awards has been recognized as of
December 31, 2009. In addition, the new employment
agreements eliminate all tax
gross-ups,
including without limitation tax
gross-ups
on
golden parachute excise taxes, which applied under the prior
employment agreements. Estimates of the cash value of
Nabors’ obligations to Messrs. Isenberg and Petrello
under (b), (c) and (d) above are included in the
payment amounts above.
Other Obligations
.
In addition
to salary and bonus, each of Messrs. Isenberg and Petrello
receive group life insurance at an amount at least equal to
three times their respective base salaries, various split-dollar
life insurance policies, reimbursement of expenses, various
perquisites and a personal umbrella insurance policy in the
amount of $5 million. Premiums payable under the
split-dollar life insurance policies were suspended as a result
of the adoption of the Sarbanes-Oxley Act of 2002.
104
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 under audit 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 12 —
Income Taxes for additional discussion.
On September 14, 2006, Nabors Drilling International
Limited, one of our wholly owned Bermuda subsidiaries
(“NDIL”), received a Notice of Assessment (the
“Notice”) from Mexico’s federal tax authorities
in connection with the audit of NDIL’s Mexican 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 and more recently that the government’s
position lacks merit. NDIL’s Mexican branch took similar
deductions for depreciation and labor expenses from 2004 to
2008. On June 30, 2009, the government proposed similar
assessments against the Mexican 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 2004
through 2008 and against NDIL II for 2007 to 2009. We believe
that the potential assessments will range from $6 million
to $26 million per year for the period from 2004 to 2009,
and in the aggregate, would be approximately $90 million to
$95 million. Although we believe that any assessments
relating to the 2004 to 2009 years would also lack merit, a
reserve has been recorded in accordance with GAAP. If these
additional assessments were made and we ultimately did not
prevail, we would be required to recognize additional tax for
the amount of the aggregate over the current reserve.
Self-Insurance
We self-insure for certain losses relating to workers’
compensation, employers’ liability, general liability,
automobile liability and property damage. Effective
April 1, 2009 with our insurance renewal, changes have been
made to our self-insured retentions. Some workers’
compensation claims are subject to a minimum $1.0 million
deductible liability, plus an additional $3.0 million
corridor deductible. Some employers’ liability and marine
employers’ liability claims are subject to a
$2.0 million per-occurrence deductible. Some automobile
liability is subject to a $.5 million per-occurrence
deductible, plus an additional $1.0 million corridor
deductible. General liability claims are subject to a
$5.0 million per-occurrence deductible.
In addition, we are subject to a $5.0 million deductible
for all land rigs and a $10.0 million deductible for
offshore rigs. This applies to all kinds of risks of physical
damage except for named windstorms in the U.S. Gulf of
Mexico for which we are self-insured.
Political risk insurance is procured for select operations in
South America, Africa, the Middle East and Asia. Losses are
subject to a $.25 million deductible, except for Colombia,
which is subject to a $.5 million deductible. There is no
assurance that such coverage will adequately protect Nabors
against liability from all potential consequences.
105
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2009 and 2008, our self-insurance
accruals totaled $139.0 million and $163.0 million,
respectively, and our related insurance recoveries/receivables
were $12.9 million and $9.7 million, respectively.
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 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. 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 one of our vendors and compliance with the Foreign
Corrupt Practices Act. The inquiry relates to transactions with
and involving Panalpina, which provides freight forwarding and
customs clearance services to some of our affiliates. To date,
the inquiry has focused on transactions in Kazakhstan, Saudi
Arabia, Algeria and Nigeria. The Audit Committee of our Board of
Directors has engaged outside counsel to review some of our
transactions with this vendor. The Audit Committee has received
periodic updates at its regularly scheduled meetings, and the
Chairman of the Audit Committee has received updates between
meetings as circumstances warrant. The investigation includes 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 Company’s investigation. The ultimate outcome of this
investigation or the effect of implementing any further measures
that may be necessary to ensure full compliance with applicable
laws cannot be determined at this time.
A court 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
is excessive. We have asserted the lack of legally required
notice as a basis for challenging the judgment on appeal to the
Algeria Supreme Court. Based upon our understanding of
applicable law and precedent, we believe that this challenge
will be successful. We do not believe that a loss is probable
and have not accrued any amounts related to this matter.
However, the ultimate resolution and the timing thereof are
uncertain. If the Company is 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.
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. We have also guaranteed payment of
contingent consideration in conjunction with an acquisition in
2005. Potential contingent consideration is based on future
operating results of the acquired business. 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
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 and guarantees representing contingent
consideration in connection with a business combination:
| Maximum Amount | ||||||||||||||||||||
| 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Financial standby letters of credit and other financial surety
instruments
|
$ | 66,182 | $ | 10,808 | $ | 277 | $ | — | $ | 77,267 | ||||||||||
|
Contingent consideration in acquisition
|
— | 4,250 | — | — | 4,250 | |||||||||||||||
|
Total
|
$ | 66,182 | $ | 15,058 | $ | 277 | $ | — | $ | 81,517 | ||||||||||
Prior to January 1, 2009, we excluded unvested restricted
stock awards in the calculation of basic earnings per share and
applied the treasury stock method of accounting in calculating
the effect on fully diluted shares of unvested restricted stock.
Effective January 1, 2009, we include unvested restricted
stock awards in the calculation of basic and diluted earnings
per share using the two-class method as required by the Earnings
Per Share Topic of the ASC. This accounting change resulted in
reductions to our basic earnings per share calculations of $.02
and to our diluted earnings per share calculations of $.02 for
the years ended December 31, 2008 and 2007.
107
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of the numerators and denominators of the basic
and diluted earnings (losses) per share computations is as
follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Net income (loss) (numerator):
|
||||||||||||
|
Income (loss) from continuing operations, net of tax
|
$ | (85,888 | ) | $ | 479,664 | $ | 830,258 | |||||
|
Less: net (income) loss attributable to noncontrolling interest
|
342 | (3,927 | ) | 420 | ||||||||
|
Net income (loss) from continuing operations — basic
|
(85,546 | ) | 475,737 | 830,678 | ||||||||
|
Add interest expense on assumed conversion of our zero coupon
convertible/exchangeable senior debentures/notes, net of tax:
|
||||||||||||
|
0.94% senior exchangeable notes due 2011(1)
|
— | — | — | |||||||||
|
Zero coupon convertible senior debentures due 2021(2)
|
— | — | — | |||||||||
|
Zero coupon exchangeable notes due 2023(3)
|
— | — | — | |||||||||
|
Adjusted net income (loss) attributable to Nabors —
diluted
|
$ | (85,546 | ) | $ | 475,737 | $ | 830,678 | |||||
|
Earnings (losses) per Nabors’ share:
|
||||||||||||
|
Basic from continuing operations
|
$ | (.30 | ) | $ | 1.69 | $ | 2.96 | |||||
|
Diluted from continuing operations
|
$ | (.30 | ) | $ | 1.65 | $ | 2.88 | |||||
|
Income from discontinued operations, net of tax
|
$ | — | $ | — | $ | 35,024 | ||||||
|
Earnings (losses) per share, discontinued operations:
|
||||||||||||
|
Basic from discontinued operations
|
$ | — | $ | — | $ | .12 | ||||||
|
Diluted from discontinued operations
|
$ | — | $ | — | $ | .12 | ||||||
|
Shares (denominator):
|
||||||||||||
|
Weighted-average number of shares outstanding —
basic(4)
|
283,326 | 281,622 | 281,238 | |||||||||
|
Net effect of dilutive stock options, warrants and restricted
stock awards based on the if-converted method
|
— | 5,332 | 6,988 | |||||||||
|
Assumed conversion of our zero coupon convertible/exchangeable
senior debentures/notes:
|
||||||||||||
|
0.94% senior exchangeable notes due 2011(1)
|
— | — | — | |||||||||
|
Zero coupon convertible senior debentures due 2021(2)
|
— | — | — | |||||||||
|
Zero coupon exchangeable notes due 2023(3)
|
— | 1,282 | — | |||||||||
|
Weighted-average number of shares outstanding — diluted
|
283,326 | 288,236 | 288,226 | |||||||||
| (1) | Diluted earnings (losses) per share for the years ended December 31, 2009, 2008 and 2007 exclude any incremental shares issuable upon exchange of the 0.94% senior exchangeable notes due 2011. During 2008 and 2009 collectively, we purchased $1.1 billion par value of these notes in the open market, leaving approximately $1.7 billion par value outstanding. The number of shares that we would be required to issue upon exchange consists of only the incremental shares that would be issued above the principal amount of the notes, as we are required to pay cash up to the principal amount of the notes exchanged. We would issue an incremental number of shares only upon exchange of these notes. Such shares are included in the calculation of the weighted-average number of shares outstanding in our diluted earnings per share calculation only when our stock price exceeds $45.83 as of the last trading day of the quarter and the average |
108
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| price of our shares for the ten consecutive trading days beginning on the third business day after the last trading day of the quarter exceeds $45.83, which did not occur during any period for the years ended December 31, 2009, 2008 and 2007. | ||
| (2) | In July 2008 Nabors Delaware paid $60.6 million in cash to redeem the notes, which equaled the issue price of $50.4 million plus accrued original issue discount of $10.2 million. No common shares were issued as part of the redemption of the zero coupon convertible senior debentures. | |
| (3) | In June and July 2008 Nabors Delaware paid cash of $171.8 million and $528.2 million, respectively, to redeem all of the notes. In addition to the $700 million in cash, we issued 5.25 million common shares with a fair value of $249.8 million, which equated to the excess of the exchange value of the notes over their principal amount. Because the conversion was completed during 2008, diluted earnings per share for the year ended December 31, 2008 reflect the conversion of the zero coupon senior exchangeable notes due 2023 which included the effect of the 5.25 million shares in the calculation of the weighted-average number of basic shares outstanding. Diluted earnings per share for the year ended December 31, 2007 did not include any incremental shares issuable upon exchange because the incremental shares would only be included in the weighted-average number of shares outstanding in our diluted earnings per share calculation when the price of our shares exceeded $35.05 on the last trading day of the quarter, which did not occur on December 31, 2007. | |
| (4) | On July 31, 2009, the exchangeable shares of Nabors Exchangeco were exchanged for Nabors’ common shares on a one-for-one basis. Basic shares outstanding includes the following weighted-average number of common shares and restricted stock of Nabors and weighted-average number of exchangeable shares of Nabors Exchangeco, respectively: 283.2 million and .1 million shares for the year ended December 31, 2009; 281.5 million and .1 million shares for the year ended December 31, 2008; 281.1 million and .1 million shares for the year ended December 31, 2007. |
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 34,113,887, 7,416,865 and
5,083,510 shares during the years ended December 31,
2009, 2008 and 2007, 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 participating securities.
At December 31, 2009, other long-term assets included a
deposit of $40 million of restricted funds held at a
financial institution to assure future credit availability for
an unconsolidated affiliate. This cash is excluded from cash and
cash equivalents in the Consolidated Balance Sheets and
Statements of Cash Flows.
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accrued liabilities include the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Accrued compensation
|
$ | 79,195 | $ | 164,712 | ||||
|
Deferred revenue
|
57,563 | 72,377 | ||||||
|
Other taxes payable
|
33,126 | 24,191 | ||||||
|
Workers’ compensation liabilities
|
31,944 | 23,618 | ||||||
|
Interest payable
|
78,607 | 37,334 | ||||||
|
Due to joint venture partners
|
25,641 | 25,641 | ||||||
|
Warranty accrual
|
6,970 | 8,639 | ||||||
|
Litigation reserves
|
11,951 | 4,825 | ||||||
|
Professional fees
|
3,390 | 1,424 | ||||||
|
Current deferred tax liability
|
8,793 | — | ||||||
|
Other accrued liabilities
|
9,157 | 4,632 | ||||||
| $ | 346,337 | $ | 367,393 | |||||
Investment income (loss) includes the following:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Interest and dividend income
|
$ | 15,934 | $ | 40,462 | $ | 45,498 | ||||||
|
Gains (losses) on marketable and non-marketable securities, net
|
9,822 | (1) | (18,736 | )(2) | (61,389 | )(3) | ||||||
| $ | 25,756 | $ | 21,726 | $ | (15,891 | ) | ||||||
| (1) | This amount reflects net unrealized gains of $9.8 million from our trading securities. | |
| (2) | This amount reflects net unrealized gains of $8.5 million from our trading securities, partially offset by losses of $27.4 million from our actively managed funds classified as long-term investments. | |
| (3) | This amount reflects a net loss of approximately $61.4 million from the portion of our long-term investments comprised of our actively managed funds inclusive of substantial gains from sales of our marketable equity securities. |
110
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Losses (gains) on sales and retirements of long-lived assets and
other expense (income), net includes the following:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Losses (gains) on sales, retirements and involuntary conversions
of long-lived assets
|
$ | 5,928 | $ | 13,211 | (1) | $ | 4,429 | (2) | ||||
|
Litigation expenses
|
11,474 | 3,492 | 9,568 | |||||||||
|
Foreign currency transaction losses (gains)
|
8,372 | (2,718 | ) | (3,235 | ) | |||||||
|
(Gains) losses on derivative instruments
|
(1,399 | ) | 14,581 | (3) | 1,347 | |||||||
|
Gain on debt extinguishment(4)
|
(11,197 | ) | (12,248 | ) | — | |||||||
|
Other losses (gains)
|
(216 | ) | (1,291 | ) | (794 | ) | ||||||
| $ | 12,962 | $ | 15,027 | $ | 11,315 | |||||||
| (1) | This amount includes involuntary conversion losses recorded as a result of Hurricanes Gustav and Ike during 2008 of approximately $12.0 million, net of insurance recoveries. | |
| (2) | This amount includes a $38.6 million gain from the sale of three accommodation units in the second quarter of 2007 and $40.0 million in losses on long-lived asset retirements during 2007. | |
| (3) | This amount includes a $9.9 million loss on a three-month written put option and a $4.7 million loss on the fair value of our range-cap-and-floor derivative. | |
| (4) | These amounts include $11.5 million and $12.2 million pre-tax gains on our purchases of our 0.94% senior exchangeable notes in the open market during 2009 and 2008, respectively. |
Supplemental cash flow information for the years ended
December 31, 2009, 2008 and 2007 is as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash paid for income taxes
|
$ | 107,994 | $ | 235,907 | $ | 378,726 | ||||||
|
Cash paid for interest, net of capitalized interest
|
126,796 | 67,327 | 41,715 | |||||||||
|
Acquisitions of businesses:
|
||||||||||||
|
Fair value of assets acquired
|
— | 7,328 | — | |||||||||
|
Goodwill
|
— | 284 | 8,391 | |||||||||
|
Liabilities assumed
|
— | (6,352 | ) | — | ||||||||
|
Common stock of acquired company previously owned
|
— | — | — | |||||||||
|
Equity consideration issued
|
— | — | — | |||||||||
|
Cash paid for acquisitions of businesses
|
— | 1,260 | 8,391 | |||||||||
|
Cash acquired in acquisitions of businesses
|
— | (973 | ) | — | ||||||||
|
Cash paid for acquisitions of businesses, net
|
$ | — | $ | 287 | $ | 8,391 | ||||||
111
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Comprehensive income (loss) for the years ended
December 31, 2009, 2008 and 2007 is as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Comprehensive income (loss) attributable to Nabors
|
$ | 153,640 | $ | 206,622 | $ | 987,076 | ||||||
|
Comprehensive income (loss) attributable to noncontrolling
interest
|
1,682 | 1,390 | 1,823 | |||||||||
|
Total comprehensive income (loss)
|
$ | 155,322 | $ | 208,012 | $ | 988,899 | ||||||
| Year Ended December 31, 2009 | ||||||||||||||||
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Operating revenues and Earnings (losses) from unconsolidated
affiliates from continuing operations(1)
|
$ | 1,133,618 | $ | 859,742 | $ | 805,372 | $ | 678,943 | ||||||||
|
Income (loss) from continuing operations, net of tax
|
$ | 124,119 | $ | (193,206 | ) | $ | 30,425 | $ | (47,226 | ) | ||||||
|
Income from discontinued operations, net of tax
|
— | — | — | — | ||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
1,051 | 220 | (895 | ) | (34 | ) | ||||||||||
|
Net income (loss) attributable to Nabors
|
$ | 125,170 | $ | (192,986 | ) | $ | 29,530 | $ | (47,260 | ) | ||||||
|
Earnings (loss) per Nabors’ share:(2)
|
||||||||||||||||
|
Basic from continuing operations
|
$ | .44 | $ | (.68 | ) | $ | .10 | $ | (.17 | ) | ||||||
|
Basic from discontinued operations
|
— | — | — | — | ||||||||||||
|
Total Basic
|
$ | .44 | $ | (.68 | ) | $ | .10 | $ | (.17 | ) | ||||||
|
Diluted from continuing operations
|
$ | .44 | $ | (.68 | ) | $ | .10 | $ | (.17 | ) | ||||||
|
Diluted from discontinued operations
|
— | — | — | — | ||||||||||||
|
Total Diluted
|
$ | .44 | $ | (.68 | ) | $ | .10 | $ | (.17 | ) | ||||||
112
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2008 | ||||||||||||||||
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Operating revenues and Earnings (losses) from unconsolidated
affiliates from continuing operations(3)
|
$ | 1,295,407 | $ | 1,278,367 | $ | 1,462,495 | $ | 1,245,793 | ||||||||
|
Income (loss) from continuing operations, net of tax
|
$ | 212,520 | $ | 176,304 | $ | 196,853 | $ | (106,013 | ) | |||||||
|
Income from discontinued operations, net of tax
|
— | — | — | — | ||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
(476 | ) | 109 | (2,870 | ) | (690 | ) | |||||||||
|
Net income (loss) attributable to Nabors
|
$ | 212,044 | $ | 176,413 | $ | 193,983 | $ | (106,703 | ) | |||||||
|
Earnings per Nabors’ share:(2)
|
||||||||||||||||
|
Basic from continuing operations
|
$ | .76 | $ | .63 | $ | .69 | $ | (.38 | ) | |||||||
|
Basic from discontinued operations
|
— | — | — | — | ||||||||||||
|
Total Basic
|
$ | .76 | $ | .63 | $ | .69 | $ | (.38 | ) | |||||||
|
Diluted from continuing operations
|
$ | .74 | $ | .60 | $ | .67 | $ | (.38 | ) | |||||||
|
Diluted from discontinued operations
|
— | — | — | — | ||||||||||||
|
Total Diluted
|
$ | .74 | $ | .60 | $ | .67 | $ | (.38 | ) | |||||||
| (1) | Includes earnings (losses) from unconsolidated affiliates, net, accounted for by the equity method, of $(64.4) million, $(8.1) million, $13.5 million and $(155.6) million, respectively. | |
| (2) | Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total computed for the year. | |
| (3) | Includes earnings (losses) from unconsolidated affiliates, net, accounted for by the equity method, of $(4.4) million, $(4.0) million, $7.9 million and $(229.3) million, respectively. |
In August 2007, we sold our Sea Mar business which had
previously been included in Other Operating Segments to an
unrelated third party for a cash purchase price of
$194.3 million, resulting in a pre-tax gain of
$49.5 million. The assets included 20 offshore supply
vessels and some related assets, including its right under a
vessel construction contract. The operating results of this
business for all periods presented are reported as discontinued
operations in the accompanying audited consolidated statements
of income (loss) and the respective accompanying notes to the
consolidated financial statements. Our condensed statements of
income
113
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
from discontinued operations related to the Sea Mar business for
the year ended December 31, 2007 was as follows:
Condensed
Statements of Income
|
Year Ended
|
||||
| December 31, | ||||
| 2007 | ||||
| (In thousands) | ||||
|
Revenues from discontinued operations
|
$ | 58,887 | ||
|
Income from discontinued operations
|
||||
|
Income from discontinued operations
|
$ | 26,092 | ||
|
Gain on disposal of business
|
49,500 | |||
|
Less: income tax expense
|
(40,568 | ) | ||
|
Income from discontinued operations, net of tax
|
$ | 35,024 | ||
As of December 31, 2009, we operate our business out of 10
operating segments. Our six Contract Drilling operating segments
are engaged in drilling, workover and well-servicing operations,
on land and offshore, and represent reportable segments. These
operating segments consist of our Alaska, U.S. Lower 48
Land Drilling, U.S. Land Well-servicing,
U.S. Offshore, Canada and International business units. Our
oil and gas operating segment includes Ramshorn Investments,
Inc. and our unconsolidated oil and gas joint ventures with
First Reserve Corporation. This segment is engaged in the
exploration for, and the development of and production of oil
and natural gas. Our Other Operating Segments, consisting of
Canrig Drilling Technology Ltd., Ryan Energy Technologies, and
Nabors Blue Sky Ltd., are engaged in the manufacturing of top
drives, manufacturing of drilling instrumentation systems,
construction and logistics services, trucking and logistics
services, manufacturing and marketing of directional drilling
and rig instrumentation systems, directional drilling, rig
instrumentation and data collection services, and heliportable
well services. These Other Operating Segments do not meet the
criteria for disclosure, individually or in the aggregate, as
reportable segments.
