<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 1-9245
--------------------
NABORS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-0711613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 W. GREENS ROAD, SUITE 1200
HOUSTON, TEXAS 77067
(Address of principal executive offices) (Zip Code)
281-874-0035
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ------
The number of shares of Common Stock, par value $.10 per share,
outstanding as of October 27, 1998 was 100,783,653.
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<PAGE> 2
NABORS INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 .......................... 2
Condensed Consolidated Statements of
Income for the Three Months and Nine Months
Ended September 30, 1998 and 1997 ................................. 3
Condensed Consolidated Statements of
Changes in Stockholders' Equity for the Nine
Months Ended September 30, 1998 and 1997 .......................... 4
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
1998 and 1997 ..................................................... 5
Notes to Condensed Consolidated
Financial Statements .............................................. 6
Report of Independent Accountants ................................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................................................ 10
Part II Other Information
Item 5. Other Information .................................................. 15
Item 6. Exhibits and Reports on Form 8-K ................................... 15
Signatures ..................................................................... 16
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,737 $ 5,623
Marketable securities 9,062 6,983
Accounts receivable, net 180,136 243,061
Inventory and supplies 28,204 21,305
Prepaid expenses and other current assets 29,625 26,359
----------- -----------
Total current assets 250,764 303,331
Property, plant and equipment, net 1,120,265 923,402
Marketable securities 9,330 29,529
Other long-term assets 31,591 25,044
----------- -----------
Total assets $ 1,411,950 $ 1,281,306
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 14,242 $ 6,091
Short-term borrowings 61,931 55,360
Trade accounts payable and accrued liabilities 144,491 166,614
Income taxes payable 16,792 12,695
----------- -----------
Total current liabilities 237,456 240,760
Long-term obligations 217,431 226,299
Other long-term liabilities 38,385 16,810
Deferred income taxes 67,643 30,097
----------- -----------
Total liabilities 560,915 513,966
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 10,000 shares; none issued or outstanding -- --
Capital stock, par value $.10 per share:
Authorized common shares 200,000;
issued and outstanding 101,360 and 101,325 10,136 10,133
Authorized Class B shares 8,000; none issued or outstanding -- --
Capital in excess of par value 397,271 400,120
Accumulated other comprehensive income (9,098) 6,670
Retained earnings 457,543 353,581
Less treasury stock, at cost, 589 and 489 common shares (4,817) (3,164)
----------- -----------
Total stockholders' equity 851,035 767,340
----------- -----------
Total liabilities and stockholders' equity $ 1,411,950 $ 1,281,306
----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 224,215 $ 305,632 $ 759,917 $ 812,226
--------- --------- --------- ---------
Operating expenses:
Direct costs 139,259 210,451 487,801 575,142
General and administrative expenses 18,489 18,115 58,628 53,898
Depreciation and amortization 21,362 19,312 62,617 52,037
--------- --------- --------- ---------
Operating expenses 179,110 247,878 609,046 681,077
--------- --------- --------- ---------
Operating income 45,105 57,754 150,871 131,149
--------- --------- --------- ---------
Other income (expense):
Interest expense (4,101) (4,377) (11,839) (12,344)
Interest income 264 365 1,205 1,843
Other income, net 3,015 12,263 24,782 26,199
--------- --------- --------- ---------
Other (expense) income (822) 8,251 14,148 15,698
--------- --------- --------- ---------
Income before income taxes 44,283 66,005 165,019 146,847
--------- --------- --------- ---------
Income taxes:
Current 8,594 4,120 29,237 10,170
Deferred 7,151 19,765 31,820 41,984
--------- --------- --------- ---------
Income taxes 15,745 23,885 61,057 52,154
--------- --------- --------- ---------
Net income $ 28,538 $ 42,120 $ 103,962 $ 94,693
--------- --------- --------- ---------
Earnings per share:
Basic $ .28 $ .42 $ 1.03 $ .97
--------- --------- --------- ---------
Diluted $ .27 $ .38 $ .96 $ .87
--------- --------- --------- ---------
Weighted average number of shares outstanding:
Basic 100,788 99,637 100,811 97,303
--------- --------- --------- ---------
Diluted 111,826 115,577 112,969 113,243
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
CAPITAL STOCK IN EXCESS OTHER TOTAL
----------------------- OF PAR COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
SHARES PAR VALUE VALUE INCOME EARNINGS STOCK EQUITY
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 95,225 $ 9,523 $ 309,388 $ 4,448 $ 216,832 $ (3,164) $ 537,027
--------- --------- --------- --------- --------- --------- ---------
Comprehensive income:
Net income 94,693 94,693
Translation adjustment (476) (476)
Unrealized gain on marketable
securities, net 12,798 12,798
--------- --------- --------- --------- --------- --------- ---------
Total comprehensive income -- -- -- 12,322 94,693 -- 107,015
--------- --------- --------- --------- --------- --------- ---------
Issuance of common shares for
stock options exercised 4,515 451 26,542 26,993
Issuance of common shares for
warrants exercised 1,500 150 8,100 8,250
Reclassification of pre-quasi-
reorganization tax benefit (729) 729 --
Tax benefit on stock option
deductions 48,558 48,558
--------- --------- --------- --------- --------- --------- ---------
Subtotal 6,015 601 82,471 -- 729 -- 83,801
--------- --------- --------- --------- --------- --------- ---------
Balances, September 30, 1997 101,240 $ 10,124 $ 391,859 $ 16,770 $ 312,254 $ (3,164) $ 727,843
--------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 1997 101,325 $ 10,133 $ 400,120 $ 6,670 $ 353,581 $ (3,164) $ 767,340
--------- --------- --------- --------- --------- --------- ---------
Comprehensive income:
Net Income 103,962 103,962
Translation adjustment (3,665) (3,665)
Unrealized loss on marketable
securities, net (12,103) (12,103)
--------- --------- --------- --------- --------- --------- ---------
Total comprehensive income -- -- -- (15,768) 103,962 -- 88,194
--------- --------- --------- --------- --------- --------- ---------
Issuance of common shares for
stock options exercised 88 8 582 590
Reduction of tax benefit on stock
option deductions (3,889) (3,889)
Return and retirement of common
shares held in escrow in
connection with Adcor acquisition (53) (5) (995) (1,000)
Warrants issued in connection with
acquisition 1,451 1,451
Conversion of 5% Notes 2 2
Repurchase of common shares (1,653) (1,653)
--------- --------- --------- --------- --------- --------- ---------
Subtotal 35 3 (2,849) -- -- (1,653) (4,499)
--------- --------- --------- --------- --------- --------- ---------
Balances, September 30, 1998 101,360 $ 10,136 $ 397,271 $ (9,098) $ 457,543 $ (4,817) $ 851,035
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 226,365 $ 151,094
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale (1,915) (4,803)
Exercise of warrants -- 9,417
Cash paid for acquisitions, net (28,208) (55,634)
Cash received from disposition of long-term assets and business 37,466 4,642
Capital expenditures (228,492) (233,185)
Investment in affiliates (1,952) --
--------- ---------
Net cash used for investing activities (223,101) (279,563)
--------- ---------
Cash flows from financing activities:
Increase in restricted cash (22) (24)
Decrease in long-term borrowings, net (10,636) (19,231)
Increase in short-term borrowings, net 6,571 30,359
Common stock and treasury stock transactions (1,063) 35,131
--------- ---------
Net cash (used for) provided by financing activities (5,150) 46,235
--------- ---------
Net decrease in cash and cash equivalents (1,886) (82,234)
Cash and cash equivalents, beginning of period 5,623 86,153
--------- ---------
Cash and cash equivalents, end of period $ 3,737 $ 3,919
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The unaudited condensed consolidated financial statements of Nabors
Industries, Inc. (collectively with its subsidiaries, the "Company") are
prepared in conformity with generally accepted accounting principles ("GAAP"),
but do not purport to be a complete presentation inasmuch as all note
disclosures required by GAAP are not included. Reference is made to the
Company's 1997 Annual Report on Form 10-K for additional note disclosures.
In the opinion of management, the condensed consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
as of September 30, 1998, and the results of its operations, its changes in
stockholders' equity and its cash flows for the periods ended September 30, 1998
and 1997. Interim results for the nine months ended September 30, 1998 are not
necessarily indicative of results which will be realized for the full year
ending December 31, 1998.
Fiscal Year Change
The Company changed its fiscal year end from September 30 to December
31, effective for the fiscal year beginning January 1, 1998. The three month
transition period from October 1, 1997 through December 31, 1997 (the
"Transition Period") preceded the start of the new fiscal year period. The
condensed consolidated financial statements for the three months and nine months
ended September 30, 1998 reflect the results of the Company for the third
quarter and first nine months of the new fiscal year.
Depreciation Change
The Company provides for the depreciation of its drilling rigs using
the units-of-production method, after provision for salvage value. When a rig is
not operating, the Company provides for a depreciation charge using the
straight-line method over an assumed depreciable life of 20 years. Effective
April 1, 1998, the Company changed the estimated depreciable lives of its
operating rigs from 3,800 days to 4,200 days to better reflect the useful lives
of these assets. The effect of this change increased net income by $.01 and $.02
per diluted share for the three months and nine months ended September 30, 1998,
respectively.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") Reporting Comprehensive Income, at the beginning of fiscal year
1998. SFAS 130 establishes standards for reporting and presentation of
comprehensive income and its components. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. In accordance with the
provisions of SFAS 130, the Company has presented the components of
comprehensive income in its condensed consolidated statements of changes in
stockholders' equity.
6
<PAGE> 8
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), Earnings Per Share, at the beginning of the Transition Period.