The accounting policies of the segments are the same as those
described in Note 2 — Summary of Significant
Accounting Policies. Inter-segment sales are recorded at cost or
cost plus a profit margin. We evaluate the performance of our
segments based on several criteria, including adjusted income
(loss) derived from operating activities.
114
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth financial information with
respect to our reportable segments:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Operating revenues and earnings (losses) from unconsolidated
affiliates from continuing operations:(1)
|
||||||||||||
|
Contract Drilling:(2)
|
||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 1,082,531 | $ | 1,878,441 | $ | 1,710,990 | ||||||
|
U.S. Land Well-servicing
|
412,243 | 758,510 | 715,414 | |||||||||
|
U.S. Offshore
|
157,305 | 252,529 | 212,160 | |||||||||
|
Alaska
|
204,407 | 184,243 | 152,490 | |||||||||
|
Canada
|
298,653 | 502,695 | 545,035 | |||||||||
|
International
|
1,265,097 | 1,372,168 | 1,094,802 | |||||||||
|
Subtotal Contract Drilling(3)
|
3,420,236 | 4,948,586 | 4,430,891 | |||||||||
|
Oil and Gas(4)(5)
|
(209,091 | ) | (151,465 | ) | 152,320 | |||||||
|
Other Operating Segments(6)(7)
|
446,282 | 683,186 | 588,483 | |||||||||
|
Other reconciling items(8)
|
(179,752 | ) | (198,245 | ) | (215,122 | ) | ||||||
|
Total
|
$ | 3,477,675 | $ | 5,282,062 | $ | 4,956,572 | ||||||
|
Depreciation and amortization, and depletion:(1)
|
||||||||||||
|
Contract Drilling:
|
||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 226,875 | $ | 210,764 | $ | 146,928 | ||||||
|
U.S. Land Well-servicing
|
69,557 | 65,050 | 57,245 | |||||||||
|
U.S. Offshore
|
37,204 | 42,565 | 34,408 | |||||||||
|
Alaska
|
29,946 | 21,710 | 14,889 | |||||||||
|
Canada
|
65,883 | 67,373 | 63,271 | |||||||||
|
International
|
208,949 | 172,066 | 121,985 | |||||||||
|
Subtotal Contract Drilling
|
638,414 | 579,528 | 438,726 | |||||||||
|
Oil and Gas
|
12,452 | 25,442 | 31,165 | |||||||||
|
Other Operating Segments
|
30,542 | 38,903 | 35,203 | |||||||||
|
Other reconciling items(8)
|
(1,915 | ) | (4,064 | ) | (4,260 | ) | ||||||
|
Total depreciation and amortization, and depletion
|
$ | 679,493 | $ | 639,809 | $ | 500,834 | ||||||
115
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Adjusted income (loss) derived from operating activities from
continuing operations:(1)(9)
|
||||||||||||
|
Contract Drilling:
|
||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 294,679 | $ | 628,579 | $ | 596,302 | ||||||
|
U.S. Land Well-servicing
|
28,950 | 148,626 | 156,243 | |||||||||
|
U.S. Offshore
|
30,508 | 59,179 | 51,508 | |||||||||
|
Alaska
|
62,742 | 52,603 | 37,394 | |||||||||
|
Canada
|
(7,019 | ) | 61,040 | 87,046 | ||||||||
|
International
|
365,566 | 407,675 | 332,283 | |||||||||
|
Subtotal Contract Drilling(3)
|
775,426 | 1,357,702 | 1,260,776 | |||||||||
|
Oil and Gas(4)(5)
|
(256,535 | ) | (206,490 | ) | 97,150 | |||||||
|
Other Operating Segments(6)(7)
|
34,120 | 68,572 | 35,273 | |||||||||
|
Other reconciling items(10)
|
(196,844 | ) | (167,831 | ) | (138,302 | ) | ||||||
|
Total adjusted income derived from operating activities
|
$ | 356,167 | $ | 1,051,953 | $ | 1,254,897 | ||||||
|
Interest expense
|
(264,948 | ) | (196,718 | ) | (154,920 | ) | ||||||
|
Investment income (loss)
|
25,756 | 21,726 | (15,891 | ) | ||||||||
|
Gains (losses) on sales and retirements of long-lived assets and
other (income) expense, net
|
(12,962 | ) | (15,027 | ) | (11,315 | ) | ||||||
|
Impairments and other charges(11)
|
(339,129 | ) | (176,123 | ) | (41,017 | ) | ||||||
|
Income (loss) from continuing operations before income taxes(1)
|
(235,116 | ) | 685,811 | 1,031,754 | ||||||||
|
Income tax expense (benefit)
|
(149,228 | ) | 206,147 | 201,496 | ||||||||
|
Income (loss) from continuing operations, net of tax
|
(85,888 | ) | 479,664 | 830,258 | ||||||||
|
Income from discontinued operations, net of tax
|
— | — | 35,024 | |||||||||
|
Net income (loss)
|
(85,888 | ) | 479,664 | 865,282 | ||||||||
|
Less: Net income (loss) attributable to noncontrolling interest
|
342 | (3,927 | ) | 420 | ||||||||
|
Net income (loss) attributable to Nabors
|
$ | (85,546 | ) | $ | 475,737 | $ | 865,702 | |||||
116
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Capital expenditures and acquisitions of businesses:(12)
|
||||||||||||
|
Contract Drilling:
|
||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 327,269 | $ | 405,831 | $ | 728,465 | ||||||
|
U.S. Land Well-servicing
|
16,671 | 48,911 | 205,185 | |||||||||
|
U.S. Offshore
|
48,694 | 82,574 | 49,270 | |||||||||
|
Alaska
|
55,426 | 85,735 | 69,233 | |||||||||
|
Canada
|
29,214 | 85,113 | 94,058 | |||||||||
|
International
|
328,252 | 635,340 | 620,264 | |||||||||
|
Subtotal Contract Drilling
|
805,526 | 1,343,504 | 1,766,475 | |||||||||
|
Oil and Gas
|
184,185 | 191,937 | 113,224 | |||||||||
|
Other Operating Segments
|
20,446 | 32,191 | 53,594 | |||||||||
|
Other reconciling items(10)(17)
|
(19,870 | ) | 10,609 | 12,639 | ||||||||
|
Total capital expenditures
|
$ | 990,287 | $ | 1,578,241 | $ | 1,945,932 | ||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Total assets:
|
||||||||||||
|
Contract Drilling:(13)(14)
|
||||||||||||
|
U.S. Lower 48 Land Drilling
|
$ | 2,609,101 | $ | 2,833,618 | $ | 2,544,629 | ||||||
|
U.S. Land Well-servicing
|
594,456 | 707,009 | 725,845 | |||||||||
|
U.S. Offshore
|
440,556 | 480,324 | 452,505 | |||||||||
|
Alaska
|
373,146 | 356,603 | 283,121 | |||||||||
|
Canada
|
984,740 | 906,154 | 1,398,363 | |||||||||
|
International
|
3,151,513 | 3,080,947 | 2,577,057 | |||||||||
|
Subtotal Contract Drilling
|
8,153,512 | 8,364,655 | 7,981,520 | |||||||||
|
Oil and Gas(15)
|
835,465 | 929,848 | 646,837 | |||||||||
|
Other Operating Segments(16)
|
502,501 | 578,802 | 610,041 | |||||||||
|
Other reconciling items(10)(17)
|
1,153,212 | 644,594 | 901,385 | |||||||||
|
Total assets
|
$ | 10,644,690 | $ | 10,517,899 | $ | 10,139,783 | ||||||
| (1) | All segment information excludes the Sea Mar business, which has been reclassified as a discontinued operation. | |
| (2) | These segments include our drilling, workover and well-servicing operations, on land and offshore. | |
| (3) | Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $9.7 million, $5.8 million and $5.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (4) | Includes our proportionate share of full-cost ceiling test writedowns recorded by our unconsolidated oil and gas joint ventures of $(237.1) million and $(228.3) million for the years ended December 31, 2009 and 2008, respectively. |
117
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Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (5) | Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $(241.9) million, $(241.4) million and $(3.9) million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (6) | Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations. | |
| (7) | Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $17.5 million, $5.8 million and $16.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (8) | Represents the elimination of inter-segment transactions. | |
| (9) | Adjusted income (loss) derived from operating activities is computed by subtracting direct costs, general and administrative expenses, depreciation and amortization, and depletion expense from Operating revenues and then adding Earnings (losses) from unconsolidated affiliates. Such amounts should not be used as a substitute for those amounts reported under GAAP. However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that these financial measures are an accurate reflection of the ongoing profitability of our Company. A reconciliation of this non-GAAP measure to income (loss) before income taxes, which is a GAAP measure, is provided within the above table. | |
| (10) | Represents the elimination of inter-segment transactions and unallocated corporate expenses, assets and capital expenditures. | |
| (11) | Represents impairments and other charges recorded during the years ended December 31, 2009, 2008 and 2007, respectively. | |
| (12) | Includes the portion of the purchase price of acquisitions allocated to fixed assets and goodwill based on their fair market value. | |
| (13) | Includes $49.8 million, $49.2 million and $47.3 million of investments in unconsolidated affiliates accounted for using the equity method as of December 31, 2009, 2008 and 2007, respectively. | |
| (14) | Includes $21.4 million of investments in unconsolidated affiliates accounted for by the cost method of accounting as of December 31, 2007. There were no investments in unconsolidated affiliates accounted for by the cost method as of December 31, 2009 or 2008. | |
| (15) | Includes $190.1 million, $298.3 million and $274.1 million investments in unconsolidated affiliates accounted for using the equity method as of December 31, 2009, 2008 and 2007, respectively. | |
| (16) | Includes $65.8 million, $63.3 million and $62.0 million of investments in unconsolidated affiliates accounted for using the equity method as of December 31, 2009, 2008 and 2007, respectively. | |
| (17) | Includes $.9 million of investments in unconsolidated affiliates accounted for using the cost method as of each of December 31, 2009 and 2008, respectively. |
118
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth financial information with
respect to Nabors’ operations by geographic area:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Operating revenues and earnings (losses) from unconsolidated
affiliates from continuing operations:
|
||||||||||||
|
U.S.
|
$ | 1,802,140 | $ | 3,306,064 | $ | 3,189,230 | ||||||
|
Outside the U.S.
|
1,675,535 | 1,975,998 | 1,767,342 | |||||||||
| $ | 3,477,675 | $ | 5,282,062 | $ | 4,956,572 | |||||||
|
Property, plant and equipment, net:
|
||||||||||||
|
U.S.
|
$ | 4,107,250 | $ | 4,059,697 | $ | 3,745,986 | ||||||
|
Outside the U.S.
|
3,538,800 | 3,272,262 | 2,923,027 | |||||||||
| $ | 7,646,050 | $ | 7,331,959 | $ | 6,669,013 | |||||||
|
Goodwill:
|
||||||||||||
|
U.S.
|
$ | 130,275 | $ | 130,275 | $ | 130,275 | ||||||
|
Outside the U.S.
|
33,990 | 45,474 | 238,157 | |||||||||
| $ | 164,265 | $ | 175,749 | $ | 368,432 | |||||||
Nabors has fully and unconditionally guaranteed all of the
issued public debt securities of Nabors Delaware, and Nabors and
Nabors Delaware have fully and unconditionally guaranteed the
4.875% senior notes due August 2009 issued by Nabors
Holdings 1, ULC, an unlimited liability company formed
under the Companies Act of Nova Scotia, Canada and a subsidiary
of Nabors (“Nabors Holdings”). On August 17,
2009, we paid $168.4 million to discharge the remaining
balance of our 4.875% senior notes. Effective
September 30, 2009, Nabors Holdings 1, ULC was amalgamated
with Nabors Drilling Canada ULC, the successor company.
The following condensed consolidating financial information is
included so that separate financial statements of Nabors
Delaware and Nabors Holdings are not required to be filed with
the 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
December 31, 2009 and 2008, statements of income (loss) for
the years ended December 31, 2009, 2008 and 2007 and the
consolidating statements of cash flows for the years ended
December 31, 2009, 2008 and 2007 of (a) Nabors,
parent/guarantor, (b) Nabors Delaware, issuer of public
debt securities guaranteed by Nabors and guarantor of the
4.875% senior notes issued by Nabors Holdings,
(c) Nabors Holdings, issuer of the 4.875% senior
notes, (d) the non-guarantor subsidiaries,
(e) consolidating adjustments necessary to consolidate
Nabors and its subsidiaries and (f) Nabors on a
consolidated basis.
119
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Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Balance Sheets
| December 31, 2009 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 11,702 | $ | 135 | $ | — | $ | 915,978 | $ | — | $ | 927,815 | ||||||||||||
|
Short-term investments
|
— | — | — | 163,036 | — | 163,036 | ||||||||||||||||||
|
Accounts receivable, net
|
— | — | — | 724,040 | — | 724,040 | ||||||||||||||||||
|
Inventory
|
— | — | — | 100,819 | — | 100,819 | ||||||||||||||||||
|
Deferred income taxes
|
— | — | — | 125,163 | — | 125,163 | ||||||||||||||||||
|
Other current assets
|
50 | (15,606 | ) | — | 151,347 | — | 135,791 | |||||||||||||||||
|
Total current assets
|
11,752 | (15,471 | ) | — | 2,180,383 | — | 2,176,664 | |||||||||||||||||
|
Long-term investments and other receivables
|
— | — | — | 100,882 | — | 100,882 | ||||||||||||||||||
|
Property, plant and equipment, net
|
— | 46,473 | — | 7,599,577 | — | 7,646,050 | ||||||||||||||||||
|
Goodwill
|
— | — | — | 164,265 | — | 164,265 | ||||||||||||||||||
|
Intercompany receivables
|
233,482 | 453,298 | — | 192,492 | (879,272 | ) | — | |||||||||||||||||
|
Investment in unconsolidated affiliates
|
4,923,949 | 5,110,430 | — | 2,168,884 | (11,896,655 | ) | 306,608 | |||||||||||||||||
|
Other long-term assets
|
— | 29,952 | — | 220,269 | — | 250,221 | ||||||||||||||||||
|
Total assets
|
$ | 5,169,183 | $ | 5,624,682 | $ | — | $ | 12,626,752 | $ | (12,775,927 | ) | $ | 10,644,690 | |||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||||||
|
Current portion of long-term debt
|
$ | — | $ | — | $ | — | $ | 163 | $ | — | $ | 163 | ||||||||||||
|
Trade accounts payable
|
20 | 8 | — | 226,395 | — | 226,423 | ||||||||||||||||||
|
Accrued liabilities
|
1,507 | 78,359 | — | 266,471 | — | 346,337 | ||||||||||||||||||
|
Income taxes payable
|
— | 9,530 | — | 26,169 | — | 35,699 | ||||||||||||||||||
|
Total current liabilities
|
1,527 | 87,897 | — | 519,198 | — | 608,622 | ||||||||||||||||||
|
Long-term debt
|
— | 3,939,896 | — | 709 | — | 3,940,605 | ||||||||||||||||||
|
Other long-term liabilities
|
— | 3,446 | — | 236,611 | — | 240,057 | ||||||||||||||||||
|
Deferred income taxes
|
— | 112,760 | — | 560,667 | — | 673,427 | ||||||||||||||||||
|
Intercompany payable
|
— | — | — | 879,272 | (879,272 | ) | — | |||||||||||||||||
|
Total liabilities
|
1,527 | 4,143,999 | — | 2,196,457 | (879,272 | ) | 5,462,711 | |||||||||||||||||
|
Shareholders’ equity
|
5,167,656 | 1,480,683 | — | 10,415,972 | (11,896,655 | ) | 5,167,656 | |||||||||||||||||
|
Noncontrolling interest
|
— | — | — | 14,323 | — | 14,323 | ||||||||||||||||||
|
Total equity
|
5,167,656 | 1,480,683 | — | 10,430,295 | (11,896,655 | ) | 5,181,979 | |||||||||||||||||
|
Total liabilities and equity
|
$ | 5,169,183 | $ | 5,624,682 | $ | — | $ | 12,626,752 | $ | (12,775,927 | ) | $ | 10,644,690 | |||||||||||
120
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| December 31, 2008 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 8,291 | $ | 96 | $ | 1,259 | $ | 432,441 | $ | — | $ | 442,087 | ||||||||||||
|
Short-term investments
|
— | — | — | 142,158 | — | 142,158 | ||||||||||||||||||
|
Accounts receivable, net
|
— | — | — | 1,160,768 | — | 1,160,768 | ||||||||||||||||||
|
Inventory
|
— | — | — | 150,118 | — | 150,118 | ||||||||||||||||||
|
Deferred income taxes
|
— | (3,992 | ) | — | 32,075 | — | 28,083 | |||||||||||||||||
|
Other current assets
|
136 | 60,090 | 376 | 182,777 | — | 243,379 | ||||||||||||||||||
|
Total current assets
|
8,427 | 56,194 | 1,635 | 2,100,337 | — | 2,166,593 | ||||||||||||||||||
|
Long-term investments and other receivables
|
— | — | — | 239,952 | — | 239,952 | ||||||||||||||||||
|
Property, plant and equipment, net
|
— | 49,917 | — | 7,282,042 | — | 7,331,959 | ||||||||||||||||||
|
Goodwill
|
— | — | — | 175,749 | — | 175,749 | ||||||||||||||||||
|
Intercompany receivables
|
185,626 | 1,177,864 | 135,284 | 36,715 | (1,535,489 | ) | — | |||||||||||||||||
|
Investment in unconsolidated affiliates
|
4,718,604 | 4,388,439 | 378,237 | 2,527,973 | (11,601,526 | ) | 411,727 | |||||||||||||||||
|
Other long-term assets
|
— | 20,874 | 401 | 170,644 | — | 191,919 | ||||||||||||||||||
|
Total assets
|
$ | 4,912,657 | $ | 5,693,288 | $ | 515,557 | $ | 12,533,412 | $ | (13,137,015 | ) | $ | 10,517,899 | |||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||||||
|
Current portion of long-term debt
|
$ | — | $ | — | $ | 224,829 | $ | 201 | $ | — | $ | 225,030 | ||||||||||||
|
Trade accounts payable
|
755 | 79 | — | 424,074 | — | 424,908 | ||||||||||||||||||
|
Accrued liabilities
|
7,796 | 31,773 | 4,151 | 323,673 | — | 367,393 | ||||||||||||||||||
|
Income taxes payable
|
— | 135,992 | 36 | (24,500 | ) | — | 111,528 | |||||||||||||||||
|
Total current liabilities
|
8,551 | 167,844 | 229,016 | 723,448 | — | 1,128,859 | ||||||||||||||||||
|
Long-term debt
|
— | 3,599,404 | — | 1,129 | — | 3,600,533 | ||||||||||||||||||
|
Other long-term liabilities
|
— | — | — | 247,560 | — | 247,560 | ||||||||||||||||||
|
Deferred income taxes
|
— | 117,125 | (333 | ) | 505,731 | — | 622,523 | |||||||||||||||||
|
Intercompany payable
|
— | — | — | 1,535,489 | (1,535,489 | ) | — | |||||||||||||||||
|
Total liabilities
|
8,551 | 3,884,373 | 228,683 | 3,013,357 | (1,535,489 | ) | 5,599,475 | |||||||||||||||||
|
Shareholders’ equity
|
4,904,106 | 1,808,915 | 286,874 | 9,505,737 | (11,601,526 | ) | 4,904,106 | |||||||||||||||||
|
Noncontrolling interest
|
— | — | — | 14,318 | — | 14,318 | ||||||||||||||||||
|
Total equity
|
4,904,106 | 1,808,915 | 286,874 | 9,520,055 | (11,601,526 | ) | 4,918,424 | |||||||||||||||||
|
Total liabilities and equity
|
$ | 4,912,657 | $ | 5,693,288 | $ | 515,557 | $ | 12,533,412 | $ | (13,137,015 | ) | $ | 10,517,899 | |||||||||||
121
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Statements of Income (Loss)
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Revenues and other income:
|
||||||||||||||||||||||||
|
Operating revenues
|
$ | — | $ | — | $ | — | $ | 3,692,356 | $ | — | $ | 3,692,356 | ||||||||||||
|
Earnings (losses) from unconsolidated affiliates
|
— | — | — | (214,681 | ) | — | (214,681 | ) | ||||||||||||||||
|
Earnings (losses) from consolidated affiliates
|
(74,204 | ) | (316,443 | ) | (86,751 | ) | (441,133 | ) | 918,531 | — | ||||||||||||||
|
Investment income (loss)
|
58 | 2,357 | 101 | 23,240 | — | 25,756 | ||||||||||||||||||
|
Intercompany interest income
|
— | 66,150 | 5,558 | — | (71,708 | ) | — | |||||||||||||||||
|
Total revenues and other income
|
(74,146 | ) | (247,936 | ) | (81,092 | ) | 3,059,782 | 846,823 | 3,503,431 | |||||||||||||||
|
Costs and other deductions:
|
||||||||||||||||||||||||
|
Direct costs
|
— | — | — | 2,012,352 | — | 2,012,352 | ||||||||||||||||||
|
General and administrative expenses
|
28,350 | 336 | 1 | 401,546 | (570 | ) | 429,663 | |||||||||||||||||
|
Depreciation and amortization
|
— | 3,594 | — | 664,821 | — | 668,415 | ||||||||||||||||||
|
Depletion
|
— | — | — | 11,078 | — | 11,078 | ||||||||||||||||||