Under the provisions of SFAS 128, primary earnings per share and fully diluted
earnings per share are replaced by basic earnings per share and diluted earnings
per share. In accordance with SFAS 128, all prior period earnings per share
amounts presented have been restated.
Basic earnings per share for all periods presented equal net income
divided by the weighted average number of shares of common stock ("Shares")
outstanding during the period, excluding Shares held in treasury. Diluted
earnings per share for all periods presented reflect the assumed conversion of
the aggregate principal amount of the $172.5 million, 5% Convertible
Subordinated Notes due 2006, issued on May 28, 1996 (the "5% Notes") from the
date of issuance. As a result of the assumed conversion, net income is adjusted
to add back approximately $1.4 million per quarter for all periods presented,
representing interest expense related to the 5% Notes on an after tax basis.
This adjusted net income is divided by the sum of: (1) the weighted average
number of Shares outstanding used for the basic computation, (2) the net effect
of dilutive stock options and warrants and (3) 9.5 million Shares assumed to be
issued on conversion of the 5% Notes.
NOTE 2 ACQUISITIONS AND DISPOSITIONS
During May 1998, the Company completed the acquisitions of the stock of
New Prospect Drilling Company ("New Prospect") and certain assets of Can-Tex
Drilling & Exploration, Ltd. ("Can-Tex") for approximately $28.0 million in cash
and the issuance of warrants to purchase 200,000 Shares, which were valued at
their estimated fair market value (Note 3). The New Prospect fleet consisted of
six rigs and other equipment located in Arkansas and Oklahoma, and the Can-Tex
fleet consisted of seven rigs and other equipment located in Alberta, Canada.
The Company accounted for these acquisitions under the purchase method of
accounting; accordingly, the total purchase price was allocated to net assets
based on their estimated fair values and the acquired company's operations have
been included in the condensed consolidated financial statements of the Company
commencing on the effective date of the acquisition.
During January 1998, the Company completed the sale of all of the
capital stock of its wholly owned subsidiary, J.W. Gibson Well Service Company
("Gibson"), to a subsidiary of Key Energy Group, Inc. ("Key"). The assets of
Gibson consisted of 74 active well servicing and workover rigs, associated
auxiliary equipment, trucks, inventory, and several yards and related
facilities. As consideration for the sale of Gibson, the Company received
approximately $20.0 million plus the value of Gibson's working capital in cash,
100,000 shares of Key common stock and 265,000 warrants to acquire common stock
of Key at an exercise price of $18.00 per share. As a result of the sale, the
Company recorded a pre-tax gain of approximately $16.0 million.
NOTE 3 CAPITAL STOCK
During the nine months ended September 30, 1998, options to acquire
88,095 Shares were exercised at prices ranging from $1.13 to $17.00 per Share.
During July 1998, the Company repurchased 100,000 Shares in the open
market at a cost of $1.7 million, or at an average cost of $16.53 per share.
During May 1998, the Company issued warrants to purchase 200,000 Shares
at an exercise price of $30.00 per share. The warrants were issued in connection
with the New Prospect acquisition (Note 2), and are exercisable until April 30,
2003.
7
<PAGE> 9
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During March 1998, 53,333 Shares that had been held in escrow in
connection with the Company's acquisition of Adcor-Nicklos Drilling Company in
January 1997 were returned to the Company and retired.
NOTE 4 INCOME TAXES
The effective tax rate during the nine months ended September 30, 1998
was 37%, as compared to an effective tax rate of 36% for the prior year period.
NOTE 5 COMMITMENTS AND CONTINGENCIES
Capital Expenditures
As of September 30, 1998, the Company had capital expenditure purchase
commitments outstanding for drilling equipment of approximately $33.0 million.
Contingencies
The Company is a defendant or otherwise involved in a number of
lawsuits in the ordinary course of its business. In the opinion of management,
the Company's ultimate liability with respect to these pending lawsuits is not
expected to have a significant or material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 6 SUBSEQUENT EVENTS
During October 1998, the Company executed a definitive agreement with
Bayard Drilling Technologies, Inc. ("Bayard"), pursuant to which a wholly owned,
recently created, special purpose subsidiary of the Company will merge into
Bayard. Pursuant to the merger, each of the approximately 18.2 million shares of
Bayard will be exchanged for 0.375 Shares of the Company and $0.30 per share in
cash. Approximately $120.0 million of Bayard debt will remain outstanding
immediately following the merger, which the Company does not intend to
guarantee. The merger, which is subject to the approval of Bayard's shareholders
and the customary regulatory approvals, will be accounted for under the purchase
method of accounting and is expected to close in December 1998 or January 1999.
Bayard owns and operates 87 drilling rigs, 73 of which are actively marketed.
The majority of the rigs are located in the mid-continent region of the United
States and South Texas with the balance of the fleet located throughout East
Texas and Louisiana. In addition, Bayard has a significant inventory of new
component equipment including drill pipe, engines and high horsepower mud pumps.
Bayard also owns and operates a sizeable fleet of oilfield hauling equipment.
On October 30, 1998, the Company issued a press release indicating it
had made a proposal to the Board of Directors of Pool Energy Services Co.
("Pool") to acquire all of the outstanding shares of Pool for consideration
equal to 0.481 Nabors Shares and $6.125 in cash for each outstanding share of
Pool. The proposal implies a value of $14.72 per Pool share based on Nabors
closing price of $17.875 on October 27, 1998. The proposed merger transaction
would have a total value of approximately $486 million, including assumed debt,
net of cash acquired. The matter is in the preliminary stages, and there is no
assurance that such proposed transaction will occur or, if it does occur, that
the terms of such transaction would not be materially different from those
outlined in the Company's proposal.
8
<PAGE> 10
Report of Independent Accountants
To the Stockholders and Board of Directors
of Nabors Industries, Inc.
We have reviewed the accompanying condensed consolidated financial statements of
Nabors Industries, Inc. and Subsidiaries as of September 30, 1998 and for the
nine months then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements for them to be in conformity with
generally accepted accounting principles.
PricewaterhouseCoopers LLP
Houston, Texas
October 30, 1998
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1998 Compared to Three Months
and Nine Months Ended September 30, 1997
This discussion covers the three months and nine months ended September
30, 1998, which are the third quarter and first nine months, respectively, of
the new fiscal year that began January 1, 1998. The Company changed its fiscal
year end from September 30 to December 31, effective for the fiscal year
beginning January 1, 1998.
Company revenues for the third quarter of fiscal 1998 (the "Current
Quarter") totaled $224.2 million, representing an $81.4 million, or 27%,
decrease as compared to the prior year period. Current Quarter operating income
and net income totaled $45.1 million and $28.5 million ($.27 per diluted share),
respectively, representing decreases of 22% and 32% compared to the prior year
period. Revenues for the first nine months of fiscal 1998 (the "Current Period")
totaled $759.9 million, representing a $52.3 million, or 6%, decrease as
compared to the prior year period. Operating income and net income for the
Current Period totaled $150.9 million and $104.0 million ($.96 per diluted
share), respectively, representing increases of 15% and 10% compared to the
prior year period.
Revenues for the Company's US Lower 48, Canadian and Gulf of Mexico
operations were lower than the prior year periods due to continued lower levels
of activity. The significant decline in crude oil prices since the fourth
quarter of 1997 has resulted in a reduction in the demand for drilling and
workover services in most of the Company's areas of operation. During the
Current Quarter and Current Period, the number of rigs operating in the US Lower
48 declined by 83 rigs and 49 rigs, respectively, as compared to the prior year
periods. Fewer rigs operating in Canada and continued lower demand for the
Company's platform workover rigs in the Gulf of Mexico further reduced revenues
as compared to the prior year periods. Additionally, average dayrates in the US
Lower 48 and for the Company's platform workover rigs in the Gulf of Mexico have
declined during the Current Quarter as compared to the prior year period.
Average dayrates for the Current Period, however, remain higher than the prior
year period for virtually all of the Company's operating areas. If the weakness
in crude oil prices deepens or continues, it is possible there will be further
deterioration in rig utilization and rig dayrates in the US Lower 48, as well as
in the Company's other areas of operation.
The following tables set forth certain financial information with
respect to the Company by geographical area:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 INCREASE (DECREASE) 1998 1997 INCREASE (DECREASE)
--------- --------- ------------------- --------- --------- -------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
North America $ 169,644 $ 258,542 $ (88,898) (34%) $ 600,809 $ 678,670 $ (77,861) (11%)
International 54,571 47,090 7,481 16% 159,108 133,556 25,552 19%
--------- --------- --------- --------- --------- ---------
Total revenues 224,215 305,632 (81,417) (27%) 759,917 812,226 (52,309) (6%)
--------- --------- --------- --------- --------- ---------
Operating income:
North America 32,853 51,643 (18,790) (36%) 121,452 113,235 8,217 7%
International 15,823 10,522 5,301 50% 40,171 29,302 10,869 37%
Corporate expenses (3,571) (4,411) 840 19% (10,752) (11,388) 636 6%
--------- --------- --------- --------- --------- ---------
Total operating income $ 45,105 $ 57,754 $ (12,649) (22%) $ 150,871 $ 131,149 $ 19,722 15%
--------- --------- --------- --------- --------- ---------
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
---------------------- -------------------- --------------------- ---------------------
RIG RIG RIG RIG RIG RIG RIG RIG
Rig activity(1) : YEARS(2) UTILIZATION YEARS(2) UTILIZATION YEARS(2) UTILIZATION YEARS(2) UTILIZATION
-------- ------------- -------- ----------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America 158.7 42% 250.9 70% 184.8 49% 235.5 66%
International 27.0 58% 30.8 59% 29.0 61% 31.8 61%
-------- -------- -------- --------
Total rig activity 185.7 43% 281.7 69% 213.8 51% 267.3 66%
-------- -------- -------- --------
</TABLE>
(1) Excludes labor contracts and Gibson workover and well servicing
rigs, which were sold in January 1998.