|
Interest expense
|
— | 288,715 | 5,634 | (29,401 | ) | — | 264,948 | |||||||||||||||||
|
Intercompany interest expense
|
— | — | — | 71,708 | (71,708 | ) | — | |||||||||||||||||
|
Losses (gains) on sales and retirements of long-lived assets and
other expense (income), net
|
(16,950 | ) | 4,145 | 5,069 | 38,375 | (17,677 | ) | 12,962 | ||||||||||||||||
|
Impairments and other charges
|
— | — | — | 339,129 | — | 339,129 | ||||||||||||||||||
|
Total costs and other deductions
|
11,400 | 296,790 | 10,704 | 3,509,608 | (89,955 | ) | 3,738,547 | |||||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
(85,546 | ) | (544,726 | ) | (91,796 | ) | (449,826 | ) | 936,778 | (235,116 | ) | |||||||||||||
|
Income tax expense (benefit)
|
— | (84,465 | ) | 15,744 | (80,507 | ) | — | (149,228 | ) | |||||||||||||||
|
Income (loss) from continuing operations, net of tax
|
(85,546 | ) | (460,261 | ) | (107,540 | ) | (369,319 | ) | 936,778 | (85,888 | ) | |||||||||||||
|
Net income (loss)
|
(85,546 | ) | (460,261 | ) | (107,540 | ) | (369,319 | ) | 936,778 | (85,888 | ) | |||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
— | — | — | 342 | — | 342 | ||||||||||||||||||
|
Net income (loss) attributable to Nabors
|
$ | (85,546 | ) | $ | (460,261 | ) | $ | (107,540 | ) | $ | (368,977 | ) | $ | 936,778 | $ | (85,546 | ) | |||||||
122
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Revenues and other income:
|
||||||||||||||||||||||||
|
Operating revenues
|
$ | — | $ | — | $ | — | $ | 5,511,896 | $ | — | $ | 5,511,896 | ||||||||||||
|
Earnings (losses) from unconsolidated affiliates
|
— | — | — | (229,834 | ) | — | (229,834 | ) | ||||||||||||||||
|
Earnings (losses) from consolidated affiliates
|
490,138 | 197,934 | 19,335 | 130,981 | (838,388 | ) | — | |||||||||||||||||
|
Investment income (loss)
|
364 | 2,373 | 3 | 18,986 | — | 21,726 | ||||||||||||||||||
|
Intercompany interest income
|
4,000 | 70,017 | 11,840 | — | (85,857 | ) | — | |||||||||||||||||
|
Total revenues and other income
|
494,502 | 270,324 | 31,178 | 5,432,029 | (924,245 | ) | 5,303,788 | |||||||||||||||||
|
Costs and other deductions:
|
||||||||||||||||||||||||
|
Direct costs
|
— | — | — | 3,110,316 | — | 3,110,316 | ||||||||||||||||||
|
General and administrative expenses
|
21,191 | 494 | 32 | 459,582 | (1,315 | ) | 479,984 | |||||||||||||||||
|
Depreciation and amortization
|
— | 3,901 | — | 610,466 | — | 614,367 | ||||||||||||||||||
|
Depletion
|
— | — | — | 25,442 | — | 25,442 | ||||||||||||||||||
|
Interest expense
|
— | 197,145 | 11,440 | (11,867 | ) | — | 196,718 | |||||||||||||||||
|
Intercompany interest expense
|
— | — | — | 85,857 | (85,857 | ) | — | |||||||||||||||||
|
Losses (gains) on sales and retirements of long-lived assets and
other expense (income), net
|
(2,426 | ) | (5,045 | ) | 27,444 | (6,261 | ) | 1,315 | 15,027 | |||||||||||||||
|
Impairments and other charges
|
— | — | — | 176,123 | — | 176,123 | ||||||||||||||||||
|
Total costs and other deductions
|
18,765 | 196,495 | 38,916 | 4,449,658 | (85,857 | ) | 4,617,977 | |||||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
475,737 | 73,829 | (7,738 | ) | 982,371 | (838,388 | ) | 685,811 | ||||||||||||||||
|
Income tax expense (benefit)
|
— | (45,920 | ) | (2,477 | ) | 254,544 | — | 206,147 | ||||||||||||||||
|
Income from continuing operations, net of tax
|
475,737 | 119,749 | (5,261 | ) | 727,827 | (838,388 | ) | 479,664 | ||||||||||||||||
|
Income from discontinued operations, net of tax
|
— | — | — | — | — | — | ||||||||||||||||||
|
Net income (loss)
|
475,737 | 119,749 | (5,261 | ) | 727,827 | (838,388 | ) | 479,664 | ||||||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
— | — | — | (3,927 | ) | — | (3,927 | ) | ||||||||||||||||
|
Net income (loss) attributable to Nabors
|
$ | 475,737 | $ | 119,749 | $ | (5,261 | ) | $ | 723,900 | $ | (838,388 | ) | $ | 475,737 | ||||||||||
123
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2007 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Revenues and other income:
|
||||||||||||||||||||||||
|
Operating revenues
|
$ | — | $ | — | $ | — | $ | 4,938,848 | $ | — | $ | 4,938,848 | ||||||||||||
|
Earnings (losses) from unconsolidated affiliates
|
— | — | — | 17,724 | — | 17,724 | ||||||||||||||||||
|
Earnings (losses) from consolidated affiliates
|
849,339 | 503,713 | 17,632 | 478,381 | (1,849,065 | ) | — | |||||||||||||||||
|
Investment income (loss)
|
687 | 146 | — | (16,724 | ) | — | (15,891 | ) | ||||||||||||||||
|
Intercompany interest income
|
3,989 | 85,550 | 2 | — | (89,541 | ) | — | |||||||||||||||||
|
Total revenues and other income
|
854,015 | 589,409 | 17,634 | 5,418,229 | (1,938,606 | ) | 4,940,681 | |||||||||||||||||
|
Costs and other deductions:
|
||||||||||||||||||||||||
|
Direct costs
|
— | — | — | 2,764,559 | — | 2,764,559 | ||||||||||||||||||
|
General and administrative expenses
|
17,085 | 144 | 17 | 419,573 | (537 | ) | 436,282 | |||||||||||||||||
|
Depreciation and amortization
|
— | 2,539 | — | 467,130 | — | 469,669 | ||||||||||||||||||
|
Depletion
|
— | — | — | 31,165 | — | 31,165 | ||||||||||||||||||
|
Interest expense
|
— | 152,374 | 11,456 | (8,910 | ) | — | 154,920 | |||||||||||||||||
|
Intercompany interest expense
|
6,260 | — | — | 83,281 | (89,541 | ) | — | |||||||||||||||||
|
Losses (gains) on sales and retirements of long-lived assets and
other expense (income), net
|
(8 | ) | 1,377 | — | 9,409 | 537 | 11,315 | |||||||||||||||||
|
Impairments and other charges
|
— | — | — | 41,017 | — | 41,017 | ||||||||||||||||||
|
Total costs and other deductions
|
23,337 | 156,434 | 11,473 | 3,807,224 | (89,541 | ) | 3,908,927 | |||||||||||||||||
|
Income (loss) from continuing operations before income taxes
|
830,678 | 432,975 | 6,161 | 1,611,005 | (1,849,065 | ) | 1,031,754 | |||||||||||||||||
|
Income tax expense (benefit)
|
— | (26,172 | ) | 1,971 | 225,697 | — | 201,496 | |||||||||||||||||
|
Income from continuing operations, net of tax
|
830,678 | 459,147 | 4,190 | 1,385,308 | (1,849,065 | ) | 830,258 | |||||||||||||||||
|
Income from discontinued operations, net of tax
|
35,024 | 35,024 | — | 70,048 | (105,072 | ) | 35,024 | |||||||||||||||||
|
Net income (loss)
|
865,702 | 494,171 | 4,190 | 1,455,356 | (1,954,137 | ) | 865,282 | |||||||||||||||||
|
Less: Net (income) loss attributable to noncontrolling interest
|
— | — | — | 420 | — | 420 | ||||||||||||||||||
|
Net income (loss) attributable to Nabors
|
$ | 865,702 | $ | 494,171 | $ | 4,190 | $ | 1,455,776 | $ | (1,954,137 | ) | $ | 865,702 | |||||||||||
124
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Statements of Cash Flows
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Net cash provided by (used for) operating activities
|
$ | 40,589 | $ | 646,645 | $ | 608 | $ | 1,089,086 | $ | (159,956 | ) | $ | 1,616,972 | |||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||||||
|
Purchases of investments
|
— | — | — | (32,674 | ) | — | (32,674 | ) | ||||||||||||||||
|
Sales and maturities of investments
|
— | — | — | 57,033 | — | 57,033 | ||||||||||||||||||
|
Investment in unconsolidated affiliates
|
— | — | — | (125,076 | ) | — | (125,076 | ) | ||||||||||||||||
|
Capital expenditures
|
— | — | — | (1,093,435 | ) | — | (1,093,435 | ) | ||||||||||||||||
|
Proceeds from sales of assets and insurance claims
|
— | — | — | 31,375 | — | 31,375 | ||||||||||||||||||
|
Proceeds from sale of consolidated affiliates
|
— | — | 239,421 | (239,421 | ) | — | — | |||||||||||||||||
|
Cash paid for investments in consolidated affiliates
|
(46,912 | ) | (900,000 | ) | — | — | 946,912 | — | ||||||||||||||||
|
Net cash provided by (used for) investing activities
|
(46,912 | ) | (900,000 | ) | 239,421 | (1,402,198 | ) | 946,912 | (1,162,777 | ) | ||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||||||
|
Increase (decrease) in cash overdrafts
|
— | — | — | (18,157 | ) | — | (18,157 | ) | ||||||||||||||||
|
Proceeds from long-term debt
|
— | 1,124,978 | — | — | — | 1,124,978 | ||||||||||||||||||
|
Debt issuance costs
|
— | (8,832 | ) | — | — | — | (8,832 | ) | ||||||||||||||||
|
Intercompany debt
|
— | — | 143,859 | (143,859 | ) | — | — | |||||||||||||||||
|
Proceeds from issuance of common shares
|
11,249 | — | — | — | — | 11,249 | ||||||||||||||||||
|
Reduction in long-term debt
|
— | (856,203 | ) | (225,191 | ) | (407 | ) | — | (1,081,801 | ) | ||||||||||||||
|
Repurchase of equity component of convertible debt
|
— | (6,586 | ) | — | — | — | (6,586 | ) | ||||||||||||||||
|
Purchase of restricted stock
|
(1,515 | ) | — | — | — | — | (1,515 | ) | ||||||||||||||||
|
Tax benefit related to share-based awards
|
— | 37 | — | — | — | 37 | ||||||||||||||||||
|
Cash dividends paid
|
— | — | (159,956 | ) | — | 159,956 | — | |||||||||||||||||
|
Proceeds from parent contributions
|
— | — | — | 946,912 | (946,912 | ) | — | |||||||||||||||||
|
Net cash (used for) provided by financing activities
|
9,734 | 253,394 | (241,288 | ) | 784,489 | (786,956 | ) | 19,373 | ||||||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
— | — | — | 12,160 | — | 12,160 | ||||||||||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
3,411 | 39 | (1,259 | ) | 483,537 | — | 485,728 | |||||||||||||||||
|
Cash and cash equivalents, beginning of period
|
8,291 | 96 | 1,259 | 432,441 | — | 442,087 | ||||||||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 11,702 | $ | 135 | $ | — | $ | 915,978 | $ | — | $ | 927,815 | ||||||||||||
125
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Net cash provided by (used for) operating activities
|
$ | 39,987 | $ | 287,628 | $ | (162,293 | ) | $ | 1,455,628 | $ | (158,126 | ) | $ | 1,462,824 | ||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||||||
|
Purchases of investments
|
— | — | — | (269,983 | ) | — | (269,983 | ) | ||||||||||||||||
|
Sales and maturities of investments
|
— | — | — | 521,613 | — | 521,613 | ||||||||||||||||||
|
Cash paid for acquisitions of businesses, net
|
— | — | — | (287 | ) | — | (287 | ) | ||||||||||||||||
|
Investment in unconsolidated affiliates
|
— | — | — | (271,309 | ) | — | (271,309 | ) | ||||||||||||||||
|
Capital expenditures
|
— | (16,817 | ) | — | (1,490,162 | ) | — | (1,506,979 | ) | |||||||||||||||
|
Proceeds from sales of assets and insurance claims
|
— | — | — | 69,842 | — | 69,842 | ||||||||||||||||||
|
Cash paid for investments in consolidated affiliates
|
(85,927 | ) | (150,626 | ) | — | (163,548 | ) | 400,101 | — | |||||||||||||||
|
Net cash provided by (used for) investing activities
|
(85,927 | ) | (167,443 | ) | — | (1,603,834 | ) | 400,101 | (1,457,103 | ) | ||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||||||
|
Increase (decrease) in cash overdrafts
|
— | — | — | 23,858 | — | 23,858 | ||||||||||||||||||
|
Proceeds from long-term debt
|
— | 962,901 | — | — | — | 962,901 | ||||||||||||||||||
|
Debt issuance costs
|
— | (7,324 | ) | — | — | — | (7,324 | ) | ||||||||||||||||
|
Proceeds from issuance of common shares
|
56,633 | — | — | (3 | ) | — | 56,630 | |||||||||||||||||
|
Reduction in long-term debt
|
— | (836,431 | ) | — | (80 | ) | — | (836,511 | ) | |||||||||||||||
|
Repurchase of common shares
|
— | (247,357 | ) | — | (33,744 | ) | — | (281,101 | ) | |||||||||||||||
|
Purchase of restricted stock
|
(13,061 | ) | — | — | — | — | (13,061 | ) | ||||||||||||||||
|
Tax benefit related to share-based awards
|
— | 5,369 | — | — | — | 5,369 | ||||||||||||||||||
|
Cash dividends paid
|
— | — | — | (158,126 | ) | 158,126 | — | |||||||||||||||||
|
Proceeds from parent contributions
|
— | — | 163,548 | 236,553 | (400,101 | ) | — | |||||||||||||||||
|
Net cash (used for) provided by financing activities
|
43,572 | (122,842 | ) | 163,548 | 68,458 | (241,975 | ) | (89,239 | ) | |||||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
— | — | — | (5,701 | ) | — | (5,701 | ) | ||||||||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(2,368 | ) | (2,657 | ) | 1,255 | (85,449 | ) | — | (89,219 | ) | ||||||||||||||
|
Cash and cash equivalents, beginning of period
|
10,659 | 2,753 | 4 | 517,890 | — | 531,306 | ||||||||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 8,291 | $ | 96 | $ | 1,259 | $ | 432,441 | $ | — | $ | 442,087 | ||||||||||||
126
Table of Contents
Nabors
Industries Ltd. and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2007 | ||||||||||||||||||||||||
|
Nabors
|
Other
|
|||||||||||||||||||||||
|
Nabors
|
Delaware
|
Nabors
|
Subsidiaries
|
|||||||||||||||||||||
|
(Parent/
|
(Issuer/
|
Holdings
|
(Non-
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
| Guarantor) | Guarantor) | (Issuer) | Guarantors) | Adjustments | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Net cash provided by (used for) operating activities
|
$ | (6,213 | ) | $ | 142,469 | $ | (16,111 | ) | $ | 1,280,248 | $ | (5,484 | ) | $ | 1,394,909 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||||||
|
Purchases of investments
|
— | — | — | (378,318 | ) | — | (378,318 | ) | ||||||||||||||||
|
Sales and maturities of investments
|
— | 926 | — | 859,459 | — | 860,385 | ||||||||||||||||||
|
Cash paid for acquisitions of businesses, net
|
— | — | — | (8,391 | ) | — | (8,391 | ) | ||||||||||||||||
|
Investment in unconsolidated affiliates
|
— | — | — | (278,100 | ) | — | (278,100 | ) | ||||||||||||||||
|
Capital expenditures
|
— | (24,711 | ) | — | (2,014,469 | ) | — | (2,039,180 | ) | |||||||||||||||
|
Proceeds from sales of assets and insurance claims
|
— | — | — | 356,387 | — | 356,387 | ||||||||||||||||||
|
Cash paid for investments in consolidated affiliates
|
— | (120,484 | ) | — | (16,107 | ) | 136,591 | — | ||||||||||||||||
|
Net cash provided by (used for) investing activities
|
— | (144,269 | ) | — | (1,479,539 | ) | 136,591 | (1,487,217 | ) | |||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||||||
|
Decrease in cash overdrafts
|
— | — | — | (38,416 | ) | — | (38,416 | ) | ||||||||||||||||
|
Proceeds from long-term debt
|
(57,811 | ) | — | — | 57,811 | — | — | |||||||||||||||||
|
Proceeds from issuance of common shares
|
61,620 | — | — | — | — | 61,620 | ||||||||||||||||||
|
Repurchase of common shares
|
— | — | — | (102,451 | ) | — | (102,451 | ) | ||||||||||||||||
|
Purchase of restricted stock
|
(1,811 | ) | — | — | — | — | (1,811 | ) | ||||||||||||||||
|
Tax benefit related to
share-based
awards
|
— | 2,159 | — | — | — | 2,159 | ||||||||||||||||||
|
Cash dividends paid
|
— | — | — | (5,484 | ) | 5,484 | — | |||||||||||||||||
|
Proceeds from parent contributions
|
— | — | 16,107 | 120,484 | (136,591 | ) | — | |||||||||||||||||
|
Net cash (used for) provided by financing activities
|
1,998 | 2,159 | 16,107 | 31,944 | (131,107 | ) | (78,899 | ) | ||||||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
— | — | — | 1,964 | — | 1,964 | ||||||||||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(4,215 | ) | 359 | (4 | ) | (165,383 | ) | — | (169,243 | ) | ||||||||||||||
|
Cash and cash equivalents, beginning of period
|
14,874 | 2,394 | 8 | 683,273 | — | 700,549 | ||||||||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 10,659 | $ | 2,753 | $ | 4 | $ | 517,890 | $ | — | $ | 531,306 | ||||||||||||
127
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures. We maintain a set
of disclosure controls and procedures designed to provide
reasonable assurance that information required to be disclosed
in our reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. We have investments
in certain unconsolidated entities that we do not control or
manage. Because we do not control or manage these entities, our
disclosure controls and procedures with respect to these
entities are necessarily more limited than those we maintain
with respect to our consolidated subsidiaries.
The Company’s management, with the participation of the
Company’s Chairman and Chief Executive Officer and
principal accounting and financial officer, has evaluated the
effectiveness of the Company’s disclosure controls and
procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based on this evaluation, the Company’s
Chairman and Chief Executive Officer and principal accounting
and financial officer have concluded that, as of the end of the
period, the Company’s disclosure controls and procedures
are effective, at the reasonable assurance level, in recording,
processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act and are
effective, at the reasonable assurance level, in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management,
including the Company’s Chairman and Chief Executive
Officer and principal accounting and financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Control Over Financial Reporting.
There have not been any changes in the Company’s internal
control over financial reporting (identified in connection with
the evaluation required by paragraph (d) in
Rules 13a-15
and
15d-15
under the Exchange Act) during the most recently completed
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Our internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a
material effect on the financial statements.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of these limitations,
there is a risk that material misstatements may not be prevented
or detected on a timely basis by internal control over financial
reporting. However, these inherent
128
Table of Contents
limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting based
on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this evaluation,
management concluded that the Company’s internal control
over financial reporting was effective as of December 31,
2009. PricewaterhouseCoopers LLP has issued a report on the
effectiveness of internal control over financial reporting,
which is included in Part II, Item 8 of this report.
| ITEM 9B. | OTHER INFORMATION |
Not applicable.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information called for by this item will be contained in the
Nabors Industries Ltd. definitive Proxy Statement to be
distributed in connection with its 2010 annual meeting of
shareholders under the captions
“Election of
Directors
”, “
Other Executive
Officers”
,
“Section 16(a) Beneficial
Ownership Reporting Compliance”
, and is incorporated
into this document by reference.
We have adopted a Code of Business Conduct that satisfies the
SEC’s definition of a “Code of Ethics” and
applies to all employees, including our principal executive
officer, principal financial officer, and principal accounting
officer. The Code of Ethics is posted on our website at
www.nabors.com. We intend to disclose on our website any
amendments to the Code of Conduct and any waivers of the Code of
Conduct that apply to our principal executive officer, principal
financial officer, and principal accounting officer.