(2) Rig years represents a measure of the number of equivalent rigs
operating during a given period. For example, one rig operating
182.5 days during a 365-day period represents 0.5 rig years.
North America. North America revenues totaled $169.6 million and $600.8
million during the Current Quarter and Current Period, respectively,
representing a 34% and 11% decrease, respectively, as compared to the prior year
periods. Equivalent North America rig years decreased during the Current Quarter
and Current Period to 158.7 years and 184.8 years, respectively, as compared to
250.9 years and 235.5 years during the prior year periods. US Lower 48, Canada
and Gulf of Mexico operation revenues decreased during both the Current Quarter
and Current Period. These decreases were partially offset during the current
year periods by increased revenues in Alaska. The Alaska drilling operation
continued to perform at high levels during the Current Quarter and Current
Period as a result of increased equivalent rig years and improved dayrates over
the prior year periods. Revenues for Peak Oilfield Services, the Company's
Alaskan construction and logistics joint venture, were lower during the Current
Quarter, but higher during the Current Period based on levels of activity. US
Lower 48 revenues decreased during the Current Quarter and Current Period as a
result of a decline in equivalent rig years associated with decreased demand for
contract drilling services, resulting from the significant decline in crude oil
prices. Additionally, the Company sold Gibson, its land workover and well
servicing operation, during January 1998. Also contributing to the revenue
decline in the US Lower 48 were lower average dayrates during the Current
Quarter, although average dayrates remained higher during the Current Period
compared to the prior year. The decline in equivalent rig years during both the
Current Quarter and Current Period has been more prevalent for the Company's
shallower mechanical rig fleet, however, all rig categories were adversely
impacted. The Company's deep-drilling, SCR rigs typically command higher
dayrates and these rigs represented a larger percentage of the Company's working
rigs in the US Lower 48 during both the Current Quarter and Current Period as
compared to the prior year periods. Revenues for the Gulf of Mexico operation
were lower during the Current Quarter and Current Period. Lower demand for the
Company's platform workover rigs led to lower equivalent rig years during the
Current Quarter and Current Period and lower average dayrates during the Current
Quarter. During the Current Quarter, these decreases were partially offset by
higher average dayrates for the Company's jackup workover rigs and platform
drilling rigs. During the Current Period, average dayrates exceeded the prior
year period for all classes of rigs operating in the Gulf of Mexico and the
Company had slightly higher equivalent rig years for its jackup workover rigs as
compared to the prior year periods. Canada revenues decreased for the Current
Quarter and Current Period as a result of a decline in drilling activity
associated with decreased demand. Average dayrates in Canada, however, remained
higher during both the Current Quarter and Current Period as compared to the
prior year periods.
International. International revenues totaled $54.6 million and $159.1
million during the Current Quarter and Current Period, respectively,
representing a 16% and a 19% increase, respectively, over the prior year
periods. Equivalent international rig years, excluding labor contracts,
decreased during the Current Quarter and Current Period to 27.0 years and 29.0
years, respectively, as compared to 30.8 years and 31.8 years during the prior
year periods. Middle Eastern revenues increased during the Current Quarter as a
result of increased drilling activity in Yemen and the United Arab Emirates.
During the Current Period, increased rental activity and higher dayrates in
Saudi Arabia, as well as increased drilling activity in Yemen and the United
Arab Emirates, contributed to the improved results. Middle Eastern revenues were
negatively impacted during the Current Period, however, by fewer operating days
for the Ocean Master VIII, a jackup drilling rig that returned to work in the
Persian Gulf during May 1998. Africa revenues increased during the Current
Quarter and Current Period as a result of new one-rig contracts in Gabon and
Mozambique, which commenced during December 1997 and July 1998, respectively.
South and Central American revenues were relatively flat during the Current
Quarter and Current Period as the decline in drilling activity in Venezuela was
offset by a new contract for one rig in
11
<PAGE> 13
Colombia, as well as higher dayrates for a platform drilling rig operating off
the coast of Trinidad. International revenues also benefited from new contracts
in Kazakhstan and Turkmenistan.
The following table sets forth selected consolidated financial
information of the Company expressed as a percentage of total operating
revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Direct costs 62.1% 68.9% 64.2% 70.8%
General and administrative expenses 8.3% 5.9% 7.7% 6.7%
Depreciation and amortization 9.5% 6.3% 8.2% 6.4%
------ ------ ------ ------
Operating expenses 79.9% 81.1% 80.1% 83.9%
------ ------ ------ ------
Operating income 20.1% 18.9% 19.9% 16.1%
Other (expense) income (0.4%) 2.7% 1.8% 2.0%
------ ------ ------ ------
Income before income taxes 19.7% 21.6% 21.7% 18.1%
Income taxes 7.0% 7.8% 8.0% 6.4%
------ ------ ------ ------
Net income 12.7% 13.8% 13.7% 11.7%
------ ------ ------ ------
</TABLE>
Direct costs as a percentage of revenues decreased to 62% and 64%
during the Current Quarter and Current Period, respectively, as compared to 69%
and 71% during the prior year periods. The resulting increase in the gross
margin percentage during the Current Quarter and Current Period is the result of
improved margins for essentially all of the Company's operations and an
increased percentage of the Company's revenues being generated by the Company's
more profitable areas of operation. During the Current Quarter, the Company
benefited from cost cutting efforts in the US Lower 48 as well as higher margins
associated with increased average dayrates in Alaska, Canada and several
international areas. During the Current Period, increased average dayrates in
all of the Company's areas of operations improved the gross margin percentage.
The increase in US Lower 48 margins during the Current Period were due in part
to an increased percentage of the Company's operating rigs being of the
deep-drilling, SCR type as compared to the prior year period. Additionally, a
lower percentage of the Company's revenues were derived from the US Lower 48
operation during both the Current Quarter and Current Period. Contracts in the
US Lower 48 generally earn a lower gross margin percentage than Gulf of Mexico,
Alaska and international contracts. General and administrative expenses as a
percentage of revenues increased during the Current Quarter and Current Period
due to the decline in revenues for the US Lower 48 operation as these expenses
were spread over a smaller revenue base. Depreciation expense as a percentage of
revenues increased during the Current Quarter and Current Period as a result of
lower revenues, significant capital expenditures and a number of acquisitions
completed during 1997 and 1998.
Other income decreased during the Current Period as compared to the
prior year period. During the Current Period, an approximate $16.0 million
pre-tax gain was recognized on the sale of the Gibson operation. Additionally,
gains on physical damage insurance claims amounted to approximately $8.0 million
during the Current Period. During the prior year period other income consisted
primarily of realized and unrealized gains on marketable securities, gains on
the exercise of warrants, and certain gains associated with the disposition of
the Company's UK North Sea subsidiary.
The effective tax rate during the Current Period was 37%, as compared
to an effective tax rate of 36% for the prior year period.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash from operations and has
substantial borrowing capacity under various credit facility arrangements.
Additionally, the Company has access to public debt and equity capital markets.
The Company's senior unsecured debt rating as provided by Moody's Investor
Service is "A3". This rating was recently confirmed in conjunction with the
announcement by the Company that it had executed a definitive merger agreement
with Bayard Drilling Technologies, Inc. ("Bayard").
The Company had working capital of $13.3 million as of September 30,
1998, representing a $49.3 million decrease as compared to December 31, 1997.
The decrease in working capital is primarily attributable to a $62.9 million
decrease in accounts receivable resulting from the decline in revenues for the
US Lower 48 operation during the Current Quarter as compared with the quarter
ended December 31, 1997. In addition, the Company has been funding its entire
capital expenditures program, including new construction and enhancement capital
expenditures, as well as acquisitions of companies, with cash generated from
operations. Total capital expenditures and acquisitions amounted to $265.5
million during the Current Period, with sustaining capital expenditures
amounting to approximately 30% of this total. Marketable securities decreased
during the Current Period as a result of declines in market prices for
essentially all of the marketable equity securities held by the Company. The
Company's ratio of funded debt to funded debt plus stockholders' equity,
commonly referred to as the debt to capital ratio, was 0.257:1 as of September
30, 1998 as compared to 0.273:1 as of December 31, 1997. The improvement in the
debt to capital ratio is the result of increased stockholders' equity resulting
primarily from the Company's earnings.
Net cash provided by operating activities totaled $226.4 million during
the Current Period, compared to $151.1 million during the prior year period.
During the Current Period and prior year period, net income was increased for
non-cash items such as depreciation and deferred taxes. During the Current
Period, cash was provided from changes in the Company's working capital
accounts, while changes in the Company's working capital accounts resulted in a
use of cash in the prior year period.
Net cash used for investing activities totaled $223.1 million during
the Current Period compared to $279.6 million during the prior year period. Cash
used for capital expenditures and acquisitions represented the primary use of
cash during both the Current Period and the prior year period. During the
Current Period, cash was provided from the disposition of long-term assets and
business, primarily the sale of Gibson.
Financing activities used cash totaling $5.1 million during the Current
Period, but provided cash of $46.2 million during the prior year period. During
the Current Period and prior year period, cash was used to reduce long-term
obligations and cash was provided by short-term borrowings. During the prior
year period, cash was provided by common stock transactions, primarily the
exercise of stock options.