On July 2, 2009, we filed with the New York Stock Exchange,
or NYSE, the Annual CEO Certification regarding our compliance
with the NYSE’s Corporate Governance listing standards as
required by
Section 303A-12(a)
of the NYSE Listed Company Manual.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information called for by this item will be contained in our
definitive Proxy Statement to be distributed in connection with
our 2010 annual meeting of shareholders under the caption
“Management Compensation”
and except as
specified in the following sentence, is incorporated into this
document by reference. Information in Nabors’ 2010 proxy
statement not deemed to be “soliciting material” or
“filed” with the Commission under its rules, including
the Compensation Committee Report, is not deemed to be
incorporated by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
We maintain five different equity compensation plans: 1996
Employee Stock Plan, 1997 Executive Officers Incentive Stock
Plan, 1998 Employee Stock Plan, 1999 Stock Option Plan for
Non-Employee Directors and 2003 Employee Stock Plan pursuant to
which we may grant equity awards to eligible persons. The terms
of our equity compensation plans are described more fully below.
129
Table of Contents
The following table gives information about these equity
compensation plans as of December 31, 2009:
| (a) | (b) | (c) | ||||||||||
|
Number of
|
Number of Securities
|
|||||||||||
|
Securities to be
|
Remaining Available for
|
|||||||||||
|
Issued Upon
|
Weighted-Average
|
Future Issuance Under
|
||||||||||
|
Exercise of
|
Exercise Price of
|
Equity Compensation
|
||||||||||
|
Outstanding
|
Outstanding
|
Plans (Excluding
|
||||||||||
|
Options, Warrants
|
Options, Warrants
|
Securities
|
||||||||||
|
Plan category
|
and Rights | and Rights | Reflected in Column (a)) | |||||||||
|
Equity compensation plans approved by security holders
|
26,120,390 | $ | 17.7883 | 11,142,913 | ||||||||
|
Equity compensation plans not approved by security holders
|
7,295,736 | $ | 22.9129 | 879,472 | ||||||||
|
Total
|
33,416,126 | 12,022,385 | ||||||||||
| (1) | The 1996 Employee Stock Plan incorporated an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the 1996 Employee Stock Plan were increased by an amount equal to 1 1/2% of the common shares outstanding on September 30 of the immediately preceding fiscal year. The 1996 Employee Stock Plan expired on January 17, 2006. | |
| (2) | The 2003 Employee Stock Plan provides, commencing on June 1, 2006 and thereafter for a period of four (4) years on each January 1, for an automatic increase in the number of shares reserved and available for issuance under the Plan by an amount equal to two percent (2%) of the Company’s outstanding common shares as of each June 1 or January 1 date. |
Following is a brief summary of the material terms of the plans
that have not been approved by our shareholders. Unless
otherwise indicated, (1) each plan is administered by an
independent committee appointed by the Company’s Board of
Directors; (2) the exercise price of options granted under
each plan must be no less than 100% of the fair market value per
common share on the date of the grant of the option;
(3) the term of an award granted under each plan may not
exceed ten years; (4) options granted under the plan are
nonstatutory options not intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as
amended (NSOs); and (5) unless otherwise determined by the
committee in its discretion, options may not be exercised after
the optionee has ceased to be employed by the Company.
1997
Executive Officers Incentive Stock Plan
The plan reserves for issuance up to 4,900,000 common shares of
the Company pursuant to the exercise of options granted under
the plan. Options may be granted under the plan to executive
officers of the Company. No optionee may receive grants in
excess of 50% of the total number of common shares authorized to
be issued under the plan.
1998
Employee Stock Plan
The plan reserves for issuance up to 35,000,000 common shares of
the Company pursuant to the exercise of options granted under
the plan. The persons eligible to participate in the plan are
employees and consultants of the Company. Options granted to
employees may either be awards of shares, non-qualified stock
options (each, an “NQSO”), incentive stock options
(each, an “ISO”) or stock appreciation rights (each,
an “SAR”). An optionee may reduce the option exercise
price by paying the Company in cash, shares, options, or the
equivalent, an amount equal to the difference between the
exercise price and the reduced exercise price of the option. The
administrative committee must establish performance goals for
stock awards in writing not later than the date required for
compliance under Section 162(m) of the United States
Internal Revenue Code, and vesting of these shares is contingent
upon the attainment of such performance goals. Stock awards vest
over a period determined by the Committee, which period must
expire no later than January 18, 2006. The committee may
grant ISOs of not less than 100% of the fair market value per
common share on the date of grant; except that in the event the
optionee owns on the date of grant, securities possessing more
than 10% of the total combined voting power of all classes of
securities of the Company or of any subsidiary of the Company,
the
130
Table of Contents
price per share must not be less than 110% of the fair market
value per common share on the date of the grant. The option must
expire five years from the date it is granted. SARs may be
granted in conjunction with all or part of any option granted
under the plan, in which case the exercise of the SAR must
require the cancellation of a corresponding portion of the
option; conversely, the exercise of the option will result in
cancellation of a corresponding portion of the SAR. In the case
of a NQSO, SARs may be granted either at or after the time of
grant of the option. In the case of an ISO, SARs may be granted
only at the time of grant of the option. A SAR may also be
granted on a stand alone basis. The term of a SAR must be
established by the committee. The exercise price of a SAR cannot
be less than 100% of the fair market value per common share on
the date of grant. The committee has the authority to make
provisions in its award and grant agreements to address vesting
and other issues arising in connection with a change of control.
1999
Stock Option Plan for Non-Employee Directors
The plan reserves for issuance up to 3,000,000 common shares of
the Company pursuant to the exercise of options granted under
the plan. The plan is administered by the Company’s Board
of Directors or a committee appointed by the Board to administer
the plan. Eligible directors may not consider or vote on the
administration of the plan or serve as a member of the
committee. Options may be granted under the plan to non-employee
directors of the Company. Options vest and become
non-forfeitable on the first anniversary of the option grant if
the optionee has continued to serve as a director until that
day, unless otherwise provided. In the event of termination of
an optionee’s service as a director by reason of voluntary
retirement, declining to stand for re-election or becoming a
full-time employee of the Company or a subsidiary of the
Company, all unvested options granted under the Plan
automatically expire and are not exercisable, and all
unexercised options continue to be exercisable until their
stated expiration date. In the event of death or disability of
an optionee while the optionee is a director, the
then-outstanding options of such optionee become exercisable for
two years from the date of the death or disability. All unvested
options automatically vest and become non-forfeitable as of the
date of death or disability and become exercisable for two years
from the date of the death of the optionee or until the stated
expiration date, whichever is earlier. In the event of the
termination of an optionee’s service as a director by the
Board of Directors for cause or the failure of such director to
be re-elected, the administrator of the plan in its sole
discretion can cancel the then-outstanding options of such
optionee, including options that have vested and such options
automatically expire and become non-exercisable on the effective
date of such termination.
The remainder of the information called for by this item will be
contained in our definitive Proxy Statement to be distributed in
connection with our 2010 annual meeting of shareholders under
the caption
“Share Ownership of Management and Principal
Shareholders”
and is incorporated into this document by
reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information called for by this item will be contained in our
definitive Proxy Statement to be distributed in connection with
our 2010 annual meeting of shareholders under the caption
“Certain Relationships and Related
Transactions”
and is incorporated into this document by
reference.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information called for by this item will be contained in our
definitive Proxy Statement to be distributed in connection with
our 2010 annual meeting of shareholders under the caption
“Principal Accounting Fees and Services”
and is
incorporated into this document by reference.
131
Table of Contents
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as part of this
report:
(1)
Financial Statements
| Page No. | ||||
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
56 | |||
|
Consolidated Statements of Income (Loss) for the Years Ended
December 31, 2009, 2008 and 2007
|
57 | |||
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009, 2008 and 2007
|
58 | |||
|
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 2009, 2008 and 2007
|
59 | |||
(2)
Financial Statement Schedules
| Page No. | ||||
|
Schedule II — Valuation and Qualifying Accounts
|
139 | |||
|
Schedule III — Financial Statements and Notes for NFR
Energy LLC
|
s-1 | |||
All other supplemental schedules are omitted because of the
absence of the conditions under which they are required or
because the required information is included in the financial
statements or related notes.
132
Table of Contents
(b) Exhibits
|
Exhibit No.
|
Description
|
|||
| 2 | .1 | Agreement and Plan of Merger among Nabors Industries, Inc., Nabors Acquisition Corp. VIII, Nabors Industries Ltd. and Nabors US Holdings Inc. (incorporated by reference to Annex I to the proxy statement/prospectus included in Nabors Industries Ltd.’s Registration Statement on Form S-4 (File No. 333-76198) filed with the Commission on May 10, 2002, as amended). | ||
| 2 | .2 | Amended and Restated Acquisition Agreement, dated as of March 18, 2002, by and between Nabors Industries, Inc. and Enserco Energy Service Company Inc. (incorporated by reference to Exhibit 2.1 to Nabors Industries, Inc.’s Registration Statement on Form S-3 (File No. 333-85228) filed with the Commission on March 29, 2002). | ||
| 2 | .3 | Form of Plan of Arrangement Under Section 192 of the Canada Business Corporations Act Involving and Affecting Enserco Energy Service Company Inc. and its Security holders (included in Schedule B to Exhibit 2.2). | ||
| 2 | .4 | Arrangement Agreement dated August 12, 2002 between Nabors Industries Ltd. and Ryan Energy Technologies Inc. (incorporated by reference to Exhibit 2.4 to Nabors Industries Ltd.’s Form 10-K for the year ended December 31, 2002 (File No. 000-49887) filed with the Commission on March 31, 2003). | ||
| 2 | .5 | Asset Purchase Agreement dated July 20, 2007, by and among Nabors US Finance LLC, Nabors Well Services Co. (inclusive of its Sea Mar Division), Sea Mar Management LLC and Hornbeck Offshore Services, Inc. (incorporated by reference to Exhibit 2.5 to Nabors Industries Ltd.’s Form 10-Q (File No. 001-32657) filed with the Commission on August 2, 2007). | ||
| 3 | .1 | Memorandum of Association of Nabors Industries Ltd. (incorporated by reference to Annex II to the proxy statement/prospectus included in Nabors Industries Ltd.’s Registration Statement on Form S-4 (File No. 333-76198) filed with the Commission on May 10, 2002, as amended). | ||
| 3 | .2 | Amended and Restated Bye-Laws of Nabors Industries Ltd. (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed with the Commission on August 3, 2005). | ||
| 3 | .3 | Amendment to Amended and Restated Bye-Laws of Nabors Industries Ltd. (incorporated by reference to Exhibit A of Nabors Industries Ltd.’s Notice of Special General Meeting and Proxy Statement (File No. 001-32657) filed with the Commission on February 24, 2006). | ||
| 3 | .4 | Form of Resolutions of the Board of Directors of Nabors Industries Ltd. authorizing the issue of the Special Voting Preferred Share (incorporated by reference to Exhibit 3.3 to Nabors Industries Ltd.’s Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-85228-99) filed with the Commission on June 11, 2002). | ||
| 4 | .1 | Indenture, dated August 22, 2002, among Nabors Industries, Inc., as issuer, Nabors Industries Ltd., as guarantor, and Bank One, N.A., with respect to Nabors Industries, Inc.’s Series A and Series B 5.375% Senior Notes due 2012 (incorporated by reference to Exhibit 4.1 to Nabors Industries, Inc.’s Registration Statement on Form S-4 (File No. 333-10049201) filed with the Commission on October 11, 2002). | ||
| 4 | .2 | Indenture, dated August 22, 2002, among Nabors Holdings 1, ULC, as issuer, Nabors Industries, Inc. and Nabors Industries Ltd., as guarantors, and Bank One, N.A., with respect to Nabors Holdings 1, ULC’s Series A and Series B 4.875% Senior Notes due 2009 (incorporated by reference to Exhibit 4.1 to Nabors Holdings 1, ULC’s Registration Statement on Form S-4 (File No. 333-10049301) filed with the Commission on October 11, 2002). | ||
| 4 | .3 | Purchase Agreement, dated May 18, 2006, among Nabors Industries, Inc., Nabors Industries Ltd., Citigroup Global Markets Inc. and Lehman Brothers Inc., with respect to Nabors Industries, Inc.’s 0.94% Senior Exchangeable Notes due 2011 (incorporated by reference to Exhibit 4.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on May 24, 2006). | ||
| 4 | .4 | Indenture, dated as of May 23, 2006, among Nabors Industries, Inc., Nabors Industries Ltd. and Wells Fargo Bank, National Association, as trustee, with respect to Nabors Industries, Inc.’s 0.94% Senior Exchangeable Notes due 2011 (including form of 0.94% Senior Exchangeable Note due 2011) (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on May 24, 2006). | ||
133
Table of Contents
|
Exhibit No.
|
Description
|
|||
| 4 | .5 | Registration Rights Agreement, dated as of May 23, 2006, among Nabors Industries, Inc., Nabors Industries Ltd., Citigroup Global Markets Inc. and Lehman Brothers Inc., with respect to Nabors Industries, Inc.’s 0.94% Senior Exchangeable Notes due 2011 (incorporated by reference to Exhibit 4.3 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on May 24, 2006). | ||
| 4 | .6 | Amended and Restated 2003 Employee Stock Plan (incorporated by reference to Exhibit A of Nabors Industries Ltd. Notice of 2006 Annual General Meeting of Shareholders and Proxy Statement (File No. 001-32657) filed with the Commission on May 4, 2006). | ||
| 4 | .7 | Purchase Agreement, dated February 14, 2008, among Nabors Industries, Inc., Nabors Industries Ltd., Citigroup Global Markets Inc. and UBS Securities LLC, with respect to Nabors Industries, Inc.’s 6.15% Senior Notes due 2018 (incorporated by reference to Exhibit 4.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on February 25, 2008). | ||
| 4 | .8 | Indenture, dated February 20, 2008, among Nabors Industries, Inc., Nabors Industries Ltd. and Wells Fargo Bank, National Association, as trustee, with respect to Nabors Industries, Inc.’s 6.15% Senior Notes due 2018 (including form of 6.15% Senior Note due 2018) (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd. Form 8-K (File No. 001-32657) filed with the Commission on February 25, 2008). | ||
| 4 | .9 | Registration Rights Agreement, dated as of February 20, 2008, among Nabors Industries, Inc., Nabors Industries, Ltd., Citigroup Global Markets Inc. and UBS Securities LLC, with respect to Nabors Industries, Inc.’s 6.15% Senior Notes due 2018 (incorporated by reference to Exhibit 4.3 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on February 25, 2008). | ||
| 4 | .10 | Purchase Agreement, dated July 17, 2008, among Nabors Industries, Inc., Nabors Industries, Ltd., Citigroup Global Markets Inc. and UBS Securities LLC, with respect to Nabors Industries, Inc.’s 6.15% Senior Notes due 2018 (incorporated by reference to Exhibit 4.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on July 23, 2008). | ||
| 4 | .11 | Registration Rights Agreement, dated July 22, 2008, among Nabors Industries, Inc., Nabors Industries, Ltd., Citigroup Global Markets Inc. and UBS Securities LLC, with respect to Nabors Industries, Inc.’s 6.15% Senior Notes due 2018 (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on July 23, 2008). | ||
| 4 | .12 | Purchase Agreement, dated January 7, 2009, among Nabors Industries, Inc., Nabors Industries Ltd., Goldman, Sachs & Co., UBS Securities LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Howard Weil Incorporated, J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated, Tudor, Pickering, Holt & Co. Securities, Inc. and Wells Fargo Securities, LLC, with respect to Nabors Industries, Inc.’s 9.25% Senior Notes due 2019 (incorporated by reference to Exhibit 4.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on January 14, 2009). | ||
| 4 | .13 | Indenture related to the Senior Notes due 2019, dated as of January 12, 2009, among Nabors Industries, Inc., Nabors Industries Ltd. and Wells Fargo Bank, National Association, as trustee, with respect to Nabors Industries, Inc.’s 9.25% Senior Notes due 2019 (including form of 9.25% Senior Note due 2019) (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on January 14, 2009). | ||
| 4 | .14 | Registration Rights Agreement, dated as of January 12, 2009, among Nabors Industries, Inc., Nabors Industries Ltd., Goldman, Sachs & Co., UBS Securities LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Howard Weil Incorporated, J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated, Tudor, Pickering, Holt & Co. Securities, Inc. and Wells Fargo Securities, LLC, with respect to Nabors Industries, Inc.’s 9.25% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on January 14, 2009). | ||
| 10 | .1 (+) | 1996 Employee Stock Plan (incorporated by reference to Nabors Industries Inc.’s Registration Statement on Form S-8 (File No. 333-11313) filed with the Commission on September 3, 1996). | ||
| 10 | .2 (+) | Employment Agreement effective October 1, 1996, between Nabors Industries, Inc. and Eugene M. Isenberg (incorporated by reference to Exhibit 10.7 to Nabors Industries Inc.’s Form 10-Q (File No. 1-9245) filed with the Commission on May 16, 1997). | ||
134
Table of Contents
|
Exhibit No.
|
Description
|
|||
| 10 | .3 (+) | First Amendment to Amended and Restated Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of June 24, 2002 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed with the Commission on August 14, 2002). | ||
| 10 | .4 (+) | Second Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of July 17, 2002 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed with the Commission on August 14, 2002). | ||
| 10 | .5 (+) | Third Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of December 28, 2005 (incorporated by reference to Exhibit 10.01 to Nabors Industries Ltd.’s Form 8-K (File No. 000-49887) filed with the Commission on December 28, 2005). | ||
| 10 | .6 (+) | Fourth Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of March 10, 2006 (incorporated by reference to Exhibit 10.8 to Nabors Industries Ltd.’s Form 10-K (File No. 000-49887) filed with the Commission on March 16, 2006). | ||
| 10 | .7 (+) | Fifth Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg dated as of December 31, 2008 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd. Form 8-K (File No. 001-32657) filed with the Commission on January 7, 2009). | ||
| 10 | .8 (+) | Executive Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg, dated as of April 1, 2009 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on April 30, 2009). | ||
| 10 | .9 (+) | First Amendment to Executive Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg, dated as of June 29, 2009 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on July 1, 2009). | ||
| 10 | .10 (+) | Second Amendment to Executive Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Eugene M. Isenberg, dated as of December 28, 2009 (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on December 28, 2009). | ||
| 10 | .11 (+) | Employment Agreement effective October 1, 1996, between Nabors Industries, Inc. and Anthony G. Petrello (incorporated by reference to Exhibit 10.8 to Nabors Industries Inc.’s Form 10-Q (File No. 1-9245) filed May 16, 1997). | ||
| 10 | .12 (+) | First Amendment to Amended and Restated Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello dated as of June 24, 2002 (incorporated by reference to Exhibit 10.2 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed August 14, 2002). | ||
| 10 | .13 (+) | Second Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello dated as of July 17, 2002 (incorporated by reference to Exhibit 10.3 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed August 14, 2002). | ||
| 10 | .14 (+) | Third Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello dated as of December 28, 2005 (incorporated by reference to Exhibit 10.02 to Nabors Industries Ltd.’s Form 8-K (File No. 000-49887) filed December 28, 2005). | ||
| 10 | .15 (+) | Fourth Amendment to Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello dated as of December 31, 2008 (incorporated by reference to Exhibit 10.2 to Nabors Industries Ltd. Form 8-K (File No. 001-32657) filed with the Commission on January 7, 2009). | ||
| 10 | .16 (+) | Executive Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello, dated as of April 1, 2009 (incorporated by reference to Exhibit 10.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on April 30, 2009). | ||
135
Table of Contents
|
Exhibit No.