The Company's cash and cash equivalents and investments in short-term
marketable securities totaled $12.8 million as of September 30, 1998. In
addition, the Company had long-term investments in marketable securities of $9.3
million. The Company currently has credit facility arrangements with various
banks totaling $253.3 million. As of September 30, 1998, remaining availability,
after borrowings on the facilities and outstanding letters of credit, totaled
approximately $183.1 million.
The Company has a universal shelf registration statement on Form S-3
filed with the Securities and Exchange Commission to allow the Company to offer,
from time to time, up to $300.0 million in debt securities, preferred stock,
common stock, depository shares or warrants and for secondary sales not
involving the Company of up to $50.0 million.
As of September 30, 1998, the Company had capital expenditure purchase
commitments outstanding for drilling equipment of approximately $33.0 million.
During October 1998, the Company executed a definitive agreement with
Bayard, pursuant to which a wholly owned, recently created, special purpose
subsidiary of the Company will merge into Bayard. Pursuant to the merger, each
of the approximately 18.2 million shares of Bayard will be exchanged for 0.375
Shares of the Company and $0.30 per
13
<PAGE> 15
share in cash. Approximately $120.0 million of Bayard debt will remain
outstanding immediately following the merger, which the Company does not intend
to guarantee. The merger, which is subject to the approval of Bayard's
shareholders and the customary regulatory approvals, will be accounted for under
the purchase method of accounting and is expected to close in December 1998 or
January 1999.
The current cash and cash equivalents, short-term investments, credit
facility position, and projected cash flow generated from current operations,
are expected to adequately finance the Company's sustaining capital and debt
service requirements for the next twelve months.
YEAR 2000 ISSUE
A number of computer programs and other equipment with embedded chips
or processors ("Systems") use two digits rather than four digits to define the
applicable year. Any Systems that are date sensitive may recognize a date of
"00" as the year 1900 rather than the year 2000. This could result in
miscalculations or System failures causing disruptions of operations, as well as
potentially exposing the Company to third party liability. This issue is
commonly referred to as the year 2000 problem ("Y2K").
The Company has initiated a Y2K compliance program to ensure that all
of the critical Systems and processes that are under its direct control remain
functional. The Company has engaged an outside consultant to assist in the
management of its Y2K compliance program, which will focus on the Company's
Systems as well as the Systems of key third party service providers and product
suppliers. The first phase of the program consists of inventorying or
identifying all Systems. The identified Systems will then be prioritized and all
critical Systems will be assessed for Y2K compliance. Systems will be remediated
or replaced as necessary and a contingency plan will be developed.
The Company is currently in the inventory and assessment phases of the
program and anticipates completion of the entire program well in advance of the
year 2000. Although the Company's Y2K compliance program will attempt to
determine the Y2K readiness of key third parties, there may be certain Systems
or processes relied on by the Company that are outside of its control, and there
can be no assurance that these Systems or processes will remain functional.
Non-compliance by key third parties could have a material effect on the
operations of the Company. To date, the costs incurred by the Company that
relate solely to the Y2K compliance program have been minimal, although upgrades
to a number of the Company's Systems in the ordinary course of business have had
the added benefit of resolving certain Y2K compliance issues. In the opinion of
management, the costs to complete the Company's Y2K compliance program will not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
OTHER MATTERS
This Quarterly Report on Form 10-Q includes certain statements that may
be deemed to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that the Company or its management "expects", "projects",
"believes" or "anticipates" will or may occur in the future, including such
matters as future capital expenditures and investments in the acquisition and
refurbishment of rigs (including the amount and nature thereof), repayment of
debt, expansion and other development trends of the contract drilling industry,
business strategies, expansion and growth of operations and other such matters
are forward-looking statements. These statements are based on certain
assumptions and analyses made by management of the Company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of risks and
uncertainties, including those discussed in this report, general economic and
business conditions, prices of crude oil and natural gas, foreign exchange and
currency fluctuations, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company. Any such
statements are not guarantees of future performance, and actual results or
developments may differ materially from those projected in the forward-looking
statements.
The Company's 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 oil or
natural
14
<PAGE> 16
gas, which could have a material impact on exploration, development and
production activities, also could materially affect the Company's financial
condition, results of operations and cash flows.
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
During October 1998, the Company executed a definitive
agreement with Bayard, pursuant to which a wholly owned, recently created,
special purpose subsidiary of the Company will merge into Bayard. Pursuant to
the merger, each of the approximately 18.2 million shares of Bayard will be
exchanged for 0.375 Shares of the Company and $0.30 per share in cash.
Approximately $120.0 million of Bayard debt will remain outstanding immediately
following the merger, which the Company does not intend to guarantee. The
merger, which is subject to the approval of Bayard's shareholders and the
customary regulatory approvals, will be accounted for under the purchase method
of accounting and is expected to close in December 1998 or January 1999.
On October 30, 1998, the Company issued a press release indicating it
had made a proposal to the Board of Directors of Pool Energy Services Co.
("Pool") to acquire all of the outstanding shares of Pool for consideration
equal to 0.481 Nabors Shares and $6.125 in cash for each outstanding share of
Pool. The proposal implies a value of $14.72 per Pool share based on Nabors
closing price of $17.875 on October 27, 1998. The proposed merger transaction
would have a total value of approximately $486 million, including assumed
debt, net of cash acquired. The matter is in the preliminary stages, and there
is no assurance that such proposed transaction will occur or, if it does occur,
that the terms of such transaction would not be materially different from those
outlined in the Company's proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of October 19,
1998, among Nabors Industries, Inc., Nabors Acquisition
Corp. VII and Bayard Drilling Technologies, Inc.
(incorporated by reference to Exhibit 2.1 of the form 8-K
filed by Bayard Drilling Technologies, Inc. (Commission
File No. 1-3553) with the Securities and Exchange
Commission on October 21, 1998).
11 Statement Re: Computation of Per Share Earnings
15.1 Awareness Letter of Independent Accountants
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 30,
1998, dated October 12, 1998, with respect to its proposal to acquire the
outstanding shares of Pool, discussed in the second paragraph of Part II, Item
5, above.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NABORS INDUSTRIES, INC.
/s/ Anthony G. Petrello
-----------------------------------------------
Anthony G. Petrello
President and Chief Operating Officer
/s/ Bruce P. Koch
-----------------------------------------------
Bruce P. Koch
Vice President - Finance (principal financial
and accounting officer)
Dated: November 3, 1998
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTI0N
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 19,
1998, among Nabors Industries, Inc., Nabors Acquisition
Corp. VII and Bayard Drilling Technologies, Inc.
(incorporated by reference to Exhibit 2.1 of the form 8-K
filed by Bayard Drilling Technologies, Inc. (Commission
File No. 1-3553) with the Securities and Exchange
Commission on October 21, 1998).
11 Statement Re: Computation of Per Share Earnings
15.1 Awareness Letter of Independent Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding 100,788 99,637 100,811 97,303
-------- -------- -------- --------
Net income $ 28,538 $ 42,120 $103,962 $ 94,693
-------- -------- -------- --------
Per share amount $ .28 $ .42 $ 1.03 $ .97
-------- -------- -------- --------
Diluted:
Weighted average number of shares outstanding 100,788 99,637 100,811 97,303
Net effect of dilutive stock options and warrants-based
on the treasury stock method using
average market price 1,521 6,423 2,641 6,423
Assumed conversion of 5% convertible notes 9,517 9,517 9,517 9,517
-------- -------- -------- --------
Total 111,826 115,577 112,969 113,243
-------- -------- -------- --------
Net income $ 28,538 $ 42,120 $103,962 $ 94,693
Add 5% convertible note interest, net
of tax effect 1,358 1,402 4,075 4,206
-------- -------- -------- --------
Total $ 29,896 $ 43,522 $108,037 $ 98,899
-------- -------- -------- --------
Per share amount $ .27 $ .38 $ .96 $ .87
-------- -------- -------- --------
</TABLE>
<PAGE> 1
EXHIBIT 15.1
PricewaterhouseCoopers LLP Awareness Letter
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Nabors Industries, Inc. and Subsidiaries
Registration Statements on Form S-8 and Form S-3
We are aware that our report dated October 30, 1998 on our review of the interim
condensed consolidated financial information of Nabors Industries, Inc. and
Subsidiaries for the nine months ended September 30, 1998 and included in this
Form 10-Q is incorporated by reference in the Company's registration statements
on Form S-8 (Registration Numbers 333-11313, 33-87324, 33-87322, 33-47521,
33-45097, 33-39316, and 333-57129) and on Form S-3 (Registration Numbers
333-20501 and 333-25233). Pursuant to Rule 436 (c) under the Securities Act of
1933, this report should not be considered a part of the registration statement
prepared or certified by us within the meanings of Section 7 and 11 of the Act.
PricewaterhouseCoopers LLP
Houston, Texas
October 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,737
<SECURITIES> 9,062
<RECEIVABLES> 180,136
<ALLOWANCES> 0
<INVENTORY> 28,204
<CURRENT-ASSETS> 250,764
<PP&E> 1,507,108
<DEPRECIATION> 386,843
<TOTAL-ASSETS> 1,411,950
<CURRENT-LIABILITIES> 237,456
<BONDS> 217,431
0
0
<COMMON> 10,136
<OTHER-SE> 840,899
<TOTAL-LIABILITY-AND-EQUITY> 1,411,950
<SALES> 759,917
<TOTAL-REVENUES> 759,917
<CGS> 487,801
<TOTAL-COSTS> 487,801
<OTHER-EXPENSES> 121,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,839
<INCOME-PRETAX> 165,019
<INCOME-TAX> 61,057
<INCOME-CONTINUING> 103,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,962
<EPS-PRIMARY> 1.03
<EPS-DILUTED> .96
</TABLE>