|
Description
|
|||
| 10 | .17 (+) | First Amendment to Executive Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello, dated as of June 29, 2009 (incorporated by reference to Exhibit 10.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on July 1, 2009). | ||
| 10 | .18 (+) | Second Amendment to Executive Employment Agreement between Nabors Industries, Inc., Nabors Industries Ltd. and Anthony G. Petrello, dated as of December 28, 2009 (incorporated by reference to Exhibit 10.2 to Nabors Industries Ltd.’s Form 8-K (File No. 001-32657) filed with the Commission on December 28, 2009). | ||
| 10 | .19 (+) | Waiver dated as of September 27, 2002, pursuant to Section 9.[c] and Schedule 9.[c] of the Amended Employment Agreement among Nabors Industries, Inc., Nabors Industries Ltd., and Anthony G. Petrello (incorporated by reference to Exhibit 10.1 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed November 14, 2002). | ||
| 10 | .20 (+) | Nabors Industries, Inc. 1997 Executive Officers Incentive Stock Plan (incorporated by reference to Exhibit 10.20 to Nabors Industries Inc.’s Form 10-K (File No. 1-9245) filed December 29, 1997). | ||
| 10 | .21 (+) | Nabors Industries, Inc. 1998 Employee Stock Plan (incorporated by reference to Exhibit 10.19 to Nabors Industries Inc.’s Form 10-K (File No. 1-9245) filed March 31, 1999). | ||
| 10 | .22 (+) | Nabors Industries, Inc. 1999 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.21 to Nabors Industries Inc.’s Form 10-K (File No. 1-9245) filed March 31, 1999). | ||
| 10 | .23 (+) | Amendment to Nabors Industries, Inc. 1999 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.19 to Nabors Industries Inc.’s Form 10-K (File No. 1-09245) filed March 19, 2002). | ||
| 10 | .24 | Form of Indemnification Agreement entered into between Nabors Industries Ltd. and the directors and executive officers identified in the schedule thereto (incorporated by reference to Exhibit 10.28 to Nabors Industries Ltd.’s Form 10-K (File No. 000-49887) filed with the Commission on March 31, 2003). | ||
| 10 | .25 (+) | Amended and Restated 1999 Stock Option Plan for Non-Employee Directors (amended on May 2, 2003) (incorporated by reference to Exhibit 10.29 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed with the Commission on May 12, 2003). | ||
| 10 | .26 (+) | 2003 Employee Stock Plan (incorporated by reference to Annex D of Nabors Industries Ltd.’s Notice of 2003 Annual General Meeting of Shareholders and Proxy Statement (File No. 000-49887) filed with the Commission on May 8, 2003). | ||
| 10 | .27 | Purchase and Sale Agreement (Red River) by and among El Paso Production Company and El Paso Production GOM Inc., jointly and severally as Seller and Ramshorn Investments, Inc., as Purchaser dated October 8, 2003 (incorporated by reference to Exhibit 10.23 to Nabors Industries Ltd.’s Form 10-K (File No. 000-49887) filed with the Commission on March 15, 2004). | ||
| 10 | .28 | Purchase and Sale Agreement (USA) between El Paso Production Oil & Gas USA, L.P., as Seller and Ramshorn Investments, Inc., as Purchaser dated October 8, 2003 (incorporated by reference to Exhibit 10.24 to Nabors Industries Ltd.’s Form 10-K (File No. 000-49887) filed with the Commission on March 15, 2004). | ||
| 10 | .29 (+) | Form of Stock Option Agreement — Isenberg/Petrello (incorporated by reference to Exhibit 10.03 to Nabors Industries Ltd.’s Form 8-K (File No. 000-49887) filed with the Commission on March 2, 2005). | ||
| 10 | .30 (+) | Form of Stock Option Agreement — Others (incorporated by reference to Exhibit 10.04 to Nabors Industries Ltd.’s Form 8-K (File No. 000-49887) filed with the Commission on March 2, 2005). | ||
| 10 | .31 | First Amendment to 2003 Employee Stock Plan (incorporated by reference to Exhibit 4.1 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed with the Commission on August 3, 2005). | ||
| 10 | .32 | Nabors Industries Ltd. Amended and Restated 2003 Employee Stock Plan (incorporated by reference to Exhibit A of Nabors Industries Ltd.’s Revised Definitive Proxy Statement on Schedule 14A (File No. 001-32657) filed with the Commission on May 4, 2006) (incorporated by reference to Exhibit 99.1 to Nabors Industries Ltd.’s Form S-8 filed with the Commission on November 12, 2008. | ||
| 12 | Computation of Ratios.* | |||
136
Table of Contents
|
Exhibit No.
|
Description
|
|||
| 14 | Code of Business Conduct (incorporated by reference to Exhibit 14 to Nabors Industries Ltd.’s Form 10-K (File No. 000-49887) filed with the Commission on March 15, 2004). | |||
| 18 | Preference Letter of Independent Accountants Regarding Change in Accounting Principle (incorporated by reference to Exhibit 18 to Nabors Industries Ltd.’s Form 10-Q (File No. 000-49887) filed with the Commission on November 2, 2005). | |||
| 21 | Significant Subsidiaries of Nabors Industries Ltd.* | |||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP — Houston.* | ||
| 23 | .2 | Consent of Independent Auditors — Ernst & Young LLP — Houston.* | ||
| 31 | .1 | Rule 13a-14(a)/15d-14(a) Certification, executed by Eugene M. Isenberg, Chairman and Chief Executive Officer of Nabors Industries Ltd.* | ||
| 31 | .2 | Rule 13a-14(a)/15d-14(a) Certification, executed by R. Clark Wood, principal accounting and financial officer of Nabors Industries Ltd.* | ||
| 32 | .1 | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Eugene M. Isenberg, Chairman and Chief Executive Officer of Nabors Industries Ltd. and R. Clark Wood, principal accounting and financial officer of Nabors Industries Ltd. (furnished herewith). | ||
| 101 | The following materials from Nabors Industries Ltd.’s Annual Report on Form 10-K for the year ended December 31, 2009, formatted in XBRL (Extensible Business Reporting Language):(i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Changes in Equity, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. | |||
| * | Filed herewith. | |
| (+) | Management contract or compensatory plan or arrangement. |
137
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NABORS INDUSTRIES LTD.
| By: |
/s/ Eugene
M. Isenberg
|
Eugene M. Isenberg
Chairman and Chief Executive Officer
| By: |
/s/ R.
Clark Wood
|
R. Clark Wood
Principal accounting and financial officer
Date: February 26,2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
||||
|
/s/ Eugene
M. Isenberg
|
Chairman and Chief Executive Officer | February 26, 2010 | ||||
|
/s/ James
L. Payne
|
Director | February 26, 2010 | ||||
|
/s/ Anthony
G. Petrello
|
Deputy Chairman, President and
Chief Operating Officer |
February 26, 2010 | ||||
|
/s/ John
V. Lombardi
|
Director | February 26, 2010 | ||||
|
/s/ Myron
M. Sheinfeld
|
Director | February 26, 2010 | ||||
|
/s/ Martin
J. Whitman
|
Director | February 26, 2010 | ||||
|
/s/ William
T. Comfort
|
Director | February 26, 2010 | ||||
138
Table of Contents
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2009, 2008 and 2007
|
Balance at
|
Charged to
|
Charged to
|
Balance at
|
|||||||||||||||||
|
Beginning of
|
Costs and
|
Other
|
End of
|
|||||||||||||||||
|
|
Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 23,224 | $ | 5,793 | $ | 239 | $ | (5,575 | ) | $ | 23,681 | |||||||||
|
Inventory reserve
|
4,483 | 1,429 | — | (1,088 | ) | 4,824 | ||||||||||||||
|
Valuation allowance on deferred tax assets
|
132,262 | 1,438,628 | — | — | 1,570,890 | |||||||||||||||
|
2008
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 16,713 | $ | 6,715 | $ | 1,241 | $ | (1,445 | ) | $ | 23,224 | |||||||||
|
Inventory reserve
|
2,309 | 4,573 | — | (2,399 | ) | 4,483 | ||||||||||||||
|
Valuation allowance on deferred tax assets
|
29,658 | 102,604 | — | — | 132,262 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 14,850 | $ | 2,824 | $ | 88 | $ | (1,049 | )(1) | $ | 16,713 | |||||||||
|
Inventory reserve
|
1,145 | 1,164 | — | — | 2,309 | |||||||||||||||
|
Valuation allowance on deferred tax assets
|
22,140 | 8,144 | (626 | ) | — | 29,658 | ||||||||||||||
| (1) | Uncollected receivables written-off, net of recoveries. |
139
Table of Contents
Consolidated
Financial Statements
NFR Energy LLC
Years Ended December 31, 2009 and 2008 and for
the Period From July 27, 2006 (Inception) Through December 31, 2007
NFR Energy LLC
Years Ended December 31, 2009 and 2008 and for
the Period From July 27, 2006 (Inception) Through December 31, 2007
Table of Contents
Consolidated
Financial Statements
NFR
Energy LLC
Index
| Page(s) | ||||
| 2 | ||||
| 3 | ||||
|
Audited Consolidated Financial Statements
|
||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| 8-23 | ||||
| 24-28 | ||||
1
Table of Contents
Report of
Independent Auditors
The Members of NFR Energy LLC
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statement of operations, of
members’ capital, and of cash flows present fairly, in all
material respects, the financial position of NFR Energy LLC and
its subsidiaries (the “Company”) at December 31,
2009, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management; our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, at December 31, 2009, the Company changed the
manner in which its oil and natural gas reserves are estimated
as well as the manner in which prices are determined to
calculate the ceiling limit on capitalized oil and natural gas
costs.
/s/ PricewaterhouseCoopers
LLP
Houston, Texas
February 25, 2010
2
Table of Contents
Report of
Independent Auditors
The Members of NFR Energy LLC
We have audited the accompanying consolidated balance sheet of
NFR Energy LLC as of December 31, 2008, and the related
consolidated statement of operations, changes in members’
capital, and cash flows for the year ended December 31,
2008 and for the period from July 27, 2006 (inception)
through December 31, 2007. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of NFR Energy LLC at December 31, 2008,
and the consolidated results of its operations and its cash
flows for the year ended December 31, 2008 and for the
period from July 27, 2006 (inception) through
December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
Houston, Texas
March 27, 2009
3
Table of Contents
NFR
Energy LLC
As of
December 31, 2009 and 2008
|
December 31,
|
December 31,
|
|||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 2,489 | $ | 4,123 | ||||
|
Accounts receivable, net
|
21,321 | 21,689 | ||||||
|
Prepaid expenses and other current assets
|
28,181 | 65,900 | ||||||
|
Derivative instruments
|
30,764 | 27,587 | ||||||
|
Total current assets
|
82,755 | 119,299 | ||||||
|
Property Plant and Equipment:
|
||||||||
|
Oil and gas properties (full cost method)
|
||||||||
|
Proved
|
1,177,439 | 796,916 | ||||||
|
Unproved
|
178,625 | 233,924 | ||||||
|
Gas gathering and processing equipment
|
39,949 | 39,584 | ||||||
|
Office furniture and fixtures
|
5,900 | 4,399 | ||||||
| 1,401,913 | 1,074,823 | |||||||
|
Accumulated depletion, depriciation and amortization
|
(882,192 | ) | (451,469 | ) | ||||
|
Total property plant and equipment, net
|
519,721 | 623,354 | ||||||
|
Other Assets:
|
||||||||
|
Derivative instruments
|
28,098 | 18,322 | ||||||
|
Deferred financing costs
|
3,666 | 1,115 | ||||||
|
Total other assets
|
31,764 | 19,437 | ||||||
|
Total assets
|
$ | 634,240 | $ | 762,090 | ||||
| LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable — trade
|
$ | 13,916 | $ | 29,269 | ||||
|
Accounts payable — related party
|
1,572 | 4,833 | ||||||
|
Royalties payable
|
7,850 | 5,397 | ||||||
|
Accrued exploration and development
|
36,647 | 24,189 | ||||||
|
Accrued operating expenses and other
|
15,188 | 11,338 | ||||||
|
Derivative instruments
|
198 | — | ||||||
|
Total current liabilities
|
75,371 | 75,026 | ||||||
|
Long term liabilities:
|
||||||||
|
Revolving credit facility
|
214,500 | 188,500 | ||||||
|
Second lien term loan
|
50,000 | — | ||||||
|
Asset retirement obligation
|
8,155 | 6,665 | ||||||
|
Derivative instruments
|
509 | — | ||||||
|
Other long-term obligations
|
1,212 | 919 | ||||||
|
Total long-term liabilities
|
274,376 | 196,084 | ||||||
|
Commitments and contingengies
|
||||||||
|
Members’ capital:
|
||||||||
|
Members’ capital
|
1,006,600 | 854,769 | ||||||
|
Amounts receivable from members
|
(351 | ) | (272 | ) | ||||
|
Retained deficit
|
(779,004 | ) | (407,170 | ) | ||||
|
Accumulated other comprehensive income
|
54,473 | 40,919 | ||||||
|
Total controlling interest members’ capital
|
281,718 | 488,246 | ||||||
|
Noncontrolling interest
|
2,775 | 2,734 | ||||||
|
Total members’ capital
|
284,493 | 490,980 | ||||||
|
Total liabilities and members’ capital
|
$ | 634,240 | $ | 762,090 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
NFR
Energy LLC
Consolidated Statement of Operations
For the Years Ended December 31, 2009 and 2008 and for the Period From July 27, 2006
(Inception) Through December 31, 2007
Consolidated Statement of Operations
For the Years Ended December 31, 2009 and 2008 and for the Period From July 27, 2006
(Inception) Through December 31, 2007
|
For the Period
|
||||||||||||
|
From July 27,
|
||||||||||||
|
2006
|
||||||||||||
|
For the Year
|
For the Year
|
(Inception)
|
||||||||||
|
Ended
|
Ended
|
Through
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues
|
||||||||||||
|
Oil and natural gas sales
|
$ | 81,937 | $ | 96,015 | $ | 2,088 | ||||||
|
Realized gain (loss) on derivative instruments
|
60,686 | (2,266 | ) | (222 | ) | |||||||
|
Other revenue
|
957 | 592 | — | |||||||||
|
Total revenues
|
143,580 | 94,341 | 1,866 | |||||||||
|
Operating expenses
|
||||||||||||
|
Lease operating expenses
|
18,520 | 13,537 | 339 | |||||||||
|
Workover expense
|
482 | 843 | — | |||||||||
|
Marketing, gathering, transportation and other
|
6,031 | 3,107 | 50 | |||||||||
|
Production and advalorem taxes
|
4,603 | 5,978 | 151 | |||||||||
|
General and administrative expenses
|
17,395 | 14,501 | 4,246 | |||||||||
|
Depletion, depriciation and amortization
|
44,813 | 34,299 | 1,328 | |||||||||
|
Accretion expense
|
407 | 215 | 10 | |||||||||
|
Bad debt expense
|
93 | — | — | |||||||||
|
Impairments
|
407,294 | 415,843 | — | |||||||||
|
Total operating expenses
|
499,638 | 488,323 | 6,124 | |||||||||
|
Other Income (Expenses)
|
||||||||||||
|
Interest expense
|
(9,392 | ) | (7,115 | ) | — | |||||||
|
Unrealized gain (loss) on derivative instruments
|
2,610 | (1,355 | ) | (812 | ) | |||||||
|
Other income (loss)
|
(8,478 | ) | 349 | 194 | ||||||||
|
Total other expenses
|
(15,260 | ) | (8,121 | ) | (618 | ) | ||||||
|
Net loss, including noncontrolling interests
|
(371,318 | ) | (402,103 | ) | (4,876 | ) | ||||||
|
Less: Net income applicable to noncontrolling interests
|
(516 | ) | (191 | ) | — | |||||||
|
Net loss applicable to controlling interests
|
$ | (371,834 | ) | $ | (402,294 | ) | $ | (4,876 | ) | |||
The accompanying notes are an integral part of these
consolidated financial statements.
5
Table of Contents
|
Amounts
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Receivable
|
Other
|
Total
|
|||||||||||||||||||||||||||||||
|
Comprehensive
|
Members’ Capital |
From
|
Retained
|
Comprehensive
|
Noncontrolling
|
Members’
|
|||||||||||||||||||||||||||
| Loss | Units | Value | Members | Deficit | Income | Interest | Capital | ||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||
|
Balance as of July 27, 2006 (inception)
|
— | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
|
Members’ contributions
|
487 | 486,752 | — | — | — | — | 486,752 | ||||||||||||||||||||||||||
|
Net Loss
|
— | — | — | (4,876 | ) | — | — | (4,876 | ) | ||||||||||||||||||||||||
|
Balance as of December 31, 2007
|
487 | $ | 486,752 | $ | — | $ | (4,876 | ) | $ | — | $ | — | $ | 481,876 | |||||||||||||||||||
|
Members’ contributions
|
368 | 368,017 | — | — | — | — | 368,017 | ||||||||||||||||||||||||||
|
Amounts receivable from members
|
— | — | (272 | ) | — | — | — | (272 | ) | ||||||||||||||||||||||||
|
Distributions — noncontrolling interest
|
— | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Acquisition of noncontrolling interest
|
— | — | — | — | — | 2,543 | 2,543 | ||||||||||||||||||||||||||
|
Comprehensive loss
|
|||||||||||||||||||||||||||||||||
|
Net loss applicable to controlling interest
|
$ | (402,294 | ) | — | — | — | (402,294 | ) | — | — | (402,294 | ) | |||||||||||||||||||||
|
Unrealized gain on derivative contracts
|
40,919 | — | — | — | — | 40,919 | — | 40,919 | |||||||||||||||||||||||||
|
Comprehensive loss applicable to controlling interest
|
(361,375 | ) | |||||||||||||||||||||||||||||||
|
Net income applicable to noncontrolling interest
|
191 | — | — | — | — | — | 191 | 191 | |||||||||||||||||||||||||
|
Comprehensive loss including noncontrolling interest
|
$ | (361,184 | ) | ||||||||||||||||||||||||||||||
|
Balance as of December 31, 2008
|
855 | $ | 854,769 | $ | (272 | ) | $ | (407,170 | ) | $ | 40,919 | $ | 2,734 | $ | 490,980 | ||||||||||||||||||
|
Members’ contributions
|
152 | 151,831 | — | — | — | — | 151,831 | ||||||||||||||||||||||||||
|
Amounts receivable from members
|
— | — | (79 | ) | — | — | — | (79 | ) | ||||||||||||||||||||||||
|
Distributions — noncontrolling interest
|
— | — | — | — | — | (475 | ) | (475 | ) | ||||||||||||||||||||||||
|
Comprehensive loss
|
|||||||||||||||||||||||||||||||||
|
Net loss applicable to controlling interest
|
$ | (371,834 | ) | — | — | — | (371,834 | ) | — | — | (371,834 | ) | |||||||||||||||||||||
|
Unrealized gain on derivative contracts
|
13,554 | — | — | — | — | 13,554 | — | 13,554 | |||||||||||||||||||||||||
|
Comprehensive loss applicable to controlling interest
|
(358,280 | ) | |||||||||||||||||||||||||||||||
|
Net income applicable to noncontrolling interest
|
516 | — | — | — | — | — | 516 | 516 | |||||||||||||||||||||||||
|
Comprehensive loss including noncontrolling interest
|
$ | (357,764 | ) | ||||||||||||||||||||||||||||||
|
Balance as of December 31, 2009
|
$ | 1,007 | $ | 1,006,600 | $ | (351 | ) | $ | (779,004 | ) | $ | 54,473 | $ | 2,775 | $ | 284,493 | |||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
6
Table of Contents
NFR
Energy LLC
Consolidated Statement of Cash Flows
For the Years Ended December 31, 2009 and 2008 and for the Period From July 27, 2006
(Inception) Through December 31, 2007
Consolidated Statement of Cash Flows
For the Years Ended December 31, 2009 and 2008 and for the Period From July 27, 2006
(Inception) Through December 31, 2007
|
For the Period
|
||||||||||||
|
From July 27,
|
||||||||||||
|
2006
|
||||||||||||
|
For the Year
|
For the Year
|
(Inception)
|
||||||||||
|
Ended
|
Ended
|
Through
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net loss, including noncontrolling interest
|
$ | (371,318 | ) | $ | (402,103 | ) | $ | (4,876 | ) | |||
|
Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:
|
||||||||||||
|
Depreciation, depletion, and amortization
|
44,813 | 34,299 | 1,328 | |||||||||
|
Impairments
|
407,294 | 415,843 | — | |||||||||
|
Loss on sale of asset
|
8,569 | — | — | |||||||||
|
Bad debt expense
|
93 | — | — | |||||||||
|
Accretion expense
|
407 | 215 | 10 | |||||||||
|
Accrued interest expense
|
(142 | ) | — | — | ||||||||
|
Rent expense and amortization of deferred rent
|
120 | — | — | |||||||||
|
Amortization of deferred financing costs
|
1,083 | 346 | — | |||||||||
|
Unrealized (gain)/loss on derivative instruments
|
(2,610 | ) | 1,355 | 812 | ||||||||
|
Option premium paid for derivative instruments
|
— | — | (11,821 | ) | ||||||||
|
Amortization of option premium
|
3,918 | 4,197 | 468 | |||||||||
|
Amortization of prepaid expenses
|
2,374 | — | — | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
(Increase)/decrease in accounts receivable
|
275 | (19,806 | ) | (1,883 | ) | |||||||
|
Increase in other assets
|
(10,895 | ) | (65,369 | ) | (519 | ) | ||||||
|
Increase/(decrease) in accounts payable and accrued liabilities
|
(1,277 | ) | 48,340 | 2,226 | ||||||||
|
Net cash provided by/(used in) operating activities
|
82,704 | 17,317 | (14,255 | ) | ||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Oil and gas property additions
|
(311,689 | ) | (448,473 | ) | (546,043 | ) | ||||||
|
Gas processsing equipment additions
|
(366 | ) | (35,586 | ) | (1,455 | ) | ||||||
|
Other asset additions
|
(1,511 | ) | (3,021 | ) | (494 | ) | ||||||
|
Cash received from sale of assets
|
5,584 | — | — | |||||||||
|
Net cash used in investing activities
|
(307,982 | ) | (487,080 | ) | (547,992 | ) | ||||||
|
Cash flows from financing activities
|
||||||||||||
|
Borrowings under revolving credit facility
|
243,500 | 269,250 | 120,000 | |||||||||
|
Debt repayments
|
(167,500 | ) | (200,750 | ) | — | |||||||
|
Deferred financing costs
|
(3,633 | ) | (1,179 | ) | — | |||||||
|
Capital contributions
|
151,752 | 367,745 | 481,067 | |||||||||
|
Distribution — noncontrolling interest
|
(475 | ) | — | — | ||||||||
|
Net cash provided by financing activities
|
223,644 | 435,066 | 601,067 | |||||||||
|
Net (decrease)/increase in cash and cash equivalents
|
(1,634 | ) | (34,697 | ) | 38,820 | |||||||
|
Cash and cash equivalents, beginning of period
|
4,123 | 38,820 | — | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 2,489 | $ | 4,123 | $ | 38,820 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
7
Table of Contents
NFR
Energy LLC
| 1. | Organization |
NFR Energy LLC (NFR or the Company) was established as a
Delaware limited liability company in July 2006. Ramshorn
Investments, Inc. (Ramshorn), a wholly owned subsidiary of
Nabors Industries Ltd. (Nabors), and First Reserve Corporation
(First Reserve) have formed NFR as a joint venture to invest in
oil and natural gas exploration opportunities within the onshore
U.S. market. Ramshorn and First Reserve each committed
$500 million in equity. Operations of the Company commenced
in 2007. Nabors is one of the largest land drilling contractors
in the world, conducting drilling operations and providing well
and other services in the U.S. and internationally. First
Reserve was founded in 1983 and is the oldest and largest
private equity firm specializing in the energy industry.
Additional equity commitments were made by certain members of
NFR management and the Company’s board of representatives
(the Members).
The Company is operating in one segment and is pursuing
development and exploration projects in a variety of forms
including operated and non-operated working interests, joint
ventures, farm-outs, and acquisitions, including conventional
and unconventional resources. NFR is a holding company within
which it conducts its operations through, and its operating
assets are owned by its subsidiaries.
| 2. | Significant Accounting Policies |
Basis
of Presentation
The Company presents its consolidated financial statements in
accordance with U.S. generally accepted accounting
principles (GAAP). The accompanying consolidated financial
statements include NFR and its subsidiaries. All significant
intercompany transactions have been eliminated.
For comparative purposes, amounts in 2007 and 2008 for
noncontrolling interest have been adjusted to reflect the
retroactive application of Accounting Standards Codification
(ASC) 810 to conform to the current period’s presentation.
Certain other reclassifications have been made to prior periods
to conform to the current presentation.
Change
in Accounting Method
As more fully described below in
Property Plant and
Equipment, net
and in
Supplemental Oil and Gas
Disclosures
to these consolidated financial statements, in
January 2010 the Financial Accounting Standard Board (FASB)
issued Accounting Standards Update
2010-03
(ASU
2010-03),
“Extractive Industries — Oil and Gas”, which
conforms the authoritative guidance to the requirements of the
new Securities Exchange Commission (SEC) rules released in
December 2008 “Modernization of Oil and Gas Reporting”
and are effective December 31, 2009. The principle
revisions under the new FASB and SEC authoritative guidance
include changing the manner in which oil and gas reserves are
estimated as well as the manner in which prices are determined
to calculate the ceiling limit on capitalized oil and gas costs.
These changes will result in future amounts of depreciation,
depletion and amortization (DD&A) being different from what
would have been recorded if the new rules had not been mandated.
This change in accounting has been treated in these financial
statements as a change in accounting principle that is
inseparable from a change in accounting estimate. As noted
below, reserves and discounted cash flows prepared using the new
rules were used in the calculation of DD&A for the fourth
quarter of 2009 and the ceiling test at December 31, 2009.
Cash
and Cash Equivalents
All highly liquid investments purchased with an initial maturity
of three months or less are considered to be cash equivalents.
8
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
Concentration
of Credit Risk
The Company’s receivables are comprised of oil and natural
gas revenue receivables. The amounts are due from a limited
number of entities; therefore, the collectability is dependent
upon the general economic conditions of a few purchasers. The
Company regularly reviews collectability and establishes the
allowance for doubtful accounts as necessary using the specific
identification method. The receivables are not collateralized.
Inventory
Inventory, which is included in prepaid expenses and other,
consists principally of tubular goods, spare parts, and
equipment, that is used in our drilling operations. The
inventory balance, net of impairments, was $27.1 million
and $64.7 million for 2009 and 2008, respectively.
Inventory is stated at the lower of weighted-average cost or
market. In 2009, the Company revamped its drilling program and
moved to a horizontal program due to improved economics versus a
vertical program, leaving it with inventory not properly
designed for its horizontal drilling activities, in effect,
rendering it obsolete. As of December 31, 2009, the total
impairment relating to obsolete inventory was
$21.3 million, included in Impairments in the consolidated
statement of operations.
Oil
and Natural Gas Properties and Equipment
The Company uses the full-cost method of accounting for its
investment in oil and natural gas properties. Under this method,
the Company capitalizes all acquisition, exploration, and
development costs incurred for the purpose of finding oil and
natural gas reserves, including salaries, benefits, and other
internal costs directly attributable to these activities. The
Company capitalized $3.3 million, $1.5 million and
$0.2 million of internal costs in 2009, 2008 and 2007,
respectively. Costs associated with production and general
corporate activities, however, are expensed in the period
incurred. The Company also includes the present value of its
dismantlement, restoration, and abandonment costs within the
capitalized oil and natural gas property balance (see
“Asset Retirement Obligation
”
below). Unless a
significant portion of the Company’s proved reserve
quantities is sold (greater than 25%), proceeds from the sale of
oil and natural gas properties are accounted for as a reduction
to capitalized costs, and gains and losses are not recognized
unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves of
oil and natural gas.
Depletion of exploration and development costs and depreciation
of production equipment is computed using the
units-of-production
method based upon estimated proved oil and natural gas reserves.
The costs of unproved properties are withheld from the depletion
base until such time as they are either developed or abandoned.
The properties are reviewed on a quarterly basis for impairment,
and if impaired, are reclassified to proved property and
included in the ceiling test and depletion calculations.
Under the full cost method of accounting, a ceiling test is
performed on a quarterly basis. The full cost ceiling test is an
impairment test prescribed by SEC
Regulation S-X
Rule 4-10.
The ceiling test determines a limit on the book value of oil and
natural gas properties. The capitalized costs of proved oil and
natural gas properties, net of accumulated DD&A, may not
exceed the estimated future net cash flows from proved oil and
natural gas reserves, excluding future cash outflows associated
with settling asset retirement obligations that have been
accrued on the balance sheets, using prices based on the prior
twelve month period for 2009 and prices in effect at the end of
the period for periods ended before December 31, 2009, held
flat for the life of production, discounted at 10%, plus the
cost of unevaluated properties and major development projects
excluded from the costs being amortized. If capitalized costs
exceed this limit, the excess is charged to expense and
reflected as accumulated DD&A.
In December 2008, the SEC adopted major revisions to its rules
governing oil and natural gas company reporting requirements.
The new rules include provisions that permit the use of new
technologies to determine proved reserves, and allow companies
to disclose their probable and possible reserves to investors in
SEC
9
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
documents outside of the financial statements. The previous
rules limited disclosure to only proved reserves. The new rules
also require companies that have an audit performed on their
reserves to report the independence and qualifications of the
reserve auditor, and file the reserve engineer’s reports
when a third party reserve engineer is relied upon to prepare
reserve estimates. The new rules also require that oil and
natural gas reserves be reported and the full cost ceiling value
be calculated using an average price based upon the beginning of
the month for the prior twelve-month period. The new reporting
requirements are effective for reporting periods ending on or
after December 31, 2009. The FASB has issued ASU
2010-03
“Extractive Industries — Oil and Gas” to
align its rules for oil and natural gas reserves estimation and
disclosure requirements with the SEC’s final rule. The
impact of these new rules is reflected below in the
Supplemental Oil and Gas Disclosures
section.
In 2008 and the first quarter of 2009, the Company recognized an
impairment of $415.8 million and $155.9 million,
respectively, due to a decrease in the period end price reserve
estimates, as required under the former SEC rules. In the fourth
quarter of 2009, the Company recognized an impairment of
$230.1 million, as a result of the change in the reserve
estimates defined under the new SEC rules as noted above.
Gathering assets and related facilities, certain other property
and equipment, and furniture and fixtures are depreciated using
the straight-line method based on the estimated useful lives of
the respective assets, generally ranging from 3 to
30 years. Leasehold improvements are amortized over the
shorter of their economic lives or the lease term. Repairs and
maintenance costs are expensed in the period incurred.
The Company’s DD&A expense on our oil and natural gas
properties is calculated each quarter utilizing period end
reserve quantities. The new SEC oil and gas reserves measurement
and disclosure rules that went into effect as of
December 31, 2009 impacted our DD&A expense for the
fourth quarter of 2009, increasing DD&A expense by
$1.7 million, or $0.11 per mcfe, for the quarter and year
ended December 31, 2009.
Capitalized
Interest
The Company capitalizes interest costs to oil and natural gas
properties on expenditures made in connection with exploration
and development projects that are not subject to current
depletion. Interest is capitalized only for the period that
activities are in progress to bring these projects to their
intended use. During 2009, the Company capitalized
$3.7 million of interest expense relating to the second
lien term loan facility borrowings (the Second Lien Agreement)
(see Note 5). The Company did not have capitalized interest
in 2008.
Leases
The Company accounts for leases with escalation clauses and rent
holidays on a straight-line basis in accordance with ASC 840,
Leases
.
Derivative
Instruments and Hedging Activities
The Company uses derivative financial instruments to achieve a
more predictable cash flow from its oil and natural gas
production by reducing its exposure to price fluctuations. Such
derivative instruments, which are placed with major financial
institutions who are participants in the Company’s first
lien credit facility (the Credit Agreement) (see
Note 5) that the Company believes are minimal credit
risks, may take the form of forward contracts, futures
contracts, swaps, options, or basis swaps. Substantially, with
the exception of basis swaps, all of our natural gas derivative
contracts are settled based upon reported New York Mercantile
Exchange (NYMEX) prices. Our derivative contracts are with
multiple counterparties to minimize our exposure to any
individual counterparty and we have netting arrangements with
all of our counterparties that provide for offsetting payables
against receivables from separate hedging arrangements with that
counterparty. The oil and natural gas reference prices, upon
which the commodity derivative contracts are based, reflect
10
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
various market indices that have a generally high degree of
historical correlation with actual prices received by the
Company for its oil and natural gas production. Our fixed-price
swap, option, and collar agreements are used to fix the sales
price for our anticipated future oil and natural gas production.
Upon settlement, the Company receives a fixed price for the
hedged commodity and receives or pays our counterparty a
floating market price, as defined in each instrument. The
instruments are settled monthly. When the floating price exceeds
the fixed price for a contract month, the Company pays our
counterparty. When the fixed price exceeds the floating price,
our counterparty is required to make a payment to the Company.
The Company has designated these swap, option and collar
agreements as cash flow hedges.
The Company accounts for these activities pursuant to ASC 815,
Derivatives and Hedging
(formerly Statements of Financial
Accounting Standards (SFAS) 133). This statement establishes
accounting and reporting standards requiring that derivative
instruments other than those that meet the normal purchases and
sales exception, be recorded on the balance sheets as either an
asset or liability measured at fair value (which is generally
based on information obtained from independent parties). ASC 815
also requires that changes in fair value be recognized currently
in earnings unless specific hedge accounting criteria are met.
Hedge accounting treatment allows unrealized gains and losses on
cash flow hedges to be deferred in accumulated other
comprehensive income. Realized gains and losses from the
Company’s oil and natural gas cash flow hedges are
generally recognized in realized gain or loss on derivative
instruments when the forecasted transaction occurs. Gains and
losses from the change in fair value of derivative instruments
that do not qualify for hedge accounting are reported in
current-period earnings as an unrealized gain or loss on
derivative instruments in the consolidated statement of
operations. If at any time the likelihood of occurrence of a
hedged forecasted transaction ceases to be “probable,”
hedge accounting under ASC 815 will cease on a prospective basis
and all future changes in the fair value of the derivative will
be recognized directly in earnings. Amounts recorded in
accumulated other comprehensive income prior to the change in
the likelihood of occurrence of the forecasted transaction will
remain in accumulated other comprehensive income until such time
as the forecasted transaction impacts earnings. If it becomes
probable that the original forecasted production will not occur,
then the derivative gain or loss would be reclassified from
accumulated other comprehensive income into earnings
immediately. Hedge effectiveness is measured at least quarterly
based on the relative changes in fair value between the
derivative instruments and the hedged item over time, and any
ineffectiveness is immediately reported as unrealized gain or
loss on derivative instruments in the consolidated statement of
operations.
Deferred
Financing Costs
Deferred financing costs of approximately $3.6 million and
$1.1 million incurred during 2009 and 2008, respectively,
include the costs associated with execution of the
Company’s Credit Agreement and Second Lien Agreement, as
amended during 2009 and 2008 (see Note 5). Deferred
financing costs are being amortized over the life of the notes.
Financial
Instruments
The Company’s financial instruments including cash and cash
equivalents, accounts receivable, and accounts payable are
carried at cost, which approximates fair value due to the
short-term maturity of these instruments. Since considerable
judgment is required to develop estimates of fair value, the
estimates provided are not necessarily indicative of the amounts
the Company could realize upon the purchase or refinancing of
such instruments.
Asset
Retirement Obligation
The Company follows ASC 410,
Asset Retirement and
Environmental Obligations
. If a reasonable estimate of the
fair value of an obligation to perform site reclamation,
dismantle facilities or plug and abandon
11
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
wells can be made, we record a liability (an asset retirement
obligation or ARO) on our consolidated balance sheets and
capitalize the present value of the asset retirement cost in oil
and natural gas properties in the period in which the retirement
obligation is incurred. In general, the amount of an ARO and the
costs capitalized will be equal to the estimated future cost to
satisfy the abandonment obligation assuming the normal operation
of the asset, using current prices that are escalated by an
assumed inflation factor up to the estimated settlement date,
which is then discounted back to the date that the abandonment
obligation was incurred using an assumed cost of funds for our
company. After recording these amounts, the ARO is accreted to
its future estimated value using the same assumed cost of funds
and the additional capitalized costs are depreciated on a
unit-of-production
basis within the related full cost pool. The capitalized costs
associated with an ARO are included in amortization base for
purposes of calculating the ceiling test.
The information below reconciles the value of the asset
retirement obligation:
| For the Year December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Beginning Balance
|
$ | 6,665 | $ | 1,585 | ||||
|
Liabilities incurred
|
1,290 | 4,876 | ||||||
|
Liabilities settled
|
(20 | ) | (11 | ) | ||||
|
Change in estimate
|
(187 | ) | — | |||||
|
Accretion expense
|
407 | 215 | ||||||
|
Ending Balance
|
$ | 8,155 | $ | 6,665 | ||||
Revenue
Recognition
The Company records revenues from the sales of natural gas and
crude oil when the production is produced and sold, and also
when collectability is ensured. The Company may have an interest
with other producers in certain properties, in which case the
Company uses the sales method to account for gas imbalances.
Under this method, revenue is recorded on the basis of natural
gas actually sold by the Company. The Company also reduces
revenue for other owners’ natural gas sold by the Company
that cannot be volumetrically balanced in the future due to
insufficient remaining reserves. The Company’s remaining
over- and under-produced gas balancing positions are considered
in the Company’s proved oil and natural gas reserves. The
Company did not have any gas imbalances at December 31,
2009, 2008 or 2007.
Use of
Estimates
The preparation of the consolidated financial statements for the
Company in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
The Company’s consolidated financial statements are based
on a number of significant estimates, including oil and natural
gas reserve quantities that are the basis for the calculation of
DD&A and impairment of oil and natural gas properties, and
timing and costs associated with its retirement obligations.
Income
Taxes
The Company is a limited liability company treated as a
partnership for federal and state income tax purposes with all
income tax liabilities
and/or
benefits of the Company being passed through to the members. As
such, no recognition of federal or state income taxes for the
Company or its subsidiaries that are organized
12
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
as limited liability companies have been provided for in the
accompanying consolidated financial statements. Any uncertain
tax position taken by the members are not uncertain positions of
the Company.
In accordance with the operating agreement of NFR, to the extent
possible without impairing the Company’s ability to
continue to conduct its business and activities, and in order to
permit its members to pay taxes on their allocable share of the
taxable income of the Company, NFR would be required to make
distributions to the members in the amount equal to the
estimated tax liability of each member computed as if each
member paid income tax at the highest marginal federal and state
rate applicable to an individual resident of New York, New York,
in the event that taxable income is generated for the members.
There was no taxable income and therefore no distributions to
the members in 2009 and 2008.
Recent
Accounting Pronouncements
In 2006, the FASB issued guidance under the
Fair Value
Measurements
topic of ASC 820 which defined fair value,
established a framework for measuring fair value and expanded
disclosures about fair value measurements. In February 2008, the
FASB delayed the effective date of the new guidance for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We adopted
the new guidance for all financial assets and financial
liabilities on January 1, 2008 and we adopted the new
guidance for all nonfinancial assets and non financial
liabilities on January 1, 2009. As this pronouncement is
only disclosure in nature, the adoption of this guidance did not
have any impact on our financial position or results of
operations.
In December 2007, the FASB issued guidance under the
Business
Combinations
topic of ASC 805 to broaden the definition of a
business combination to include all transactions or other events
in which control of one or more businesses is obtained. Further,
the statement establishes principles and requirements for how an
acquirer recognizes assets acquired, liabilities assumed and any
noncontrolling interests acquired. NFR has adopted this guidance
as of January 1, 2009, although, during 2009 there were no
such transactions.
In December 2007, the FASB issued guidance under the
Consolidations
topic of ASC 810 which establishes
accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount
of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. The new
guidance also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. NFR adopted this
guidance as of January 1, 2009 which resulted in a
retroactive reclassification of its noncontrolling interest in
subsidiaries into Members’ Capital.
In March 2008, the FASB issued guidance under the
Derivatives
and Hedging
topic of ASC 815 which requires entities that
utilize derivative instruments to provide qualitative
disclosures about their objectives and strategies for using such
instruments, as well as any details of credit risk related
contingent features contained within derivatives. The guidance
also requires entities to disclose additional information about
the amounts and location of derivatives within the financial
statements, how the provisions of accounting guidance related to
derivatives and hedging have been applied, and the impact that
hedges have on an entity’s financial position, financial
performance and cash flows. The Company adopted the disclosure
requirement beginning January 1, 2009.
In December 2008, the SEC issued a final rule,
Modernization
of Oil and Gas Reporting
, which is effective January 1,
2010 for reporting 2009 oil and gas reserve information. We
adopted the guidance as of December 31, 2009. In January
2010, the FASB issued ASU
2010-03
“Extractive Industries — Oil and Gas” to
align its rules for oil and natural gas reserves estimation and
disclosure requirements with the SEC’s final rule.
13
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
In April 2009, the FASB issued new rules to provide additional
application guidance and enhance disclosures regarding fair
value measurements and impairments of securities. The FASB
enhanced its guidance to 1) determine fair value when the
volume and level of activity for an asset or liability have
significantly decreased and 2) identify transactions that
are not orderly. The FASB issued guidance under the
Financial
Instruments
topic (820) of the ASC to enhance
consistency in financial reporting by increasing the frequency
of fair value disclosures. The FASB also issued guidance under
the
Investments — Debt and Equity Securities
topic of ASC 320 to provide additional guidance to create
greater clarity and consistency in accounting for and presenting
impairment losses on securities. The new guidance was effective
for interim and annual periods ending after June 15, 2009.
The Company adopted the disclosure requirement changes in 2009.
In August 2009, the FASB issued guidance under the
Fair Value
Measurements and Disclosures
topic of ASC 820 to provide
additional guidance on measuring the fair value of liabilities.
The new guidance was effective for the Company on
October 1, 2009 and did not have an impact on the
Company’s financial position or results of operations.
In May 2009, the FASB issued an amendment to the accounting and
disclosure requirements to re-map the auditing guidance on
subsequent events to the accounting standards with some
terminology changes. The amendment also requires additional
disclosures which includes the date through which the entity has
evaluated subsequent events and whether that evaluation date is
the date of issuance or the date the financial statements were
available to be issued. The amendment is effective for interim
or annual financial periods ending after June 15, 2009 and
should be applied prospectively. Management has evaluated
subsequent events through February 25, 2010 which
represents the date the consolidated financial statements were
issued.
In June 2009, the FASB issued the FASB Accounting Standards
Codification (“Codification”). The Codification will
become the single source for all authoritative GAAP recognized
by the FASB to be applied for financial statements issued for
the periods ending after September 15, 2009. The
Codification does not change GAAP and will not have an effect on
the Company’s financial position, results of operations or
liquidity.
In June 2009, the FASB also issued an amendment to the
accounting and disclosure requirements for the consolidation of
variable interest entities (“VIEs”) under the
Consolidation
topic of ASC 810. The elimination of the
concept of a qualifying special-purpose entity
(“QSPE”), removes the exception from applying the
consolidation guidance within this amendment. This amendment
requires an enterprise to perform a qualitative analysis when
determining whether or not it must consolidate a VIE. The
amendment also requires an enterprise to continuously reassess
whether it must consolidate a risk exposure due to that
involvement, as well as how its involvement with VIEs impacts
the enterprise’s financial statements. Finally, an
enterprise will be required to disclose significant judgments
and assumptions used to determine whether or not to consolidate
a VIE. This amendment is effective for financial statements
issued for fiscal years beginning after November 15, 2009.
The Company has determined this standard will not have an impact
on its consolidated financial statements.
| 3. | Significant Customers |
During the year ended December 31, 2009, purchases by one
company exceeded 10% of the total oil and natural gas sales of
the Company. Purchases by Enbridge Pipeline (East Texas) LP
accounted for approximately 28% of total oil and natural gas
sales. During the year ended December 31, 2008, purchases
by three companies exceeded 10% of the total oil and natural gas
revenues of the Company. Purchases by Enbridge Pipeline (East
Texas) LP accounted for approximately 33% of total oil and
natural gas sales, purchases by Riverbend Gas Gathering Company,
LLC, accounted for approximately 11% of total oil and natural
gas sales, and purchases by Woodlawn Pipeline Company, Inc.,
accounted for approximately 10% of total oil and natural gas
sales. During the year ended December 31, 2007, purchases
by two companies exceeded 10% of the total oil and gas sales of
the Company. Purchases by Riverbend Gas Gathering Company, LLC,
accounted for
14
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
approximately 51% of total revenues, and purchases by Woodlawn
Pipeline Company, Inc. accounted for approximately 12% of total
oil and natural gas sales. The Company believes that the loss of
any of the purchasers above would not result in a material
adverse effect on its ability to market future oil and natural
gas production.
| 4. | Property Acquisitions |
In June 2009, NFR entered into an agreement to acquire the deep
rights (Haynesville Shale) with approximately 23,000 net
acres in East Texas for a cash purchase price of approximately
$60 million as adjusted in accordance with the purchase and
sale agreement. The acquisition closed on June 22, 2009.
None of the acreage was developed or proved at the time of
acquisition.
In August 2008, NFR entered into an agreement to acquire
interest in certain producing properties and undeveloped acreage
in the Bear Paws Basin, located in north central Montana for a
cash purchase price of approximately $221 million as
adjusted in accordance with the purchase and sale agreement. The
acquisition closed on October 3, 2008, and also included
membership interests in each of Lodge Creek Pipelines LLC,
Willow Creek Gathering LLC, and Redrock Drilling LLC, which
collectively provide compression, transportation, gathering, and
drilling services to properties in the Bear Paws Basin acquired
by NFR.
In July 2008, NFR entered into an agreement and closed the
acquisition to acquire interests in certain producing properties
and oil, natural gas, and mineral leases and other mineral
rights in East Texas for a cash purchase price of approximately
$34 million.
In April 2008, NFR entered into a carry and earning agreement
covering approximately 47,000 gross acres of oil, natural
gas, and mineral leases in East Texas. In accordance with the
carry and earnings agreement, NFR is committed to drill a
certain number of wells between April 1, 2008 and
December 31, 2012. The Company will pay disproportionate
share of drilling costs in exchange for earning an interest in
the respective acreage.
In connection with the carry and earnings agreement, NFR
executed a $72 million performance bond. The bond will be
reduced by a certain amount upon the completion of each well
under the agreement.
In November 2007, NFR entered into an agreement to acquire
interests in certain producing properties and undeveloped
acreage in East Texas for a cash purchase price of approximately
$410 million as adjusted in accordance with the purchase
and sale agreement. The acquisition closed on December 31,
2007.
In October 2007, NFR entered into an agreement to acquire
interests in certain producing properties and undeveloped
acreage in East Texas for a cash purchase price of approximately
$100 million as adjusted in accordance with the purchase
and sale agreement. The acquisition closed on November 20,
2007.
In October 2007, the Company signed a lease purchase and
exploration agreement to obtain an undivided 60% working
interest in certain acreage located in East Texas in exchange
for total consideration of approximately $2 million in cash
and disproportionate share of drilling costs up to
$2.1 million. NFR satisfied the obligation during 2008.
On August 24, 2007, Ramshorn assigned all of its rights,
duties, obligations, and liabilities under its agreement with
Behm Energy, Inc. (Behm), to NFR Williston Basin LLC, a
subsidiary of NFR. The total consideration of $11.4 million
paid by the Company consisted of $5.7 million of cash and
$5.7 million treated as Ramshorn’s capital
contribution to NFR. The acquisition included a 50% working
interest in oil and natural gas leases covering approximately
80,000 acres (40,000 net acres to NFR) and seismic
data for the same area. In 2008, NFR agreed to sell its
operatorship rights to Hess Corporation for approximately
$10 million, which reduced the Company’s basis in the
assets. As a result of this transaction, NFR’s interest in
the assets has not changed. Additionally, during 2008 NFR
drilled an exploratory well for $1.7 million, which was
declared a dry hole and as such included in proved properties as
of December 31, 2008.
15
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
In July 2007, NFR entered into an agreement to participate in
drilling of 30 wells in the Uinta Basin of Utah. NFR paid
approximately $19 million at signing of the agreement
representing its share of Program Wells costs already incurred
and committed to spending approximately $24 million for its
share of remaining Program Wells costs.
Additionally, during 2009 and 2008, NFR acquired leases for
acreage in the same areas as the acquisitions listed above for
the $6.3 million and $38.4 million for each of the
respective years.
Acquired properties are recorded at their fair value. In
determining the fair value of the proved and unproved
properties, the Company prepares estimates of oil and natural
gas reserves. The Company estimates future prices to apply to
the estimated reserve quantities acquired and the estimated
future operating and development costs to arrive at the
estimates of future net revenues. For the fair value assigned to
proved reserves, the future net revenues are discounted using a
market-based weighted-average cost of capital rate determined
appropriate at the time of the acquisition. To compensate for
inherent risks of estimating and valuing unproved reserves,
probable and possible reserves are reduced by additional
risk-weighting factors.
The results of each of the acquisitions are included in the
accompanying consolidated statement of operations since the
respective date of purchase.
Total costs incurred for property acquisitions for 2009 and 2008
were approximately $69.0 million and $254.8 million
respectively (excluding related asset retirement costs), of
which approximately $62.7 million and $42.8 million
related to unproved properties. The Company incurred
$252.8 million and $211.9 million in development
costs, for 2009 and 2008 respectively. All development related
costs were included in proved properties. The Company incurred
unsuccessful exploration costs of $2.3 million and
$1.7 million in 2009 and 2008, respectively.
The unproved costs associated with the Company’s drilling
projects will be transferred to proved properties as the wells
are drilled or impaired.
| 5. |
|
On November 30, 2007, the Company entered into a first lien
credit agreement with a syndication of banks, with BNP Paribas
as administrative agent for the syndicators. On October 28,
2009, the Company amended and restated the Credit Agreement.
Borrowings made under the Credit Agreement are guaranteed by the
first priority perfected liens and security interest on
substantially all assets of NFR and its subsidiaries and pledge
of 100% of NFR’s ownership of stock of subsidiaries.
The aggregate commitment under the Credit Agreement is
$400 million, subject to a borrowing base that was set at
$250 million at December 31, 2009, and is redetermined
semiannually or at the Company’s request. The
Company’s most recent redetermination was October 28,
2009. Borrowings under the Credit Agreement totaled
$214.5 million and $188.5 million as of
December 31, 2009 and 2008 respectively. The amount
borrowed under the Credit Agreement is due in full on
November 30, 2011. There is no penalty for early repayment
of debt.
In addition to the Credit Agreement, NFR entered into a second
lien term loan facility for $50 million on April 28,
2009. As of December 31, 2009, the outstanding balance
under our Second Lien Agreement was $50 million, with
accrued interest at floating rates in accordance with the Credit
Agreement. The average annual interest rate for our term loan
borrowings for the twelve months ended December 31, 2009
was 4%, plus an applicable margin of 1,000 basis points, or
14%.
As discussed in Note 13, on February 12, 2010 the
Company issued $200 million of senior unsecured notes. The
proceeds of the issuance were used to repay the Second Lien
Agreement in full and to repay a
16
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
portion of the outstanding indebtedness under the Credit
Agreement. Additionally, the terms of the Credit Agreement which
are discussed below were amended.
Interest on borrowings under the Credit Agreement accrues at
variable interest rates at either a Eurodollar rate or an
alternate base rate (ABR). The Eurodollar rate is calculated as
London Interbank Offered Rate (LIBOR) plus an applicable margin
that varies from 2.25% (for periods in which NFR has utilized
less than 50% of the borrowing base) to 3.00% (for periods in
which NFR has utilized equal to or greater than 90% of the
borrowing base). The ABR is calculated as the greater of
(a) the Prime Rate, (b) the Federal Funds Effective
Rate plus
1
/
2
%,
or (c) Eurodollar rate on such day (or if such day is not a
business day, the immediately preceding business day) plus 1.5%.
The Company elects the basis of the interest rate at the time of
each borrowing. In addition, NFR pays a commitment fee under the
Credit Agreement (quarterly in arrears) for the amount that the
aggregate commitments exceed borrowings under the agreement. The
commitment fee varies from 0.375% to 0.500% based on the
percentage of the borrowing base utilized.
Under the Credit Agreement, the Company may request letters of
credit, provided that the borrowing base is not exceeded or will
not be exceeded as a result of issuance of the letter of credit.
There were no outstanding letters of credit on December 31,
2009.
The Credit Agreement requires the Company to comply with certain
financial covenants to maintain (a) a Current Ratio,
defined as a ratio of consolidated current assets (including the
unused amount of the total commitments under the Credit
Agreement, but excluding noncash assets under ASC 815 to
consolidated current liabilities (excluding noncash obligations
under ASC 815 and the current maturities under the Credit
Agreement), determined at the end of each quarter, of not less
than 1.0 to 1.0; (b) an Interest Coverage ratio at the end
of each quarter defined as a ratio of EBITDA (as such terms are
defined in the Credit Agreement) for the period of four fiscal
quarters then ending to interest expense for such period of not
less than 2.5 to 1.0; and (c) ratio of debt to EBITDA for
the four fiscal quarters ending on the last day of the fiscal
quarter immediately preceding the date of determination for
which financial statements are available to be greater than 3.75
to 1.0. The Second Lien Agreement requires a ratio of debt to
EBITDA for the four fiscal quarters ending on the last day of
the fiscal quarter immediately preceding the date of
determination for which financial statements are available to be
greater than 4.0 to 1.0. In addition, the Credit Agreement
contains covenants that restrict the Company’s ability to
incur other indebtedness, create liens, or sell its assets;
merge with other entities; pay dividends; and make certain
investments. At December 31, 2009 and 2008, NFR was in
compliance with its financial debt covenants under the Credit
and Second Lien Agreements. See Note 13 for changes in
financial covenants as the result of an amendment to the Credit
Agreement subsequent to year end.
| 6. | Members’ Capital |
The Company is authorized to issue two classes of members units
to be designated as “Common Units” and “Incentive
Units.” The Units are not represented by certificates. All
Common Units are issued at a price equal to $1,000 per unit.
Each common unit holder will have one vote on any matter put
before the Members.
Incentive
units
The Incentive Units of the Company represent “profits
interest” in the Company and are subject to vesting,
forfeiture, and other provisions that set forth in grants
evidencing their issuance. The incentive unit holders have no
voting power. In accordance with its operating agreement, the
Company is authorized to issue 10,000 of Incentive Units. As of
December 31, 2009, 2008 and 2007, the Company has issued
7,297, 6,585 and 3,782 Incentive Units, respectively.
17
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
| 7. | Statement of Cash Flows |
During the year ended December 31, 2009, the Company’s
noncash investing and financing activities consisted of the
following transactions:
| • | Recognition of an asset retirement obligation for the plugging and abandonment costs related to the Company’s oil and natural gas properties valued at $1.1 million. | |
| • | Additions to oil and natural gas properties of $36.6 million, included in accrued exploration and development. |
During the year ended December 31, 2008, the Company’s
noncash investing and financing activities consisted of the
following transactions:
| • | Recognition of an asset retirement obligation for the plugging and abandonment costs related to the Company’s oil and natural gas properties valued at $4.9 million. | |
| • | Additions to oil and natural gas properties of $21.1 million, included in accrued exploration and development. |
For the period from July 27, 2006 (inception) through
December 31, 2007, the Company’s noncash investing and
financing activities consisted of the following transactions:
| • | Recognition of an asset retirement obligation for the plugging and abandonment costs related to the Company’s oil and natural gas properties valued at $1.6 million. | |
| • | Additions to oil and natural gas properties of $8.8 million, of which $3.1 million is included in accrued exploration and development and $5.7 million represents a noncash capital contribution. |
NFR paid $11.8 million and $5.5 million for interest
during 2009 and 2008, respectively. There was no interest for
the period from July 27, 2006 (inception) through
December 31, 2007.
| 8. | Derivative Financial Instruments |
The Company is exposed to risks associated with unfavorable
changes in the market price of natural gas as a result of the
forecasted sale of its production and uses derivative
instruments to hedge or reduce its exposure to certain of these
risks. During 2009, a portion of commodity derivative
instruments were designated as cash flow hedges and were subject
to cash flow hedge accounting under ASC 815. For the remaining
derivative instruments, the Company did not elect hedge
accounting for accounting purposes and, accordingly, recorded
the net change in the
mark-to-market
valuation of these derivative instruments in the consolidated
statement of operations.
18
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NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
The following swaps, put options, basis swaps and costless
collars were outstanding with associated notional volumes and
contracted swap, floor, and ceiling prices that represent hedge
weighted average prices for the index specified as of
December 31, 2009:
| Future Production Designated for Hedge Accounting | ||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
|
Puts
|
||||||||||||||||||||
|
Volume (MMBTU)
|
2,200,822 | — | — | — | — | |||||||||||||||
|
Price
|
$ | 8.00 | — | — | — | — | ||||||||||||||
|
Swaps
|
||||||||||||||||||||
|
Volume (MMBTU)
|
6,230,061 | 9,565,996 | 8,317,098 | 10,339,085 | 10,414,152 | |||||||||||||||
|
Price
|
$ | 7.32 | $ | 7.13 | $ | 7.22 | $ | 7.40 | $ | 7.34 | ||||||||||
|
Collars
|
||||||||||||||||||||
|
Volume (MMBTU)
|
11,327,276 | 11,111,111 | 7,233,214 | — | — | |||||||||||||||
|
Price (Floor/Ceiling)
|
$ | 6.86/$9.26 | $ | 6.00/$7.50 | $ | 6.00/ $8.65 | — | — | ||||||||||||
| Future Production not Designated for Hedge Accounting | ||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||
|
Puts
|
||||||||||||||||||||
|
Volume (MMBTU)
|
655,740 | — | — | — | — | |||||||||||||||
|
Price
|
$ | 8.00 | — | — | — | — | ||||||||||||||
|
Basis Swap, NYMEX — East Texas (Houston Ship
Channel)
|
||||||||||||||||||||
|
Volume (MMBTU)
|
1,825,000 | 1,825,000 | 1,830,000 | — | — | |||||||||||||||
|
Contract differential(1)
|
$ | .10 | $ | .15 | $ | .15 | $ | — | $ | — | ||||||||||
|
Basis Swap, NYMEX — TEXOK (NGLP)
|
||||||||||||||||||||
|
Volume (MMBTU)
|
5,475,000 | (5,475,000 | ) | (5,490,000 | ) | — | — | |||||||||||||
|
Contract differential(1)
|
$ | .21 | $ | .26 | $ | .29 | $ | — | $ | — | ||||||||||
| (1) | Basis swaps settle based on NYMEX pricing minus a differencial, which is then compared to Inside Federal Energy Regulatory Commission (FERC) for the index on which volumes are being hedged. |
For our energy commodity derivative instruments that were
designated as cash flow hedges, the portion of the change in the
value of derivative instruments that is effective in offsetting
changes in expected cash flows (the effective portion) is
reported as a component of accumulated other comprehensive
income, but only to the extent that they can later offset the
undesired changes in expected cash flows during the period in
which the hedged cash flows affect earnings. To the contrary,
the portion of the change in the value of derivative instruments
that is not effective in offsetting undesired changes in
expected cash flows (the ineffective portion), as well as any
component excluded from the assessment of the effectiveness of
the derivative instruments, is required to be recognized
currently in earnings. The Company excludes time value
associated with put options, swaps and costless collars from the
assessment of effectiveness.
The Company recorded a short-term and a long-term derivative
asset of $30.8 million and $28.1 million,
respectively, related to the fair value of the hedging
instrument’s prices on hedged volumes as of
December 31, 2009 after application of ASC 820,
Fair
Value Measurements
.
19
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
The table below provides data about the carrying values of
derivatives that are designated as cash flow hedge instruments
as of December 31, 2009.
| Assets Derivatives | ||||||
| December 31, 2009 | Fair Value | |||||
| (In thousands) | ||||||
|
Derivatives designated as hedging instruments
|
||||||
|
Current
|
Derivative Instruments | $ | 29,195 | |||
|
Long-term
|
Derivative Instruments | 28,098 | ||||
|
Total derivatives designated as hedging instruments
|
$ | 57,293 | ||||
| Assets Derivatives | ||||||
| December 31, 2009 | ||||||
| Fair Value | ||||||
| (In thousands) | ||||||
|
Derivatives not designated as hedging instruments
|
||||||
|
Current
|
Derivative Instruments | $ | 1,569 | |||
|
Long-term
|
Derivative Instruments | — | ||||
|
Total derivatives not designated as hedging instruments
|
$ | 1,569 | ||||
| Liability Derivatives | ||||||
| December 31, 2009 | ||||||
| Fair Value | ||||||
| (In thousands) | ||||||
|
Derivatives not designated as hedging instruments
|
||||||
|
Current
|
Derivative Instruments | $ | 198 | |||
|
Long-term
|
Derivative Instruments | 509 | ||||
|
Total derivatives not designated as hedging instruments
|
$ | 707 | ||||
The following table summarizes the cash flow hedge gains and
losses and their locations on the Consolidated Balance Sheet as
of December 31, 2009 and Consolidated Statement of
Operations for the year ended December 31, 2009:
|
Amount of Gain
|
Amount of Gain (Loss)
|
|||||||||||||||
|
Recognized in
|
Location of Gain
|
Amount of Gain
|
Recognized in Income
|
|||||||||||||
|
Derivatives in Cash
|
Other
|
Reclassified from
|
Reclassified from
|
(Ineffective Portion and
|
||||||||||||
|
Flow Helging
|
Comprehensive
|
Accumulated OCI
|
Accumulated OCI into
|
Location of Loss on
|
Amount Excluded from
|
|||||||||||
|
Relationships
|
Income (OCI) | into Income | Income |
Ineffective Hedges
|
Effectiveness Testing) | |||||||||||
| (In thousands) | ||||||||||||||||
|
Derivative Instruments
|
$ | 75,363 | Realized gain on derivative instruments | $ | 61,809 | Unrealized loss on derivative instruments | $ | (2,497 | ) | |||||||
|
Total
|
$ | 75,363 | $ | 61,809 | $ | (2,497 | ) | |||||||||
20
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
The following table summarizes the location in the Consolidated
Statement of Operations and amounts gains and losses on
derivative instruments that do not qualify for hedge accounting
for the year ended December 31, 2009:
|
Recognized in
|
||||||
|
Income
|
||||||
|
Derivatives Not
|
on Derivatives for the
|
|||||
|
Designated as Hedging
|
Year Ended
|
|||||
|
Instruments
|
Location of Gain Recognized in Income on Derivatives | December 31, 2009 | ||||
| (In thousands) | ||||||
|
Derivative Instruments
|
Unrealized gain on Derivative Instruments | $ | 187 | |||
The consolidated accumulated other comprehensive income balance
was $54.5 million as of December 31, 2009, and
$40.9 million as of December 31, 2008. Approximately
$17.6 million of this total accumulated gain associated
with commodity price risk management activities as of
December 31, 2009, is expected to be reclassified into
earnings during the next twelve months (when the associated
forecasted sales and purchases are also expected to occur.)
None of the derivative instruments were designated as hedges in
2007.
| 9. | Fair Value Measurements |
In September 2006, the FASB issued ASC 820,
Fair Value
Measurement
, which defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements. The provisions of ASC 820 are
effective January 1, 2008. The FASB has also issued
820-10-55,
which delayed the effective date of ASC 820 for nonfinancial
assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years
beginning after November 15, 2008. Effective
January 1, 2008, the Company adopted ASC 820 as discussed
above and elected to defer the application thereof to
nonfinancial assets and liabilities in accordance with
820-10-55
until January 1, 2009.
As discussed in Note 8, the Company utilizes derivative
instruments to hedge against the variability in cash flows
associated with the forecasted sale of its anticipated future
natural gas production. The Company generally hedges a
substantial, but varying, portion of anticipated natural gas
production for the next 12 to 60 months. These derivatives
are carried at fair value on the consolidated balance sheets.
As defined in ASC 820, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date (exit price). The Company utilizes market data
or assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and the
risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market corroborated, or
generally unobservable. The Company classifies fair value
balances based on the observability of those inputs. ASC 820
establishes a fair value hierarchy that prioritizes the inputs
used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3
measurement).
The three levels of the fair value hierarchy defined by ASC 820
are as follows:
Level 1
— Quoted prices are available in
active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions
for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 1 primarily consists of financial instruments such as
exchange-traded derivatives, marketable securities and listed
equities.
Level 2
— Pricing inputs are other than
quoted prices in active markets included in level 1, which
are either directly or indirectly observable as of the reported
date. Level 2 includes those financial instruments that are
valued using models or other valuation methodologies. These
models are primarily
21
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices
for the underlying instruments, as well as other relevant
economic measures. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the
instrument, can be derived from observable data, or are
supported by observable levels at which transactions are
executed in the marketplace. Instruments in this category
generally include non-exchange-traded derivatives such as
commodity swaps, basis swaps, options, and collars.
Level 3
— Pricing inputs include
significant inputs that are generally less observable from
objective sources. These inputs may be used with internally
developed methodologies that result in management’s best
estimate of fair value.
The following table sets forth, by level, within the fair value
hierarchy, the Company’s financial assets and liabilities
that were accounted for at fair value as of December 31,
2009 and 2008. As required by ASC 820, financial assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement. The Company’s assessment of the significance
of a particular input to the fair value measurement requires
judgment and may affect the valuation of fair value assets and
liabilities and their placement within the fair value hierarchy
levels.
| Recurring Fair Value Measures | ||||||||||||||||
| As of December 31, | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In millions) | ||||||||||||||||
|
Derivative Assets, net
|
||||||||||||||||
|
2008
|
$ | — | $ | 45.9 | $ | — | $ | 45.9 | ||||||||
|
2009
|
$ | — | $ | 58.2 | $ | — | $ | 58.2 | ||||||||
Derivatives listed above include commodity swaps, basis swaps,
options, and collars that are carried at fair value. The fair
value amounts on the consolidated balance sheets associated with
the Company’s derivatives resulted from Level 2 fair
value methodologies, that is, the Company is able to value the
assets and liabilities based on observable market data for
similar instruments.
This observable data includes the forward curve for commodity
prices and interest rates based on quoted markets prices and
prospective volatility factors related to changes in commodity
prices, as well as the impact of our non-performance risk of the
counterparties which is derived using credit default swap values.
| 10. | Related-Party Transactions |
NFR paid $42.2 million and $16.1 million during 2009
and 2008 respectively to Nabors and its subsidiaries for
drilling and other oilfield services.
NFR paid $0.8 million and $1.2 million during 2009 and
2008, respectively, to Smith International, Inc. (Smith), an oil
and natural gas services company, for services provided. A
member of the Company’s board of representatives is the
Chief Executive Officer, President, and Chief Operating Officer
of Smith.
No payments were made to related parties in 2007.
| 11. | Commitments |
The Company leases approximately 36,500 square feet of
office space in downtown Houston, Texas, under a lease, which
terminates on May 1, 2013. The average rent for this space
over the life of the lease is approximately $0.6 million
per year. The Company has an option to extend its lease term for
additional 60 months. As of December 31, 2009, total
future commitments are $2.0 million.
22
Table of Contents
NFR
Energy LLC
Notes to
Consolidated Financial
Statements — (Continued)
In December 2008, the Company signed a lease agreement to lease
approximately 11,000 square feet of office space in
downtown Denver, Colorado. The lease term began on June 1,
2009, and terminates on August 31, 2014. The average rent
for this space over the life of the lease is approximately
$0.2 million per year. The Company has two options to
extend its lease term for additional 60 months each time.
As of December 31, 2009, total future commitments are
$1.0 million.
As part of our ongoing operations, we have contracted with
affiliates of Nabors to secure drilling rigs for drilling the
oil and natural gas well activity we expect to undertake. As of
December 31, 2009, total future commitments are
$156.1 million.
As of December 31, 2009, future minimum lease payments were
as follows (in thousands):
|
2010
|
$ | 45,549 | ||
|
2011
|
48,327 | |||
|
2012
|
40,049 | |||
|
2013
|
24,975 | |||
|
2014
|
146 | |||
|
Thereafter
|
— | |||
| $ | 159,046 | |||
Rent expense was approximately $1.1 million for the year
ended December 31, 2009, $0.6 million for the year
ended December 31, 2008 and $0.1 million for the
period from July 27, 2006 (inception) through
December 31, 2007.
In connection with the Carry and Earning Agreement for the East
Texas properties described in Note 4, the Company executed
a $72 million performance bond. As of December 31,
2009, the face amount of the performance bond had been reduced
to approximately $20 million.
As is customary in the oil and natural gas industry, the Company
may at times have commitments in place to reserve or earn
certain acreage positions or wells. If the Company does not pay
such commitments, the acreage positions or wells may be lost.
| 12. | Employee Benefit Plans |
The Company co-sponsors a 401(k) tax deferred savings plan (the
Plan) and makes it available to employees. The Plan is a defined
contribution plan, and the Company may make discretionary
matching contributions of up to 6% of each participating
employee’s compensation to the Plan. The contributions made
by the Company totaled approximately $502,000 during the year
ended December 31, 2009, $220,000 during the year ended
December 31, 2008 and $32,000 for the period from
July 27, 2006 (inception) through December 31, 2007.
| 13. | Subsequent Events |
On February 12, 2010, the Company issued $200 million
of senior unsecured notes. The notes were priced at 98.733% of
par, have a coupon of 9.75%, and yield 10.00%. The notes are
non-callable for four years and are due in full in 2017. The
Company used the proceeds from the offering to repay the Second
Lien Agreement in full and to repay a portion of the outstanding
indebtedness under the Credit Agreement. As a result of repaying
the Second Lien Agreement, the Company will expense associated
unamortized debt issuance costs of $1.9 million in 2010.
In conjunction with the issuance of the notes, the Credit
Agreement terms were amended by extending the maturity to
February 12, 2014 and by modifying the existing debt to
EBITDA covenant ratio to be 4.5 to 1.0, 4.25 to 1.0 and 4.0 to
1.0 for the years ending December 31, 2011, 2012 and 2013,
respectively.
23
Table of Contents
NFR
Energy LLC
The following supplemental information regarding our natural gas
and oil producing activities is presented in accordance with the
requirements of
Section 932-235-50
of the ASC.
Costs
Incurred and Capitalized Costs
The costs incurred in oil and natural gas acquisitions,
exploration and development activities were as follows:
| For the Year December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Property acquisition costs, proved(1)
|
$ | 6,297 | $ | 162,300 | $ | 361,192 | ||||||
|
Property acquisition costs, unproved
|
62,725 | 86,353 | 158,495 | |||||||||
|
Exploration and extension well costs
|
2,263 | 1,692 | — | |||||||||
|
Developmental costs(1)
|
252,838 | 219,108 | 35,101 | |||||||||
|
Asset retirement costs
|
1,100 | 5,000 | 1,600 | |||||||||
|
Total costs
|
$ | 325,223 | $ | 474,453 | $ | 556,388 | ||||||
| (1) | Property acquisition and development costs for the year ended December 31, 2008 differ from the amounts reflected in the notes to our audited consolidated financial statements due in part to the inclusion in the amount shown in the notes of the acquisition costs related to the acquisition of certain gathering assets and to the recharacterization as development costs of a portion of the costs originally characterized as property acquisition costs. The Company reclassified and recharacterized these cost to reflect the total cost incurred for oil and gas producing activities during the period, versus costs relating solely to acquisitions that closed during the period, which are disclosed in Note 4. |
Results
of Operations
Results of operations for oil and natural gas producing
activities, which exclude processing and other activities,
corporate general and administrative expenses, and straight-line
depreciation expense on non oil and gas assets, were as follows:
|
For the Period
|
||||||||||||
|
From July 27,
|
||||||||||||
|
2006
|
||||||||||||
|
For the Year
|
For the Year
|
(Inception)
|
||||||||||
|
Ended
|
Ended
|
Through
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Revenues
|
$ | 81,937 | $ | 96,015 | $ | 2,088 | ||||||
|
Operating costs:
|
||||||||||||
|
Lease operating expenses
|
18,520 | 13,249 | 339 | |||||||||
|
Workover expense
|
482 | 843 | — | |||||||||
|
Marketing, gathering, transportaion and other
|
6,031 | 3,107 | 50 | |||||||||
|
Production taxes
|
4,603 | 5,861 | 151 | |||||||||
|
Depreciation, depletion and amortization
|
41,137 | 32,993 | 1,265 | |||||||||
|
Impairment of oil and gas properties
|
407,295 | 415,843 | — | |||||||||
|
Realized (gain)/loss on derivative instruments
|
(60,686 | ) | 2,266 | 222 | ||||||||
|
Results of operations
|
$ | (335,445 | ) | $ | (378,147 | ) | $ | 61 | ||||
|
Amortization rate per bcfe
|
$ | (15.68 | ) | $ | (32.60 | ) | $ | 0.13 | ||||
24
Table of Contents
NFR
Energy LLC
Supplemental
Oil and Gas Disclosure
(Unaudited) — (Continued)
Oil
and Natural Gas Reserves and Related Financial
Data
Users of this information should be aware that the process of
estimating quantities of “proved” and “proved
developed” natural gas and crude oil reserves is very
complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering and economic
data for each reservoir. The data for a given reservoir also may
change substantially over time as a result of numerous factors,
including additional development activity, evolving production
history and continual reassessment of the viability of
production under varying economic conditions. Consequently,
material revisions to existing reserve estimates may occur from
time to time.
The following tables set forth our total proved reserves and the
changes in our total proved reserves. These reserve estimates
are based in part on reports prepared by Miller and Lents, Ltd.
(Miller and Lents), independent petroleum engineers, utilizing
data compiled by us. In preparing its reports, Miller and Lents
evaluated properties representing all of our proved reserves at
December 31, 2009 and approximately 94% of our proved
reserves at December 31, 2008 and December 31, 2007.
Our proved reserves are located onshore in the United States.
There are many uncertainties inherent in estimating proved
reserve quantities, and projecting future production rates and
the timing of future development expenditures. In addition,
reserve estimates of new discoveries are more imprecise than
those of properties with production history. Accordingly, these
estimates are subject to change as additional information
becomes available. Proved reserves are the estimated quantities
of natural gas, natural gas liquids and oil that geoscience and
engineering data demonstrate with reasonable certainty to be
economically producible in future years from known oil and
natural gas reservoirs under existing economic conditions,
operating methods and government regulations at the end of the
respective years. Proved developed reserves are those reserves
expected to be recovered through existing wells with existing
equipment and operating methods.
Proved reserves as of December 31, 2009 were estimated
using the average of the historical unweighted
first-day-of-the-month
prices of oil and natural gas for the prior twelve months as
required under new SEC rules effective for fiscal years ending
on or after that date. Future prices actually received may
materially differ from current prices or the prices used in
making the reserve estimates. With respect to future development
costs and operating expenses, the Company derived estimates
using the current cost environment at year end, which is
consistent with both the current and former SEC rules. The new
SEC rules also contain new reserve definitions and permit the
use of new technologies to determine proved reserves, if those
technologies have been demonstrated to result in reliable
conclusions about reserve volumes. As reflected in the table
below, approximately 472.4 Bcfe of the increase in our
total estimated proved reserves from December 31, 2008 to
December 31, 2009 relates to the application of the new SEC
rules discussed herein.
25
Table of Contents
NFR
Energy LLC
Supplemental
Oil and Gas Disclosure
(Unaudited) — (Continued)
|
Natural
|
Natural Gas
|
|||||||||||||||
|
Gas
|
NGLS
|
Oil
|
Equivalents
|
|||||||||||||
|
Estimated Proved Reserves
|
(Bcf) | (BBLS) | (BBLS) | (Bcfe) | ||||||||||||
|
Inception
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
Revisions — Performance
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
Revisions — Pricing
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
Extensions, Additions and Discoveries
|
18.7 | 0.0 | 0.1 | 19.39 | ||||||||||||
|
Production
|
(0.5 | ) | (0.0 | ) | (0.0 | ) | (0.46 | ) | ||||||||
|
Purchases in Place
|
251.9 | 6.3 | 2.4 | 304.2 | ||||||||||||
|
Sales in Place
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
December 31, 2007
|
270.1 | 6.3 | 2.5 | 323.1 | ||||||||||||
|
Revisions — Performance
|
4.3 | 0.0 | (0.4 | ) | 1.9 | |||||||||||
|
Revisions — Pricing
|
(82.9 | ) | (2.0 | ) | (0.8 | ) | (99.9 | ) | ||||||||
|
Extensions, Additions and Discoveries
|
121.3 | 0.9 | 0.8 | 131.1 | ||||||||||||
|
Production
|
(10.2 | ) | (0.2 | ) | (0.1 | ) | (11.6 | ) | ||||||||
|
Purchases in Place
|
73.2 | 0.3 | 0.7 | 79.2 | ||||||||||||
|
Sales in Place
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
December 31, 2008
|
375.8 | 5.3 | 2.7 | 423.8 | ||||||||||||
|
Revisions- Performance
|
14.1 | 0.3 | 0.2 | 17.0 | ||||||||||||
|
Revisions- Pricing
|
(86.2 | ) | (1.3 | ) | (0.5 | ) | (96.9 | ) | ||||||||
|
Extensions, Additions and Discoveries (Old SEC Rules)
|
192.7 | 0.6 | 1.7 | 207.1 | ||||||||||||
|
Extensions, Additions and Discoveries (New SEC Rules)(1)
|
460.9 | 1.3 | 0.6 | 472.4 | ||||||||||||
|
Production
|
(18.9 | ) | (0.3 | ) | (0.1 | ) | (21.4 | ) | ||||||||
|
Purchase in Place
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
Sales in Place
|
0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
|
December 31, 2009
|
938.4 | 5.9 | 4.6 | 1002.0 | ||||||||||||
|
Natural
|
Natural Gas
|
|||||||||||||||
|
Gas
|
NGLS
|
Oil
|
Equivalents
|
|||||||||||||
|
Estimated Proved Developed Reserves
|
(Bcf) | (BBLS) | (BBLS) | (Bcfe) | ||||||||||||
|
December 31, 2007
|
86.7 | 1.9 | 0.7 | 102.2 | ||||||||||||
|
December 31, 2008
|
164.0 | 2.2 | 1.1 | 183.8 | ||||||||||||
|
December 31, 2009
|
214.5 | 2.3 | 1.3 | 236.0 | ||||||||||||
| (1) | Primarily due to the application of revised definitions contained in the SEC’s new rules, particularly the definition of proved oil and natural gas reserves, which now permits the addition of undrilled locations beyond immediate offsets of producing wells that are supported by a determination, with reasonable certainty, of reservoir continuity. |
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves
The following information was developed utilizing procedures
prescribed by ASC 932,
Disclosures about Oil and Gas
Producing Activities.
The information is based on estimates
prepared by our petroleum
26
Table of Contents
NFR
Energy LLC
Supplemental
Oil and Gas Disclosure
(Unaudited) — (Continued)
engineering staff. The “standardized measure of discounted
future net cash flows” should not be viewed as
representative of the current value of our proved oil and
natural gas reserves. It and the other information contained in
the following tables may be useful for certain comparative
purposes, but should not be solely relied upon in evaluating us
or our performance.
In reviewing the information that follows, we believe that the
following factors should be taken into account:
| • | future costs and sales prices will probably differ from those required to be used in these calculations; | |
| • | actual production rates for future periods may vary significantly from the rates assumed in the calculations; | |
| • | a 10% discount rate may not be reasonable relative to risk inherent in realizing future net oil and natural gas revenues; and |
Under the standardized measure, future cash inflows were
estimated by using the average of the historical unweighted
first-day-of-the-month
prices of oil and natural gas for 2009 and by using year-end oil
and natural gas prices applicable to our reserves to the
estimated future production of year-end proved reserves for 2008
and prior periods. Future cash inflows do not reflect the impact
of open hedge positions. Future cash inflows were reduced by
estimated future development, abandonment and production costs
based on year-end costs in order to arrive at net cash flows
before tax. Use of a 10% discount rate and year-end prices and
costs are required by ASC 932.
In general, management does not rely on the following
information in making investment and operating decisions. Such
decisions are based upon a wide range of factors, including
estimates of probable as well as proved reserves and varying
price and cost assumptions considered more representative of a
range of possible outcomes.
The standardized measure of discounted future net cash flows
from our estimated proved oil and natural gas reserves follows:
| For the Year December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Future cash inflows
|
$ | 3,915,847 | $ | 2,311,193 | $ | 2,231,655 | ||||||
|
Less related future:
|
||||||||||||
|
Production costs
|
(1,257,905 | ) | (760,534 | ) | (729,391 | ) | ||||||
|
Development costs
|
(1,307,147 | ) | (581,600 | ) | (476,904 | ) | ||||||
|
Future net cash inflows
|
1,350,795 | 969,059 | 1,025,360 | |||||||||
|
10% annual discount for estimated timing of cash flows(1)
|
(1,244,380 | ) | (688,632 | ) | (698,879 | ) | ||||||
|
Standardized measure of discounted future net cash flows
|
$ | 106,415 | $ | 280,427 | $ | 326,481 | ||||||
| (1) | The high effective discount factor is attributable to the negative present value factor, which is due to the addition of proved undeveloped properties that require a large amount of development costs. Additionally, these costs are weighted heavily in the first five years. |
27
Table of Contents
NFR
Energy LLC
Supplemental
Oil and Gas Disclosure
(Unaudited) — (Continued)
A summary of the changes in the standardized measure of
discounted future net cash flows applicable to proved natural
gas and crude oil reserves follows:
| For the Year December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Beginning Balance
|
$ | 280,427 | $ | 326,481 | $ | — | ||||||
|
Revisions of previous estimates
|
||||||||||||
|
Changes in prices and costs
|
(147,028 | ) | (253,529 | ) | — | |||||||
|
Changes in quantities
|
1,803 | 1,278 | — | |||||||||
|
Additions to proved reserves(1)
|
(52,953 | ) | 26,513 | 37,922 | ||||||||
|
Purchases of reserves
|
— | 145,855 | 290,106 | |||||||||
|
Accretion of discount
|
28,043 | 32,648 | — | |||||||||
|
Sales of oil and gas, net
|
(52,302 | ) | (72,550 | ) | (1,547 | ) | ||||||
|
Change in estimated future development costs
|
27,954 | 74,659 | — | |||||||||
|
Previously estimated development costs incurred
|
12,279 | 23,068 | — | |||||||||
|
Changes in rate of production and other, net
|
8,192 | (23,996 | ) | — | ||||||||
|
Net Change
|
(174,012 | ) | (46,054 | ) | 326,481 | |||||||
|
Ending Balance
|
$ | 106,415 | $ | 280,427 | $ | 326,481 | ||||||
| (1) | The negative value of additions is attributable to a large number of wells that were proved as a result of the new SEC rules. Consistent with the new SEC rules, the Company only adds proved undeveloped reserves that will be developed within a five year time horizon. As a result, a large of amount of future development costs are included in the present value calculation. Additionally, these costs are not discounted as heavily as costs in the later years, thus causing the total present value to be negative. |
28
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of OperationsNote 2 Summary Of Significant Accounting PoliciesNote 3 Impairments and Other ChargesNote 4 Cash and Cash Equivalents and InvestmentsNote 5 Fair Value MeasurementsNote 6 Share-based CompensationNote 7 Acquisitions and DivestituresNote 8 Property, Plant and EquipmentNote 9 Investments in Unconsolidated AffiliatesNote 10 Financial Instruments and Risk ConcentrationNote 11 DebtNote 12 Income TaxesNote 13 Common SharesNote 14 Pension, Postretirement and Postemployment BenefitsNote 15 Related-party TransactionsNote 16 Commitments and ContingenciesNote 17 Earnings (losses) Per ShareNote 18 Supplemental Balance Sheet, Income Statement and Cash Flow InformationNote 19 Unaudited Quarterly Financial InformationNote 20 Discontinued OperationNote 21 Segment InformationNote 22 Condensed Consolidating Financial InformationItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules