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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-9245
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NABORS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-0711613
(State of incorporation) (I.R.S. Employer Identification No.)
515 WEST GREENS ROAD, SUITE 1200
HOUSTON, TEXAS 77067
(Address of principal executive offices) (Zip Code)
(281) 874-0035
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each
Title of each class exchange on which registered
COMMON STOCK, $.10 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE, INC.
Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this Form 10-K, 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. [ X ]
The aggregate market value on March 15, 1999 of voting stock held by
non-affiliates of the registrant was approximately $1,319 million.
The number of shares of common stock, par value $.10 per share, outstanding as
of March 15, 1999 was 100,792,426.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Specified portions of the 1998 Annual Report to Stockholders
(Parts I, II and IV)
Specified portions of the 1999 Notice of Annual Meeting of Stockholders
and Proxy Statement (Part III)
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FORWARD-LOOKING STATEMENTS
The statements in this document and the documents incorporated by reference that
relate to matters that are not historical facts are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. When used in this document and the
documents incorporated by reference, words such as "anticipate," "believe,"
"expect," "plan," "intend," "estimate," "project," "will," "could," "may,"
"predict" and similar expressions are intended to identify forward-looking
statements. Further events and actual results may differ materially from the
results set forth in or implied in the forward-looking statements. Factors that
might cause such a difference include:
o fluctuations in world-wide prices and demand for oil and gas;
o fluctuations in level of oil and gas exploration and development
activities;
o fluctuations in the demand for contract drilling services;
o the existence of competitors, technological changes and developments
in the industry;
o the existence of operating risks inherent in the contract drilling
industry;
o the existence of regulatory uncertainties, the possibility of
political instability in any of the countries in which Nabors does
business; and
o year 2000 issues and general economic conditions, in addition to the
other matters discussed under "Part II -- Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
PART I
ITEM 1. BUSINESS
Nabors is the largest land drilling contractor in the world, with 400 actively
marketed land rigs as of December 31, 1998. Nabors conducts oil and gas land
drilling operations in the US Lower 48 states, Alaska and Canada, and
internationally, primarily in South and Central America and the Middle East.
Offshore, Nabors markets 25 platform, six jackup and five barge rigs in the
Gulf of Mexico and several international markets. To supplement our primary
business, we offer a number of ancillary well-site services, including oilfield
management, engineering, transportation, construction, maintenance, well logging
and other support services, in selected domestic and international markets. In
addition, we manufacture and lease or sell top drives for a broad range of
drilling rig applications and we manufacture and lease or sell rig
instrumentation equipment and rig reporting software.
Nabors' principal executive offices are located at 515 West Greens Road, Suite
1200, Houston, Texas 77067. Our phone number is (281) 874-0035.
BUSINESS STRATEGY
Our business philosophy is to grow and remain profitable in any market
environment, to build a diverse portfolio of market positions that mitigate risk
and create potential for growth, to maintain a conservative and flexible
financial posture and to forge long-term relationships with customers. We have
implemented this philosophy by:
o maintaining a technologically and geographically diverse rig fleet,
enabling us to optimize returns through increased utilization and
increased dayrates;
o increasing revenues from value-added, ancillary well-site products and
services, including top drives, mudlogging, instrumentation systems
and software, pipe rental, and construction and transportation
services, that complement our businesses in existing field locations;
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o upgrading and enhancing the capabilities of our existing rig fleet and
building certain specialized rig equipment such as the MASE(TM),
arctic and other special purpose rigs;
o entering into partnering relationships or alliances with operators as
a preferred contractor in certain domestic and international
locations; and
o making strategic acquisitions to augment our existing rig fleet or to
grow in other related areas, while making divestitures that take
advantage of market conditions in non-strategic business or geographic
markets.
BUSINESS
CONTRACT DRILLING OVERVIEW
Rigs. Our rigs include land-based rigs and offshore platform, jackup and barge
rigs. Drilling rigs come in a wide variety of sizes and capabilities, and may
include specialized equipment, such as top drives, or have design features or
modifications for specialized drilling conditions, such as arctic drilling. The
rigs are classified by their depth capabilities and by whether their power
systems are mechanical or electric. They generally are powered by two to four
large diesel engines. An electric rig differs from a mechanical rig in that it
converts the diesel power into electricity to power the rig. This gives the rig
operator the ability to deliver the same amount of torque at high and low
speeds, permitting more finite control of the primary rig components, including
the drawworks and mud pumps. We believe this electric capability enhances
operating efficiency and safety, reduces drilling time and saves the customer
money, particularly in deeper applications. Because of these advantages, diesel
electric rigs, known in the industry as silicon-controlled rectifier or SCR
rigs, generally are preferred by our customers, and often enjoy higher
utilization and dayrates than similarly sized mechanical rigs.
Nabors' various types of rigs may perform drilling, well servicing (routine
repair and maintenance of mechanical problems) or workover services (major
overhaul or remediation of an existing wellbore and/or plugging and redrilling
the well), depending on the configuration of the individual rig. Each rig is
rated for operations up to a specific depth. The basic types of rigs operated by
Nabors are described below.
o Land Rigs. A land-based drilling rig generally consists of engines, a
drawworks (which hoists and lowers the drill string in and out of the
well), 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. A land-based well servicing rig consists of a mobile carrier,
engine, drawworks and a mast. 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. Typically, land-based drilling and well
servicing rigs can be readily moved between well sites and between
geographic areas of operations.
o 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. Our fleet of
platform rigs includes:
o The Sundowner(R) series of platform workover rigs are self-erecting
(that is, they can be off-loaded with their own crane, rather than
requiring a separate barge and crane to assemble), and are designed to
fit the geometry of nearly any producing platform without major
modifications to either the rig or the platform.
o The Super Sundowner(R) rigs, which are enhanced versions of the
Sundowner(R) rig, and have more powerful mud pump systems and greater
hook load capacities. This enables the rigs to be used in more
rigorous workover, re-entry, side-tracking or horizontal drilling
operations.
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o Minimum Area, Self-Erecting, or MASE(TM), drilling rigs are our latest
generation of modular platform rigs. They represent a smaller and
lighter, full-scale drilling rig patterned after the Super
Sundowner(R).
o API (American Petroleum Institute) drilling rigs have similar
capabilities to the MASE(TM) rigs, but generally come in larger
modules. Unlike the Sundowner(R), Super Sundowner(R) and MASE(TM)
rigs, API rigs are not self-erecting, and require a separate barge
crane to load onto, and off of, the platform.
o We also operate one land rig modified for offshore work for drilling
on mudslide and selected conventional offshore platforms. This rig is
self-erecting and modular.
o Jackup Rigs. Jackup rigs are mobile, self-elevating drilling and workover
platforms equipped with legs that can be lowered to the ocean or lake 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.
Independent leg rigs are better suited for harsher or uneven seabed
conditions. All of our jackup 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' jackup rigs are generally subject to a maximum water
depth of approximately 125 feet, while some of our jackup rigs may drill in
water depths as shallow as 13 feet. The water depth limit of a particular
rig is determined by the length of the rig's legs and 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 on the surface of the water. The hull is then
towed to the new drilling site.
o Barge Rigs. Two of Nabors' barge rigs are full-size drilling units. The
other three are comprised of a self-propelled barge having a covered
structure or substructure and well service or workover equipment. 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 from three to eight feet.
Additional information on the number and location of our rigs can be found below
under the caption "Business --Markets".
Drilling Contracts. Our rigs are employed under individual contracts which
extend either over a stated period of time or the time required to drill a well
or a stated number of wells to a specified depth. On land in the US Lower 48
states and Canada, we typically contract on a single well basis, with extensions
subject to mutual agreement on pricing and other significant terms. Offshore,
and on land in Alaska and international markets, contracts generally provide for
longer terms, usually from one to five years. We generally are awarded drilling
contracts through competitive bidding, although we occasionally enter into
contracts by direct negotiation. Most of our well-to-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. The contract terms and rates may 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.
Drilling contracts provide for compensation on a daywork, footage or turnkey
basis. In each case, we provide the rig and crews. The principal differences
among the types of contract are set forth below.
o Daywork Contracts. A daywork contract generally provides for a basic rate
per day when drilling (the dayrate) and for lower rates when the rig is
moving, or when drilling operations are interrupted or restricted by
equipment breakdowns, actions of the customer or 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.
o Footage Contracts. Under footage contracts we typically run casing and
provide drill bits. We receive payment on the basis of a rate per foot
drilled. The customer continues to provide drilling mud, casing,
cementing and well design expertise. If we drill the well in less time
than was estimated, then we have the opportunity to improve our margins.
If, however, we take longer to drill the well than we
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estimated, our margins will be lower. In footage contracts we bear the cost
of the services and supplies that we provide until the well has been
drilled to the agreed depth. Such contracts therefore require us to make
significant up-front working capital commitments prior to receiving
payment. Footage contracts generally contain greater risks for the
contractor than daywork contracts, but fewer risks than turnkey contracts.
Under footage contracts, the contractor assumes certain risks associated
with loss of hole from fire, blowout and other drilling risks. However,
footage contracts generally protect the contractor from such risks when
unexpected drilling conditions such as abnormal pressure, impenetrable
geologic formation or loss circulation zones are present.
o Turnkey Contracts. In turnkey contracts, we drill a well to a specified
depth for a fixed price regardless of the time required or the problems
encountered in drilling the well. On a turnkey well, we provide technical
expertise and engineering services, as well as most of the equipment
required to complete the well, and we are compensated only when the agreed
scope of work has been satisfied. In addition, we often subcontract for
related services and we manage the drilling process. In turnkey contracts,
we bear the cost of performing the drilling services until the well has
been drilled, and accordingly, such contracts require us to make
significant working capital commitments. We also generally agree to furnish
services such as testing, coring and casing the hole and other services
which are not normally provided by a drilling contractor working under a
daywork contract. If the well is not completed to the specified depth, we
may not receive the turnkey price. Turnkey contracts generally involve a
higher degree of risk to us than daywork and footage contracts because we
assume greater risks (including risk of blowout, loss of hole, stuck drill
pipe, machinery breakdowns, abnormal drilling conditions and risks
associated with subcontractors' services, supplies, cost escalation and
personnel) and bear the cost of unanticipated downhole problems and price
escalation. Generally, however, our agreements limit catastrophic risks
associated with blowout, redrill and pollution to a specific sum. The
customer assumes the risk of losses in excess of the agreed level. If the
well is successfully drilled without undue delay or complication, our
margins under these types of contracts are usually greater than under
daywork and footage contracts.
During fiscal 1998, substantially all of our drilling and workover contracts
were on a daywork basis. Our preferred strategy is to operate drilling and
workover rigs under daywork contracts, because of their lower risk. However, we
continually analyze market conditions, customer requirements, rig demand and the
experience of our personnel to determine how to contract our fleet most
profitably. In periods of low utilization, competitive pressures and customer
demands may require us to consider entering into a larger number of footage or
turnkey drilling contracts. In addition, we may seek alternative accommodations
with certain customers, as a means of ensuring long-term drilling commitments
and healthy customer relations. Because of this, there can be no assurance that
we will not suffer a loss that is not insured as a result of entering into such
higher risk contracts, and any such uninsured loss could have a material adverse
effect on our financial position and results of operations.
MANUFACTURING AND LOGISTICS OVERVIEW
Through various subsidiaries and joint ventures, Nabors provides additional
well-site services that comprise our manufacturing and logistics segment. These
services can be packaged with our contract drilling services or provided on a
stand alone basis to operators or other contractors. They include top drive
rentals and sales, mudlogging services, rig instrumentation equipment rentals
and sales, rig reporting software, construction and maintenance services and rig
transportation services. Sales by these ancillary service providers to other
Nabors companies reduce our costs for similar third-party products and services.
o Top Drives. Our Canrig Drilling Technologies subsidiary manufactures top
drives, which are installed on both onshore and offshore drilling rigs to
improve drilling efficiency. Rigs equipped with top drives enjoy more
finite control and directional orientation than rigs without, and can trip
drill string in and out of the well faster and more safely by handling
preassembled "doubles" and "triples" of pipe. Top drives also allow the
drill string to be simultaneously hoisted and rotated, which provides
better well control and reduces the incidence of stuck pipe, yielding time
and cost savings.
o Mudlogging, Rig Instrumentation and Software. Nabors acquired EPOCH Well
Logging, Inc., a mud logging and rig instrumentation operation, in November
1996. Mudlogging involves the analysis of exhausted drill cuttings to
discern certain information about the presence of hydrocarbons, rates of
penetration and the nature of the formation. EPOCH also offers rig
instrumentation equipment, including sensors, proprietary RIGWATCH(TM)
software and computerized equipment that monitors the real-time performance
of a rig. In
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December 1997, EPOCH acquired C.A.P.E. International, Inc., a small
software concern specializing in daily reporting software for drilling
operations.
o Construction, Transportation and Related Services. Nabors has a 50%
interest in Peak Oilfield Services Company, a general partnership with Cook
Inlet Region, Inc., a leading Alaskan native corporation. Peak Oilfield
Services provides heavy equipment to move drilling rigs, water, other
fluids and construction materials. The partnership also provides
construction and maintenance for roads, pads, facilities, equipment, drill
sites and pipelines. Peak Oilfield Services is a partner to a multi-year
alliance contract to provide maintenance services for the Prudhoe Bay Unit
and has been chosen to coordinate and supply drilling support
transportation services to the unit. Both arrangements are up for renewal
in 1999. Through our investments in other ventures, such as Alaska
Interstate Construction, an Alaska-based company with significant
experience in arctic road and site construction, and Peak USA Energy
Services Ltd., a partnership that provides trucking and oilfield services
in ten states in the Lower 48 States, we have expanded the scope of our
business to other sectors in the oil and gas services industry.
Service Contracts. We provide onshore transportation and support services
through long-term contracts or on a short-term demand basis. Long-term service
contracts may be negotiated or awarded by competitive bidding. Whether provided
on a long-term or short-term basis, equipment and labor are usually billed
separately at specified hourly rates. These hourly rates vary depending upon
numerous factors, including types of equipment and labor, and duration of the
work.
Other. From time to time, we provide drilling engineering and integrated project
management services, ranging from well design and engineering expertise to site
preparation and road construction. We offer these services to help customers
eliminate or reduce management overhead which would otherwise be necessary to
supervise such services. While such services have not been significant in the
past, we are seeking to expand in this area, both domestically and
internationally.
Sundowner(R), MASE TM and RIGWATCH TM are trademarks of the Nabors companies.
MARKETS
Nabors operates in two primary business segments within the oilfield services
industry -- contract drilling and manufacturing and logistics. Within these
segments, we conduct business in the following distinct markets or business
lines:
o Contract Drilling: We provide drilling, workover and related services
on land and offshore in the US Lower 48 states, Canada and Alaska and
in international markets.
o Manufacturing and Logistics: We manufacture and lease or sell top
drives, drilling instrumentation systems and rig reporting software
domestically and internationally; and provide construction and
logistics services in Alaska and the US Lower 48 states.
Additional information regarding the geographic markets in which we operate and
our business segments can be found in Note Thirteen of the Notes to Consolidated
Financial Statements on page 62 and 63 of the Nabors Industries, Inc. 1998
Annual Report to Stockholders ("1998 Annual Report") and is incorporated into
this document by reference.
Contract drilling revenues totaled $872.7 million during calendar 1998,
representing a 14% decrease compared with calendar 1997. Utilization rates for
Nabors' rigs decreased from 66% during calendar 1997 to 48% during 1998.
Equivalent rig years decreased to 204.1 years during 1998 form an average of
268.8 years during 1997. The decrease in revenues and rig activity is primarily
attributable to the decline in drilling activity for our US Lower 48 operation.
These decreases were partially offset by increased revenues for our Alaska and
International operations.
Utilization rates and equivalent rig years are measures of demand for rigs
commonly used in the drilling industry. Utilization rates from period to period
may not be comparable as a measure of activity levels, because the calculation
of utilization does not reflect the impact of changes in the number of rigs
owned during the periods.
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Equivalent rig years (calculated as the number of days rigs are in operation
divided by the number of days in the period) measure the operating volume of
Nabors' rigs.
Manufacturing and logistics revenues were $111.2 million during 1998, as
compared to $126.0 million during 1997, a 12% decrease. Canrig revenues
decreased significantly as a result of a decline in land portable top drive
sales, particularly to the Nabors fleet. This decrease in top drive sales was
somewhat mitigated by the introduction of a top drive rental fleet during the
year. Revenues for Epoch, our drilling operation software and instrumentation
provider, and Peak Oilfield Services, our Alaskan construction and logistics
joint venture, were relatively flat as a result of steady activity levels.
The portion of our revenues generated by our contract drilling segment has been
consistent for the last three full fiscal years, accounting for approximately
90% to 91%, and the remainder of our revenues has also been consistently
accounted for by our manufacturing and logistics segment. Revenues in the
manufacturing and logistics segment include revenues from sales to other Nabors
companies.
Additional information regarding revenues can be found on pages 38 through 42 of
the 1998 Annual Report, under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations".
Additional information regarding the rig fleet can be found on pages 34 and 35
of the 1998 Annual Report, under the caption "Our operations at a glance".
CONTRACT DRILLING
US Lower 48 States. Nabors currently markets approximately 300 land rigs in the
US Lower 48 market.
o 136 of our land drilling rigs in the US Lower 48 states are diesel
electric rigs controlled by a computerized SCR system, and
o 171 are capable of drilling to 15,000 feet or deeper.
In addition, we own 32 portable top drives for use on our rigs, depending on
customer requirements.
Canada. We also have a fleet of 35 rigs in Canada. Fourteen rigs in the fleet
are diesel electric SCR rigs, 14 are equipped with top drives and 14 are capable
of drilling to 15,000 feet or deeper. Many of the rigs in our Canadian fleet are
capable of performing exploratory and development drilling under arctic and
sub-arctic conditions.
Alaska. Nabors owns 12 arctic land drilling and well service rigs on the North
Slope and three land drilling rigs in the Cook Inlet area of South Central
Alaska. Nine of these rigs are SCR rigs, and five are equipped with top drive
units. Ten are capable of performing drilling or workover operations to depths
of 18,000 feet or deeper. One of the North Slope rigs is a coiled tubing
drilling rig owned and operated through a joint venture.
All of the North Slope rigs are designed to operate in severe arctic conditions
and most employ wheel mounted systems engineered by Nabors to permit efficient
movement of the rigs from well to well and over ice or gravel roads. Three of
these rigs are also self-propelled to further facilitate movement and
maneuverability. Several of the rigs have been designed with spacing capability
that allows them to move between reduced well spacing on drilling pads without
disrupting production. In addition, Nabors' arctic rigs generally incorporate
environmental protection features such as dry mud and fluid containment systems.
International. We conduct our international operations primarily through Nabors
Drilling International Limited and its subsidiaries. The International group
actively markets 50 land rigs and one jackup rig. Of these, 35 are SCR rigs, 15
are equipped with top drives, two are slim hole rigs and 27 are capable of
drilling to depths of 15,000 feet or deeper.
o South and Central America. We currently market 20 land drilling rigs
in South and Central America, including 14 in Venezuela, two in
Colombia and four in Bolivia.
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o The Middle East. In the Middle East, Nabors markets 19 land rigs and
one jackup rig. Of the land rigs, seven are in Yemen, five are in
Saudi Arabia and seven are in the United Arab Emirates. The jackup
rig, which was under contract for much of 1998, currently is stacked
in Qatar. In Abu Dhabi, U.A.E., we also provide a crew for one rig
under a labor contract with an oil and gas company.
o Other. In the Commonwealth of Independent States, we market seven
rigs, of which five are located in Kazakhstan and two are located in
Turkmenistan. We participate in a joint venture that operates two of
the rigs in Kazakhstan. The International group also has one rig in
Gabon, Africa, and three rigs stacked in Houston.
Offshore Drilling, Workover and Well Servicing. Nabors currently performs
offshore drilling and offshore workover and well servicing through its Sundowner
and Nabors Offshore subsidiaries. The Offshore group operates a fleet of 33 rigs
including eight Sundowner(R) and seven Super Sundowner(R) platform rigs, three
MASE(TM) platform drilling rigs, five API platform drilling rigs, one land rig
converted to an offshore platform drilling rig, five jackup workover rigs and
three inland barge rigs that offer plugging and abandonment services. Six of the
Super Sundowner(R) rigs, two of the Sundowner(R) rigs and all of the platform
drilling rigs (including the MASE(TM) rigs) are equipped with portable top drive
units to enhance drilling efficiency in sidetrack and horizontal drilling
operations. Ten of our platform rigs are capable of operating at well depths of
up to 20,000 or 25,000 feet.
Fourteen of our platform rigs are specifically designed for workover drilling.
Most of our offshore fleet (25 rigs) operates in the US Gulf of Mexico. We also
have three offshore rigs operating in Mexican waters, and one each in Italy,
Brazil, Cameroon, the Caspian Sea and Trinidad. In addition, other subsidiaries
own three offshore rigs, of which one is a jackup rig located in the Middle East
(discussed under "--International" above) and two are barges chartered to a
third party and operating in the US Gulf of Mexico. We also provide plugging and
abandonment services on the US Gulf Coast.
MANUFACTURING AND LOGISTICS - ADDITIONAL WELL-SITE SERVICES
We manufacture top drives at our Magnolia, Texas facility. We market our top
drives throughout the United States and Canada, and to various international
markets, to customers serving the oil and gas industry. A substantial portion of
our top drive sales are made to other Nabors companies. We also rent top drives
and provide top drive installation, repair and maintenance services to our
customers.
We manufacture our rig instrumentation systems at our Magnolia, Texas facility.
We develop our software out of our Houston, Texas office. We sell or lease
products to customers within the oil and gas industry, domestically and abroad.
We provide mudlogging services within the US Lower 48 states and Alaska.
We also provide site and road construction, rig transportation, fluid hauling
and related oilfield services in Alaska, through our Peak Oilfield Services
joint venture. In the US Lower 48 states, we provide rig transportation and
related services through our Peak USA Energy Services joint venture.
INDUSTRY CONDITIONS
Throughout calendar 1997, Nabors benefited from an increase in the number of its
rigs under contract and improvements in rig pricing associated with the
increased demand for quality drilling and workover rigs. During the fourth
quarter of 1997, an imbalance began to develop in the supply and the demand for
crude oil. Reduced demand was fueled by the Asian recession and two consecutive,
warmer than normal winters in North America. The supply of crude oil increased
as a result of increased production quotas by the Organization of Petroleum
Exporting Countries and renewed production by Iraq. The resulting excess supply
of crude oil caused significant declines in oil prices during calendar 1998.
Crude oil prices averaged $14.38 per barrel during 1998 compared to $20.58 per
barrel during 1997. During the fourth quarter of 1998, crude oil prices averaged
$12.90 per barrel, representing the lowest inflation-adjusted oil prices in
history. Natural gas prices were also lower during the second half of 1998 as
warmer than normal winters in North American during 1997 and 1998 resulted in
weaker demand. Reduced prices for oil and gas led to a sharp decline in the
demand for drilling and workover services as oil and gas companies significantly
reduced capital spending for exploration, development and production activities.
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Nabors' US Lower 48 operation was the first and most severely impacted by the
steadily weakening market. The Baker Hughes US land drilling industry rig count
averaged 699 during 1998 compared to 822 during 1997. The rig count continued to
decline throughout 1998 and was down to 500 rigs by year end. The area next
impacted was our offshore workover rigs operating in the Gulf of Mexico. By the
end of 1998, substantially all of our areas of operation experienced a
deteriorating market outlook. The active US land rig count has continued to
decline subsequent to year end and, if the weakness in oil and gas prices
continues, it is likely that there will be further deterioration in rig
utilization and rig dayrates in the US Lower 48 states, as well as in our other
areas of operation. As a result, we anticipate significantly lower levels of
revenues and profitability for 1999.
The long-term decline in the number of available rigs in our industry continued
during 1998. Industry sources estimate that from its peak in 1982, the supply of
domestic land rigs has fallen by almost 75% as a result of normal attrition,
cannibalization of components to refurbish rigs, the inability of smaller
competitors to raise capital needed to upgrade and modernize rigs and the export
of rigs to international markets. Dayrates continue to be below levels that
would justify the construction of new rigs.
Nabors' revenues, cash flows and earnings are substantially dependent upon, and
affected by, the level of domestic and international oil and gas exploration and
development activity. See "Part II -- Item 7 --Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Decreased oil and
gas prices could adversely affect drilling activity and Nabors' revenues, cash
flows and profitability."
RECENT DEVELOPMENTS
On October 19, 1998, Nabors agreed to acquire Bayard Drilling Technologies,
Inc., a leading provider of contract land drilling services to major and
independent oil and gas companies. As of December 31, 1998, Bayard's fleet
consisted of 87 rigs, of which 69 are capable of drilling to depths of 15,000
feet or deeper and 43 are capable of drilling to depths of 20,000 feet or
deeper. Bayard's rig fleet is currently concentrated in three core operating
regions in the US Lower 48 states -- the Mid-Continent region, the Gulf Coast
region and the South Texas region. The agreement provides for Nabors to issue
approximately 6,140,000 shares of common stock, and pay to Bayard's stockholders
approximately $5.5 million in cash in exchange for all of the outstanding shares
of Bayard. Bayard has approximately $120 million of debt that will remain an
obligation of Bayard after the acquisition. Our acquisition of Bayard is
subject to satisfaction of several closing conditions, and is expected to close
in the second quarter of 1999.
On January 10, 1999, Nabors agreed to acquire Pool Energy Services Co., an
energy services company. Pool's principal business is providing well servicing,
workover, drilling and related transportation services on land and offshore in
the United States and selected international markets. Pool's rig fleet includes
754 US-based land well servicing workover rigs, 32 internationally-based
workover rigs, 29 internationally-based land drilling rigs, 5 US-based land
drilling rigs and 25 offshore rigs. Pool also owns and operates 23 offshore
supply vessels, more than 300 fluid hauling trucks and a large number of fluid
storage tanks. The agreement provides for Nabors to issue approximately 19.3
million shares of common stock in exchange for all of the outstanding shares of
Pool not owned by Nabors prior to the merger. As of December 31, 1998, Pool had
approximately $172.8 million of long-term debt that will remain an obligation of
Pool after the acquisition. Our acquisition of Pool is subject to several
closing conditions, including regulatory approval and the approvals of holders
of at least two-thirds of Pool's outstanding shares.
ENGINEERING DEVELOPMENTS
In recent years, Nabors has been increasingly involved in engineering research
and development with respect to the commercialization of new drilling
technology. We own the rights to several proprietary designs and innovations
which, when applied to our rigs, can substantially reduce the costs of drilling
and working on offshore wells. These proprietary designs are being applied to a
new generation of modular MASE(TM) rigs specifically for drilling. Three
MASE(TM) rigs are presently operational.
Our Canrig subsidiary manufactures and markets electric top drives that are
designed with enhanced safety and drilling efficiency features. This top drive
design includes fixed and portable units that are being utilized in a broad
range of land and offshore applications. We also developed an automated slant
rig, capable of drilling shallow or slim hole wells.
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<PAGE> 10
In 1998, Nabors obtained certain license rights to build and operate drilling
rigs using coiled tubing technology developed by Transocean Offshore. We operate
one rig on the North Slope of Alaska that employs this technology in a joint
venture with Transocean.
Nabors' engineers have obtained new patents during the past year and have patent
applications pending for new technology associated with drilling activities. The
costs associated with our research and development are not material to Nabors
and its subsidiaries, taken together.
CUSTOMERS
Our customers include major oil and gas companies, foreign national oil and gas
companies and independent oil and gas companies. During 1998, one customer (BP
Exploration (Alaska), Inc.) provided approximately 11% of consolidated revenues.
COMPETITIVE CONDITIONS
Although the number of available rigs decreased materially over the past 15
years, the well servicing, workover and drilling industry remains very
competitive. The number of rigs continues to exceed demand in many of our
markets, resulting in strong price competition. Many drilling rigs can be
readily moved from one region to another in response to changes in levels of
activity, which may result in an over supply of rigs in such areas. Many of the
total available contracts are currently awarded on a bid basis, which further
increases competition based on price. The land drilling market is generally more
competitive than the offshore market due to the larger number of rigs and
companies.
In all of our market areas, price and 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 domestically, the ability to offer ancillary services. In
international markets, experience in operating in certain environments and
customer alliances have also been factors in the selection of Nabors.
Certain competitors are present in more than one of Nabors' regions, although no
one competitor operates in all of these areas. In the US Lower 48, there are
several hundred competitors with smaller national, regional or local rig
operations. In the Alaska market, Nabors has five major competitors. In Canada
and offshore, Nabors competes with several firms of varying size many of which
have more significant operations in those areas than Nabors. Internationally,
Nabors competes directly with various competitors at each location where it
operates. Nabors believes that the market for land drilling contracts will
continue to be competitive for the foreseeable future. Although Nabors believes
it has a strong competitive position in the domestic land market, certain of the
our competitors internationally and offshore may be better positioned in the
markets and have newer and more desirable equipment, allowing them to compete
more effectively.
Seasonality is not a significant factor with respect to our operations. However,
the contract drilling industry has been cyclical historically, with significant
volatility in profitability and rig values. This industry cyclicality has been
due to changes in the level of domestic oil and gas exploration and development
activity and the available supply of drilling rigs. From 1982 until 1996, the
contract drilling business was severely impacted by the decline and continued
instability in the prices of oil and natural gas following a period of
significant increase in new drilling rig capacity. Although the market improved
in 1997, the rapid, severe downturn in 1998 illustrates the dependence of the
drilling industry on oil and gas prices. See "Business--Industry Conditions."
Our manufacturing and logistics segment represents a relatively small part of
our business, and there are numerous competitors in each area in which we
operate who may have greater resources and may be better positioned than Nabors.
Canrig is one of the six major manufacturers of top drives. It largest
competitors are Varco, Tesco and National Oilwell. EPOCH's largest competitor in
the manufacture of rig instrumentation systems is Varco's Totco subsidiary.
Mudlogging services are provided by a number of entities that serve the oil and
gas industry on a regional basis. EPOCH competes for mudlogging customers with
Sperry Sun and Baker Hughes in the Gulf Coast region, California and Alaska. In
the US Lower 48 states, there are hundreds of rig transportation companies, and
there are at least three or four that compete with Nabors in each of its
operating regions. In Alaska, Peak Oilfield
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Services 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.
ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
We have grown from a land drilling business centered in 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 land drilling rigs in Canada, Alaska and in various
international markets. Today, Nabors' active drill fleet consists of 400 land
rigs and 36 offshore rigs. Much of this growth was fueled by strategic
acquisitions, as summarized in the following chart:
<TABLE>
<CAPTION>
- --------------- ---------------------------------- --------------------------------- --------------------------------
DATE ACQUIRED OR SELLING ENTITY ASSETS ACQUIRED(1) LOCATIONS
- --------------- ---------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
3/1990 Loffland Brothers Company 63 rigs; yards; miscellaneous North Sea, Middle East,
equipment and inventory; Canada, US Lower 48, Gulf of
financial assets Mexico, Venezuela
- --------------- ---------------------------------- --------------------------------- --------------------------------
11/1990 Henley Drilling Co. 11 rigs US Lower 48, Yemen
- --------------- ---------------------------------- --------------------------------- --------------------------------
6/1993 Grace Drilling Co. 110 rigs; yards; US Lower 48
miscellaneous equipment
and inventory
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1994 MND Drilling 16 land rigs US Lower 48
- --------------- ---------------------------------- --------------------------------- --------------------------------
10/1994 Sundowner Offshore Services, Inc. 15 platform rigs, 1 platform Gulf of Mexico, International
rig under construction, 5
jackup workover rigs, 3
workover and plug and
abandonment barges
- --------------- ---------------------------------- --------------------------------- --------------------------------
1994 Various 8 mobile, medium-depth rigs US Lower 48
- --------------- ---------------------------------- --------------------------------- --------------------------------
1/1995 Delta Drilling Company 30 rigs (15 SCR, 15,000+ Texas, Louisiana
capable depth), yards and
office facilities
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1996 Exeter Drilling Company 49 shallow and medium depth rigs United States (47),
International (2)
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1996 J.W. Gibson Well Servicing 78 workover and well servicing Rocky Mountains, Mid-continent
Company(2) rigs (10 leased from third Region
parties)
- --------------- -----------------------4----------- --------------------------------- --------------------------------
11/1996 EPOCH Well Logging, Inc. Mud logging units Not applicable
- --------------- ---------------------------------- --------------------------------- --------------------------------
12/1996 Noble Drilling 47 land rigs (19 operating and United States (38),
Company 28 stacked); yards; equipment Canada (9)
and inventory
- --------------- ---------------------------------- --------------------------------- --------------------------------
1/1997 Adcor-Nicklos Drilling 36 land rigs (30 active, 6 US Lower 48
Company stacked, including 14 SCR),
equipment, drill pipe, yards,
vehicles and support equipment
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1997 Chesley Pruet Drilling Company 12 land rigs (10 active, 2 Alabama, Louisiana, Mississippi
stacked, including 9 SCR)
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1997 Samson Rig Company 25 stacked SCR land rigs and Oklahoma
large component of equipment
- --------------- ---------------------------------- --------------------------------- --------------------------------
8/1997 Cleveland Drilling Company, Inc. 7 land rigs (6 active, 1 California, Nevada
stacked, including 6 SCR rigs)
- --------------- ---------------------------------- --------------------------------- --------------------------------
11/1997 VECO Drilling, Inc.; 6 land rigs (5 active, 1 California, Texas
Diamond L stacked, including 3 SCR) and
two offshore labor contracts; 3
active mechanical rigs
- --------------- ---------------------------------- --------------------------------- --------------------------------
12/1997 C.A.P.E. International, Inc. Rig reporting software Not applicable
- --------------- ---------------------------------- --------------------------------- --------------------------------
5/1998 New Prospect Drilling Company 6 land rigs Arkansas, Oklahoma
- --------------- ---------------------------------- --------------------------------- --------------------------------
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
- --------------- ---------------------------------- --------------------------------- --------------------------------
DATE ACQUIRED OR SELLING ENTITY ASSETS ACQUIRED(1) LOCATIONS
- --------------- ---------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
5/1998 Can-Tex Drilling & Exploration, 7 land rigs Alberta, Canada
Ltd.
- --------------- ---------------------------------- --------------------------------- --------------------------------
6/1998 Transocean-Nabors Drilling Joint interest in a coiled Alaska
Technology LLC tubing drilling rig; certain
technology rights
- --------------- ---------------------------------- --------------------------------- --------------------------------
Pending(3) Bayard Drilling Technologies, 87 rigs (73 actively marketed); Oklahoma, Texas, Louisiana,
Inc. significant inventories of new Arkansas
component equipment (e.g.,
drill pipe, engines and mud
pumps); oilfield hauling
equipment fleet
- --------------- ---------------------------------- --------------------------------- --------------------------------
Pending(4) Pool Energy Services Co. 786 land well Lower 48 States, Gulf of
servicing/workover rigs; 34 Mexico, Alaska,
land rigs; 25 offshore rigs; International
300+ fluid handling trucks;
1,060 storage tanks and 14
self-water disposal wells; 23
offshore supply vessels
- --------------- ---------------------------------- --------------------------------- --------------------------------
</TABLE>
(1) With the exception of the MND Drilling and Samson Rig Company
transactions, all acquisitions of rigs also included substantial
quantities of drill collars and drill pipe.
(2) Sold in January 1998.
(3) This acquisition is expected to close in the second quarter of 1999.
(4) This acquisition is subject to customary regulatory and stockholder
approvals and certain other closing conditions. If these are satisfied,
it is expected to close in the second quarter of 1999.
While Nabors continues to examine opportunities, there can be no assurance that
attractive rigs or other acquisition targets will continue to be available, that
the pricing will be economical or that we will be successful in making such
acquisitions in the future.
DIVESTITURES
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. In
January 1998, Nabors sold its J.W. Gibson Well Service Company subsidiary to Key
Energy Group, Inc. We acquired Gibson as part of the Exeter Drilling Company
acquisition in 1996. Gibson represented Nabors' entry into the domestic well
servicing business. However, at the time, Nabors' management did not believe it
could establish a dominant position in that business, and determined to sell the
subsidiary. On completing the sale, we received $20 million plus the value of
Gibson's working capital in cash, 100,000 shares of Key Energy common stock and
warrants to acquire 265,000 shares of Key Energy common stock at an exercise
price of $18 per share. (The number of shares and exercise price of the warrants
have since been adjusted.) We recorded a pre-tax gain on the sale of
approximately $16.0 million during 1998.
In November 1996, Nabors sold substantially all of its North Sea labor contract
operation, which was viewed as having slower growth potential and weaker margins
than our other operations, to a subsidiary of Abbot Group plc, a diversified
holding company listed on the London Stock Exchange. We received approximately
$36 million plus the value of working capital in cash, and warrants to acquire
10.8 million ordinary shares of Abbot Group plc, and recorded a gain of $29.9
million during 1997. We exercised the warrants at various times during 1997 and
recorded a gain of $8.8 million from the sale of the underlying shares.
INTERNATIONAL OPERATIONS
A significant portion of our business is derived from international markets,
including major operations in Canada, the Middle East, the Commonwealth of
Independent States and South and Central America. Such operations may be subject
to various risks, including risk of war and civil disturbances and governmental
activities that may limit or
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<PAGE> 13
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, such operations may be subject to the additional risk of fluctuating
currency values and exchange controls. See also "Part II -- Item 7
- --Management's Discussion and Analysis of Financial Condition and Results of
Operations -- The nature of Nabors' operations present inherent risks of loss
that, if not insured or indemnified against, could adversely affect its results
of operations" and "--The profitability of Nabors' international operations
could be adversely affected by war, civil disturbance or economic turmoil."
In the international markets in which we operate, we are subject to various laws
and regulations with respect to 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 be uncertain.
When contracting abroad, we are faced with the risks of currency fluctuation
and, in certain cases, exchange rate controls. Normally, we limit these risks by
obtaining contracts providing for payment in freely convertible foreign
currencies or U.S. dollars. To the extent possible, we try to limit our exposure
to potentially devaluating currencies by matching our acceptance of payments in
local currencies to our expense requirements in such local currencies, by
entering into forward exchange contracts or by local currency borrowings.
Additional information on Nabors' foreign currency transactions can be found
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Instruments and Market Risk" on page 45
of the 1998 Annual Report, and in Note One of the Notes to Consolidated
Financial Statements under the caption "Foreign Currency Risk " on page 53 of
the 1998 Annual Report, which is incorporated into this document by reference.
If we are unable to take these or similar actions in the future, we could be
exposed to foreign currency fluctuations that could have a material adverse
effect upon our results of operations and financial condition.
Governments at various levels in the countries in which we operate have enacted
legislation or adopted regulations affecting the drilling and servicing of oil
and gas wells, controlling the discharge and disposal of wastes from drilling
and other operations and providing for the protection of the environment in
general. In recent years, laws and regulations protecting the environment have
generally become more stringent and have sought to impose greater liability on a
larger number of potentially responsible parties. While we believe it is
generally in compliance with applicable laws and regulations related to
environmental controls, that Nabors could nonetheless be subject to cleanup
costs or costs associated with environmental laws and regulations which could be
substantial and have a material adverse effect on the our results of operations
and financial condition.
GEOGRAPHIC DISTRIBUTION OF REVENUES AND PROPERTY, PLANT AND EQUIPMENT
The revenues and property, plant and equipment by geographic area for the two
years ended September 30, 1996 and 1997, the three month transition period from
October 1, 1997 to December 31, 1997 and the year ended December 31, 1998, can
be found in Note Thirteen of the Notes to Consolidated Financial Statements in
the table on page 63 of the 1998 Annual Report, and is incorporated into this
document by reference.
EMPLOYEES
As of December 31, 1998, Nabors employed 6,835 persons, of which 553 were
salaried and 6,282 were hourly employees. In addition, the Peak group employed
1,257 persons, of which 144 were salaried and 1,113 were hourly employees. In
Venezuela, most of our oilfield workers under the supervisor level are covered
by a collective bargaining agreement that expires in November 1999. We believe
our relationship with our employees generally is good.
NABORS' YEAR 2000 COMPLIANCE PROGRAM
A discussion of Nabors' Year 2000 compliance program can be found under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Year 2000 Issue and Compliance Program" on pages 44 and 45 of
the 1998 Annual Report, and is incorporated into this document by reference.
ITEM 2. PROPERTIES
A table of information regarding Nabors' rig fleet can be found under the
caption "Our operations at a glance" on pages 34 and 35 of the 1998 Annual
Report and is incorporated into this document by reference.
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<PAGE> 14
Many of the international drilling rigs and certain 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 which are used to support the drilling and logistics
operations.
Nabors and its subsidiaries own or lease executive and administrative office
space in Houston, Texas (headquarters); Anchorage, Alaska; Houma, Arcadia and
Lafayette, Louisiana; Bakersfield, California; Magnolia, Texas; Calgary and
Nisku, Alberta, Canada; Sana'a, Yemen; Dubai, U.A.E.; Dhahran, Saudi Arabia; and
Anaco, Venezuela. The Company owns or leases a number of facilities and storage
yards used in support of operations in each of its geographic markets.
Additional information about our properties can be found in Notes One (under the
caption "Property, Plant and Equipment"), Four and Ten (under the caption
"Operating Leases") of the Notes to Consolidated Financial Statements on pages
51, 56 and 60, respectively, of the 1998 Annual Report and is incorporated into
this document by reference.
Nabors' management believes that our 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
Information with respect to legal proceedings can be found in Note Ten of the
Notes to Consolidated Financial Statements under the caption "Commitments and
Contingencies -- Contingencies" on page 61 of the 1998 Annual Report and is
incorporated into this document by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Nabors' security holders during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND STOCK PRICES
The information called for by this item can be found under the caption "Price of
Common Stock" on the inside back cover of the 1998 Annual Report and is
incorporated into this document by reference.
DIVIDEND POLICY
Nabors has not declared or paid any cash dividends on its common stock since
1982. Certain of our debt instruments restrict our ability to pay dividends.
Under the terms of these instruments, Nabors may pay dividends to the extent
that cumulative dividends plus certain other payments since March 31, 1989 do
not exceed 50% of our cumulative net income since March 31, 1989 plus the
proceeds of any offering of equity securities of Nabors that are not redeemable
at the option of the holder of the securities. As of December 31, 1998, retained
earnings available for dividends totaled approximately $320.0 million. We do not
intend to pay any cash dividends on our common stock in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
During the past three years, Nabors has made sales of unregistered securities as
follows:
On May 1, 1998, as part of the consideration for the purchase of New Prospect
Drilling Company, Nabors issued warrants to purchase 200,000 shares of its
common stock, par value $.10 per share, to the former stockholders of New
Prospect. The warrants, with an exercise price of $30.00 per share, expire on
April 30, 2003. The issuance of the warrants was exempt from registration under
Section 4(2) of the Securities Act of 1933, as a sale not involving a
14
<PAGE> 15
public offering, because, among other things, offers and sales were made to a
limited number of persons and no general solicitation or advertising was used.
In addition, each purchaser was supplied with information about Nabors and each
purchaser represented to Nabors that the purchaser was an "accredited investor,"
as that term is defined in Regulation D under the Securities Act of 1933, and/or
such purchaser or his purchaser representative was a sophisticated investor by
virtue of his education, training and/or numerous prior investments.
On January 2, 1997, we completed a private placement of 3,354,175 shares of our
common stock to the holders of the outstanding shares of common stock and
options to purchase common stock of Adcor-Nicklos Drilling Company in exchange
for all of the outstanding shares of stock and options of Adcor. The private
placement was made to effect the acquisition of Adcor by Nabors. The sale of
Nabors' common stock was exempt from registration under Section 4(2) of the
Securities Act of 1933, because, among other things, offers and sales were made
to a limited number of persons and no general solicitation or advertising was
used. In addition, each purchaser was supplied with information about Nabors and
each purchaser represented to Nabors that the purchaser was an "accredited
investor," and/or such purchaser or his purchaser representative was a
sophisticated investor by virtue of his education, training and/or numerous
prior investments. During 1998, 69,685 of the Nabors' shares that had been held
in escrow in connection with the Adcor acquisition were returned to Nabors and
retired.
During January 1997, warrants to acquire 1,500,000 shares of Nabors' common
stock were exercised at a price of $5.50 per share. The warrants had originally
been issued to John Hancock Mutual Life Insurance Company in 1990, and were
exercisable until January 31, 1997. The original issuance and subsequent
conversion of the warrants were exempt from registration under Section 4(2) of
the Securities Act of 1933, as sales not involving a public offering, because,
among other things, the sales were to one, qualified institution which received
information about Nabors in connection with its investment decision.
During April, 1996, Nabors completed the acquisition of Exeter Drilling Company
and its subsidiary, J. W. Gibson Well Servicing Company, from Occidental Oil and
Gas Corporation. The consideration consisted of $18.0 million in cash, 266,223
shares of Nabors common stock (then valued at $4.0 million) and $10.6 million
paid in cash for Exeter's and Gibson's working capital. The shares of stock were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
sales not involving a public offering because, among other things, the sale was
to one, sophisticated investor which received information about Nabors in
connection with its investment decision.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item can be found under the caption "Selected
Financial Data" on page 37 of the 1998 Annual Report and is incorporated into
this document by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information called for by this item can be found under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 38 through 45 of the 1998 Annual Report and is incorporated
into this document by reference. In addition, the principal risks associated
with Nabors' business are noted below.
DECREASED OIL AND GAS PRICES COULD ADVERSELY AFFECT DRILLING ACTIVITY AND
NABORS' REVENUES, CASH FLOWS AND PROFITABILITY
Nabors' operations are materially dependent upon the level of activity in oil
and gas exploration and production. Both short-term and long-term trends in oil
and gas prices affect the level of such activity. Oil and gas prices and,
therefore, the level of drilling, exploration and production activity can be
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 gas. Fluctuations during the last
year in the demand and supply of oil and gas have contributed to, and are likely
to continue to contribute to, price volatility. Nabors believes that any
prolonged reduction in oil and gas prices would depress the level of exploration
and production activity. This would likely result in a corresponding decline in
the demand for Nabors' services and could have a material adverse effect on
Nabors' revenues, cash flows and profitability. There can be no assurances as to
the future level of demand for Nabors' services or future conditions in the
drilling industry. Beginning in early 1998, domestic land
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<PAGE> 16
drillers, including Nabors, experienced a significant downturn in demand for
their drilling rigs. The downturn has since impacted offshore and international
drilling activity. Nabors believes the downturn is attributable in large part to
sharp drops in oil prices that began in late 1997 and continued in 1998. Gas
prices also have dropped during this period. The decline in crude oil and gas
prices negatively impacted the revenues of oil and gas companies, who have
responded by reducing exploration and development activity. Decreased demand has
adversely affected Nabors by lowering utilization of Nabors' rigs and reducing
the day rates Nabors can charge for its rigs.
NABORS OPERATES IN A HIGHLY COMPETITIVE INDUSTRY WITH EXCESS DRILLING CAPACITY,
WHICH MAY ADVERSELY AFFECT NABORS' RESULTS OF OPERATIONS
The drilling and workover industry in which Nabors operates 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 rigs can be readily moved from one region to another in response
to changes in levels of activity, which may result in an oversupply of rigs in
such area. In many markets in which Nabors operates, 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.
Certain competitors are present in more than one of Nabors' regions, although no
one competitor operates in all of these areas. In the US Lower 48, there are
several hundred competitors with smaller national, regional or local rig
operations. In the Alaska market, Nabors has five major competitors. In Canada
and offshore, Nabors competes with several firms of varying size many of which
have more significant operations in those areas than Nabors. Internationally,
Nabors competes directly with various competitors at each location where it
operates. Nabors believes that the market for land drilling contracts will
continue to be competitive for the foreseeable future. Although Nabors believes
it has a strong competitive position in the domestic land market, certain of the
our competitors internationally and offshore may be better positioned in the
markets and have newer and more desirable equipment, allowing them to compete
more effectively.
See also "Part I -- Item1--Business -- Competitive Conditions."
THE NATURE OF NABORS' OPERATIONS PRESENT INHERENT RISKS OF LOSS THAT, IF NOT
INSURED OR INDEMNIFIED AGAINST, COULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS
Nabors' 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, any of which 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. Nabors' offshore operations are also subject to the hazards
of marine operations including capsizing, grounding, collision, damage from
heavy weather or sea conditions and unsound bottom conditions. In addition,
Nabors' international operations are subject to risks of war, civil disturbances
or other political events. See also "Part I -- Item 1 -- Business --
International Operations". Generally, drilling contracts provide for the
division of responsibilities between a drilling company and its customer, and
Nabors seeks to obtain indemnification from its customers by contract for
certain of these risks. To the extent that Nabors is unable to transfer such
risks to customers by contract or indemnification agreements, Nabors seeks
protection through insurance which its management considers to be adequate.
However, there is no assurance that such insurance or indemnification agreements
will adequately protect Nabors 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 of a customer to meet its indemnification
obligations, could result in substantial losses to Nabors. In addition, there
can be no assurance that insurance will be available to cover any or all of
these risks, or, even if available, that it will be adequate or that insurance
premiums or other costs will not rise significantly in the future, so as to make
such insurance prohibitive.
THE PROFITABILITY OF NABORS' INTERNATIONAL OPERATIONS COULD BE ADVERSELY
AFFECTED BY WAR, CIVIL DISTURBANCE, ECONOMIC TURMOIL OR CURRENCY FLUCTUATIONS
Nabors derives a significant portion of its business from international markets,
including major operations in Canada, the Middle East, the Commonwealth of
Independent States and South and Central America. These
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<PAGE> 17
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,
Nabors' operations may be subject to the additional risk of fluctuating currency
values and exchange controls. In the international markets in which Nabors
operates, it is subject to various laws and regulations that govern the
operation and taxation of its business and the import and export of its
equipment from country to country, the imposition, application and
interpretation of which can prove to be uncertain.
EXPOSURE TO ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT NABORS' RESULTS OF
OPERATIONS
The drilling of oil and gas wells is subject to various federal, state, local
and foreign laws, rules and regulations. The cost to Nabors of compliance with
these laws and regulations may be substantial. For example, federal law imposes
specific design and operational standards on rigs and platforms. Failure to
comply with these requirements could subject Nabors to substantial civil and
criminal penalties as well as potential court injunctions. In addition, federal
law imposes a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages from such spills. Nabors, as
an owner and operator of onshore and offshore rigs, may be deemed to be a
responsible party under federal law. Federal law assigns liability to a
responsible party of oil removal costs and subjects a responsible party to a
variety of public and private damages. In some circumstances, federal law
imposes liability without regard to negligence or fault, resulting in
substantial costs to the party upon whom such liability is imposed. Nabors
generally tries to require its customers to contractually assume responsibility
for compliance with environmental regulations. However, Nabors is not always
successful in shifting all of these risks.
NABORS COULD BE ADVERSELY AFFECTED IF IT LOSES THE SERVICES OF MR. ISENBERG, MR.
PETRELLO OR MR. STRATTON
Nabors' business is dependent to a significant extent upon the performance of
certain key individuals, including Eugene M. Isenberg, Anthony G. Petrello and
Richard A. Stratton. Each of these individuals has entered into an employment
agreement with Nabors. The loss of the services of Mr. Isenberg, Mr. Petrello or
Mr. Stratton could have a material adverse effect on Nabors.
THE MARKET PRICE OF NABORS COMMON STOCK COULD BE ADVERSELY AFFECTED BY THE SALE
OF THE LARGE NUMBER OF SHARES THAT ARE AVAILABLE FOR SALE IN THE FUTURE
The sale, or availability for sale, of substantial amounts of Nabors common
stock in the public market from the exercise of options and the conversion of
convertible notes could adversely affect the prevailing market price of Nabors
common stock and could impair Nabors' ability to raise additional capital
through the sale of equity securities. As of March 15, 1999, there were
100,792,426 shares of Nabors common stock outstanding. As of that date, an
additional 18,313,517 shares of Nabors common stock were reserved for issuance
under options and warrants and 9,517,132 shares of Nabors common stock were
reserved for issuance upon the conversion of convertible notes of Nabors. The
exercise of certain of these options may cause Nabors to issue to the exercising
holders additional options to purchase shares of Nabors common stock at an
exercise price equal to the fair market value of Nabors common stock on the date
of issuance, and Nabors may issue additional options in the future under stock
option plans or otherwise. Certain of the shares to be issued upon the exercise
of options may be "restricted securities," as that term is defined in Rule 144
promulgated under the Securities Act of 1933.
THE ABSENCE OF DIVIDENDS LIMITS THE ABILITY OF STOCKHOLDERS TO RECOGNIZE A
RETURN ON AN INVESTMENT IN NABORS COMMON STOCK
Nabors does not anticipate that it will pay any dividends on the shares of
Nabors common stock in the foreseeable future. Certain of Nabors' debt
instruments restrict Nabors' ability to pay dividends or to make certain other
distributions to shareholders.
NABORS HAS IMPLEMENTED ANTI-TAKEOVER MEASURES THAT COULD PREVENT NABORS'
STOCKHOLDERS FROM RECOGNIZING A POSSIBLE PREMIUM ON THEIR SHARES
Nabors has implemented various measures which could hinder, delay or prevent a
takeover of Nabors. These anti-takeover measures could prevent Nabors'
shareholders from realizing a possible premium on their shares. The
17
<PAGE> 18
Board of Directors of Nabors is divided into three classes of directors, with
each class serving a staggered three-year term. In addition, the Board of
Directors of Nabors has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the price, voting and other rights, conversion
ratios, preferences and privileges of that stock without any vote or action by
the holders of Nabors common stock. Although Nabors has no present plans to
issue shares of preferred stock, the classified board and the ability of the
Nabors Board to issue additional shares of preferred stock may discourage, delay
or prevent changes in control of Nabors that are not approved by the Nabors
Board.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item can be found under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Instruments and Market Risk" on page 45 of the 1998
Annual Report and is incorporated into this document by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated February 2, 1999, appear on pages 46 through 63
of the 1998 Annual Report and are incorporated herein by reference. With the
exception of the specific information expressly incorporated into Items 1, 2, 3,
5, 6, 7, 7A, 8 and 14 of this document, the 1998 Annual Report is not deemed to
be filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item will be contained in the Nabors
Industries, Inc. definitive proxy statement to be distributed in connection with
its 1999 annual meeting of stockholders under the captions "Election of
Directors" and "Executive Officers" and is incorporated into this document by
reference. Section 16(a) of the Securities Exchange Act of 1934 requires Nabors'
directors and executive officers, and persons who own more than 10% of a
registered class of Nabors' equity securities, to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of Nabors. Officers, directors and greater than 10% shareholders are required by
Commission regulation to furnish Nabors with copies of all Section 16(a) forms
which they file.
To our knowledge, based solely on review of the copies of such reports furnished
to us and written representations that no other reports were required, with
regard to the period from October 1, 1996 to December 31, 1998, all Section
16(a) filings required to be made by Nabors' officers, directors and greater
than 10% beneficial owners were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
Except as specified in the following sentence, the information called for by
this item will be contained in the 1999 proxy statement under the caption
"Remuneration of Management" and is incorporated into this document by
reference. Information in Nabors' 1999 proxy statement not deemed to be
"soliciting material" or "filed" with the Commission under its rules, including
the Report of the Compensation Committee on Executive Compensation and the Five
Year Stock Performance Graph, is not deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item will be contained in Nabors' 1999 proxy
statement under the caption "Share Ownership of Management and Principal
Shareholders" and is incorporated into this document by reference.
18
<PAGE> 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item will be contained in Nabors' 1999 proxy
statement under the captions "Business Relationships" and "Compensation
Committee Interlocks and Insider Participation" and is incorporated into this
document by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements of Nabors Industries, Inc. and
Subsidiaries which are listed in Part II, Item 8 and are
incorporated herein by reference from the 1998 Annual Report
from the respective page numbers indicated:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Report of Independent Public Accountants..............................................46
Consolidated Balance Sheets...........................................................47
Consolidated Statements of Income.....................................................48
Consolidated Statements of Changes in Stockholders' Equity............................49
Consolidated Statements of Cash Flows.................................................50
Notes to Consolidated Financial Statements............................................51
</TABLE>
(2) Financial Statement Schedules
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.
(b) Exhibits
Exhibit No. Description
3.1(1) Restated Certificate of Incorporation of Nabors
Industries, Inc. dated March 4, 1997
3.2(7) Restated By-Laws of the Nabors Industries, Inc.
adopted December 4, 1997
4.1(2) Indenture for Subordinated Debt Securities dated May
15, 1996 between Marine Midland Bank, Trustee and
Nabors Industries, Inc. in connection with
$172,500,000 aggregate principal amount of 5%
Convertible Subordinated Notes due 2006 (the "5%
Notes")
4.2(2) Supplemental Indenture dated May 28, 1996 between
Marine Midland Bank, Trustee and Nabors Industries,
Inc. in connection with the 5% Notes
4.3(3) Registration Rights Agreement dated as of April 30,
1996 between Nabors Industries, Inc. and Occidental
Oil and Gas Corporation
4.4(8) Indenture dated as of March 1, 1999 between Nabors
Industries, Inc., as Issuer, and Norwest Bank
Minnesota, National Association, as Trustee, in
connection with $325,000,000 aggregate principal
amount of 6.80% Notes due 2004 (the "6.80% Notes")
19
<PAGE> 20
4.5(8) Supplemental Indenture No. 1 dated as of March 1,
1999 between Nabors Industries, Inc., as Issuer, and
Norwest Bank Minnesota, National Association, as
Trustee, in connection with the 6.80% Notes
10.1(4) 1993 Stock Option Plan for Non-Employee Directors
10.2(5) 1994 Executive Officers Stock Plan
10.3(5) 1996 Employee Stock Plan
10.4(3) 1994 Executive Stock Option Agreement effective
December 28, 1994 between Nabors Industries, Inc. and
Eugene M. Isenberg
10.5(3) 1994 Executive Stock Option Agreement effective
December 28, 1994 between Nabors Industries, Inc. and
Anthony G. Petrello
10.6(3) 1994 Executive Stock Option Agreement effective
December 28, 1994 between Nabors Industries, Inc. and
Richard A. Stratton
10.7(1) Employment Agreement effective October 1, 1996
between Nabors Industries, Inc. and Eugene M.
Isenberg
10.8(1) Employment Agreement effective October 1, 1996
between Nabors Industries, Inc. and Anthony G.
Petrello
10.9(7) Employment Agreement effective October 1, 1996
between Nabors Industries, Inc. and Richard A.
Stratton
10.10(6) Note Purchase Agreement between Nabors Industries,
Inc. and John Hancock Mutual Life Insurance Company
dated October 1, 1992
10.11(7) Nabors Industries, Inc. 1996 Chairman's Executive
Stock Plan
10.12(7) Nabors Industries, Inc. 1996 Executive Officers Stock
Plan
10.13(7) Nabors Industries, Inc. 1996 Executive Officers
Incentive Stock Plan
10.14(7) Nabors Industries, Inc. 1997 Executive Officers
Incentive Stock Plan
10.15(7) Form of Indemnification Agreement entered into
between Nabors Industries, Inc. and the directors and
executive officers identified in the schedule thereto
10.16(9) Agreement and Plan of Merger by and among Nabors
Industries, Inc., Nabors Acquisition Corp. VII and
Bayard Drilling Technologies, Inc., dated October 19,
1999, as amended
10.17(10) Agreement and Plan of Merger by and among Nabors
Industries, Inc., Starry Acquisition Corp. and Pool
Energy Services Co. dated as of January 10, 1999
10.18(8) Underwriting Agreement dated March 4, 1999 between
Nabors and the underwriters named therein
10.19 Nabors Industries, Inc. 1998 Employee Stock Plan
10.20 Nabors Industries, Inc. 1998 Chairman's Executive
Stock Plan
20
<PAGE> 21
10.21 Nabors Industries, Inc. 1999 Stock Option Plan for
Non-Employee Directors
11 Computation of Per Share Earnings
12 Computation of Ratios of Earnings to Fixed Charges
13(11) 1998 Annual Report to Stockholders
21 Significant Subsidiaries of Nabors Industries, Inc.
23 Consent of Independent Accountants
27 Financial Data Schedule
99.1(7) Credit Agreement among Nabors Industries, Inc., the
subsidiary borrowers thereto, Bank of America
National Trust and Savings Association, Wells Fargo
Bank (Texas) National Association and the other
financial institutions party thereto dated September
5, 1997
- -------------------------
(1) Incorporated by Reference to the Exhibits to Form 10-Q, File No.
1-9245, filed with the Commission on May 16, 1997.
(2) Incorporated by Reference to Form 8-K, File No. 1-9245, filed
with the Commission on May 28, 1996.
(3) Incorporated by Reference to the Exhibits to Form 10-K, File No.
1-9245, filed with the Commission on December 29, 1996.
(4) Incorporated by Reference to Form S-8, Registration No. 33-87322,
filed with the Commission on December 29, 1994.
(5) Incorporated by Reference to Form S-8, Registration No.
333-11313, filed with the Commission on September 3, 1996.
(6) Incorporated by Reference to the Exhibits to Form 10-K, File No.
1-9245, filed with the Commission on December 29, 1992.
(7) Incorporated by Reference to the Exhibits to Form 10-K, File No.
1-9245, filed with the Commission on December 29, 1997.
(8) Incorporated by Reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3, Registration No. 333-25233,
filed with the Commission on March 5, 1999.
(9) Incorporated by Reference to Registration Statement on Form S-4,
Registration No. 333-72397, filed with the Commission on February
16, 1999.
(10) Incorporated by Reference to Form 8-K, File No. 1-9245, filed
with the Commission on January 11, 1999.
(11) With the exception of the specific information expressly
incorporated into Items 1, 2, 3, 5, 6, 7, 7A, 8 and 14 of this
document, the 1998 Annual Report is not deemed to be filed as
part of this report.
(c) Reports on Form 8-K:
o Report on Form 8-K filed with the Commission on January 11, 1999 with
regard to the signing of a definitive merger agreement with Pool Energy
Services Co.
21
<PAGE> 22
o Report on Form 8-K filed with the Commission on February 3, 1999 with
regard to Nabors Industries, Inc.'s earnings release for the quarter ended
December 31, 1998.
o Report on Form 8-K filed with the Commission on March 1, 1999 with regard
to Bayard Drilling Technologies, Inc.'s earnings release for the quarter
ended December 31, 1998, Bayard's financial statements and Nabors' Year
2000 Compliance Program.
22
<PAGE> 23
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, as of March 31, 1999.
NABORS INDUSTRIES, INC.
By: /s/ Anthony G. Petrello
---------------------------------------
Anthony G. Petrello
President and Chief Operating Officer
By: /s/ Bruce P. Koch
---------------------------------------
Bruce P. Koch
Vice President - Finance
(Principal Financial and Accounting Officer)
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.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Eugene M. Isenberg Chairman and March 31, 1999
- ------------------------------------ Chief Executive Officer
Eugene M. Isenberg
/s/ Anthony G. Petrello President and March 31, 1999
- ------------------------------------ Chief Operating Officer
Anthony G. Petrello
/s/ Richard A. Stratton Vice Chairman March 31, 1999
- ------------------------------------
Richard A. Stratton
/s/ Gary T. Hurford Director March 31, 1999
- ------------------------------------
Gary T. Hurford
/s/ Hans Schmidt.. Director March 31, 1999
Hans Schmidt
/s/ Myron M. Sheinfeld Director March 31, 1999
- ------------------------------------
Myron M. Sheinfeld
/s/ Jack Wexler... Director March 31, 1999
- ------------------------------------
Jack Wexler
/s/ Martin J. Whitman Director March 31, 1999
- ------------------------------------
Martin J. Whitman
</TABLE>
23
<PAGE> 24
INDEX TO EXHIBITS
(b) Exhibits
Exhibit No. Description
3.1(1) Restated Certificate of Incorporation of Nabors
Industries, Inc. dated March 4, 1997
3.2(7) Restated By-Laws of the Nabors Industries, Inc.
adopted December 4, 1997
4.1(2) Indenture for Subordinated Debt Securities dated May
15, 1996 between Marine Midland Bank, Trustee and
Nabors Industries, Inc. in connection with
$172,500,000 aggregate principal amount of 5%
Convertible Subordinated Notes due 2006 (the "5%
Notes")
4.2(2) Supplemental Indenture dated May 28, 1996 between
Marine Midland Bank, Trustee and Nabors Industries,
Inc. in connection with the 5% Notes
4.3(3) Registration Rights Agreement dated as of April 30,
1996 between Nabors Industries, Inc. and Occidental
Oil and Gas Corporation
4.4(8) Indenture dated as of March 1, 1999 between Nabors
Industries, Inc., as Issuer, and Norwest Bank
Minnesota, National Association, as Trustee, in
connection with $325,000,000 aggregate principal
amount of 6.80% Notes due 2004 (the "6.80% Notes")
<PAGE> 25
4.5(8) Supplemental Indenture No. 1 dated as of March 1,
1999 between Nabors Industries, Inc., as Issuer, and
Norwest Bank Minnesota, National Association, as
Trustee, in connection with the 6.80% Notes
10.1(4) 1993 Stock Option Plan for Non-Employee Directors
10.2(5) 1994 Executive Officers Stock Plan
10.3(5) 1996 Employee Stock Plan
10.4(3) 1994 Executive Stock Option Agreement effective
December 28, 1994 between Nabors Industries, Inc. and
Eugene M. Isenberg
10.5(3) 1994 Executive Stock Option Agreement effective
December 28, 1994 between Nabors Industries, Inc. and
Anthony G. Petrello
10.6(3) 1994 Executive Stock Option Agreement effective
December 28, 1994 between Nabors Industries, Inc. and
Richard A. Stratton
10.7(1) Employment Agreement effective October 1, 1996
between Nabors Industries, Inc. and Eugene M.
Isenberg
10.8(1) Employment Agreement effective October 1, 1996
between Nabors Industries, Inc. and Anthony G.
Petrello
10.9(7) Employment Agreement effective October 1, 1996
between Nabors Industries, Inc. and Richard A.
Stratton
10.10(6) Note Purchase Agreement between Nabors Industries,
Inc. and John Hancock Mutual Life Insurance Company
dated October 1, 1992
10.11(7) Nabors Industries, Inc. 1996 Chairman's Executive
Stock Plan
10.12(7) Nabors Industries, Inc. 1996 Executive Officers Stock
Plan
10.13(7) Nabors Industries, Inc. 1996 Executive Officers
Incentive Stock Plan
10.14(7) Nabors Industries, Inc. 1997 Executive Officers
Incentive Stock Plan
10.15(7) Form of Indemnification Agreement entered into
between Nabors Industries, Inc. and the directors and
executive officers identified in the schedule thereto
10.16(9) Agreement and Plan of Merger by and among Nabors
Industries, Inc., Nabors Acquisition Corp. VII and
Bayard Drilling Technologies, Inc., dated October 19,
1999, as amended
10.17(10) Agreement and Plan of Merger by and among Nabors
Industries, Inc., Starry Acquisition Corp. and Pool
Energy Services Co. dated as of January 10, 1999
10.18(8) Underwriting Agreement dated March 4, 1999 between
Nabors and the underwriters named therein
10.19 Nabors Industries, Inc. 1998 Employee Stock Plan
10.20 Nabors Industries, Inc. 1998 Chairman's Executive
Stock Plan
<PAGE> 26
10.21 Nabors Industries, Inc. 1999 Stock Option Plan for
Non-Employee Directors
11 Computation of Per Share Earnings
12 Computation of Ratios of Earnings to Fixed Charges
13(11) 1998 Annual Report to Stockholders
21 Significant Subsidiaries of Nabors Industries, Inc.
23 Consent of Independent Accountants
27 Financial Data Schedule
99.1(7) Credit Agreement among Nabors Industries, Inc., the
subsidiary borrowers thereto, Bank of America
National Trust and Savings Association, Wells Fargo
Bank (Texas) National Association and the other
financial institutions party thereto dated September
5, 1997
- -------------------------
(1) Incorporated by Reference to the Exhibits to Form 10-Q, File No.
1-9245, filed with the Commission on May 16, 1997.
(2) Incorporated by Reference to Form 8-K, File No. 1-9245, filed
with the Commission on May 28, 1996.
(3) Incorporated by Reference to the Exhibits to Form 10-K, File No.
1-9245, filed with the Commission on December 29, 1996.
(4) Incorporated by Reference to Form S-8, Registration No. 33-87322,
filed with the Commission on December 29, 1994.
(5) Incorporated by Reference to Form S-8, Registration No.
333-11313, filed with the Commission on September 3, 1996.
(6) Incorporated by Reference to the Exhibits to Form 10-K, File No.
1-9245, filed with the Commission on December 29, 1992.
(7) Incorporated by Reference to the Exhibits to Form 10-K, File No.
1-9245, filed with the Commission on December 29, 1997.
(8) Incorporated by Reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3, Registration No. 333-25233,
filed with the Commission on March 5, 1999.
(9) Incorporated by Reference to Registration Statement on Form S-4,
Registration No. 333-72397, filed with the Commission on February
16, 1999.
(10) Incorporated by Reference to Form 8-K, File No. 1-9245, filed
with the Commission on January 11, 1999.
(11) With the exception of the specific information expressly
incorporated into Items 1, 2, 3, 5, 6, 7, 7A, 8 and 14 of this
document, the 1998 Annual Report is not deemed to be filed as
part of this report.
<PAGE> 1
EXHIBIT 10.19
NABORS INDUSTRIES, INC.
1998 EMPLOYEE STOCK PLAN
1. Purpose.
(a) General. The purposes of the 1998 Employee Stock Plan (the "Plan") are
(i) to provide incentives for employees of Nabors Industries, Inc.
("Nabors" or the "Company") and its affiliates (collectively, the
"Company") by encouraging their ownership of the Company's Common
Stock, $.10 par value, (the "Common Stock"), and (ii) to aid the
Company in (A) retaining such employees upon whose efforts the
Company's success and future growth depends and (B) attracting other
such employees.
(b) Effective Date. The Plan shall be effective on January 9, 1998. The
Plan shall remain effective until January 8, 2008, or such earlier date
as the Board shall determine.
2. Administration.
(a) General. The Plan shall be administered by an independent committee
(the "Committee") appointed by the Company's Board of Directors (the
"Board"), as hereinafter provided.
(b) Committee Structure and Authority. The Committee shall be appointed
from time to time by the Board and shall consist of not fewer than two
members. No member of the Committee shall be eligible to participate in
the Plan while serving as a member of the Committee. All members of the
Committee shall be "disinterested persons" as defined by Rule 16b-3 of
the Securities Exchange Act of 1934, as amended (the "34 Act") or any
successor thereto and "outside directors" as defined in Section 162(m)
of the Internal Revenue Code of 1986, as amended ("IRC") and the
regulations issued thereunder. The Board shall designate one of the
members of the Committee as the Committee Chairman. The Committee shall
hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations
of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by all members
shall be effective as if made by a majority vote at a meeting duly
called and held. The Committee may appoint a secretary (who need not be
a member of the Committee). Service on the Committee shall constitute
service as a director of Nabors for all purposes.
(c) Committee Discretion. For purposes of administration, the Committee,
subject to the terms of the Plan, shall have final authority to
establish such rules and regulations, and take such other
administrative actions as it deems necessary or advisable. All
determinations and interpretations made by the Committee shall be
final, conclusive and binding on all persons, including persons awarded
shares of stock hereunder ("Awardees"), options ("Optionees") or stock
appreciation rights ("SARs") ("SAR Holders") hereunder and their legal
representatives and beneficiaries.
(d) Committee Liability. No member of the Committee shall be liable for any
act or omission with respect to his services on the Committee, if he
acts in good faith and in a manner he reasonably believes to be in or
not opposed to the best interests of the Company.
<PAGE> 2
3. Eligibility.
The persons who shall be eligible to participate in the Plan shall be those
persons who are employees and consultants of the Company or any subsidiary
("Covered Persons") who are in a position, in the opinion of the Committee,
to make contributions to the growth and financial success of the Company
and its subsidiaries. From the Covered Person eligible to participate in
the Plan, the Committee may, from time to time, select persons to be
granted options and shares ("Participants") and shall determine the terms
and conditions with respect thereto. Non-Employee Directors of the Company
will not be eligible to participate in the Plan.
4. Stock Subject to the Plan.
(a) Stock Authorized. There shall be available for the grant of options
under the Plan a total of 17,500,000 Shares of Common Stock.
(b) Adjustment of Shares. The amount of shares that are subject to option
or SAR grants and share awards are subject to the following
adjustments.
(i) If any change is made in the Common Stock whether through
merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, combination of shares, rights
offerings, change in corporate structure of the Company, or
otherwise, appropriate adjustments will be made (A) to the
number or type of securities subject to and reserved for
issuance under the Plan; and (B) in order to prevent dilution
or enlargement of the rights of Awardees or Optionees, to the
number or type of stock awards, option or SAR grants and the
exercise price subject to outstanding options or SARs.
(ii) The provisions of this paragraph (e) shall apply to stock,
options, or SARs authorized but not awarded or granted under
the Plan as well as any unvested stock awarded or unexercised
options.
(c) Registration, Listing and Qualification of Shares of Common Stock. Each
stock award or option grant shall be subject to the requirements that
if at any time the Common Stock covered thereby is not registered,
listed or qualified with or by any securities exchange or under any
federal or state law, and (i) if the Committee shall determine that
such registration, listing, qualification, consent or approval, of any
governmental regulatory body is necessary or desirable as a condition
of, or in connection with, the stock award or option grant or the
purchase of shares of Common Stock thereunder, no such share shall vest
or option may be exercised, unless and, until such registration,
listing, qualification, consent or approval shall have been obtained or
(ii) if the Board shall determine that such registration, listing,
qualification, consent or approval of any governmental regulatory body
is not necessary and/or not desirable as a condition of, or in
connection with, the vesting of such stock award or option grant or the
purchase of shares of Common Stock thereunder, the Board may impose any
conditions upon the vesting of such stock awards and the exercise of
such options, as it shall deem necessary or desirable in view of such
determination and no such award may vest or option may be exercised,
unless and until such conditions have been satisfied. Without limiting
the foregoing, the Company may require that any person receiving a
stock award or exercising an option grant, shall make such
representations and agreements and furnished such information as it
deems appropriate to assure compliance with the foregoing or any other
applicable legal requirement.
2
<PAGE> 3
(d) Release of Shares. If any shares of Common Stock that have been awarded
or granted cease to be subject to an award or grant, if any shares of
Common Stock that are subject to any award or grant are forfeited, if
any award or grant otherwise terminates without issuance of shares of
Common Stock being made to the Awardee or Optionee, or if any shares of
Common Stock that were previously issued under the Plan are received in
connection with the vesting of a stock award or the exercise of an
option, such shares may again be available for distribution in
connection with stock awards or option grants under the Plan.
(e) Stockholders Rights. Neither an Awardee or an Optionee nor their
respective legal representatives, legatees or distributees, as the case
may be, shall have any of the rights or privileges of a stockholder of
the Company by virtue of an award of stock, or grant of an option or
SAR, except with respect to any shares of Common Stock actually issued
or transferred of record and delivered to one of the aforementioned
persons.
5. Stock Awards and Option Grants.
(a) General. The Committee shall have the authority to award stock and
grant options under the Plan.
(b) Terms and Conditions of Stock or Options. Awards of stock and grants of
options under this Plan shall be evidenced by an Agreement, which shall
embody the terms and conditions of such Awards and Grants and which
shall be subject to the terms and conditions set forth in the Plan. The
Committee shall, in its discretion, prescribe the terms and conditions
of the Awards and Grants hereunder, which terms and conditions need not
be the same in each case, subject to the following:
(i) Number of Shares. Each Share Award and Option Grant shall
state the number of shares of Common Stock to which it
pertains. Option Grants may include the grant of additional
options that are contingent upon the exercise of previously
granted options.
(ii) Option Exercise Price. The option exercise price shall be set
by the Committee, but in the case of non-qualified stock
options ("NQSOs") shall be no less than 100% of the Fair
Market Value per Share of Common Stock on the date of the
grant of the option. The Committee shall have the power to
enter into an amendatory agreement with an Optionee reducing
the option price of an existing option where the option price
is in excess of the fair market value of a share of Common
Stock. The new exercise price will be no less that 100% of the
fair market value of a share of Common Stock on the date such
exercise price is reduced. As determined by the Committee, on
the date of the grant, 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 option price is to be paid, upon exercise, in cash
or, in the discretion of the Committee, in options or shares
of the Company to be valued at fair market value at the time
of exercise.
(iii) Fair Market Value. For purposes of the Plan, the Fair Market
Value per share of Common Stock shall be the last sale on the
date of reference, or, in the case no sale takes place on such
date, the average of the closing high bid and low asked
prices, in either case on the principal national securities
exchange on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to
trading on any national securities exchange,
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<PAGE> 4
the last sale price reported on the National Market System of
the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") on such date, or the average of
the closing high bid and low asked prices of the Common Stock
in the over-the-counter market reported on NASDAQ on such
date, whichever is applicable or, if there are not such prices
reported on NASDAQ on such date, then as furnished to the
Committee by any New York Stock Exchange member selected from
time to time by the Committee for such purpose. If there is no
bid or asked price reported on any such date, the market value
shall be determined by any other appropriate method selected
by the Committee.
(iv) Option Period. The Committee may specify a period for exercise
of an option (the "Option Period") which period shall in no
event be more than ten years from the date of grant. Options
may, in the discretion of the Committee, be exercisable in
installments during the Option Period. Any shares of Common
Stock not purchased on any applicable installment date may be
purchased thereafter at any time before the expiration date of
the Option Period.
(v) Exercise of Options. In order to exercise an option, the
Optionee shall deliver to Nabors written notice specifying the
number of shares of Common Stock to be purchased, together
with a certified or bank cashier's check payable to the order
of Nabors in the full amount of the purchase price therefor;
provided, however, that the Committee may, in its discretion,
allow such payments to be made in whole or in part in Common
Stock delivered, or options surrendered, by the Optionee
valued at the Fair Market Value of such Common Stock.
If the Optionee so requests, shares of Common Stock purchased
upon exercise of an option may be issued in the name of the
Optionee or another person. An Optionee shall not have any of
the rights of a stockholder until the shares of Common Stock
are issued to him. An option may not be exercised for less
than the lesser of (A) ten shares of Common Stock, or (B) the
number of shares of Common Stock remaining subject to such
option.
(vi) Performance Goal for Stock Awards. The Committee shall
establish Performance Goals for stock awards in writing not
later than the date required for compliance under IRC Section
162(m) and the vesting of such stock shall be contingent upon
the attainment of such Performance Goals. Such Performance
Goals shall be based upon the following business criteria: (a)
income before federal taxes and net interest expense; (b)
achievement of specific and measurable operational objectives
in the areas of rig operating costs, accident records, and
employee turnover; (c) working capital, generally defined to
include receivables, inventories and controllable current
liabilities, measured either in absolute dollars or relative
to sales; (d) earnings growth, revenues, expenses, stock
price, market share, return on assets, equity or investment,
regulatory compliance, satisfactory internal or external
audits, improvement of financial ratings, or achievement of
balance sheet, income statement or cash flow objectives,
and/or (e) Performance Goals based upon a percentage of cash
flow in excess of a percentage of stockholders' equity. The
Committee shall designate in writing (A) those individuals
from among the class of Covered Persons who are eligible to
receive stock awards upon the attainment of the Performance
Goals (i.e., the Participants), and (B) the maximum number of
shares available for stock awards to any Participant, subject
to the limitations described in Section 4(d) above. Stock
awards shall vest over a period determined by the Committee
which period shall expire no later than January 9, 2008.
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<PAGE> 5
(vii)Effect of Termination of Employment. Unless otherwise
determined by the Committee in its discretion, an option may
not be exercised after the Optionee has ceased to be in the
employ of the Company whether such Optionee's employment is
terminated by voluntary resignation of the Optionee or by
action of the Company with cause, without cause, or by reason
of death or disability (as defined in Section 22 (e) (3) of
the Internal Revenue Code of 1986, as amended). Unless
otherwise determined by the Committee, awards of Common Stock
which have not vested on and as of the date of termination
shall be forfeited. The Committee, in its discretion, however,
may in all cases extend the period of vesting or the time to
exercise an option following termination of employment, but
not beyond the Option Period.
(viii) Nontransferability of Stock or Options. Except as otherwise
determined by the Committee in its discretion, (A) options
shall be exercisable only by the Optionee and (B) no option
shall be transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic
relations order as defined by the IRC or Title I of the
Employee Retirement Income Security Act, or the rules
thereunder. The designation of a beneficiary by an employee
shall not constitute a transfer.
(ix) Wrongful Conduct. If the Board of Directors of the Company or
any committee of the Board of Directors, prior to or following
the date an Optionee ceases for any reason whatsoever to be an
employee or consultant of the Employer and after full
consideration of the facts, find by majority vote that
Optionee has engaged in fraud, embezzlement, theft, commission
of a felony, dishonesty, or any other conduct inimical to the
Company, Optionee shall forfeit all unexercised options,
whether or not vested. The decision of the Board of Directors
of the Company of such committee shall be final.
(x) Other Terms and Conditions. The Committee may impose such
other terms and conditions, not inconsistent with the terms
hereof, on the grant or exercise of options, or on the award
of stock, as it deems advisable.
(c) Provisions Applicable to Incentive Stock Options. The Committee may, in
its discretion, grant options under the Plan which constitute incentive
stock options ("ISOs") within the meaning of Section 422A(b) of the
IRC, provided, however, that the price at which each share of Common
Stock subject to an option issued pursuant to this paragraph (c) may be
purchased shall, subject to any adjustments which may be made pursuant
to Section 4(e) hereof, in no event be less than 100% of the Fair
Market Value per share of Common Stock on the date of grant; and
provided further 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 price per share shall not be less than 110% of the
fair market value per share of Common Stock on the date of the grant
and such option shall not be exercisable after the expiration of five
(5) years from the date such option is granted.
6. Stock Appreciation Rights.
(a) General. The Committee shall have authority to grant SAR under the
Plan. A SAR shall entitle the SAR Holder to surrender to the Company
the SAR and to be paid therefor in shares of the Common Stock, cash or
a combination thereof as herein provided, the amount described in this
Section 6.
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<PAGE> 6
(b) Grant. SAR's may be granted in conjunction with all or part of any
option granted under the Plan in which case the exercise of the SAR
shall require the cancellation of a corresponding portion of the option
and the exercise of the option will result in the cancellation of a
corresponding portion of the SAR. In the case of a NQSO, such rights
may be granted either at or after the time of grant of such option. In
the case of an ISO, such rights may be granted only at the time of
grant of such option. A SAR may also be granted on a stand alone basis.
The grant of a SAR shall occur as of the date the Committee determines.
Each SAR granted under this Plan shall be evidenced by an Agreement,
which shall embody the terms and conditions of such SAR and which shall
be subject to the terms and conditions set forth in the Plan.
(c) Terms and Conditions. SAR shall be subject to such terms and conditions
as shall be determined by the Committee, including the following:
(i) Period and Exercise. The term of a SAR shall be established by
the Committee. If granted in conjunction with an option, the
SAR shall have a term which is the same as the Option Period
and shall be exercisable only at such time or times and to the
extent the related options would be exercisable in accordance
with the provisions of Section 5. A SAR which is granted on a
stand alone basis shall be for such period and shall be
exercisable at such times and to the extent provided in an
Agreement.
(ii) Exercise Price. The exercise price of a SAR shall in no event
be less than 100% of the Fair Market Value per share of Common
Stock on the date of grant.
(iii)Amount. Upon the exercise of a SAR, the SAR Holder shall be
entitled to receive an amount in cash, shares of Common Stock
or both as determined by the Committee or as otherwise
permitted in an Agreement equal in value to the excess of the
Fair Market Value per Share of Common Stock over the Option
Price per Share of Common Stock specified in the related
Agreement multiplied by the number of shares in respect of
which the SAR is exercised. In the case of a SAR granted on a
stand alone basis, the Agreement shall specify the value to be
used in lieu of the Option Price per Share of Common Stock.
The aggregate Fair Market Value per Share of the Common Stock
shall be determined as of the date of exercise of such SAR.
(iv) Non-transferability of Stock Appreciation Rights. SAR shall be
transferable only when and to the extent that a stock option
would be transferable under the Plan unless otherwise provided
in an Agreement.
(v) Termination. A SAR shall terminate at such time as an option
would terminate under the Plan, unless otherwise provided in
an Agreement.
(vi) Incentive Stock Option. A SAR granted in tandem with an ISO
shall not be exercisable unless the fair market value of the
Common Stock on the date of exercise exceeds the Option Price.
In no event shall any amount paid pursuant to the SAR exceed
the difference between the Fair Market Value on the date of
exercise and the Option Price.
(vii)Limitation on SARs. No Participant shall be granted SARs
exceeding the limitation provided in Section 4(c), subject to
the adjustment provided in Section 4(e).
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<PAGE> 7
7. Change in Control/Extraordinary Transaction. The Committee, in its
discretion, shall have the authority to make provisions in its award and
grant agreements to address vesting and other issues arising in connection
with a change in control.
8. Amendments and Termination. Either the Board or the Committee may amend or
terminate the Plan at any time, but no amendment or termination shall be
made which would impair the rights of the Optionee, Awardee, or SAR Holder
without his or her consent. Any amendment made by the Committee shall be
subject to approval or rejection of the Board. The Committee may amend the
terms of any Grant or Award, prospectively or retroactively, except that no
such amendment shall impair the rights of the Optionee, Awardee, or SAR
Holder. The Committee may also substitute new stock options or SARs for
previously granted stock options or SARs, including previously granted
stock options or SARs having higher option prices, but no such substitution
shall be made which would impair the rights of the Optionee or SAR Holder
under such stock option or SAR theretofore granted without the Optionee's
or SAR Holder's consent. Neither the Board nor the Committee shall, without
approval of a majority of the votes cast by the stockholders of Nabors at a
meeting of stockholders at which a proposal to amend the Plan is voted upon
(i) increase the maximum number of shares of Common Stock which may be
awarded or granted under the Plan in the aggregate or to any individual;
(ii) extend the period during which stock, options, or SARs may be granted
or options or SARs may be exercised; (iii) amend the class of Covered
Persons eligible to receive stock awards, option, or SAR grants; or (iv)
alter the Performance Goals. Subject to the above provisions, the Board
shall have authority to amend the Plan to make changes that are consistent
with the purpose of the Plan or to take into account changes in law and tax
and accounting rules, as well as other developments and to make Awards and
Grants which qualify for beneficial treatment under such rules without
shareholder approval.
9. Miscellaneous.
(a) Other Actions. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and
powers, including but not limited to, the right of the Company to award
stock or grant options for proper corporate purposes other than under
the Plan to any employee or other person, firm, corporation or
association.
(b) Governing Laws. The Plan and all rights and obligations thereunder
shall be construed in accordance with and governed by the laws of the
State of Delaware.
(c) Approval. The Plan shall become effective on January 9, 1998.
(d) Withholding of Taxes. No stock may be awarded or option or SAR may be
exercised, unless the Awardee, Optionee or SAR Holder has paid, or has
made provision, satisfactory to the Committee for payment of federal,
state and local income taxes, or any other taxes (other than stock
transfer taxes), which the Company may be obligated to withhold. The
Committee may authorize that shares of Common Stock or options be
applied toward the payment of withholding taxes.
(e) Awards and Grants in Substitution for Awards Granted by Other
Corporations. Awards may be granted under the Plan from time to time in
substitution for awards held by employees, directors or service
providers of other corporations who are about to become employees of
the Company or an affiliate as the result of a merger or consolidation
of the employing corporation with the Company or an affiliate, or the
acquisition by the Company or an affiliate of the assets of the
employing corporation, or the acquisition by the Company or affiliate
of the stock of the employing corporation,
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<PAGE> 8
as the result of which it becomes a designated employer under the Plan.
The terms and conditions of the stock awards and option grants so
granted may vary from the terms and conditions set forth in this Plan
at the time of such grant as the majority of the members of the
Committee may deem appropriate to conform, in whole or in part, to the
provisions of the stock awards and option grants in substitution for
which they are made.
(f) Continuance of Employment. Nothing in the Plan or in any Award or Grant
pursuant to the Plan shall confer on any Covered Person any right to
continue in the employ of the Company or interfere in any way with the
right of the Company to terminate his employment at any time.
(g) Loans or Installment Payments. The Committee may, in its discretion,
assist any Awardee or Optionee in the award of stock or exercise of
options including satisfaction of any federal, state and local income
and employment tax obligations arising therefrom, by authorizing the
extension of a loan from the Company to such Awardee or Optionee. The
terms of any loan and the method of payment (including the interest
rate and terms of repayment) shall be upon such terms as the Committee
deems appropriate under the circumstances. Loans may be authorized with
or without security or collateral.
(h) Headings. The headings contained in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of
this Plan.
(i) Severability. If any provision of this Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereby, and this
Plan shall be construed as if such invalid or unenforceable provision
were omitted.
(j) Successors and Assigns. This Plan shall inure to the benefit of and be
binding upon each successor and assign of the Company. All obligations
imposed upon a Participant, and all rights granted to the Company
hereunder, shall be binding upon the Participant's heirs, legal
representatives and successors.
(k) Entire Agreement. This Plan and any Agreement entered into with an
Awardee, Optionee, or SAR Holder shall constitute the entire agreement
with respect to the subject matter thereof, provided that in the event
of any inconsistency between the Plan and the Agreement, the terms and
conditions of the Agreement shall control.
8
<PAGE> 1
EXHIBIT 10.20
NABORS INDUSTRIES, INC.
1998 CHAIRMAN'S EXECUTIVE STOCK PLAN
1. Purpose of Plan. The purpose of 1998 Chairman's Executive Stock
Plan (the "Plan") is (i) to provide an incentive for the Chairman
of the Board, ("Covered Employee") of Nabors Industries, Inc.
("Nabors" or the "Company") by encouraging ownership of the
Company's common stock, $.10 par value, (the "Common Stock"), and
(ii) to aid the Company in retaining such officer upon whose
efforts the Company's success and future growth depends.
2. Administration. The Plan shall be administered by an independent
committee (the "Committee") appointed by the Company's Board of
Directors (the "Board"), as hereinafter provided.
The Committee shall be appointed from time to time by the Board
and shall consist of not fewer than two members. No member of the
Committee shall be eligible to participate in the Plan while
serving as a member of the Committee. All members of the Committee
shall be "disinterested persons" as defined by Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "34 Act") or any
successor thereto. The Board shall designate one of the members of
the Committee as the Committee Chairman. The Committee shall hold
its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and
signed by all members shall be effective as if made by a majority
vote at a meeting duly called and held. The Committee may appoint
a secretary (who need not be a member of the Committee). For
purposes of administration, the Committee, subject to the terms of
the Plan, shall have final authority to establish such rules and
regulations, and take such other administrative actions as it
deems necessary or advisable. All determinations and
interpretations made by the Committee shall be final, conclusive
and binding on all persons, including persons granted options
hereunder ("Optionees") and their legal representatives and
beneficiaries. No member of the Committee shall be liable for any
act or omission with respect to his services on the Committee, if
he acts in good faith and in a manner he reasonably believes to be
in or not opposed to the best interests of the Company.
3. Stock Available for Stock Awards and Option Grants. There shall be
available for the grant of options under the Employee Plan a total
of 764,924 Shares of Common Stock. This amount is subject to any
adjustments which may be made pursuant to Section 5(f) hereof.
Shares of Common Stock with respect to which options are granted
under the Plan may be either authorized and unissued shares of
Common Stock, or previously issued shares of Common Stock held in
the treasury of the Company, or both. Shares of Common Stock
reserved for options which have terminated or expired prior to
exercise shall be available for further awards or grants
4. (a) Eligibility. Option grants under the Plan may be made to
Covered Employees. Stock Options made to a Covered Employee
whether or not they hold or have held awards or grants previously,
under the Plan or otherwise granted or assumed by Nabors. In
selecting a Covered Employee to receive awards or grants, the
Committee may take into consideration any factors it may deem
relevant, including its estimate of the individual's present and
potential contributions to the success of the Company.
<PAGE> 2
(b) Description of Compensation. The maximum amount of
compensation payable to an employee attributable to the exercise
of stock options granted under the Plan shall be equal to the
maximum number of Shares of Common Stock for which options can be
granted to an employee multiplied by the difference between the
Fair Market Value on the date of exercise less the exercise price
(which is no less than the Fair Market Value on the date of the
grant of the option).
5. Terms and Conditions of Stock or Options. The Committee shall, in
its discretion, prescribe the terms and conditions of the grants
hereunder, which terms and conditions need not be the same in each
case, subject to the following:
(a) Number of Shares. Each option grant shall state the number of
shares of Common Stock to which it pertains.
(b) Option Exercise Price. The option exercise price shall be set
by the Committee, but shall be no less than the Fair Market Value
per share of Common Stock on the date of the grant of the option.
The option price is to be paid, upon exercise, in cash or, in the
discretion of the Committee, in options or Shares of the Company
to be valued at fair market value at the time of exercise. For
purposes of the Plan, the Fair Market Value per share of Common
Stock shall be the last sale price regular way on the date of
reference, or, in the case no sale takes place on such date, the
average of the closing high bid and low asked prices regular way,
in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if the
Common Stock is not listed or admitted to trading on any national
securities exchange, the last sale price reported on the National
Market System of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") on such date, or the average
of the closing high bid and low asked prices of the Common Stock
in the over-the-counter market reported on NASDAQ on such date,
whichever is applicable or, if there are not such prices reported
on NASDAQ on such date, then as furnished to the Committee by any
New York Stock Exchange member selected from time to time by the
Committee for such purpose. If there is no bid or asked price
reported on any such date, the market value shall be determined by
any other appropriate method selected by the Committee.
(c) Option Period. The Committee may specify a period for exercise
of an option (the "Option Period") which period shall in no event
be more than ten years from the date of grant. Options may, in the
discretion of the Committee, be exercisable in installments during
the Option Period and such installments may be accelerated based
upon target prices for Nabors Common Stock. Any shares of Common
Stock not purchased on any applicable installment date may be
purchased thereafter at any time before the expiration date of the
Option Period subject to Section 5(e) hereof.
(d) Exercise of Options. In order to exercise an option, the
Optionee shall deliver to Nabors written notice specifying the
number of shares of Common Stock to be purchased, together with a
certified or bank cashier's check payable to the order of Nabors
in the full amount of the purchase price therefor; provided,
however, that the Committee may, in its discretion, allow such
payments to be made in whole or in part in Common Stock delivered,
or options surrendered, by the Optionee valued at the Fair Market
Value of such Common Stock.
If the Optionee so requests, shares of Common Stock purchased upon
exercise of an option may be issued in the name of the Optionee or
another person. An Optionee shall not have any of the rights of a
stockholder until the shares of Common Stock are issued to him. An
option may not be exercised for less than the lesser of (i) ten
shares of Common Stock, or (b) the number of shares of Common
Stock remaining subject to such option.
<PAGE> 3
(e) Effect of Termination of Employment. Any option granted
hereunder may be exercised by the Optionee, his heirs, devisees,
legatees or assigns at any time before the relevant expiration
date, whether or not Optionee ceases to be an employee and whether
or not such employment is terminated by voluntary written
resignation, by action of the Company for cause, without cause, or
by reason of death or disability, with respect to all options as
to which his right of exercise has vested or as to which his right
of exercise shall vest in accordance with the next sentence of
this paragraph on the date of his termination of employment. In
the event of a termination of employment for any reason, except by
the Company for cause or by voluntary resignation by Optionee, all
unvested options shall be immediately exercisable as of the date
of his termination of his employment. The term "for cause" shall
be defined by the Committee at the time of the grant of an Option
pursuant to this Plan.
(f) Adjustments. In the event of a reorganization,
recapitalization, stock split, stock dividend, Extraordinary
Dividend, combination of shares, consolidation, merger (other that
a merger or consolidation which does not result in any
reclassification, conversion, exchange or cancellation of
outstanding shares), any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange
offer for or the acquisition, directly or indirectly, by any
person or group of all or a majority of the then outstanding
voting securities of the Company, rights offering, or any other
change in the corporate structure or rights with respect to any
shares of the Company, adjustments shall be made to the number or
type of stock granted pursuant to this Plan and, in order to
prevent dilution or enlargement of the rights of Optionee, to the
number of Options, and the type and option price of stock subject
to outstanding Options or as provided below with respect to
Extraordinary Dividend. In the case of an Extraordinary Dividend,
the Optionee shall be entitled to have distributed to him upon the
exercise of any portion of the option an amount equal to the
Extraordinary Dividend her would have received had he exercised
such portion of the option immediately prior to the declaration of
the Extraordinary Dividend. For this purpose, an Extraordinary
Dividend shall mean any dividend or dividends paid or declared in
the twelve month period immediately prior to the day after any
such declaration in excess in the aggregate of 7% of the average
Closing Price of the Common Stock during such period.
(g) Registration, Listing and Qualification of Shares of Common
Stock. The Company shall register all the shares underlying the
options on a Registration Statement on Form S-8 ("S-8") as soon as
practicable. The Company shall list all the shares underlying the
options on the American Stock Exchange with an Additional Listing
Application in accordance with and subject to the American Stock
Exchange rules which may be in effect from time to time.
(h) Withholding of Taxes. No option may be exercised, unless the
Optionee has paid, or has made provision, satisfactory to the
Committee for payment of, Federal, state and local income taxes,
or any other taxes (other than stock transfer taxes), which the
Company may be obligated to collect as a result of the issue or
transfer of shares of Common Stock upon exercise of an option. The
Committee may authorize that shares of Common Stock or options to
be applied towards the payment of withholding taxes.
(i) Transferability. Options granted pursuant to this Plan may be
transferred by the Employee with the consent of the Company which
shall not be unreasonably withheld at any time; provided however,
Section 5(e) of this Plan shall be applied based on the Employee
and his status and not that of any assignee.
(j) Other Terms and Conditions. The Committee may impose such
other terms and conditions, not inconsistent with the terms
hereof, on the grant or exercise of options, or on the grant of
stock, as it deems advisable.
<PAGE> 4
6. Stockholder's Rights. Neither an Optionee nor their respective
legal representatives, legatees or distributees, as the case may
be, shall have any of the rights or privileges of a stockholder of
the Company by virtue of an award of stock, or grant of an Option,
except with respect to any shares of Common Stock actually issued
or transferred of record and delivered to one of the
aforementioned persons.
7. Governing Laws. The Employee Plan and all rights and obligations
thereunder shall be construed in accordance with and governed by
the laws of the State of Delaware.
<PAGE> 1
EXHIBIT 10.21
NABORS INDUSTRIES, INC.
1999 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of the Nabors Industries, Inc. 1999 Stock Option Plan for
Non-employee Directors (the "Plan") is to promote the interests of the Nabors
Industries, Inc. (the "Company") and its stockholders by strengthening the
Company's ability to attract and retain the services of experienced and
knowledgeable non-employee directors and by encouraging such directors to
acquire an increased proprietary interest in the Company.
2. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Article 7, the total number of shares of
common stock, $.10 par value (the "Common Stock") of the Company for which
options may be granted under the Plan shall be 500,000 Shares of Common Stock
(the "Shares"). The Shares shall be shares currently authorized but unissued or
currently held or subsequently acquired by the Company as treasury shares,
including shares purchased in the open market or in private transactions. If any
option granted under the Plan expires or terminates for any reason without
having been exercised in full, the Shares subject to, but not delivered under,
such option may become available for the grant of other options under the Plan.
To the extent that Shares are delivered to pay the exercise price of an option,
the number of Shares so delivered shall again be available for grant under the
Plan.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered, subject to Articles 10 and 11, by the Company's
Board of Directors provided that the Board may appoint a committee (the
"Committee") to administer the Plan. In no event, shall an Eligible Director (as
defined herein) consider or vote on the administration of this Plan or serve as
a member of the Committee. The Board of Directors or, if applicable, the
Committee shall be referred to herein as the "Administrator". Subject to the
terms of the Plan, the Administrator shall have the power to construe the
provisions of the Plan, to determine the resolution of all questions arising
thereunder, and to adopt and amend such rules and regulations for administering
the Plan as the Administrator deems desirable. Any and all decisions of the
Administrator in the administration of the Plan shall be final and conclusive,
including decisions concerning capital adjustments contemplated by Article 7
hereof. No member of the Administrator shall be liable for anything done or
omitted to be done by such member in connection with the Plan, except in
circumstances involving actual bad faith.
<PAGE> 2
4. PARTICIPATION IN THE PLAN
Each member of the Company's Board of Directors (a "Director") who is not
otherwise an employee of the Company or any subsidiary of the Company on the
date of grant and who qualifies as a "non-employee director" pursuant to Rule
16b-3 of the Securities Exchange Act of 1934, as amended ("Rule 16b-3") and as
an "outside director" pursuant to Section 162(m) of the Internal Revenue Code of
1986, as amended and the rules promulgated thereunder ("Section 162(m)") on the
date of the grant (an "Eligible Director") shall be eligible to participate in
the Plan.
5. NON STATUTORY STOCK OPTIONS
All options granted under the Plan shall be non-statutory options not intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended.
6. OPTION TERMS
Each option granted to an Eligible Director under the Plan and the issuance of
Shares thereunder shall be subject to the following terms:
6.1 Option Agreements. Each option granted under the Plan shall be
evidenced by an option agreement (an "Agreement") duly
executed on behalf of the Company and by the Eligible Director
to whom such option is granted and dated as of the applicable
date of grant. Each Agreement shall be signed on behalf of the
Company by an officer or officers delegated such authority by
the Administrator using either manual or facsimile signature.
Each Agreement shall comply with and be subject to the terms
and conditions of the Plan. Any Agreement may contain such
other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator. The terms
and provisions of any particular Agreement may differ from the
terms and provisions of any other Agreement.
6.2 Grants. Options shall be granted by the Administrator to
Eligible Directors.
6.3 Option Exercise Price. Each Agreement shall state the exercise
price per share of each share of Common Stock to which it
relates. The exercise price per share of Common Stock subject
to an option shall not be less than 100% of the Fair Market
Value on the date of grant. For purposes of the Plan, the Fair
Market Value per share of Common Stock shall be the last sale
price regular way on the date of reference, or, in the case no
sale takes place on such date, the average of the closing high
bid and low ask prices regular way, in either case on the
principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if the Common Stock
is not listed or admitted to trading on any national
securities exchange, the last sale price reported on the
National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") on
such date, or the average of the closing high bid and low ask
prices of the Common Stock in the over-the-counter market
reported on NASDAQ on such date, whichever is applicable or,
if there are not such prices reported on NASDAQ on such date,
then
<PAGE> 3
as furnished to the Administrator by any New York Stock
Exchange member selected from time to time by the
Administrator for such purpose. If there is no sale, bid or
asked price reported on any such date, the market value shall
be determined by any other appropriate method selected by the
Administrator.
6.4 Vesting; Exercisability. Options shall vest and become
non-forfeitable on the first year anniversary of the day on
which such option was granted, if the optionee has continued
to serve as a Director until that day, unless otherwise
provided. An option shall on that day and thereafter be
exercisable, subject only to Section 6.7.
6.5 Time and Manner of Option Exercise. Any vested and exercisable
option is exercisable in whole or in part at any time or from
time to time during the option period by giving written
notice, signed by the person exercising the option, to the
Company stating the number of Shares with respect to which the
option is being exercised, accompanied by payment in full of
the option exercise price for the number of Shares to be
purchased and by the payment or making provision satisfactory
to the Company for the payment of any taxes which the Company
is obligated to collect with respect to the issue or transfer
of the Shares upon such exercise. The date both such notice
and payment are received by the office of the Secretary of the
Company shall be the date of exercise of the stock option as
to such number of Shares. No option may at any time be
exercised with respect to a fractional Share.
6.6 Payment of Exercise Price. Payment of the option exercise
price may be in cash or by bank-certified, cashier's, or
personal check or payment may be in whole or part by
a. transfer to the Company of shares of Common Stock having
a Fair Market Value equal to the option exercise price
at the time of such exercise, or
b. delivery of instructions to the Company to withhold
Shares, that would otherwise be issued on such exercise
of the option, having a Fair Market Value at the time of
such exercise equal to the total option exercise price
of the options being exercised.
If the Fair Market Value of the number of whole shares transferred or the number
of whole option Shares surrendered is less than the total exercise price of the
option being exercised, the shortfall must be made up in cash or other form of
payment as permitted under this Section 6.6.
6.7 Term of Options. Each option shall expire ten years from its
date of grant, but shall be subject to earlier termination as
follows:
a. In the event of the 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 pursuant to this
Plan shall automatically expire and shall not be
<PAGE> 4
exercisable and all options vested but unexercised shall
continue to be exercisable until the stated expiration
date of such options.
b. In the event of the death or disablement of an optionee
while the optionee is a Director, the then-outstanding
options of such optionee shall be exercisable for two
years from the date of the death or disablement of the
optionee or until the stated grant expiration date,
whichever is earlier, by the optionee or by his/her
successors in interest, in accordance with the paragraph
below. All unvested options shall automatically vest and
become non-forfeitable as of the date of death or
disablement and shall be exercisable for two years from
the date of the death of the optionee or until the
stated grant expiration date, whichever is earlier, by
the optionee or by his/her successors in interest, in
accordance with the paragraph below.
c. 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 (other than
for the reasons set forth in Section 6.7(a) or (b)), the
Administrator in its sole discretion can cancel the
then-outstanding options of such optionee, including
those options which have vested pursuant to Section 6.4,
and such options shall automatically expire and become
non-exercisable on the effective date of such
termination.
Exercise of a deceased optionee's exercisable options shall be by the estate of
such optionee or by a person or persons whom the optionee has designated in
writing filed with the Company, or, if no such designation has been made, by the
person or persons to whom the optionee's rights have passed by will or the laws
of descent and distribution.
6.8 Transferability. No options granted hereunder may be
transferred, pledged, assigned or otherwise encumbered by an
optionee except:
(a) by will;
(b) by the laws of descent and distribution;
(c) to charities or other not-for-profit organizations; or
(d) if permitted by the Administrator and so provided in the
Agreement or an amendment thereto, (i) pursuant to a
domestic relations order, as defined in the Internal
Revenue Code of 1986, as amended, (ii) to Immediate
Family Members (as defined below), (iii) to a
partnership in which Immediate Family Members, or
entities in which Immediate Family Members are the
owners, members or beneficiaries, as appropriate, are
the partners, (iv) to a limited liability company in
which Immediate Family Members, or entities in which
Immediate Family Members are the owners, members or
beneficiaries, as appropriate, are the members, or (v)
to a trust for the benefit of Immediate Family Members;
provided, however, that no more than a de minimus
beneficial interest in a
<PAGE> 5
partnership, limited liability company or trust
described in (iii), (iv) or (v) above may be owned by a
person who is not an Immediate Family Member or by an
entity that is not beneficially owned solely by
Immediate Family Members. "Immediate Family Members"
shall be defined as the spouse and natural or adopted
children or grandchildren of the optionee and their
spouses.
Except as set forth above, an optionee's rights and interest
under the Plan may not be assigned or transferred in whole or
in part either directly or by operation of law or otherwise,
including, but not limited to, execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner, and no
such right or interest or any participant in the Plan shall be
subject to any obligation or liability of such participant.
6.9 Limitation of Rights.
6.9.1 Limitation as to Shares. Neither the recipient of an option
under the Plan nor an optionee's successor or successors in
interest shall have any rights as a stockholder of the Company
with respect to any Shares subject to an option granted to
such person until the date of issuance of a stock certificate
for such Shares.
6.9.2 Limitation as to Directorship. Neither the Plan, nor the
granting of an option, nor any other action taken pursuant to
the Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that an Eligible Director
has a right to continue as a Director for any period of time
or at any particular rate of compensation.
6.10 Regulatory Approval and Compliance. The Company shall not be
required to issue any certificate or certificates for Shares
upon the exercise of an option granted under the Plan or to
record as a holder of record of Shares the name of the
individual exercising an option under the Plan, without
obtaining to the complete satisfaction of the Administrator
the approval of all regulatory bodies deemed necessary by the
Administrator and without complying, to the Administrator's
complete satisfaction, with all rules and regulations under
federal, state, or local law deemed applicable by the
Administrator.
6.11 Tax Withholding. Eligible Directors participating in the Plan,
upon exercise of any options pursuant to the Plan, may
instruct the Company to withhold option Shares, that would
otherwise be issuable upon such exercise, to cover withholding
taxes.
6.12 Cashing Out of Stock Option. On receipt of written notice of
exercise, the Administrator may elect to cash out all or part
of the portion of the shares of Common Stock for which an
option is being exercised by paying the optionee an amount, in
cash or Common Stock, as determined by the Administrator,
equal to the excess of the Fair Market Value of the Common
Stock over the option price multiplied by the number of shares
of Common Stock for which the option is being exercised on the
effective date of such cash-out.
<PAGE> 6
6.13 Deferral of Option Shares. The Administrator may from time to
time establish procedures pursuant to which an optionee may
elect to defer, until a time or times later than the exercise
of an option, receipt of all or a portion of the shares
subject to such option and/or to receive cash at such later
time or times in lieu of such deferred shares, all on such
terms and conditions as the Administrator shall determine. If
any such deferrals are permitted, an optionee who elects such
deferral shall not have any rights as a stockholder with
respect to such deferred shares unless and until certificates
representing such shares are actually delivered to the
optionee with respect thereto, except to the extent otherwise
permitted by the Administrator.
7. CAPITAL ADJUSTMENTS
If any change is made to the Common Stock subject to the Plan, through merger,
consolidation, reorganization, recapitalization, stock dividend, spin-off, stock
split, combination of shares, rights offerings, change in corporate structure of
the Company, or otherwise, appropriate adjustments as conclusively determined by
the Administrator will be made (A) to the number or type of securities or other
property subject to and reserved for issuance or transfer under the Plan and,
(B) in order to prevent dilution or enlargement of the rights of Optionees, to
the number of Stock Options, securities or other property underlying the Options
and Option price of securities subject to outstanding Options.
8. EXPENSES OF THE PLAN
All costs and expenses of the adoption and administration of the Plan shall be
borne by the Company, and none of such expenses shall be charged to any
optionee.
9. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective December 30, 1998 (the "Effective Date"). The Plan
shall continue in effect until it is terminated by action of the Company's Board
of Directors but such termination shall not affect the terms of any
then-outstanding options.
<PAGE> 7
10. TERMINATION AND AMENDMENT OF THE PLAN
The Company's Board of Directors may at any time terminate or from time to time
amend, modify or suspend this Plan; provided, however, that no such amendment or
modification shall be made which would cause the participants to fail to qualify
as "outside directors" for purposes of Section 162(m) or as "non-employee
directors" for purposes of Rule 16b-3 or which would cause the grants not to be
exempt from Section 16 of the Securities Exchange Act of 1934, as amended. No
amendment of the Plan shall materially and adversely affect any right of any
optionee with respect to any option theretofore granted without such optionee's
written consent.
11. OTHER
It is intended that the participants in the Plan shall qualify as "outside
directors" for purposes of Section 162(m) and as "non-employee directors" for
purposes of Rule 16b-3 and that grants under the Plan shall be exempt from
Section 16 of the Securities Exchange Act of 1934, as amended and this Plan
shall be construed and interpreted in a manner not inconsistent with this
intent.
<PAGE> 1
EXHIBIT 11
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three
Year Ended Months Ended
December 31, December 31, Year Ended September 30,
1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding 100,807 100,814 96,034 85,429
---------- ---------- ---------- ----------
Net income $ 124,988 $ 41,327 $ 114,808 $ 70,500
---------- ---------- ---------- ----------
Per share amount $ 1.24 $ .41 $ 1.20 $ .83
---------- ---------- ---------- ----------
Diluted:
Weighted average number of shares outstanding 100,807 100,814 96,034 85,429
Net effect of dilutive stock options and warrants-based
on the treasury stock method using
average market price 2,231 6,096 6,424 8,323
Assumed conversion of 5% convertible notes (1) 9,517 9,517 9,517 --
---------- ---------- ---------- ----------
Total 112,555 116,427 111,975 93,752
---------- ---------- ---------- ----------
Net income $ 124,988 $ 41,327 $ 114,808 $ 70,500
Add 5% convertable note interest, net
of tax effect (1) 5,392 1,348 5,606 --
---------- ---------- ---------- ----------
Total $ 130,380 $ 42,675 $ 120,414 $ 70,500
---------- ---------- ---------- ----------
Per share amount $ 1.16 $ .37 $ 1.08 $ .75
---------- ---------- ---------- ----------
</TABLE>
(1) The 5% convertible notes issued during May 1996 are not included in the
diluted earnings per share calculation for the year ended September 30,
1996 because inclusion would have been anti-dilutive.
<PAGE> 1
EXHIBIT 12
NABORS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio amounts)
<TABLE>
<CAPTION>
Three
Year Ended Months Ended
December 31, December 31, Year Ended September 30,
1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pretax income $ 199,981 $ 62,616 $ 182,410 $ 81,600
Add fixed charges as adjusted (from below) 16,040 4,107 16,980 12,258
---------- ---------- ---------- ----------
Earnings $ 216,021 $ 66,723 $ 199,390 $ 93,858
---------- ---------- ---------- ----------
Fixed charges:
Interest expense:
Interest on indebtedness $ 14,974 $ 3,858 $ 15,993 $ 11,356
Capitalized 2,648 297 1,191 985
Amortization of debt costs 489 121 527 528
Interest portion of rental expense 577 128 460 374
---------- ---------- ---------- ----------
Fixed charges before adjustments 18,688 4,404 18,171 13,243
Less capitalized interest (2,648) (297) (1,191) (985)
---------- ---------- ---------- ----------
Fixed charges as adjusted $ 16,040 $ 4,107 $ 16,980 $ 12,258
---------- ---------- ---------- ----------
Ratio (earnings divided by fixed charges
before adjustments) 11.56 15.15 10.97 7.09
---------- ---------- ---------- ----------
</TABLE>
<PAGE> 1
WHAT SETS NABORS APART?
NABORS INDUSTRIES
1998 ANNUAL REPORT
<PAGE> 2
Ten-Year (1988-1997) Average Returns on
Capital Employed for Selected Oil Service Sectors
[CHART]
To our Shareholders 2 Financial Highlights 5 Questions and Answers 7
Operating Units 14 Financial Review 36 Corporate Information 64
Nabors' Annual Returns on Capital Employed
1998-1998
[CHART]
\
<PAGE> 3
DURING 1998, A CONTINUAL DECLINE IN DRILLING AND RELATED ACTIVITY OCCURRED IN
MOST KEY MARKETS THAT NABORS SERVES. THIS WAS TRIGGERED IN LATE 1997 BY FALLING
OIL PRICES WHICH, WHEN COMBINED WITH RECENT DECLINES IN NATURAL GAS PRICES,
FORCED A CURTAILMENT IN OUR CUSTOMERS' DRILLING-RELATED EXPENDITURES. DESPITE
THIS DETERIORATING MARKET ENVIRONMENT, WE WERE ABLE TO REMAIN PROFITABLE AND
TURN IN A RESPECTABLE PERFORMANCE FOR 1998.
TO OUR SHAREHOLDERS
A review of our 1998 results reveals that revenues of $968 million were
13 percent less than calendar year 1997, but earnings per share declined only
six percent from last year's record level. Even more noteworthy was the
relatively small impact the weak market had on our operating income, which
declined less than seven percent to $182 million. This diminished impact on our
EPS and operating income was derived from expanded margins, as our more premium
assets and recent higher-yielding rig investments constituted an increasing
proportion of our revenues. All of this resulted in a solid 13 percent return
on capital employed. Nevertheless, our results continued to deteriorate each
quarter, finishing the year at roughly one-half of 1997's peak, and portending a
significantly lower level of profitability in the coming year as the protracted
market weakness spreads to all of our operations.
Our ability to achieve relatively favorable results in such a difficult
year is rooted in the consistent application of our long-term strategy. Two
vital objectives of this strategy are to minimize the impact of an unexpected
market downturn and to enhance our competitive status and long-term upside. We
achieved this by retaining a solid financial position, by diversifying into
sustainable markets and possessing a portfolio of diverse and premium assets.
[PHOTO OF Eugene M. Isenberg Chairman and Chief Executive Officer]
[PHOTO OF Richard A. Stratton Vice Chairman]
[PHOTO OF Anthony G. Petrello President and Chief Operating Officer]
2
<PAGE> 4
This past year has demonstrated the value of maintaining this discipline,
even during the very strong growth market of 1997. Adverse financial effects
initially were confined to those aspects of our business characterized by
short-term contracts which were easily curtailed with fluctuations in commodity
prices. Contributing positively to our combined 1998 results were those areas of
our business such as Alaska and International that represent longer-term
contract commitments and slower cycle times. Our more premium assets and certain
regions within our vulnerable units were slower to react and continue to fare
better than others.
In 1999 we expect to see continued soft oil and natural gas prices, the
resultant reduction in operator cash flows and capital expenditure budgets
leading to probable lower levels of drilling activity worldwide. The beginning
1999 crude oil price in real dollars is the lowest in decades, the result of an
imbalance in the supply and demand for crude oil that stemmed from additional
supply, coupled with a simultaneous slowing in demand growth. I believe that
dramatically reduced investment in exploration and development drilling will
inevitably reduce future supply and restore balance, a process that will be
accelerated by recent OPEC production cuts. I am equally convinced that there
will be a return to more normalized growth in demand. When this occurs, we
expect a significant improvement in our results.
Just as we have in the past, we will utilize the current environment as an
opportunity to build an improved position for the future through a lower cost
structure and opportunistic acquisitions. We are nearing completion of a merger
with a US land driller, Bayard Drilling Technologies, and we are moving ahead on
the proposed merger with Pool Energy Services later this year. The addition of
these fine companies will broaden our market coverage, reduce cost and increase
efficiency, thereby enhancing our ability to serve our customers and increasing
our earnings potential. We continue to evaluate potentially attractive
acquisitions that increase the range of value-added services we can offer our
customers without compromising our balance sheet or diluting the quality of our
asset base.
While I view the long-term outlook for our business as very positive, we
continue to manage the business anticipating protracted low oil and natural gas
prices, just as we have always managed for the unexpected downside.
Specifically, we will constantly adjust our direct operating costs, overhead and
capital expenditures to accommodate any further deterioration in activity
levels, assuring profitability, maximizing cash flow and maintaining our
investment grade credit ratings. This lower cost structure and any enhancements
we can achieve in our business position should yield an even greater ultimate
upside when our markets normalize.
Finally, I want to acknowledge the tremendous efforts of our employees
during these difficult times. The strength of our Company is ultimately derived
from their skill and dedication. The balance of this report reviews in more
detail the developments of 1998, the overall market environment, those
attributes that differentiate Nabors from its peers and our expectations of the
near and longer-term future. I look forward to reporting an improved market
outlook and our continued progress in the future.
Sincerely,
/s/ EUGENE M. ISENBERG
Eugene M. Isenberg Chairman and Chief Executive Officer
3
<PAGE> 5
REVENUES OPERATING INCOME SHAREHOLDERS' EQUITY
BEFORE PROVISION FOR
ASSET WRITE-DOWNS
[CHART] [CHART] [CHART]
<PAGE> 6
NABORS INDUSTRIES
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve
Months Ended
Year Ended December 31,
December 31, (Unaudited) Year Ended September 30,
------------------------------------------------------------------
OPERATING DATA 1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 968,157 $1,115,032 $1,029,303 $ 719,743 $ 572,788 $ 484,268 $ 419,406
Depreciation and amortization 84,949 72,350 66,391 46,117 31,042 26,241 22,434
Operating income 182,338 195,348 154,761 77,099 58,555 9,299 38,257
Net income 124,988 136,020 114,808 70,500 51,104 1,350 38,558
Net income per diluted share $ 1.16 $ 1.24 $ 1.08 $ .75 $ .57 $ .02 $ .50
Weighted average number of
diluted shares outstanding 112,555 113,793 111,975 93,752 89,655 85,620 77,806
Capital expenditures and
acquisitions of businesses $ 313,464 $ 381,009 $ 396,668 $ 174,483 $ 144,560 $ 62,907 $ 84,752
<CAPTION>
Year Ended September 30,
--------------------------------------
OPERATING DATA 1992 1991 1990
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 312,407 $ 264,239 $ 153,920
Depreciation and amortization 16,526 10,119 5,232
Operating income 34,705 30,324 14,383
Net income 33,740 29,724 16,401
Net income per diluted share $ .45 $ .42 $ .26
Weighted average number of
diluted shares outstanding 74,666 70,728 62,251
Capital expenditures and
acquisitions of businesses $ 61,124 $ 88,104 $ 73,943
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of September 30,
------------------------ ------------------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and short-term
marketable securities $ 23,450 $ 12,606 $ 11,044 $ 104,027 $ 15,334 $ 45,232 $ 70,458
Working capital 21,157 62,571 70,872 172,091 33,892 77,248 113,653
Property, plant and
equipment, net 1,127,154 923,402 861,393 511,203 393,464 283,141 270,865
Total assets 1,450,242 1,281,306 1,234,232 871,274 593,272 490,273 493,927
Long-term obligations 217,034 226,299 229,507 229,504 51,478 61,879 73,109
Stockholders' equity 867,469 767,340 727,843 457,822 368,750 317,424 307,583
Funded debt to capital ratio 0.26:1 0.27:1 0.27:1 0.35:1 0.20:1 0.21:1 0.24:1
<CAPTION>
As of September 30,
--------------------------------------
BALANCE SHEET DATA 1992 1991 1990
---------- ---------- ----------
<S> <C> <C> <C>
Cash and short-term
marketable securities $ 14,783 $ 15,139 $ 29,332
Working capital 33,831 15,650 40,956
Property, plant and
equipment, net 220,761 185,543 109,928
Total assets 339,930 285,615 226,846
Long-term obligations 49,294 37,489 37,729
Stockholders' equity 201,058 157,302 117,335
Funded debt to capital ratio 0.28:1 0.24:1 0.27:1
</TABLE>
<TABLE>
<CAPTION>
Twelve
Months Ended
Year Ended December 31,
December 31, (Unaudited) Year Ended September 30,
------------------------------------------------------------------
GEOGRAPHIC DISTRIBUTION
OF REVENUES AND ASSETS 1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
United States $ 692,636 $ 867,999 $ 797,319 $ 503,622 $ 383,376 $ 299,278 $ 224,401
Foreign 275,521 247,033 231,984 216,121 189,412 184,990 195,005
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 968,157 $1,115,032 $1,029,303 $ 719,743 $ 572,788 $ 484,268 $ 419,406
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets:
United States $1,052,528 $ 958,026 $ 897,453 $ 593,014 $ 348,248 $ 287,390 $ 277,945
Foreign 397,714 323,280 336,779 278,260 245,024 202,883 215,982
---------- ---------- ---------- ---------- ---------- ---------- ----------
$1,450,242 $1,281,306 $1,234,232 $ 871,274 $ 593,272 $ 490,273 $ 493,927
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
Year Ended September 30,
--------------------------------------
GEOGRAPHIC DISTRIBUTION
OF REVENUES AND ASSETS 1992 1991 1990
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
United States $ 138,534 $ 146,690 $ 89,561
Foreign 173,873 117,549 64,359
---------- ---------- ----------
$ 312,407 $ 264,239 $ 153,920
---------- ---------- ----------
Total assets:
United States $ 152,715 $ 144,590 $ 128,649
Foreign 187,215 141,025 98,197
---------- ---------- ----------
$ 339,930 $ 285,615 $ 226,846
---------- ---------- ----------
</TABLE>
5
<PAGE> 7
[PHOTO]
A Nabors Drilling USA crew member climbing the self-elevating substructure of a
deep SCR rig during rig-up.
6
<PAGE> 8
WHAT HAPPENED IN 1998?
During 1998, many of our shareholders experienced a large drop in the
value of their holdings in Nabors. The following questions and answers attempt
to explain what happened, the current market environment and the prospects for
more prosperous times. They also attempt to elaborate on the attributes that
distinguish Nabors from its peers, allowing it to weather adverse market
conditions and emerge as a stronger Company with enhanced upside potential.
In 1998, energy markets saw a sudden and unexpected drop in the worldwide
pricing of crude oil to historically low inflation adjusted levels. This
reversed the market's future growth expectations for oil service companies,
lowering equity valuations throughout the year in line with the pessimistic
outlook for oil prices and customer drilling plans. As we ended 1998,
expectations for both crude oil and natural gas moved even lower, with no
improvement anticipated before the second half of 1999 or later. This has had a
devastating effect on our clients' capital spending and, in turn, oil service
companies' earnings and cash flow. Equity valuations are not likely to rise
until an improved outlook for oil or gas materializes.
HOW DID NABORS PERFORM?
Our ability to achieve satisfactory results in such a dismal business
environment is the result of our continued adherence to the business strategy
that has served us well for several years. A key element of this strategy is to
minimize the financial effects of weak markets by maintaining diversity in our
premium assets and their geographic locations. This diversity was well
illustrated in 1998 by the relative operating income performance of our
operating units. Our US Lower 48 land business declined by nearly 40 percent
and our offshore division fell 28 percent, as platform workover rig utilization
dropped from 90 percent to 50 percent. Our Canrig subsidiary saw similar
declines as the market for portable land top drives all but evaporated. However,
Canada started the year very strong and ultimately was off only l0 percent.
These reductions were mostly offset by our Alaskan and International units,
which both achieved record results in 1998 with year to year increases in
operating income that approximated 45 percent and 58 percent, respectively. Even
within our adversely affected units, our higher margin, technically
sophisticated and premium assets were less affected, contributing to the
expansion of our consolidated margins from 30.5 percent in l997 to 35.6 percent
in l998.
7
<PAGE> 9
WHY ARE NABORS' RETURNS HIGHER?
In the simplest terms we have a relatively favorable (higher) numerator
divided by a lower denominator. The numerator is the Company's net operating
profit after cash taxes (NOPAT), which has been substantial on an absolute
basis, but is even more impressive when viewed as a percentage of revenues due
to our lower per rig operating cost, overhead, depreciation and taxes, all of
which have characterized our results over the last ten years. The denominator is
the average capital employed in the business during the period. This is
favorable when a company has lower cost assets, which Nabors has achieved by
capitalizing upon periods of weak market conditions to purchase assets at more
favorable prices. Both elements are a function of maintaining a low cost
structure, which has always been an important tenet of Nabors' strategy. We
believe that one of the most important measures of our business is our realized
return on invested capital, just as investors measure their investment
portfolio's performance.
WHY DID OIL PRICES FALL?
Beginning in the fall of 1997, an imbalance developed in the supply of
crude oil worldwide and demand for that commodity, which averaged approximately
74 million barrels per day during 1998. Demand growth rates of two to three
percent per year during the balanced oil market of 1996 and 1997 slowed to
slightly under one percent in 1998 (a change of approximately 1.5 million
barrels per day per year), with the Asian recession and two consecutively warmer
than normal winters primarily to blame. This, combined with a late 1997 increase
in stated oil production quotas within the Organization of Petroleum Exporting
Countries (OPEC) and renewed production by Iraq, exacerbated an excess supply
situation created by the reduced demand and added to burgeoning worldwide crude
oil inventories. The result in early 1999 is the lowest inflation adjusted oil
price in history.
8
<PAGE> 10
WHAT ABOUT NATURAL GAS?
The long-term outlook for natural gas is strong but the near-term is weak,
the result of reduced demand stemming from the much warmer than normal start to
the 97-98 winter and the attendant high inventory of gas in storage as winter
nears its end. This has resulted in lower gas prices which, when coupled with
reduced operator cash flows from low oil prices, has had a dampening effect on
gas drilling. As a consequence, gas production is falling and should decline
even more sharply given the ever increasing depletion rates of new gas wells. A
shortfall in gas supply is likely to develop from these factors, and may be made
more acute if next winter is closer to normal temperatures. Demand for gas is
also expected to grow as a result of its environmental desirability and a
possible shrinking price differential to crude oil distillates. Given the high
costs and political obstacles inherent in importing liquefied natural gas, this
predictable shortfall can best be remedied with increased drilling in North
America, which bodes well for Nabors.
WHAT WILL IMPROVE THE OUTLOOK?
A sufficient period of time in which the demand for oil and natural gas
exceeds supply is necessary to reduce high inventories to more normal levels,
thereby restoring the market balance that existed until late 1997. This in turn
will lead to increased capital spending by our customers for exploration and
development drilling.
Inventories of crude and refined products is the lesser factor, as
evidenced by US levels which, at the beginning of 1999, exceeded eight-year
averages by the equivalent of only four days of supply. US inventory statistics
are generally considered to be the most reliable and are indicative of worldwide
inventories, considering that one-third of the total resides in this country.
Most analysts believe that the Asian situation is stabilizing and, absent
a global recession, demand for crude oil will increase in 1999. This, coupled
with lower supply from OPEC production cuts and falling non-OPEC productive
capacity as a result of the sharp reductions in investment in petroleum
exploration and development, will accelerate inventory reductions and rebalance
the market in time, which is the only unknown element.
9
<PAGE> 11
WILL THIS OCCUR IN 1999?
Obviously no one can say for sure. The overhang in supply and inventory is
small relative to current consumption rates and compared to that which existed
in the 1980s. With the reduced investment in exploration and development
drilling, many analysts believe that the trend toward convergence of supply and
demand in oil will occur by mid 2000 and will be visible by 1999 year end. The
market will bid up commodity prices well in advance of balance, particularly if
this visibility coincides with a period of increased seasonal demand. However,
there is likely going to be a significant time lag between a price response and
an increase in drilling activity due to the impact that protracted lower oil and
now natural gas prices have had on our customers' financial resources. Two to
three quarters of higher prices or alternative financing will be necessary to
restore sufficient capital to fund drilling programs.
WHAT ABOUT THE LONGER-TERM?
The longer-term future is promising, emanating from the same four factors
that have historically driven our growth in profitability and cash flow, as well
as our consistently good returns on capital. First, eventual restoration of the
supply/demand balance of rigs will occur, driven by the continual attrition of
the rig supply and increases in demand. This will lead to increased utilization
of our worldwide fleet and the subsequent improvement in dayrates for our rigs.
Next, we expect to add to the scope of wellsite services we offer our customers,
in order to enhance Nabors' contributions to our customers' drilling
efficiency. We also expect to realize a resurgence of good investment
opportunities that should spring from a recovery in our customers' drilling
programs, which often require new or upgraded rigs. Finally, we expect an
increase in acquisition opportunities, particularly if the current depressed
market environment persists.
10
<PAGE> 12
HOW GOOD CAN IT GET?
Each of the upside elements previously mentioned has the potential to
contribute significantly to increased earnings, cash flow and higher returns on
capital. The magnitude and timing of good investment opportunities in increased
wellsite services, new and upgraded rigs and acquisitions is impossible to
predict. These elements have always contributed significantly to Nabors' growth
and likely will in the future. Our higher level of intellectual capital,
residing in our technical and operational staff, makes it ever more likely we
will see a continually increasing number of opportunities to participate in some
of the world's most challenging drilling projects.
The most easily quantified and probably the biggest upside potential lies
in increasing the utilization and pricing of our rigs. These assets have the
potential to make huge incremental contributions to Nabors' results long before
they reach rig replacement economics. The premium rigs that comprise the
majority of our fleet should see the greatest appreciation. Even a small change
in pricing and utilization generates a significant increase in our earnings per
share.
WHAT ARE THE RISKS?
There are a number of risks that can significantly impact Nabors'
performance and realization of its potential. These include commodity price
risk, which is influenced by weather, global economics, consumption patterns and
technological advancements; political risk, like Iraq's return to production
or regional conflicts; geologic risks, where an active market diminishes or
prolific new fields upset the supply/demand balance; and operating risks, like
blowouts or accidents. We prepare for the risks we cannot control by continuing
to adhere to our philosophy of achieving low costs, maintaining a diverse
portfolio of market positions, limiting debt and always managing for the
downside. We strive to minimize all the controllable risks, like operating and
political risks, which can be insured against, contractually mitigated or
otherwise addressed. Our uncompromisingly strict adherence to and constant
review of safety programs and operating procedures further supports this effort.
11
<PAGE> 13
[MAP]
WHERE DO WE OPERATE?
12
<PAGE> 14
[MAP]
WHERE DO WE OPERATE?
13
<PAGE> 15
[PHOTO]
Nabors Alaska Drilling Rig 2ES operating during the brief summer at Prudhoe Bay
on the Alaskan North Slope with a Peak Oilfield Services vacuum unit loading
drilling waste from another Nabors rig.
14
<PAGE> 16
NABORS OPERATES THROUGH A GROUP OF SEMI-AUTONOMOUS BUSINESS UNITS WHICH ARE
ORGANIZED ON A GEOGRAPHIC AND LINE OF BUSINESS BASIS. EACH UNIT HAS LEADING
MARKET POSITIONS, HIGH-QUALITY ASSETS AND WELL-QUALIFIED AND EXPERIENCED PEOPLE.
THE FOLLOWING SECTIONS ELABORATE ON THE NATURE OF EACH BUSINESS, ITS ASSETS AND
MARKETS, AS WELL AS THE EVENTS AND ACCOMPLISHMENTS OF 1998 AND NEAR AND
LONG-TERM PROSPECTS.
CORE BUSINESS
NABORS ALASKA
NABORS ALASKA IS THE MARKET LEADER OPERATING 15 DRILLING, REENTRY AND WORKOVER
RIGS, PRIMARILY ON THE ARCTIC NORTH SLOPE.
Our Alaskan drilling operations experienced significant growth in 1998
with operating income up more than 90 percent over 1997 due to a much more
active North Slope resulting from the development of marginal fields. The
company achieved a milestone in the fourth quarter when almost 100 percent of
its North Slope rigs were being utilized. An excellent safety record also
contributed to what turned out to be one of the company's best years ever.
During the year Nabors Alaska built two new state-of-the-art rigs, both of
which have five-year contracts. Additionally, we reactivated Rig 33E, previously
stacked for five years, to perform under a contract to drill the North Star
field. This unit also entered into a joint venture with Transocean to own and
operate a coiled tubing drilling business.
In 1999, the company expects significantly lower levels of utilization as
global budget cuts impact North Slope activity. The financial effects of 1999's
lower activity level should be partially offset by a full year's contributions
from the two new rigs and from term commitments on several of the company's
existing rigs. Long-term, the magnitude of remaining reserves and the reduced
development cost as a result of the existing infrastructure bolster the outlook
for this market. Nabors has consistently held a strong position in Alaska and is
positioned to enjoy a significant upside when oil prices recover.
15
<PAGE> 17
CORE BUSINESS
NABORS CANADA OPERATES A DIVERSE FLEET OF DRILLING RIGS IN ALL MAJOR CANADIAN
OIL AND GAS AREAS.
The last few years were the best in decades for Nabors Canada, fueled
largely by a booming natural gas market. That performance extended into early
1998, the first quarter of which was the best in the company's history.
Performance during the balance of the year declined beyond normal seasonal
patterns, but was partially offset by revenues attributable to seven rigs
acquired from Can-Tex Drilling. This acquisition added more middle depth rigs to
the Nabors' fleet, balancing the depth distribution of our rigs in the higher
margin ranges while expanding our customer base.
NABORS CANADA
The weak drilling environment is expected to continue in 1999. However,
there is the potential of an increase in drilling activity as a result of
additional Canadian capacity to export gas to the United States. There is
currently insufficient gas production to meet Canadian domestic requirements and
fill the incremental export capacity. As gas prices improve, significantly
increased drilling activity will be necessary to raise gas production,
particularly in the face of increasing production decline rates for natural gas
in Canada.
Going forward, the shallowest gas producing regions, which were
significant contributors to the recent boom in Canadian drilling, have become
less economically attractive due to very high depletion rates. This will have no
incremental impact on Nabors since we have minimal presence in the ultra-shallow
rig market, which saw substantial overbuilding in 1998. Future drilling is
expected to place more emphasis on deeper, more sustainable reserves with
correspondingly improved economics. Since Nabors has a substantial concentration
of rigs in this depth range, the company is well positioned to participate in
this market. Nabors' capabilities in providing high specification rigs for
deeper drilling is illustrated by a recent contract to deploy a deep SCR rig to
Newfoundland.
16
<PAGE> 18
[PHOTO]
Nabors Drilling Ltd. (Canada) Rig 16, drilling for deep gas at a location in the
foothills of the Canadian Rocky Mountains.
17
<PAGE> 19
CORE BUSINESS
NABORS DRILLING USA OPERATES THE LARGEST, HIGHEST-QUALITY AND MOST DIVERSE
DRILLING RIG FLEET AND PARTICIPATES IN ALL MAJOR OIL, GAS AND GEOTHERMAL AREAS
IN THE CONTINENTAL UNITED STATES.
Nabors Drilling USA was the first to experience the weak drilling market
and was the hardest hit. This came in the wake of a two-year period of steadily
increasing drilling activity that spurred demand for rigs, improving utilization
and pricing within the Nabors fleet.
As the market deteriorated in 1998 fleet utilization declined, with the
average number of rigs operating per day dropping from a third quarter 1997
high of 200 to around 100 by the end of 1998. Pricing soon followed declining
utilization, but remained above 1997 average levels, as did the average gross
margin per rig per day.
US LOWER 48
However, our US Lower 48 operations fared better than virtually all of our
competitors during this time due to a lower cost structure, the contributions of
integrated rentals like top drives and rig instrumentation systems, and the
benefits of a large and geographically diverse rig fleet. The broad distribution
of Nabors' rigs allowed us to increase our deep rig presence in the Rocky
Mountains to take advantage of new gas discoveries there, to fulfill a key
customer drilling program in the Elk Hills area of California and to mobilize
rigs for a significant project in Northern Mexico.
The outlook for 1999 is flat with prospects of an upturn not likely to be
felt in this market until late 1999 or the year 2000. This should be balanced
somewhat by Nabors' strong presence in all US natural gas markets, the outlook
for which appears better than it does for crude oil. Reductions in costs,
including overhead, along with sharp reductions in capital spending should
further soften the impact. We will also continue our heavy emphasis on improving
our industry-leading record in safety and environmental performance in order to
reduce lost time incidents, thereby improving conditions for our employees and
performance for our customers. This will further benefit workers' compensation
cost and reduce insurance claims. We will also accelerate the implementation of
Epoch's rig instrumentation systems within the Nabors fleet, which displaces
significant rental costs now paid to third parties. These efforts position this
business segment to be even more profitable when the market returns.
18
<PAGE> 20
[PHOTO]
Nabors Drilling USA's Rig 727, a 25,000-foot rated SCR rig equipped with a top
drive, drilling in south Louisiana.
19
<PAGE> 21
[PHOTO]
20
<PAGE> 22
[PHOTO]
Nabors Drilling USA Rig 118 crew going in the hole with a new directional
drilling assembly.
21
<PAGE> 23
[PHOTO]
A Nabors Drilling International Ltd. rig, drilling at a Middle Eastern desert
location.
22
<PAGE> 24
CORE BUSINESS
NABORS INTERNATIONAL OPERATES A LARGE AND DIVERSE FLEET OF LAND DRILLING RIGS
IN MOST OF THE MAJOR OIL AND GAS PRODUCING AREAS WORLDWIDE.
In 1998, Nabors International continued the steady growth trend that has
characterized its business in recent years. That growth peaked in the third
quarter and reversed in the fourth as global budget cuts caught up with this
group.
Our International unit still experienced the best performance in its
history, due in large part to the size and diversity of our rig fleet and the
ability to reallocate assets to meet demand. For instance, Nabors mobilized four
rigs to respond to increased drilling activity in Bolivia, two coming from the
United States and two coming from Venezuela, where utilization had declined
significantly. Several rigs also were redeployed after being stacked for several
years to perform contracts in Kazakhstan, Mozambique, the United Arab Emirates,
Colombia and Yemen.
INTERNATIONAL
Going forward, this business segment should be stable through 1999 at
year-end 1998 activity levels. This is due to the longer-term nature of these
markets, the commencement of several contracts obtained in 1998 and the
prospects for additional contracts in 1999. There is potential for increased
drilling activity in North Africa, the Caspian Sea area and the Middle East,
areas in which Nabors has significant assets.
Longer-term, this business should benefit from the fact that it is
concentrated in areas where there are long-term sustainable reserves and some of
the lowest cost oil production in the world. Nabors enjoys a substantial
competitive advantage in these markets because our geographic rig positioning,
diverse assets and technical capabilities allow us to favorably compete for some
of the most sophisticated drilling projects in the world. For example, we were
recently selected by Shell for a high profile project in the Andean Mountains
of Peru. Although this project did not proceed to completion, we designed and
commenced construction on a high specification, very specialized rig that would
have a minimum footprint to diminish the environmental impact, yet have maximum
drilling capabilities. Furthermore, our large fleet of lower cost deep SCR rigs
in the US Lower 48 yields an economic and timing advantage to meet incremental
demand as the international markets recover.
23
<PAGE> 25
CORE BUSINESS
NABORS OFFSHORE OPERATES PLATFORM DRILLING AND PLATFORM AND JACKUP WORKOVER
RIGS IN MANY OF THE WORLD'S OIL AND GAS PRODUCING OFFSHORE WATERS.
Our offshore business unit had been experiencing steady growth in recent
years, but experienced a downturn in sales and earnings in 1998. This was due to
an industry-wide decline in utilization of platform rigs and a second half
reduction in pricing for jackup workover rigs in the US Gulf of Mexico,
attributable to lower oil prices.
The weak financial performance has overshadowed several achievements made
during 1998 that build for the future. Especially noteworthy was the
establishment of important inroads into the emerging deepwater platform drilling
market when a Nabors API rig was placed on a customer's SPAR platform drilling
in 2,700 feet of water in the US Gulf of Mexico.
NABORS OFFSHORE
Another bright spot was the performance of the company's large platform
drilling rigs. These rigs maintained pricing and utilization levels due
primarily to the fact that they are involved in large, multi-well, long-term
drilling programs. We were also able to redeploy three Super Sundowner(R)
platform workover/redrilling rigs from the US Gulf of Mexico to offshore
international waters. The broader package of equipment and services that
accompanies each of these rigs generates higher rates and margins. This was
accomplished in the fourth quarter so the full impact of this action will not be
seen until 1999.
The outlook for 1999 is for a continuing weak market, but the future of
this business unit holds significant promise. Utilization of platform and jackup
workover rigs should continue to be soft and at lower rates, while platform
drilling rig utilization and rates should continue to be minimally affected
worldwide. We are optimistic that several major deferred projects will come to
fruition as the market returns. Areas of potential include the US and Mexican
areas of the Gulf of Mexico, China, Brazil, the Caspian Sea and West Africa,
many of which contain deepwater prospects. Given our experience and the
company's proven ability to innovate and design rigs for specific applications,
such as the MASE(TM) rig's smaller, lighter footprint, the company believes it
is well positioned to be a leading candidate for all of these projects.
24
<PAGE> 26
[PHOTO]
A Nabors Offshore Drilling Inc. rig drilling in the US Gulf of Mexico.
25
<PAGE> 27
[PHOTO]
26
<PAGE> 28
[PHOTOS]
Super Sundowner(R) Rig XVII, loading out at a dock in Louisiana for redeployment
to an offshore platform in the Bay of Campeche.
27
<PAGE> 29
OTHER BUSINESSES
CANRIG PROVIDES TOP DRIVE DRILLING SYSTEMS USED ON RIGS DRILLING FOR OIL AND GAS
WORLDWIDE.
In l998, the market for Canrig products and services experienced the
downturn that affected many of our other businesses. A decline in land portable
top drive sales, particularly to the Nabors fleet, was partially offset by
several outside sources of revenue, notably increased participation in the
international market and the introduction of a rental fleet.
Several cost-cutting measures designed to improve financial performance
were instituted during the year. These included the consolidation of
manufacturing into a single facility and the introduction of a new software
system to improve customer service, inventory control and manufacturing
efficiency.
In l999, this business unit should see the benefits of its l998
penetration of the ultra deepwater market, rigs capable of drilling in up to
7,500 feet of water and more. Six 750-ton units will be delivered during the
coming year, establishing Canrig as one of the leaders in the offshore top drive
market. Longer-term, this business unit expects to see a revitalized land market
and an emerging retrofit market offshore. Canrig's highly engineered products
are well positioned to participate in these markets.
CANRIG DRILLING TECHNOLOGY
[PHOTO]
A Canrig technician making final adjustments to the pipe torque assembly of a
new top drive being prepared for shipment to the customer.
28
<PAGE> 30
[PHOTO]
A Canrig 750-ton top drive (foreground), and a 500-ton top drive (background)
undergoing final testing for shipment and installation on deepwater drilling
rigs.
29
<PAGE> 31
[PHOTO]
An Epoch RigWatch(TM) drilling instrumentation system control panel undergoing
final assembly and testing.
30
<PAGE> 32
OTHER BUSINESSES
EPOCH PROVIDES SOPHISTICATED DRILLING OPERATIONS SOFTWARE AND INSTRUMENTATION
SYSTEMS THAT ACCUMULATE, ANALYZE AND REPORT DRILLING DATA. THE COMPANY ALSO
OFFERS MUDLOGGING AND GEOLOGIC CONSULTING SERVICES.
During 1998, Epoch continued the growth curve it began when Nabors
acquired it in 1996, although that growth slowed somewhat in the last quarter.
The year brought two significant developments, the launching of our RigWatch(TM)
product and the acquisition of C.A.P.E. International, a developer of software
for rig and well operations data reporting and storage. The integration of
these two businesses, coupled with our mudlogging and geologic expertise,
provides a complete package of data accumulation and storage that holds great
promise for improving drilling planning and operational efficiency.
Growth in 1999 should continue, but at a reduced rate. External sales are
expected to be lower, offset somewhat by contributions from markets outside the
continental US. Epoch's reduced external sales will be substantially replaced by
accelerated internal sales to the Nabors fleet as the company displaces the
third party rental cost of competitive products. This not only results in
increased sales for Epoch, but improved operating performance for Nabors as a
whole.
EPOCH WELL SERVICES
[PHOTO]
An Epoch RigWatch(TM) drilling instrumentation system display screen.
31
<PAGE> 33
OTHER BUSINESSES
PEAK OILFIELD SERVICES SPECIALIZES IN OILFIELD HAULING, RIG MOVING, SITE
CONSTRUCTION AND FACILITIES AND EQUIPMENT MAINTENANCE.
1998 was a good year for our 50 percent owned Peak joint venture, with
operating income approaching record levels. This resulted from an active rig
moving and specialized heavy hauling business on the North Slope through the
first three quarters and growth in the company's US Lower 48 operations.
Beginning in 1999, Peak will no longer be consolidated into our results, but
rather be reported as other income.
The outlook for 1999 is for a significant reduction in business as a
result of decreased rig activity in both Alaska and the Lower 48. This financial
impact should be offset to some extent by several new projects and ongoing
facilities and equipment maintenance contracts. Our heavy civil construction
business has had a favorable impact on our results in the past year and should
continue to do so.
Peak will continue to look at potential acquisitions during the coming
year that will expand product lines and increase the number of areas in which
the company operates. The objective of this is to position the company for
greater profitability when the market improves.
PEAK OILFIELD SERVICES
[PHOTO]
Nabors Alaska Drilling Rig 28E at the Prudhoe Bay west dock, loading to a barge
for transport to the Badami Field.
32
<PAGE> 34
[PHOTO]
Peak Oilfield Services crew unloading a new crew quarters module for assembly at
Prudhoe Bay.
33
<PAGE> 35
NABORS OPERATES THE WORLD'S LARGEST, HIGHEST QUALITY AND MOST DIVERSE FLEET OF
LAND AND OFFSHORE PLATFORM RIGS IN NUMEROUS AREAS THROUGHOUT THE WORLD. THE
MAJORITY OF OUR RIGS ARE RATED FOR DEEP, MORE SOPHISTICATED DRILLING
APPLICATIONS. WE HAVE A LARGE CONCENTRATION OF PREMIUM ELECTRIC (SCR) RIGS,
WHICH ARE GENERALLY PREFERRED FOR DIRECTIONAL, HORIZONTAL AND MORE DIFFICULT
WELLS. MANY OF OUR RIGS ARE HIGHLY SPECIALIZED AND SOPHISTICATED DESIGNS FOR USE
IN SOME OF THE WORLD'S MOST CHALLENGING LOCATIONS AND ENVIRONMENTS.
OUR OPERATIONS AT A GLANCE.
<TABLE>
<CAPTION>
US LOWER 48 RIG FLEET Less than 10,000' 10,000' to 14,999' 15,000' to 19,999' 20,000' and Deeper
300 ACTIVELY MARKETED RIGS* ---------------- ---------------- ---------------- ----------------
Mech SCR Mech SCR Mech SCR Mech SCR Total
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHERN DIVISION
East Texas District 11 2 6 14 9 42
South Texas District 6 3 19 10 38
Gulf Coast District 1 1 3 4 3 15 27
------ ------ ------ ------ ------ ------ ------ ------ ------
SOUTHWEST DIVISION
Arkoma District 10 9 3 10 8 1 13 54
California District 7 1 3 7 1 5 6 30
West Texas District 7 17 7 2 2 1 36
------ ------ ------ ------ ------ ------ ------ ------ ------
WESTERN DIVISION
Wyoming District 9 2 19 3 12 2 1 4 52
North Dakota District 8 11 2 21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total 33 3 74 19 50 56 7 58 300
------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
*As of December 31, 1998.
34
<PAGE> 36
<TABLE>
<CAPTION>
LAND RIG FLEET Less than 10,000' 15,000' 20,000'
400 ACTIVELY MARKETED RIGS* 10,000' to 14,999' to 19,999' and Deeper Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ALASKA
North Slope 4 3 5 12
Kenai/Cook Inlet 1 2 3
--------- --------- --------- --------- ---------
INTERNATIONAL
Houston 1 1
Africa 1 1 2
Far East/Southeast Asia 2 2
CIS 3 1 2 6
Middle East 3 7 4 5 19
South and Central America 1 8 4 7 20
--------- --------- --------- --------- ---------
US LOWER 48 36 93 106 65 300
--------- --------- --------- --------- ---------
CANADA 15 6 9 5 35
--------- --------- --------- --------- ---------
TOTAL 55 123 130 92 400
--------- --------- --------- --------- ---------
</TABLE>
* As of December 31, 1998.
<TABLE>
<CAPTION>
Super
OFFSHORE RIG FLEET MASE(TM) Sundowner(R) Sundowner(R) Platform
36 ACTIVELY MARKETED RIGS* Drilling Workover Workover Drilling Jackup Barge Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
Middle East 1 1
South and Central America 1 1 2
CIS 1 1
Europe and Africa 1 1 2
--------- --------- --------- --------- --------- --------- ---------
GULF OF MEXICO 2 6 5 7 5 5** 30
--------- --------- --------- --------- --------- --------- ---------
TOTAL 3 8 7 7 6 5** 36
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
* As of December 31, 1998.
** Number includes three P&A barges.
35
<PAGE> 37
NABORS INDUSTRIES
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve
Months Ended Three
Year Ended December 31, Months Ended Year Ended September 30,
December 31, (Unaudited) December 31, --------------------------------------------
OPERATING DATA(1) 1998 1997(2) 1997 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 968,157 $ 1,115,032 $ 302,806 $ 1,029,303 $ 719,743 $ 572,788
Operating expenses:
Direct costs 623,844 774,856 199,714 737,780 539,665 434,097
General and admin-
istrative expenses 77,026 72,478 18,580 68,616 56,862 49,094
Depreciation and
amortization 84,949 72,350 20,313 66,391 46,117 31,042
Merger expenses -- -- -- 1,755 -- --
Provision for reduc-
tion in carrying
value of assets -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Operating income 182,338 195,348 64,199 154,761 77,099 58,555
Interest income
(expense), net (13,983) (14,387) (3,886) (13,098) (9,189) (5,917)
Other income, net 31,626 28,502 2,303 40,747 13,690 5,990
----------- ----------- ----------- ----------- ----------- -----------
Income before
income taxes 199,981 209,463 62,616 182,410 81,600 58,628
Income taxes 74,993 73,443 21,289 67,602 11,100 7,524
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 124,988 $ 136,020 $ 41,327 $ 114,808 $ 70,500 $ 51,104
----------- ----------- ----------- ----------- ----------- -----------
Net income per
diluted share $ 1.16 $ 1.24 $ .37 $ 1.08 $ .75 $ .57
Weighted average
number of diluted
shares outstanding 112,555 113,793 116,427 111,975 93,752 89,655
Capital expenditures
and acquisitions
of businesses $ 313,464 $ 381,009 $ 84,038 $ 396,668 $ 174,483 $ 144,560
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------
OPERATING DATA(1) 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 484,268 $ 419,406 $ 312,407 $ 264,239 $ 153,920
Operating expenses:
Direct costs 369,677 313,458 215,939 187,873 111,405
General and admin-
istrative expenses 47,770 45,257 45,237 35,923 22,900
Depreciation and
amortization 26,241 22,434 16,526 10,119 5,232
Merger expenses 1,595 -- -- -- --
Provision for reduc-
tion in carrying
value of assets 29,686(3) -- -- -- --
----------- ----------- ----------- ----------- -----------
Operating income 9,299 38,257 34,705 30,324 14,383
Interest income
(expense), net (5,778) (7,733) (4,349) 551 1,153
Other income, net 2,718 11,593 5,559 2,395 3,341
----------- ----------- ----------- ----------- -----------
Income before
income taxes 6,239 42,117 35,915 33,270 18,877
Income taxes 4,889 3,559 2,175 3,546 2,476
----------- ----------- ----------- ----------- -----------
Net income $ 1,350 $ 38,558 $ 33,740 $ 29,724 $ 16,401
----------- ----------- ----------- ----------- -----------
Net income per
diluted share $ .02 $ .50 $ .45 $ .42 $ .26
Weighted average
number of diluted
shares outstanding 85,620 77,806 74,666 70,728 62,251
Capital expenditures
and acquisitions
of businesses $ 62,907 $ 84,752 $ 61,124 $ 88,104 $ 73,943
<CAPTION>
As of December 31, As of September 30,
--------------------------- --------------------------------------------
BALANCE SHEET DATA(1) 1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Cash and short-term
marketable securities $ 23,450 $ 12,606 $ 11,044 $ 104,027 $ 15,334
Working capital 21,157 62,571 70,872 172,091 33,892
Property, plant and
equipment, net 1,127,154 923,402 861,393 511,203 393,464
Long-term mar-
ketable securities 23,890 29,529 42,279 11,839 9,645
Total assets 1,450,242 1,281,306 1,234,232 871,274 593,272
Long-term obligations 217,034 226,299 229,507 229,504 51,478
Stockholders' equity 867,469 767,340 727,843 457,822 368,750
Funded debt to
capital ratio 0.26:1 0.27:1 0.27:1 0.35:1 0.20:1
<CAPTION>
As of September 30,
-----------------------------------------------------------------------------
BALANCE SHEET DATA(1) 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
Cash and short-term
marketable securities $ 45,232 $ 70,458 $ 14,783 $ 15,139 $ 29,332
Working capital 77,248 113,653 33,831 15,650 40,956
Property, plant and
equipment, net 283,141 270,865 220,761 185,543 109,928
Long-term mar-
ketable securities 20,266 -- -- -- --
Total assets 490,273 493,927 339,930 285,615 226,846
Long-term obligations 61,879 73,109 49,294 37,489 37,729
Stockholders' equity 317,424 307,583 201,058 157,302 117,335
Funded debt to
capital ratio 0.21:1 0.24:1 0.28:1 0.24:1 0.27:1
</TABLE>
(1) The results of operations and financial position for all years prior to
1995 have been retroactively restated to include the results of operations
and financial position of Sundowner Offshore Services, Inc., which was
merged with the Company during October 1994. Other acquisitions' results of
operations and financial position have been included beginning on the
respective dates of acquisition and include New Prospect Drilling Company
(May 1998), Can-Tex Drilling & Exploration, Ltd. land rigs (May 1998), Veco
Drilling, Inc. land rigs (November 1997), Diamond L Drilling & Production
land rigs (November 1997), Cleveland Drilling Company, Inc. (August 1997),
Chesley Pruet Drilling Company (April 1997), Adcor-Nicklos Drilling Company
(January 1997, retroactive to October 1996), Noble Drilling Corporation
land rigs (December 1996), Exeter Drilling Company and its subsidiary, J.W.
Gibson Well Services Company ("Gibson") (April 1996), Delta Drilling
Company (January 1995), Grace Drilling Company (June 1993), Henley Drilling
Company (November 1990) and Loffland Brothers Company (March 1990). The
results of operations also reflect the disposition of the Company's UK
North Sea (November 1996) and Gibson (January 1998) operations.
(2) Represents unaudited recast financial data for the twelve months ended
December 31, 1997. This data was derived by adjusting the audited results
for the year ended September 30, 1997 to exclude the unaudited results for
quarter ended December 31, 1996 and to include the audited results for the
three months ended December 31, 1997.
(3) Represents reduction in carrying value of the Company's Yemen logistical
assets and inventory, as well as facility closure costs in certain
international areas, including Yemen, totaling $.35 per share.
37
<PAGE> 38
NABORS INDUSTRIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared to
Twelve Months Ended December 31, 1997
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. This discussion
compares the results of operations for the year ended December 31, 1998 ("1998")
with the unaudited recast results of operations for the twelve months ended
December 31, 1997 ("1997"). The results of operations for the twelve months
ended December 31, 1997 were derived by adjusting the audited results for the
year ended September 30, 1997 to exclude the unaudited results for the quarter
ended December 31, 1996, and to include the audited results for the three months
ended December 31, 1997.
Company revenues for 1998 totaled $968.2 million, representing a $146.9
million or 13% decrease compared to 1997. Operating income and net income for
1998 totaled $182.3 million and $125.0 million ($1.16 per diluted share),
respectively, representing a decrease of 7% and 8% compared to 1997.
Throughout 1997 the Company benefited from increased active rig counts and
improvements in rig pricing associated with the increased demand for drilling
and workover rigs. During the fourth quarter of 1997, an imbalance began to
develop in the supply and the demand for crude oil. A reduction in demand growth
rates was brought about by the Asian recession and two consecutively warmer than
normal winters in North America. The supply of crude oil increased as a result
of increased production quotas by the Organization of Petroleum Exporting
Countries (OPEC) and renewed production by Iraq. The resulting excess supply of
crude oil caused significant declines in oil prices during 1998. Crude oil
prices averaged $14.38 per barrel during 1998 compared to $20.58 per barrel
during 1997. During the fourth quarter of 1998, crude oil prices averaged $12.90
per barrel, representing the lowest inflation adjusted oil prices in history.
Natural gas prices were also lower during 1998 as warmer than normal winters in
North America during 1997 and 1998 resulted in weaker demand. Reduced prices for
oil and gas led to a sharp decline in the demand for drilling and workover
services as oil and gas companies significantly reduced capital spending for
exploration, development and production activities.
The Company's US Lower 48 operation was the first and most severely
impacted by the steadily weakening market. The total US land rig count averaged
699 during 1998 compared to 822 during 1997. The rig count continued to decline
throughout 1998 and was down to 500 rigs by year end. The area next impacted was
the Company's offshore workover rigs operating in the Gulf of Mexico. By the end
of 1998, substantially all of the Company's areas of operation experienced a
deteriorating market outlook. The active US land rig count has continued to
decline subsequent to year end and, if the weakness in oil and gas prices
deepens or continues, it is likely that 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. As a result, significantly lower levels of revenues
and profitability are anticipated for 1999.
The following tables set forth information with respect to the Company's
operating segments, the Company's rig activity and certain industry data:
<TABLE>
<CAPTION>
Twelve Months Ended
Year Ended December 31, Year Ended September 30, Increase (Decrease)
December 31, (Unaudited) --------------------------- -------------------------
(In thousands, except percentages) 1998 1997(1) 1997 1996 1998 to 1997(1)
----------- ----------- ----------- ----------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling $ 872,717 $ 1,018,445 $ 940,941 $ 657,509 $ (145,728) (14%)
Manufacturing and logistics 111,188 125,992 115,051 76,956 (14,804) (12%)
Other(2) (15,748) (29,405) (26,689) (14,722) 13,657 46%
----------- ----------- ----------- ----------- ----------- -----------
$ 968,157 $ 1,115,032 $ 1,029,303 $ 719,743 $ (146,875) (13%)
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss):
Contract drilling $ 181,793 $ 193,553 $ 157,879 $ 82,941 $ (11,760) (6%)
Manufacturing and logistics 15,861 19,540 13,428 7,317 (3,679) (19%)
Other(2) (15,316) (17,745) (16,546) (13,159) 2,429 14%
----------- ----------- ----------- ----------- ----------- -----------
$ 182,338 $ 195,348 $ 154,761 $ 77,099 $ (13,010) (7%)
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
Increase (Decrease)
-------------------------
(In thousands, except percentages) 1997 to 1996
-------------------------
<S> <C> <C>
Revenues:
Contract drilling $ 283,432 43%
Manufacturing and logistics 38,095 50%
Other(2) (11,967) (81%)
----------- -----------
$ 309,560 43%
----------- -----------
Operating income (loss):
Contract drilling $ 74,938 90%
Manufacturing and logistics 6,111 84%
Other(2) (3,387) (26%)
----------- -----------
$ 77,662 101%
----------- -----------
</TABLE>
(1) Represents unaudited recast segment information provided for comparative
purposes.
(2) Includes the elimination of inter-segment transactions and unallocated
corporate expenses.
38
<PAGE> 39
<TABLE>
<CAPTION>
Year Twelve
Ended Months Ended Year Ended September 30,
December 31, December 31, -----------------------------
1998 1999 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Rig activity:(1)
Rig years(2) 204.1 268.8 258.4 181.1
Rig utilization 48% 66% 65% 58%
</TABLE>
(1) Excludes labor contracts and Gibson workover and well servicing rigs.
(2) Rig years represent 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.
<TABLE>
<CAPTION>
Year Twelve
Ended Months Ended Year Ended September 30,
December 31, December 31, ----------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average West Texas
intermediate
crude oil spot
($/bbl)(1) $ 14.38 $ 20.58 $ 21.78 $ 20.50
Average US
natural gas spot
($/mcf)(1) $ 2.00 $ 2.36 $ 2.43 $ 2.11
Average US land
rig count(2) 699 822 788 651
Average Interna-
tional land rig
count(2) 504 557 556 553
</TABLE>
(1) Source: Bloomberg
(2) Source: Baker Hughes
Contract drilling revenues totaled $872.7 million during 1998,
representing a 14% decrease compared with 1997. Equivalent rig years decreased
to 204.1 years during 1998 from an average of 268.8 years during 1997. The
decrease in revenues and rig activity is primarily attributable to the decline
in drilling activity for the Company's US Lower 48 operation. These decreases
were partially offset by increased revenues from the Company's Alaska and
International operations.
The Alaska drilling operation showed significant improvements over 1997 as
revenues increased by 52%. This increase was attributable to increased North
Slope drilling activity resulting from the development of marginal fields.
Increased demand led to an average of 10.5 rig years during 1998, an increase
over 1997 of 3.4 rig years, and improved dayrates. The Alaska operation
completed construction of two new 1,000 horsepower redrilling and recompletion
drilling rigs, 7ES and 9ES, which commenced five-year contracts during the
fourth quarter of 1998. Additionally, the Company reactivated and modified a rig
that had been stacked for a number of years. This rig began operations during
the second quarter of 1998. The Company also entered into a joint venture during
1998, which operates a coiled tubing drilling rig in Alaska. This rig commenced
operations during the second quarter.
Canadian revenues were 23% lower than the prior year as a result of lower
equivalent rig years associated with the reduced demand for drilling services.
Equivalent rig years totaled 15.1 years during 1998 compared to 22.1 years
during 1997. The impact of the decline in drilling activity was somewhat
mitigated by improved average dayrates during 1998. The Canadian results also
benefited from the purchase of seven rigs from Can-Tex Drilling & Exploration,
Ltd. during the second quarter of 1998.
US Lower 48 revenues decreased by 32% during 1998 as a result of lower
equivalent rig years associated with the reduced demand for drilling services.
Equivalent rig years and utilization totaled 132.3 years and 43%, respectively,
during 1998, down significantly from 187.6 years and 64% during 1997. The
decline in equivalent rig years in the US Lower 48 during 1998 was more
prevalent for the Company's shallower mechanical rig fleet; however, all rig
categories were adversely affected. The Company's deep drilling,
silicon-controlled rectifier (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 1998. Average US Lower 48 dayrates were higher than 1997, but
were trending lower by the end of 1998. Additionally, revenues were negatively
impacted by the January 1998 sale of Gibson, the Company's land workover and
well servicing operation.
International operation revenues increased by 18% despite equivalent rig
years decreasing during 1998 to 24.7 years from 27.4 years during 1997. Middle
Eastern revenues increased during 1998 as a result of increased drilling
activity in Yemen and the United Arab Emirates as compared to 1997.
Additionally, increased rental activity, improved dayrates and the recognition
of mobilization and demobilization profits in Saudi Arabia contributed to
improved results even though equivalent rig years were lower during 1998. Middle
Eastern revenues were negatively impacted during 1998 by fewer operating days
for the OceanMaster VIII, a jackup drilling rig. African revenues increased
during 1998 as a result of additional drilling activity in Gabon and Mozambique
associated with new contracts that commenced during December 1997 and July 1998,
respectively. South and Central American revenues were essentially equivalent to
the prior year as a decline in drilling activity in Venezuela was offset by new
contracts for four rigs in Bolivia. Two of these rigs commenced operations at
the end of the third quarter and two commenced operations during the fourth
quarter of 1998. Additionally, a new contract for one rig in Colombia positively
impacted South and Central American results during 1998.
Offshore revenues decreased by 4% during 1998 as a result of a significant
decline in activity for the Company's platform workover rigs operating in the
Gulf of Mexico. The demand for this class of rig was the first to decline within
the Company's offshore operation as a result of weaker crude oil and natural gas
prices. The resulting decline in
39
<PAGE> 40
offshore revenues was partially offset by increased platform workover revenues
in international areas due in part to the redeployment of three Super
Sundowner(R) rigs to offshore Mexico for new contracts during the fourth quarter
of 1998. Additionally, the average dayrates for all classes of rigs operating in
the Gulf of Mexico and internationally improved during 1998.
Manufacturing and logistics revenues were $111.2 million during 1998, as
compared to $126.0 million during 1997, representing a 12% decrease. Canrig
revenues decreased significantly as a result of a decline in land portable top
drive sales, particularly to the Nabors fleet. This decrease in top drive sales
was somewhat mitigated by the introduction of a top drive rental fleet during
the year. Revenues for Epoch, the Company's drilling operation software and
instrumentation provider, and Peak Oilfield Services, the Company's Alaskan
construction and logistics joint venture, were relatively flat as a result of
steady activity levels.
The following table sets forth selected consolidated financial information
of the Company expressed as a percentage of total operating revenues:
<TABLE>
<CAPTION>
Twelve
Year Months Ended
Ended December 31, Year Ended September 30,
December 31, (Unaudited) -----------------------------
(In thousands) 1998 1997(1) 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
------------ ------------ ------------ ------------
Operating
expenses:
Direct costs 64.4% 69.5% 71.7% 75.0%
General and
administrative
expenses 8.0% 6.5% 6.7% 7.9%
Depreciation and
amortization 8.8% 6.5% 6.4% 6.4%
Merger expenses -- -- .2% --
------------ ------------ ------------ ------------
Operating
expenses 81.2% 82.5% 85.0% 89.3%
------------ ------------ ------------ ------------
Operating income 18.8% 17.5% 15.0% 10.7%
Other income 1.8% 1.3% 2.7% .6%
------------ ------------ ------------ ------------
Income before
income taxes 20.6% 18.8% 17.7% 11.3%
Income taxes 7.7% 6.6% 6.5% 1.5%
------------ ------------ ------------ ------------
Net income 12.9% 12.2% 11.2% 9.8%
------------ ------------ ------------ ------------
</TABLE>
(1) Represents unaudited recast financial information provided for comparative
purposes.
Direct costs as a percentage of revenues decreased to 64% during 1998 as
compared to almost 70% during 1997. The resulting increase in the gross margin
percentage during 1998 is the result of improved margins for several 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 1998, 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, the
US Lower 48 and several international areas. The increase in US Lower 48 margins
during 1998 was due in part to an increased percentage of the Company's
operating rigs being of the deep drilling, SCR type as compared to 1997.
Additionally, a lower percentage of the Company's revenues were derived from the
US Lower 48 operation, which increased the overall gross margin percentage.
Contracts in the US Lower 48 generally earn a lower gross margin percentage than
Gulf of Mexico, Alaska and international contracts. Also contributing to the
increase in the gross margin percentage was the January 1998 sale of Gibson,
the Company's lower margin land workover and well servicing operation.
General and administrative expenses as a percentage of revenues increased
during 1998 as a result of increased support costs associated with the growth in
activity levels throughout 1997 and the anticipated growth through 1998. As the
demand for drilling and workover services weakened during 1998, these costs
represented a larger percentage of revenues. General and administrative expenses
for 1999 should better reflect the reduction in activity levels.
Depreciation expense as a percentage of revenues increased during 1998 as
a result of the decrease in revenues, significant capital expenditures and a
number of acquisitions completed during 1997 and 1998. Other income increased
during 1998 as compared to 1997.
Other income during 1998 included an approximate $16.0 million pre-tax gain
recognized on the sale of the Gibson operation.
Other income also included gains on physical damage insurance claims of
$15.0 million and dividend income totaling $4.1 million during 1998. Unrealized
holding losses on marketable equity securities of $4.3 million reduced other
income.
Other income during 1997 included an $8.8 million gain recorded on the
exercise of warrants received in connection with the sale of the Company's UK
North Sea operation in November of 1996. Other income also included $1.6 million
in realized and unrealized gains from equity security transactions, $.5 million
of dividend income and gains on sales of long-term assets and businesses
amounting to $6.6 million.
The effective tax rate for 1998 was 37.5%, as compared to 35.0% for the
prior year period.
40
<PAGE> 41
Fiscal Year 1997 Compared to Fiscal Year 1996
Company revenues for fiscal year 1997 ("Fiscal 1997") totaled $1,029.3
million, representing a $309.6 million or 43% increase compared to fiscal year
1996 ("1996"). Operating income during Fiscal 1997 totaled $154.8 million,
compared to $77.1 million during 1996, representing an increase of 101%. Net
income totaled $114.8 million ($1.08 per fully diluted share) during Fiscal
1997, compared to $70.5 million ($.75 per fully diluted share) during the prior
year. The significant improvements in operating results during Fiscal 1997
reflected a number of positive trends and developments in each of the Company's
businesses. Most notable was the convergence of the supply and demand for rigs
on a worldwide basis. The continued attrition in the supply of quality rigs,
coupled with an increase in demand, exerted upward pressure on rig pricing,
which had a correspondingly positive effect on the Company's results. The same
situation also generated higher utilization in almost all of the Company's
operating areas. This year's results also benefited from the contribution of
several acquisitions in the Company's US Lower 48 unit and continued strong oil
and natural gas prices. Net income was also positively affected during Fiscal
1997 by a gain on the sale of the Company's UK North Sea operation during
November 1996. Partially offsetting these increases was an increase in the
Company's effective tax rate to 37% during Fiscal 1997 from 14% during 1996,
resulting from non-cash US federal deferred income taxes, which reduced net
income.
Contract drilling revenues totaled $940.9 million during Fiscal 1997,
representing a 43% increase over 1996. Equivalent rig years increased to 258.4
years during Fiscal 1997 from an average of 181.1 years during 1996. This
increase in revenues and rig years was primarily attributable to a significant
increase in activity for the Company's US Lower 48 operations.
Drilling revenues in Alaska were flat as increased dayrates were offset by
a decrease in equivalent rig years.
Canada operation revenues increased 90% during Fiscal 1997 as a result of
the contribution of nine land rigs purchased from Noble Drilling Corporation
during December 1996, as well as an improvement in dayrates and rig utilization
as compared to 1996.
US Lower 48 revenues increased 81% as a result of contributions from the
acquisition of Exeter Drilling Company and its subsidiary Gibson during April
1996; the December 1996 purchase of the Noble Drilling Corporation land rigs;
the acquisition of Adcor-Nicklos Drilling Company ("Adcor") during January 1997,
which was accounted for as a pooling-of-interests with Adcor results
retroactively included to October 1, 1996; and the acquisition of the Chesley
Pruet Drilling Company land rigs during April 1997. Additionally, dayrates and
rig utilization improved in the US Lower 48 as a result of increased rig demand,
primarily for deep drilling SCR rigs.
International operation revenues increased by 25% during Fiscal 1997.
Middle Eastern revenues increased significantly compared to 1996 due to new
contracts in Saudi Arabia for six rigs, three of which commenced operations
during the third quarter of 1996 and three of which commenced operations during
the second quarter of Fiscal 1997. Additionally, a jackup rig began operating in
the Persian Gulf during March 1997. Commonwealth of Independent States (CIS)
revenues increased as a result of increased rig activity in Kazakhstan during
Fiscal 1997. South and Central American revenues decreased by 17% compared to
1996. The decrease was primarily attributable to lower rig activity in Venezuela
and the completion of two contracts in Costa Rica during 1996.
Revenues for the offshore operation increased by 35% during Fiscal 1997 as
a result of increased equivalent rig years and higher dayrates for the Company's
platform drilling rigs and platform workover rigs, as well as higher dayrates
for the Company's jackup workover rigs as compared to 1996. Platform drilling
equivalent rig years increased in part as a result of the newly constructed MASE
TM rigs 802 and 803, which began working during June 1996 and November 1996,
respectively. Additionally, two land rigs adapted for platform drilling
applications began working in the Gulf of Mexico during June 1996 and August
1997. In international offshore areas, MASE TM rig 801 began operations in
Trinidad during January 1996 and Super Sundowner(R) XII was redeployed from the
Gulf of Mexico and began operations in Brazil during December 1996. Jackup
workover rig years in the Gulf of Mexico were lower than 1996 as a result of two
rigs that were down for repairs during the third quarter of Fiscal 1997.
Manufacturing and logistics revenues were $115.1 million during Fiscal
1997, representing a 50% increase as compared to 1996. Canrig revenues increased
significantly due to increased top drive sales to both Nabors and external
customers as compared to 1996. Additionally, the acquisition of Epoch, the
Company's drilling operation software and instrumentation provider, at the
beginning of Fiscal 1997 positively impacted revenues. Revenues for Peak
Oilfield Services, the Company's Alaskan construction and logistics joint
venture, were also higher than the prior year period as a result of increased
activity.
Direct costs as a percentage of revenues decreased to 72% during Fiscal
1997 compared to 75% during 1996. The resulting increase in the gross margin
percentage during Fiscal 1997 is largely the result of improved margins in
essentially all of the Company's operations on the strength of improved
dayrates. Partially offsetting the increase in dayrates was the impact of an
increased percentage of the Company's revenues being derived from the Company's
US Lower 48 operations, as these contracts are usually at a lower gross margin
percentage than Gulf of Mexico, Alaska and international contracts.
41
<PAGE> 42
General and administrative expenses as a percentage of revenues decreased
during Fiscal 1997 due primarily to the increase in revenues for the US Lower 48
operations, since these expenses were spread over a larger revenue base.
Merger expenses of $1.8 million, relating to the merger with Adcor, were
recorded during the first quarter of Fiscal 1997.
Interest expense increased during Fiscal 1997 as a result of the interest
associated with the $172.5 million 5% Convertible Subordinated Notes issued on
May 28, 1996 (the "5% Notes"). Interest income increased during Fiscal 1997 due
to the higher average cash and cash equivalent balances that resulted from
investing the remaining proceeds from the 5% Notes.
Other income increased during Fiscal 1997, primarily due to a $29.9
million gain recorded on the sale of the Company's UK North Sea operation in
which the Company received approximately $36.0 million plus the value of working
capital in cash, as well as 10.8 million four-year warrants to acquire stock in
Abbot Group plc. The Company subsequently exercised the warrants throughout
Fiscal 1997 and recognized a gain of $8.8 million. Other income for Fiscal 1997
also included $2.6 million in realized and unrealized gains from equity security
transactions, $.6 million of dividend income, and gains on sales of long-term
assets amounting to $2.2 million. The Company also recorded foreign currency
gains totaling $.9 million during Fiscal 1997. During Fiscal 1997, the
Venezuelan bolivar devalued by approximately 6%. As a result of the devaluation,
the Company recognized an insignificant translation gain as the Company had a
bolivar denominated net monetary liability position. The Company continues to
reduce its net monetary position in Venezuela by borrowing in the local
currency. The Company increased its exposure to foreign currency devaluation in
Saudi Arabia during Fiscal 1997 and 1996 as a result of increased activity there
resulting from a number of new drilling contracts. The Company has offset a
portion of its foreign currency exposure in Saudi Arabia through the use of
forward exchange contracts.
Other income during 1996 included $4.9 million in realized and unrealized
gains from equity securities transactions and $.5 million in dividend income.
Also included were gains on dispositions of long-term assets totaling $7.2
million. Foreign currency gains totaled $.5 million during 1996, relating
primarily to Venezuela.
During Fiscal 1997, the Company began recording non-cash US federal
deferred income taxes based on the relationship between the amount of the
Company's unused US federal net operating loss carryforwards ("US NOL") and the
temporary differences between the book basis and tax basis in the Company's
assets. The temporary differences primarily arise from using accelerated
depreciation for tax return purposes as compared to a lower depreciation amount
recorded for financial statement purposes. Additionally, the Company recorded
higher UK taxes during Fiscal 1997 as a result of the sale of the UK operation,
resulting in a 1997 effective tax rate of 37% compared to an effective tax rate
of 14% for 1996. The current and deferred income tax provisions for 1996 related
primarily to foreign operations as substantially all of the US taxable income
and temporary differences between the book basis and tax basis of the Company's
assets were offset by available US NOL.
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 and Standard & Poor's is "A3" and "BBB+", respectively.
The Company had working capital of $21.2 million as of December 31, 1998,
representing a $41.4 million decrease as compared to December 31, 1997. The
decrease in working capital is primarily attributable to a $68.8 million
decrease in accounts receivable resulting from the sharp decline in drilling
activity during 1998 and the normal levels of collection. Additionally, a $19.2
million increase in short-term borrowings for general corporate purposes and
capital expenditures further reduced the Company's working capital. These
decreases were offset by increased other current assets associated with casualty
insurance claim receivables, increased cash balances amounting to $11.1 million,
and lower trade payables and accrued liabilities associated with the reduction
in drilling activity. The Company's other long-term obligations increased $32.4
million during 1998, primarily as a result of an increase in deferred revenues
on long-term contracts. The Company's ratio of funded debt to funded debt plus
stockholders' equity, commonly referred to as the debt to capital ratio, was
0.26:1 as of December 31, 1998 as compared to 0.27:1 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 $281.7 million during
1998. Net income was increased for non-cash items such as depreciation and
deferred taxes and cash was provided from changes in the Company's working
capital accounts, primarily a reduction in accounts receivable.
Net cash used for investing activities totaled $276.3 million during 1998.
Cash paid for acquisitions and capital expenditures represented the primary uses
of cash during 1998. Additionally, cash was used to purchase marketable
securities classified as available-for-sale. Cash was provided by the
disposition of long-term assets and businesses, primarily the sale of Gibson.
42
<PAGE> 43
Financing activities provided cash totaling $5.7 million during 1998, as
cash was provided by short-term borrowings and used for reductions in long-term
obligations.
The Company's cash and cash equivalents and short-term investments in
marketable securities totaled $23.5 million as of December 31, 1998. In
addition, the Company had long-term investments in marketable securities of
$23.9 million. The Company currently has credit facility arrangements with
various banks with total availability of $254.6 million. As of December 31,
1998, remaining availability, after borrowings on the facilities and outstanding
letters of credit, totaled approximately $166.5 million.
On March 9, 1999, the Company issued $325.0 million of 6.80% senior
unsecured notes due April 15, 2004 (the "6.80% Notes"). Interest on the 6.80%
Notes is payable semi-annually on April 15 and October 15 each year, commencing
on October 15, 1999. The proceeds from the issuance of the 6.80% Notes are
expected to be used to repay certain short-term and long-term borrowings of the
Company and, if the acquisition of Bayard is completed, certain senior bank debt
and equipment notes of Bayard. The remaining proceeds will be used for general
corporate purposes, including but not limited to working capital, investment in
subsidiaries, retirement of other indebtedness if economically prudent and
possible future business acquisitions.
The Company may also offer and sell up to $25 million in debt securities,
preferred stock, common stock, depository shares or warrants pursuant to an
effective universal shelf registration statement on file with the Securities and
Exchange Commission.
During October 1998, the Company executed a definitive agreement with
Bayard, pursuant to which a wholly owned, special purpose subsidiary of the
Company will merge into Bayard. Pursuant to the merger agreement as amended,
each of the approximately 18.2 million shares of Bayard will be exchanged for
.3375 shares of the Company and $.30 per share in cash (approximately 6.14
million shares and $5.5 million in cash in the aggregate). Approximately $120.0
million of Bayard debt will remain outstanding immediately following the merger
as an obligation of Bayard, which the Company does not intend to guarantee. The
merger, which has received the necessary approvals, is subject to the
satisfaction of several closing conditions, and is expected to close in the
second quarter of 1999. The merger will be accounted for under the purchase
method of accounting. 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.
During January 1999, the Company executed a definitive merger agreement
with Pool, pursuant to which each of the approximately 18.8 million shares of
Pool not owned by the Company prior to the merger will be exchanged for 1.025
shares of the Company (approximately 19.3 million shares). As of December 31,
1998, Pool had approximately $172.8 million of long-term debt that will remain
an obligation of Pool after the acquisition. The merger, which is subject to the
approval of Pool's shareholders, the customary regulatory approvals and other
closing conditions, will be accounted for under the purchase method of
accounting and is expected to close during the second quarter of 1999. Pool
operates five drilling rigs in Alaska, a total of 57 drilling and workover rigs
in international areas, 25 offshore platform drilling rigs in the Gulf of Mexico
and 754 workover rigs in the United States. Pool also owns and operates 23
offshore supply vessels, more than 300 fluid hauling trucks and a large quantity
of fluid storage tanks.
As of December 31, 1998, the Company had capital expenditure commitments
totaling approximately $2.2 million.
Projected capital expenditures for 1999 are expected to reflect
substantial reductions in cash spending as a result of the current market
conditions. The Company has completed several acquisitions during the periods
presented and will continue to evaluate opportunities to acquire assets or
businesses to enhance the Company's core operations. Such capital expenditures
and acquisitions are subject to the discretion of the Company and will depend on
management's view of market conditions and other factors.
The Company's historical capital expenditures and acquisitions of
businesses are classified as follows:
<TABLE>
<CAPTION>
Twelve
Year Months Ended
Ended December 31, Year Ended September 30,
December 31, (Unaudited) ----------------------------
(In thousands) 1998 1997(1) 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
New construction $ 51,205 $ 28,920 $ 14,664 $ 39,191
Enhancement 105,138 91,216 86,766 45,334
Acquisition 52,883 187,343 234,492 53,208
Sustaining 104,238 73,530 60,746 36,750
------------ ------------ ------------ ------------
$ 313,464 $ 381,009 $ 396,668 $ 174,483
------------ ------------ ------------ ------------
</TABLE>
(1) Represents unaudited recast financial information provided for comparative
purposes.
The current cash and cash equivalents, short-term investments, credit
facility position, projected cash flow generated from current operations, and
proceeds from the 6.80% Note offering are expected to adequately finance the
Company's sustaining capital and debt service requirements for the next twelve
months.
43
<PAGE> 44
OTHER MATTERS
Year 2000 Issue and Compliance Program
Background - The Year 2000 problem ("Y2K") refers to the fact that a
number of computers, computer programs and other equipment with embedded chips
or processors (referred to collectively as "Systems") in use today, 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.
Y2K Compliance Program - 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 organized a task force of
key employees and engaged an outside consultant to assist in the management of
its Y2K compliance program. The Company's Y2K compliance program focuses on the
Company's Systems as well as the Systems of key third party service providers,
product suppliers and customers. The first phase of the program consisted of
inventorying or identifying all Systems. The identified Systems are being
prioritized and all critical Systems will be assessed for Y2K compliance.
Systems will be remediated or replaced as necessary and contingency plans will
be developed if deemed appropriate. The Company is currently in the assessment
and remediation phases of the program, which it expects to complete by March 31,
1999, with the entire program being completed well in advance of the year 2000.
Critical Systems - The Systems that are critical to the Company's
operations include its accounting and administrative Systems and its operational
Systems. Upgrades to a number of the Company's accounting and administrative
Systems in the ordinary course of business have had the added benefit of
resolving certain Y2K compliance issues. Accordingly, the Company believes its
critical accounting and administrative Systems, which consist primarily of
computer hardware and software, to be substantially Y2K compliant. The Company's
critical operational Systems consist primarily of Systems in use on the
Company's drilling rigs. The Company has completed an inventory of each type of
drilling rig's critical Systems and is in the process of assessing these Systems
for Y2K compliance. The Company's mechanical rigs appear to be Y2K compliant.
Currently, the Company is not in a position to reasonably predict the likely
worst case Y2K scenario for its drilling rigs, but expects to be able to do so
following the completion of its drilling rig assessment.
Key Third Parties - Third parties that are key to the Company's operations
include suppliers that provide capital equipment and other supplies and services
essential to the operation of the Company's drilling rigs or business, and
customers that provide a source of revenue and cash flow to the Company. Any
significant Y2K disruptions of the Company's key suppliers and customers could
adversely impact the Company's financial condition, results of operations or
cash flows. The Company is directly contacting key suppliers and customers and
is reviewing published information of various suppliers to determine the state
of their Y2K readiness. Because the Company must rely on representations made by
key third parties with respect to their state of Y2K readiness, it cannot
guarantee that all of the Systems of key third parties that are relied upon by
the Company will remain functional. The Company expects to have completed
identifying and contacting all key third parties with respect to their Y2K
readiness by March 31, 1999.
Costs - To date, the incremental costs incurred by the Company that relate
solely to the Y2K compliance program have not been and are not expected to be
material. These costs are exclusive of upgrades made to the Company's Systems in
the ordinary course of business and consist primarily of fees paid to an outside
consultant and internal employee time. The Company does not separately track the
internal costs incurred for the Y2K project, which consist primarily of payroll
and related costs associated with employee time. Based upon the Company's
current assessments, the costs to complete the Company's Y2K compliance program
will not have a material effect on the Company's financial condition, results of
operations or cash flows. All current and future costs related to the Company's
Y2K compliance program have been and are expected to be funded with cash
generated from the Company's operations.
Risks - There are numerous uncertainties that make the ultimate impact of
Y2K disruptions in the United States or other countries where the Company
operates difficult to predict. While the Company will attempt to obtain
representations from key third parties with respect to their Y2K readiness,
there will be certain Systems or processes relied on by the Company that are
outside of the Company's control. The failure by key third parties to correct
their Y2K issues could adversely effect the Company. Additionally, the Company
could be unsuccessful in identifying and remediating or replacing all of its
non-compliant Systems and, as such, the Company's financial condition, results
of operations and cash flows could be materially impacted. While the Company
does not currently anticipate any catastrophic System failures, no assurances
can be made that such failures will not ultimately occur.
44
<PAGE> 45
Contingency Plans - If during the course of the Company's assessment of
its critical Systems it is determined that the risk of Y2K disruptions is
significant, contingency plans will be developed as appropriate. Such plans
might include the use of alternative service providers or product suppliers.
Currently, the Company does not have any contingency plans in place based on
current Y2K readiness assessments.
Financial Instruments and Market Risk
The Company is 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 that would result from adverse fluctuations in interest rates,
foreign currency exchange rates and marketable equity security prices as
discussed below.
Interest Rate Risk - The Company is exposed to interest rate risk through
its convertible and fixed rate long-term debt. The fair market value of fixed
rate debt will increase as prevailing interest rates decrease. The fair value of
the Company's long-term debt is estimated based on quoted market prices, where
applicable, or based on the present value of expected cash flows relating to the
debt discounted at rates currently available to the Company for long-term
borrowings with similar terms and maturities. The fair value of the Company's
long-term debt as of December 31, 1998 is $233.7 million, which exceeds its
carrying value of $228.4 million. A hypothetical 10% decrease in interest rates
and a 10% increase in quoted market prices would increase the fair market value
of the Company's long-term debt by $18.6 million.
Foreign Currency Risk - The Company operates in a number of international
areas and is involved in transactions denominated in currencies other than US
dollars, which exposes the Company to foreign exchange rate risk. The most
significant exposures arise in connection with the Company's operations in
Canada and Saudi Arabia. The Company utilizes forward exchange contracts, local
currency borrowings and the payment structure of customer contracts to
selectively hedge its exposure to exchange rate fluctuations in connection with
monetary assets, liabilities and cash flows denominated in certain foreign
currencies. A hypothetical 10% decrease in the value of all foreign currencies
relative to the US dollar as of December 31, 1998 would result in a $.2 million
decrease in the fair value of the Company's net monetary assets denominated in
currencies other than US dollars. The Company does not hold or issue forward
exchange contracts or other derivative financial instruments for speculative
purposes.
Equity Price Risk - The Company maintains an investment portfolio of
marketable equity securities that potentially expose the Company to equity price
risk. These equity securities are carried at fair market value and include $2.7
million in securities classified as trading and $27.9 million in securities
classified as available-for-sale as of December 31, 1998. A hypothetical 10%
decrease in the market prices for all marketable equity securities would
decrease the fair market value of the Company's trading securities and
available-for-sale securities by $.3 million and $2.8 million, respectively.
Forward-Looking Statements
The statements in this document that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When used in this document, words such as "anticipate", "believe",
"expect", "plan", "intend", "estimate", "project", "will", "could", "may",
"predict" and similar expressions are intended to identify forward-looking
statements. Future events and actual results may differ materially from the
results set forth in or implied in the forward-looking statements. Factors that
might cause such a difference include:
o fluctuations in worldwide prices and demand for oil and gas;
o fluctuations in levels of oil and gas exploration and development
activities;
o fluctuations in the demand for contract drilling services;
o the existence of competitors, technological changes and developments in the
industry;
o the existence of operating risks inherent in the contract drilling
industry;
o the existence of regulatory uncertainties;
o the possibility of political instability in any of the countries in which
Nabors does business; and
o year 2000 issues and general economic conditions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133, which is effective for fiscal
years beginning after June 15, 1999, establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position, and measure those instruments at fair value.
The Company believes that the adoption of the provisions of SFAS 133 will not
have a significant impact on the Company's financial position or results of
operations.
45
<PAGE> 46
NABORS INDUSTRIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF NABORS INDUSTRIES, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity and
cash flows present fairly, in all material respects, the financial position of
Nabors Industries, Inc. and its Subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for the year in the period
ended December 31, 1998, the three months in the period ended December 31, 1997
and the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards 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
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Houston, Texas
February 2, 1999
46
<PAGE> 47
NABORS INDUSTRIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,748 $ 5,623
Marketable securities 6,702 6,983
Accounts receivable, net 174,304 243,061
Inventory and supplies 25,740 21,305
Prepaid expenses and other current assets 42,021 26,359
----------- -----------
TOTAL CURRENT ASSETS 265,515 303,331
Property, plant and equipment, net 1,127,154 923,402
Marketable securities 23,890 29,529
Other long-term assets 33,683 25,044
----------- -----------
TOTAL ASSETS $ 1,450,242 $ 1,281,306
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 11,329 $ 6,091
Short-term borrowings 74,565 55,360
Trade accounts payable 58,534 71,709
Accrued liabilities 85,262 94,905
Income taxes payable 14,668 12,695
----------- -----------
TOTAL CURRENT LIABILITIES 244,358 240,760
Long-term obligations 217,034 226,299
Other long-term liabilities 49,182 16,810
Deferred income taxes 72,199 30,097
----------- -----------
TOTAL LIABILITIES 582,773 513,966
----------- -----------
Commitments and contingencies
Stockholders' equity:
Capital stock, par value $.10 per share:
Authorized common shares 200,000; issued and
outstanding 101,382 in 1998 and 101,325 in 1997 10,138 10,133
Capital in excess of par value 394,562 400,120
Accumulated other comprehensive income (10,983) 6,670
Retained earnings 478,569 353,581
Less treasury stock, common shares at cost, 589 in 1998 and 489 in 1997 (4,817) (3,164)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 867,469 767,340
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,450,242 $ 1,281,306
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
47
<PAGE> 48
NABORS INDUSTRIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three
Year Ended Months Ended Year Ended September 30,
December 31, December 31, ---------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 968,157 $ 302,806 $ 1,029,303 $ 719,743
----------- ----------- ----------- -----------
Operating expenses:
Direct costs 623,844 199,714 737,780 539,665
General and administrative expenses 77,026 18,580 68,616 56,862
Depreciation and amortization 84,949 20,313 66,391 46,117
Merger expenses -- -- 1,755 --
----------- ----------- ----------- -----------
Operating expenses 785,819 238,607 874,542 642,644
----------- ----------- ----------- -----------
Operating income 182,338 64,199 154,761 77,099
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (15,463) (3,979) (16,520) (11,884)
Interest income 1,480 93 3,422 2,695
Other income, net 31,626 2,303 40,747 13,690
----------- ----------- ----------- -----------
Other income (expense) 17,643 (1,583) 27,649 4,501
----------- ----------- ----------- -----------
Income before income taxes 199,981 62,616 182,410 81,600
----------- ----------- ----------- -----------
Income taxes:
Current 40,256 7,103 11,459 8,488
Deferred 34,737 14,186 56,143 2,612
----------- ----------- ----------- -----------
Total income taxes 74,993 21,289 67,602 11,100
----------- ----------- ----------- -----------
NET INCOME $ 124,988 $ 41,327 $ 114,808 $ 70,500
----------- ----------- ----------- -----------
EARNINGS PER SHARE:
BASIC $ 1.24 $ .41 $ 1.20 $ .83
----------- ----------- ----------- -----------
DILUTED $ 1.16 $ .37 $ 1.08 $ .75
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
BASIC 100,807 100,814 96,034 85,429
----------- ----------- ----------- -----------
DILUTED 112,555 116,427 111,975 93,752
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
48
<PAGE> 49
NABORS INDUSTRIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital Other Total
-------------------------- in Excess Comprehensive Retained Treasury Stockholders'
Shares Par Value of Par Value Income Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1995 85,017 $ 8,502 $ 229,267 $ (2,316) $ 138,091 $ (4,794) $ 368,750
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 70,500 70,500
Translation adjustment (22) (22)
Unrealized gain on
marketable securities, net 3,374 3,374
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 3,352 70,500 -- 73,852
- ------------------------------------------------------------------------------------------------------------------------------------
Reclassification of pre-quasi-
reorganization tax benefit 8,383 (8,383) --
Issuance of common shares for
stock options exercised 2,422 242 11,769 12,011
Issuance of common shares
for stock awards 31 3 214 217
Issuance of treasury stock in
connection with
acquisition of assets 2,370 1,630 4,000
Repurchase of Company warrants (1,008) (1,008)
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 2,453 245 21,728 -- (8,383) 1,630 15,220
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996 87,470 8,747 250,995 1,036 200,208 (3,164) 457,822
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 114,808 114,808
Translation adjustment 375 375
Unrealized gain on
marketable securities, net 15,359 15,359
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 15,734 114,808 -- 130,542
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common shares for
stock options exercised 8,897 890 49,679 50,569
Issuance of common shares for
stock awards 19 2 131 133
Issuance of common shares in
connection with Adcor merger 3,354 335 23,409 (2,762) 20,982
Issuance of common shares for
warrants exercised 1,500 150 8,100 8,250
Tax benefit on stock option
deductions 59,545 59,545
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 13,770 1,377 140,864 -- (2,762) -- 139,479
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 101,240 10,124 391,859 16,770 312,254 (3,164) 727,843
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 41,327 41,327
Translation adjustment (1,813) (1,813)
Unrealized loss on
marketable securities, net (8,287) (8,287)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- (10,100) 41,327 -- 31,227
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common shares for
stock options exercised 66 7 433 440
Issuance of common shares for
stock awards 19 2 131 133
Tax benefit on stock option
deductions 7,697 7,697
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 85 9 8,261 -- -- -- 8,270
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 101,325 10,133 400,120 6,670 353,581 (3,164) 767,340
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 124,988 124,988
Translation adjustment (3,724) (3,724)
Unrealized loss on
marketable securities, net (13,929) (13,929)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- (17,653) 124,988 -- 107,335
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common shares for
stock options exercised 126 12 903 915
Reduction of tax benefit on
stock option deductions (6,600) (6,600)
Return and retirement of
common shares held in
escrow in connection
with the Adcor merger (69) (7) (1,315) (1,322)
Issuance of warrants in
connection with acquisition 1,452 1,452
Conversion of 5% Notes 2 2
Repurchase of common shares (1,653) (1,653)
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 57 5 (5,558) -- -- (1,653) (7,206)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 101,382 $ 10,138 $ 394,562 $ (10,983) $ 478,569 $ (4,817) $ 867,469
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
49
<PAGE> 50
NABORS INDUSTRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three
Year Ended Months Ended Year Ended September 30,
December 31, December 31, ---------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 124,988 $ 41,327 $ 114,808 $ 70,500
Adjustments to net income:
Depreciation and amortization 84,949 20,313 66,391 46,117
Deferred taxes 34,737 14,186 56,143 2,612
Gains on disposition of long-term assets and businesses (34,126) (345) (32,143) (7,155)
Losses (gains) on marketable securities and warrants 4,324 142 (11,461) (4,871)
Foreign currency transaction and translation gains (216) (3) (919) (510)
Non-cash compensation element of stock awards and options -- -- 133 152
Equity in losses (earnings) of affiliates 306 25 (450) (139)
Other (212) 59 265 201
Increase (decrease), net of effects from acquisitions and dispositions,
from changes in:
Accounts receivable 62,165 1,895 (76,646) (21,089)
Inventory and supplies (4,721) 67 (3,415) (4,149)
Prepaid expenses and other current assets (541) 1,836 349 (7,968)
Other long-term assets (6,803) (1,011) (1,540) (7,699)
Trade accounts payable and accrued liabilities (21,233) (13,320) 46,751 12,005
Income taxes payable 2,395 699 3,760 4,576
Other long-term liabilities 35,731 3,204 2,978 1,541
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 281,743 69,074 165,004 84,124
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities, held-to-maturity -- -- -- 2,000
Purchases of marketable securities, available-for-sale (18,531) -- (4,803) --
Sales of marketable securities, available-for-sale -- -- -- 1,698
Purchases of marketable securities, trading -- -- -- (11,280)
Sales of marketable securities, trading -- -- 3,653 8,766
Exercise of warrants -- -- 9,417 --
Cash received from disposition of long-term assets and businesses 48,828 1,217 52,174 15,726
Cash paid for acquisitions of businesses, net (28,208) (25,666) (118,134) (28,317)
Capital expenditures (276,471) (58,372) (267,882) (146,440)
Investment in affiliates (1,952) (200) (502) (2,548)
------------ ------------ ------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (276,334) (83,021) (326,077) (160,395)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in restricted cash (946) (6) (24) 861
Long-term borrowings -- -- -- 183,295
Reduction of long-term obligations (10,805) (1,056) (19,040) (14,633)
Increase (decrease) in short-term borrowings, net 18,205 16,273 28,852 (20,449)
Common stock and treasury stock transactions (738) 440 58,819 11,026
------------ ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,716 15,651 68,607 160,100
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,125 1,704 (92,466) 83,829
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,623 3,919 95,867 12,038
ADJUSTMENT FOR ADCOR CASH, BEGINNING OF PERIOD -- -- 518 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,748 $ 5,623 $ 3,919 $ 95,867
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
50
<PAGE> 51
NABORS INDUSTRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Nabors is the largest land drilling contractor in the world, with 400
actively marketed land rigs as of December 31, 1998. Nabors conducts oil and gas
land drilling operations in the US Lower 48 states, Alaska, Canada and
internationally, primarily in South and Central America and the Middle East.
Offshore, Nabors markets 25 platform, six jackup and five barge rigs in the Gulf
of Mexico and several international markets. To supplement our primary business,
we offer a number of ancillary wellsite services, including oilfield management,
engineering, transportation, construction, maintenance, well logging and other
support services, in selected domestic and international markets. In addition,
we manufacture and lease or sell top drives for a broad range of drilling rig
applications and we manufacture and lease or sell rig instrumentation equipment
and rig reporting software.
The Company's businesses depend to a large degree on the level of capital
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 gas, which could have a material impact on exploration, development and
production activities, could materially affect the Company's financial
condition, results of operations and cash flows.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and all subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Investments in affiliates in which the Company has an ownership interest
of between 20% and 49% are accounted for by the equity method. The Company's
investments in several 50% owned joint ventures are accounted for under the
proportionate consolidation method.
The Company's proportionate share of the 50% owned joint ventures' net
assets and pre-tax income was as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended September 30,
December 31, December 31, --------------------------
(In thousands) 1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net assets $ 18,731 $ 29,675 $ 31,723 $ 27,895
Pre-tax income 10,803 2,265 10,695 6,464
</TABLE>
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. The fiscal
years ended September 30, 1997 ("1997") and September 30, 1996 ("1996") have not
been recast to conform to the new fiscal year ended December 31, 1998 ("1998").
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.
Marketable Securities
The Company's marketable securities consist only of marketable equity
securities. Equity securities that are classified as available-for-sale or
trading are stated at fair value. Unrealized holding gains and losses for
available-for-sale securities are excluded from earnings and, until realized,
are reported net of taxes in a separate component of stockholders' equity.
Unrealized gains and losses on securities classified as trading are reported in
earnings currently.
In computing realized gains and losses on the sale of equity securities,
the cost of the equity securities sold is determined using the specific cost of
the security when originally purchased.
Inventory and Supplies
Inventory and supplies are composed of replacement parts and supplies held
for use in the drilling operations of the Company, and top drives and drilling
instrumentation systems that are manufactured by Company subsidiaries for
resale. Inventory and supplies are valued at the lower of weighted average cost
or market value.
51
<PAGE> 52
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. The Company provides for the depreciation
of its drilling rigs using the units-of-production method over a 4,200-day
period after provision for salvage value. When the Company's rigs are not
operating, a depreciation charge is provided for 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 operating rigs from 3,800 to
4,200 active days to better reflect the useful lives of these assets. The effect
of this change in accounting estimate increased net income by approximately $.05
per diluted share for 1998. Depreciation on buildings, oilfield hauling and
mobile 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; 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 the results of operations.
Income Taxes
United States deferred income taxes have not been provided on unremitted
earnings of foreign subsidiaries, as such earnings are considered permanently
reinvested.
The Company realizes an income tax benefit associated with certain stock
options issued under the Company's stock option plans. This benefit results in a
reduction in taxes payable and an increase in capital in excess of par value.
Revenue Recognition
Revenues and costs on daywork contracts are recognized daily and revenues
and costs applicable to footage and turnkey contracts are recognized when the
well is completed (completed contract method). Revenues and related costs for
the manufacturing operations are recognized when products are shipped or
services are rendered to the customer.
Foreign Currency Translation
For certain foreign subsidiaries, such as those in Canada and Saudi
Arabia, the local currency is the functional currency and therefore translation
gains or losses are accumulated in a separate section of stockholders' equity.
For subsidiaries operating in highly inflationary countries, such as Venezuela,
and for certain other subsidiaries, the US dollar is the functional currency and
translation gains and losses are included in the Company's results of
operations.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"), 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 equals net income
divided by the weighted average number of shares of common stock outstanding
during the period, excluding shares of common stock held in treasury. Diluted
earnings per share for 1998, the Transition Period and 1997 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")
as conversion in those periods would have been dilutive. As a result of the
assumed conversion in those periods, net income is adjusted in 1998, the
Transition Period and 1997 to add back $5.4 million, $1.3 million and $5.6
million, respectively, representing interest expense relating 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 of common stock outstanding used for the basic
computation, (2) the net effect of dilutive stock options and warrants and (3)
for 1998, the Transition Period and 1997, 9.5 million shares of common stock
assumed to be issued upon conversion of the 5% Notes.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"). Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of grant over the
amount an employee must pay to acquire the common stock.
52
<PAGE> 53
Cash Flow Information
The supplemental cash flow information for 1998, the Transition Period,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Three
Year Ended Months Ended Year Ended September 30,
December 31, December 31, ---------------------------
(In thousands) 1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash paid for income taxes $ 36,331 $ 6,361 $ 6,303 $ 3,160
Cash paid for interest, net of capitalized interest 14,707 5,005 15,028 8,324
Acquisition of businesses:
Fair value of assets acquired less negative goodwill 39,034 25,666 124,415 50,400
Goodwill 4,873 -- 4,050 3,825
Liabilities assumed or created (14,222) -- (10,331) (21,174)
Warrants issued (1,452) -- -- --
Treasury shares issued -- -- -- (4,000)
------------ ------------ ------------ ------------
Cash paid for acquisitions 28,233 25,666 118,134 29,051
Cash acquired in acquisitions (25) -- -- (734)
------------ ------------ ------------ ------------
Cash paid for acquisitions, net 28,208 25,666 118,134 28,317
------------ ------------ ------------ ------------
Property, plant and equipment additions by notes payable -- -- 4,400 --
Disposition of businesses:
Equity consideration received 1,000 -- 567 --
</TABLE>
Financial Instruments and Risk Concentration
With the exception of the Company's convertible and fixed rate long-term
debt, the carrying amounts of the Company's financial instruments approximate
fair value. The fair value of the Company's long-term debt is estimated based on
quoted market prices, where applicable, or based on the present value of
expected cash flows relating to the debt discounted at rates currently available
to the Company for long-term borrowings with similar terms and maturities. The
fair value of the Company's long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
(In thousands) Carrying Value Fair Value Carrying Value Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
5% Notes $ 172,498 $ 173,447 $ 172,500 $ 311,552
9.18% Senior
Secured Notes 40,000 44,356 40,000 44,999
Other long-term
obligations 15,865 15,865 19,890 19,890
------------ ------------ ------------ ------------
$ 228,363 $ 233,668 $ 232,390 $ 376,441
------------ ------------ ------------ ------------
</TABLE>
Foreign Currency Risk - The Company operates in a number of international
areas and is involved in transactions denominated in currencies other than US
dollars, which exposes the Company to foreign exchange rate risk. The most
significant exposures arise in connection with the Company's operations in
Canada and Saudi Arabia. The Company utilizes forward exchange contracts, local
currency borrowings and the payment structure of customer contracts to
selectively hedge its exposure to exchange rate fluctuations in connection with
monetary assets, liabilities and cash flows denominated in certain foreign
currencies. The carrying amounts of the forward exchange contracts equal their
fair value and are adjusted at each balance sheet date for changes in exchange
rates. Realized and unrealized gains and losses on the forward exchange
contracts are deferred and recognized as foreign currency gains or losses over
the term of the contract. Deferred unrealized losses associated with these
forward exchange contracts were not significant as of December 31, 1998 and
December 31, 1997. The remaining forward exchange contract as of December 31,
1998 matures on June 30, 1999 and has a face value of $13.2 million. The face
value of forward exchange contracts as of December 31, 1997 totaled $34.4
million. The Company does not hold or issue forward exchange contracts or other
derivative financial instruments for speculative purposes.
Credit Risk - Financial instruments that potentially subject the Company
to concentrations of credit risk consist primarily of deposits and temporary
cash investments that the Company has with a variety of financial institutions.
The Company believes that the credit risk in such instruments is minimal. In
addition, the Company's trade receivables are with a variety of domestic,
international and national oil and gas companies. Management considers this
credit risk to be limited due to these companies' financial resources.
53
<PAGE> 54
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the 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.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"), at the beginning of 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 consolidated
statements of changes in stockholders' equity.
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"), during 1998. SFAS 131 established revised guidelines for determining an
entity's operating segments, as well as the type and level of financial
information to be disclosed. The adoption of SFAS 131 did not affect the
Company's financial position or results of operations, but did affect the
disclosure of the Company's segment information (Note 13).
The Company adopted Financial Reporting Release 48 ("FRR 48") at the
beginning of 1998. FRR 48 expands the disclosure requirements with respect to
certain derivative and other financial instruments. Under the provisions of FRR
48, the Company has provided enhanced descriptions in the footnotes to the
financial statements and qualitative and quantitative disclosures in
"Management's Discussion and Analysis..." regarding market risk related to
derivative and other financial instruments.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133, which is effective for fiscal
years beginning after June 15, 1999, establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position, and measure those instruments at fair value.
The Company believes that the adoption of the provisions of SFAS 133 will not
have a significant impact on the Company's financial position or results of
operations.
TWO
ACQUISITIONS, CAPITAL EXPENDITURES AND DISPOSITIONS
During October 1998 and January 1999 the Company executed agreements to
acquire Bayard Drilling Technologies, Inc. ("Bayard") and Pool Energy Services
Co. ("Pool"), respectively (Note 14).
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 of Nabors common stock
(Note 8), which were valued at their estimated fair market value. 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 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 warrants to acquire 265,000 shares of Key common stock
at an exercise price of $18.00 per share, and recorded a pre-tax gain of
approximately $16.0 million.
During November 1997, the Company completed the acquisition of certain
domestic land drilling assets from Veco Drilling, Inc. ("Veco") and Diamond L
Drilling & Production ("Diamond L") for approximately $26.0 million in cash. The
Veco fleet consisted of six land drilling rigs located in California and Nevada
and two platform labor contracts offshore California. The Diamond L fleet
consisted of three land rigs located in east Texas. The Company accounted for
these acquisitions under the purchase method of accounting.
During August 1997, the Company completed the acquisition of Cleveland
Drilling Company, Inc. ("Cleveland") for $11.7 million, plus the value of
working capital in cash. The Cleveland fleet consisted of seven rigs (six
active, one stacked), six of which were diesel electric SCR rigs located in the
United States. The Company accounted for this acquisition under the purchase
method of accounting.
54
<PAGE> 55
During April 1997, the Company completed the acquisition of substantially
all of the assets of Chesley Pruet Drilling Company ("Chesley Pruet") and an
affiliate for cash. The Chesley Pruet fleet consisted of 10 active and two
stacked land rigs located in the United States. The acquisition, which also
included drill pipe and component equipment, was accounted for under the
purchase method of accounting.
During April 1997, the Company completed the purchase of 25 stacked land
rigs and a large complement of component equipment located in the United States
from a subsidiary of Samson Investment Company for $85.0 million in cash.
During January 1997, the Company completed the acquisition of
Adcor-Nicklos Drilling Company ("Adcor") through a merger of a wholly owned
subsidiary with and into Adcor. In the merger, all of the stock of Adcor was
exchanged for 3,354,175 shares of Nabors common stock. Subsequent to the merger,
69,685 Nabors shares that were held in escrow were returned to the Company and
retired. The Adcor fleet consisted of 30 active and six stacked land rigs
located in the United States. The assets also included drill pipe, spare
drilling equipment, yards, vehicles and other support equipment. The transaction
was accounted for as a pooling-of-interests. The results of operations of Adcor
were included in the Company's 1997 results of operations commencing January 1,
1997. The historical consolidated financial statements of the Company were
retroactively restated to include the results of operations, financial position
and cash flows of Adcor commencing on October 1, 1996. The historical
consolidated financial statements of the Company prior to 1997 were not restated
as the effect in those years was not significant. Accordingly, an adjustment was
made to the Company's retained earnings on October 1, 1996 to record the
cumulative retained deficit of Adcor as of September 30, 1996.
During December 1996, the Company acquired 47 land drilling rigs from
Noble Drilling Corporation and certain of its subsidiaries for $60.0 million in
cash. The fleet of rigs consisted of 19 operating rigs and 28 stacked rigs in
various stages of completeness, with 38 of the rigs located in the United States
and nine located in Canada. The acquisition was accounted for under the purchase
method of accounting.
During November 1996, the Company completed the sale of its wholly owned
subsidiary, Nabors Drilling & Energy Services UK Ltd., to a wholly owned
subsidiary of Abbot Group plc, a diversified holding company listed on the
London Stock Exchange. The Company received approximately $36.0 million plus the
value of working capital in cash, as well as 10.8 million four-year warrants to
acquire stock in Abbot Group plc., and recorded a gain of $29.9 million during
1997. The Company subsequently exercised the warrants throughout 1997 and
recognized a gain of $8.8 million.
During April 1996, the Company acquired Exeter Drilling Company ("Exeter")
and its subsidiary, Gibson, from Occidental Oil and Gas Corporation. The
consideration paid consisted of $18.0 million in cash, $4.0 million of Nabors
common stock (266,223 shares) and $10.6 million paid in cash for Exeter's and
Gibson's working capital. Exeter's land drilling rig fleet consisted of 47
actively marketed rigs in the United States and two located internationally.
Gibson operated 78 workover and well servicing land rigs located in the United
States. The acquisition was accounted for under the purchase method of
accounting.
THREE
MARKETABLE SECURITIES
Marketable securities classified as current and long-term assets are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Equity securities, classified as trading,
at fair value $ 2,658 $ 6,983
Equity securities, classified as available-
for-sale, at fair value 4,044 --
------------ ------------
6,702 6,983
Long-term assets:
Equity securities, classified as available-
for-sale, at fair value 23,890 29,529
</TABLE>
The fair value of equity securities that were classified as
available-for-sale were lower than cost by $5.2 million as of December 31, 1998,
and exceeded cost by $16.6 million as of December 31, 1997.
The Company recorded unrealized holding gains (losses) on equity
securities classified as trading totaling $(4.3) million, $(.1) million, $1.1
million and $2.5 million during 1998, the Transition Period, 1997 and 1996,
respectively.
During 1997, the Company received $3.7 million of proceeds and realized
gains of $1.6 million resulting from the sale of certain investments in equity
securities that had been classified as trading.
During 1996, the Company received $1.7 million of proceeds and realized
gains of $.5 million and received $8.8 million of proceeds and realized gains of
$1.9 million resulting from the sale of certain investments in equity securities
that had been classified as available-for-sale and trading, respectively.
55
<PAGE> 56
FOUR
PROPERTY, PLANT AND EQUIPMENT
The major components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
(In thousands) 1998 1997
----------- -----------
<S> <C> <C>
Land $ 5,749 $ 6,262
Buildings 20,784 18,575
Contract drilling and related equipment 1,423,483 1,163,378
Oilfield hauling and mobile equipment 58,246 49,071
Other machinery and equipment 20,446 17,895
----------- -----------
1,528,708 1,255,181
Less: accumulated depreciation
and amortization(1) (401,554) (331,779)
----------- -----------
$ 1,127,154 $ 923,402
----------- -----------
</TABLE>
(1) Includes, as of December 31, 1998 and 1997, reserves of $53.6 million and
$54.6 million, respectively, resulting from the permanent impairment of
certain asset values.
Repair and maintenance expense included in direct costs in the
consolidated statements of income amounted to $102.1 million, $32.0 million,
$116.9 million and $81.4 million for 1998, the Transition Period, 1997 and 1996,
respectively.
Interest expense of $2.6 million, $.3 million, $1.2 million and $1.0
million was capitalized during 1998, the Transition Period, 1997 and 1996,
respectively.
FIVE
SHORT-TERM BORROWINGS AND LETTERS OF CREDIT
The Company has available lines of credit with various banks that permit
borrowing at interest rates generally not to exceed, at the option of the
Company, each bank's prime rate or LIBOR plus .25%. The weighted average
interest rate on short-term borrowings outstanding as of December 31, 1998 and
1997, excluding short-term, local currency borrowings in Venezuela for hedging
purposes, equaled 5.88% and 6.12%, respectively. The weighted average interest
rate inclusive of the Venezuela borrowings outstanding as of December 31, 1998
and 1997 equaled 5.88% and 7.03%, respectively.
The Company has a $200 million unsecured revolving credit facility with a
syndicate of banks. The credit facility is a committed facility with a term of
five years that expires on September 5, 2002. Loans under the credit facility
bear interest, at the option of the Company, at the agent bank's prime rate or
LIBOR, plus a margin (.25% at December 31, 1998) that varies depending on the
Company's senior unsecured debt rating. A commitment fee (.085% at December 31,
1998) is charged based on the average daily unused portion of the credit
facility. The loans are guaranteed by certain subsidiaries of the Company and
contain affirmative and negative covenants regarding, among other things,
limitations on liens and maintenance of financial ratios regarding funded debt
to capitalization, interest coverage and minimum net worth.
Availability and borrowings under the lines of credit are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Lines of credit available $254,584 $254,980
Short-term borrowings outstanding 74,565 55,360
Letters of credit outstanding 13,555 13,001
-------- --------
Remaining availability $166,464 $186,619
-------- --------
</TABLE>
SIX
LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
5% Notes payable in their entirety
May 2006 $ 172,498 $ 172,500
9.18% Senior Secured Notes payable in
semi-annual installments of $4,000
commencing January 2002 40,000 40,000
Loans payable in varying amounts in
August 1998, November 1998,
January 1999 and April 1999 7,881 12,995
Medium-term notes payable, maturing
from 1997 to 2002, from 5.56%
to 12.9%(1) 7,984 6,895
------------ ------------
228,363 232,390
Less: current portion (11,329) (6,091)
------------ ------------
$ 217,034 $ 226,299
------------ ------------
</TABLE>
(1) Certain of these obligations are collateralized by specific assets financed
with the related proceeds. The aggregate net book value of such assets
approximated $13.5 million and $9.9 million as of December 31, 1998 and
1997, respectively.
56
<PAGE> 57
On May 28, 1996, the Company issued $172.5 million of 5% Notes with a
scheduled maturity on May 15, 2006. Interest on the 5% Notes is payable
semi-annually on May 15 and November 15 of each year. The 5% Notes are
convertible into common shares of the Company at any time, at the option of the
holder, at a conversion price of $18.125 per share, subject to adjustment in
certain events. The 5% Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after May 15, 1999, initially at 103.5% and
at decreasing prices thereafter to 100% at maturity, in each case together with
accrued and unpaid interest. The 5% Notes also may be repaid at the option of
the holder at 101%, together with accrued and unpaid interest, any time prior to
May 15, 2006 if there is a change in control, as defined in the subordinated
indenture.
The Company issued 9.18% Senior Secured Notes in the principal amount of
$40.0 million (the "9.18% Senior Secured Notes") to the John Hancock Mutual Life
Insurance Company and an affiliate ("John Hancock"), pursuant to a note purchase
agreement dated October 1, 1992. The 9.18% Senior Secured Notes are due in
semi-annual installments of $4.0 million commencing January 2002 and impose
certain restrictions on the Company, including restrictions on the payments of
dividends and certain business combinations. The Company may pay dividends to
the extent the Company's cumulative dividends, plus certain other payments since
March 31, 1989, do not exceed 50% of the Company's cumulative net income since
March 31, 1989, plus the proceeds of any offering of equity securities of the
Company that are not redeemable at the option of the holder of the securities.
As of December 31, 1998, retained earnings available for dividends totaled
approximately $320.0 million. Also, proceeds from the sale of certain assets
must be used to prepay the 9.18% Senior Secured Notes to the extent that an
amount equal to such proceeds is not invested by the Company during a two-year
period. The 9.18% Senior Secured Notes also require that certain financial tests
be met on a consolidated Company basis, the most restrictive of which requires
working capital to be in excess of $5.0 million. The 9.18% Senior Secured Notes
are guaranteed by the Company and are collateralized by net assets with an
aggregate book value of approximately $27.0 million as of December 31, 1998 and
1997. Interest on the 9.18% Senior Secured Notes is payable semi-annually on
July 31 and January 31 of each year.
During 1995, a subsidiary of the Company entered into a revolving loan
agreement with a Canadian governmental entity whereby it could borrow up to
$20.0 million for the construction of certain drilling equipment that is
exported from Canada by one of the Company's subsidiaries. During 1995 and 1996,
the Company borrowed $13.0 million in the aggregate of which $7.8 million
remains outstanding as of December 31, 1998. The loans bear interest at 90-day
LIBOR plus .25% (5.63% at December 31, 1998). The loans are collateralized by
several drilling rigs located in the US with an aggregate net book value of
approximately $22.7 million and $23.5 million as of December 31, 1998 and 1997,
respectively. The loans are guaranteed by the Company and require the Company,
on a consolidated basis, to maintain various financial ratios, the most
restrictive of which requires working capital to be in excess of $5.0 million.
As of December 31, 1998, the maturities of long-term obligations for the
five years after 1998 are as follows:
<TABLE>
<S> <C>
(In thousands)
1999 $ 11,329
2000 3,511
2001 636
2002 4,361
2003 4,024
Thereafter 204,502
--------
$228,363
--------
</TABLE>
57
<PAGE> 58
SEVEN
INCOME TAXES
The Company's income tax, reconciled to the US federal income tax using the
federal statutory rate, and an analysis of the income tax provision are as
follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended September 30,
December 31, December 31, -----------------------------
(In thousands) 1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total pretax income(1) $ 199,981 $ 62,616 $ 182,410 $ 81,600
------------ ------------ ------------ ------------
Expected federal income tax using the 35% statutory rate 69,993 21,916 63,844 28,560
Recognition of net loss carryforwards -- -- -- (20,801)
State income taxes 3,974 1,702 1,453 469
Foreign taxes and other 1,026 (2,329) 2,305 2,872
------------ ------------ ------------ ------------
Total income tax $ 74,993 $ 21,289 $ 67,602 $ 11,100
------------ ------------ ------------ ------------
Analysis of the income tax provision:
Current:
US federal $ 22,780 $ 1,696 $ 1,113 $ 543
State 2,610 745 35 15
Foreign 14,866 4,662 10,311 7,930
------------ ------------ ------------ ------------
40,256 7,103 11,459 8,488
------------ ------------ ------------ ------------
Deferred:
US federal 29,384 12,160 49,269 --
State 3,504 1,875 2,200 454
Foreign 1,849 151 4,674 2,158
------------ ------------ ------------ ------------
34,737 14,186 56,143 2,612
------------ ------------ ------------ ------------
Total income tax $ 74,993 $ 21,289 $ 67,602 $ 11,100
------------ ------------ ------------ ------------
</TABLE>
(1) Includes foreign income before taxes of $56.4 million, $10.3 million, $30.9
million and $17.2 million, for the year ended December 31, 1998, the
Transition Period, 1997 and 1996, respectively.
The components of the Company's net deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 21,006 $ 45,082
Accrued liabilities and other 40,218 37,686
General tax credits 7,198 5,403
Unrealized loss on marketable securities 2,050 --
--------- ---------
Deferred tax asset 70,472 88,171
--------- ---------
Deferred tax liabilities:
Excess tax over book depreciation (142,671) (112,451)
Unrealized gain on marketable securities -- (5,817)
--------- ---------
Net deferred tax liability $ (72,199) $ (30,097)
--------- ---------
</TABLE>
In conjunction with the acquisition of New Prospect (Note 2), deferred tax
liabilities of $8.8 million were recorded during 1998.
For US federal income tax purposes, the Company has net operating loss
carryforwards of approximately $59.8 million that, if not utilized, will expire
from 1999 to 2009. The net operating loss carryforwards for Alternative Minimum
Tax purposes are approximately $33.2 million. There are Alternative Minimum Tax
credit carryforwards of $6.4 million available to offset future regular tax
liabilities. In addition, the Company has approximately $.8 million of
investment-tax-credit carryforwards expiring at various dates from 1999 to 2001.
Under US 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 the Company and its subsidiaries. The
utilization of such carryforwards could be limited or effectively lost upon
certain changes in ownership. Accordingly, although the Company believes
substantial loss carryforwards are available to it, no assurance can be given
concerning such loss carryforwards, or whether or not such loss carryforwards
will be available in the future.
58
<PAGE> 59
EIGHT
CAPITAL STOCK AND STOCK OPTIONS
Capital Stock
During 1998, 69,685 shares of common stock ("Shares") that had been held in
escrow in connection with the Company's acquisition of Adcor (Note 2) in January
1997 were returned to the Company and retired.
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 expire on April 30, 2003.
During January 1997, the Company completed the acquisition of Adcor whereby
the Company acquired all of the outstanding Shares of Adcor in exchange for
3,354,175 newly issued Shares.
During January 1997, warrants to acquire 1,500,000 Shares were exercised at
a price of $5.50 per Share. The warrants had originally been issued to John
Hancock during 1990.
During June 1996, 1,100,000 warrants previously issued in connection with
the acquisition of the drilling assets of Grace Drilling Company expired.
During April 1996, the Company issued 266,223 Shares that were previously
held in treasury to Occidental Oil and Gas Corporation in connection with the
Exeter acquisition (Note 2).
During October 1995, the Company purchased for $1.0 million, 650,000
warrants that the Company had previously issued in connection with the purchase
of several drilling rigs in April 1994.
The Company is authorized to issue up to 10,000,000 shares of preferred
stock with a par value of $.10 per share in one or more series, and to fix the
powers, designations, preferences and rights to each series.
As of December 31, 1998, there were warrants outstanding to purchase
200,000 Shares at $30.00 per Share, exercisable until April 30, 2003. As of
September 30, 1996, there were warrants outstanding to purchase 1,500,000 Shares
at $5.50 per Share, exercisable until January 31, 1997.
Stock Option Plans
As of December 31, 1998, the Company has several stock option plans under
which options to purchase Shares may be granted to key officers, directors and
managerial employees of the Company and its subsidiaries. Options granted under
the plans are at prices equal to the fair market value of the stock on the date
of the grant. Options granted under the plans 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 stock 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 11,125,731 and 1,687,151 Shares
remained available for grant as of December 31, 1998 and 1997, respectively.
On December 11, 1998, certain options previously granted to employees of
the Company were re-priced to the closing price of the Company's Shares on that
date. Options totaling 11,228,467, with exercise prices ranging from $16.00 to
$40.25 were re-priced to $12.50. As a condition of the re-pricing, certain
employees forfeited 25% of the options previously granted, or 3,634,930 options,
and none of the re-priced options may be exercised for a one-year period from
the re-pricing date.
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
(Share amounts in thousands) Shares Price
------ -------
<S> <C> <C>
Options outstanding as of September 30, 1995 12,620 $ 5.39
Granted 2,339 9.97
Exercised (2,422) 4.97
Forfeited (126) 8.01
------ -------
Options outstanding as of September 30, 1996 12,411 $ 6.31
Granted 11,706 21.72
Exercised (8,897) 5.68
Forfeited (118) 10.34
------ -------
Options outstanding as of September 30, 1997 15,102 $ 18.59
Granted 15 37.50
Exercised (66) 6.68
Forfeited (12) 12.26
------ -------
Options outstanding as of December 31, 1997 15,039 $ 18.67
Granted 6,927 18.49
Exercised (126) 7.24
Forfeited (3,726) 22.34
------ -------
Options outstanding as of December 31, 1998 18,114 $ 11.77
------ -------
</TABLE>
Of the options outstanding, 6,026,387, 13,339,470, 13,268,670 and
10,873,345 were exercisable at weighted average exercise prices of $10.40,
$19.24, $19.30 and $5.98 as of December 31, 1998 and 1997 and September 30, 1997
and 1996, respectively.
59
<PAGE> 60
A summary of stock options outstanding at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------
Weighted Weighted
Average Average
Number Remaining Exercise
(Share amounts in thousands) Outstanding Contractual Life Price
----------- ---------------- --------
<S> <C> <C> <C>
Range of exercise prices:
$ 1.07 - 1.61 220 2.2 $ 1.07
4.04 - 6.06 275 3.8 4.84
6.25 - 9.38 1,002 5.3 6.76
9.56 - 14.34 16,415 8.6 12.26
15.06 - 22.59 161 8.0 15.82
24.44 - 36.66 41 9.1 24.74
------ --- ------
18,114 8.2 $11.77
------ --- ------
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
---------------------------
Weighted
Average
Number Exercise
(Share amounts in thousands) Exercisable Price
----------- --------
<S> <C> <C>
Range of exercise prices:
$ 1.07 - 1.61 220 $ 1.07
4.04 - 6.06 275 4.84
6.25 - 9.38 898 6.81
9.56 - 14.34 4,499 11.75
15.06 - 22.59 134 15.75
----- ------
6,026 $10.40
----- ------
</TABLE>
The weighted average fair value of options granted during 1998, the
Transition Period, 1997 and 1996 was $5.05, $13.43, $4.96 and $2.46,
respectively.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants during 1998, the Transition Period, 1997 and
1996, respectively: risk-free interest rates of 4.95%, 5.88%, 5.80% and 5.25%;
dividend yield of 0.0% for all periods; expected life of 2.2 years, 3.5 years,
2.1 years and 2.5 years; and volatility of 38.9%, 38.9%, 30.9% and 30.9%.
Had compensation cost for the Company's stock-based compensation plans been
recognized in accordance with SFAS 123, the Company's net income and diluted
earnings per share for 1998, the Transition Period, 1997 and 1996 would have
been $99.7 million and $.93 per share, $41.0 million and $.36 per share, $66.1
million and $.63 per share and $68.1 million and $.73 per share, respectively.
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1996.
NINE
EMPLOYEE BENEFIT PLANS
Certain of the Company's employees are covered by defined contribution
plans. The Company's contributions to the plans are based on employee
contributions and totaled $6.4 million, $1.4 million, $4.4 million and $3.6
million for 1998, the Transition Period, 1997 and 1996, respectively. The
Company does not provide post-employment benefits to its employees.
TEN
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company and its subsidiaries occupy various facilities and lease
certain equipment under leases that range in length from 1 to 40 years. The
minimum rental commitments under non-cancelable operating leases, with lease
terms in excess of one year subsequent to December 31, 1998, are as follows:
<TABLE>
<S> <C>
(In thousands)
1999 $2,981
2000 1,476
2001 230
2002 99
2003 48
Thereafter 436
------
$5,270
------
</TABLE>
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 $3.8 million, $.9
million, $3.1 million and $2.5 million for 1998, the Transition Period, 1997 and
1996, respectively.
Employment Contracts
The Company has entered into employment contracts with certain of its
employees. The Company's minimum salary and bonus obligations under these
contracts as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
(In thousands)
1999 $1,621
2000 1,575
2001 1,181
2002 --
2003 --
------
$4,377
------
</TABLE>
60
<PAGE> 61
Pursuant to an employment agreement with an officer, the Company has
provided a non-interest bearing loan for approximately $2.9 million.
Capital Expenditures
As of December 31, 1998, the Company had capital expenditure commitments
totaling approximately $2.2 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 or results of operations.
ELEVEN
SUPPLEMENTAL BALANCE SHEET AND INCOME STATEMENT INFORMATION
Accounts receivable is net of an allowance for doubtful accounts of $3.7
million and $3.0 million as of December 31, 1998 and 1997, respectively.
Prepaid expenses and other current assets include insurance claims
receivable of $15.2 million and $2.1 million as of December 31, 1998 and 1997,
respectively.
Accrued liabilities include the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
(In thousands) 1998 1997
------- -------
<S> <C> <C>
Accrued compensation $24,596 $31,059
Deferred revenue 16,737 19,023
Workers' compensation liabilities 10,066 12,843
Other accrued liabilities 33,863 31,980
------- -------
$85,262 $94,905
------- -------
</TABLE>
Other income, net includes the following:
<TABLE>
<CAPTION>
Year Three
Ended Months Ended Year Ended September 30,
December 31, December 31, ----------------------
(In thousands) 1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Losses) gains
on marketable
securities and
warrants $ (4,324) $ (142) $ 11,461 $ 4,871
Gains on disposition
of long-term assets
and businesses 34,126 345 32,143 7,155
Dividend income 4,119 18 572 486
Foreign currency
gains 216 3 919 510
Other (2,511) 2,079 (4,348) 668
-------- -------- -------- --------
$ 31,626 $ 2,303 $ 40,747 $ 13,690
-------- -------- -------- --------
</TABLE>
TWELVE
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------
Quarter Ended
(In thousands, except ----------------------------------------------------
per share amounts) March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $286,774 $248,928 $224,215 $208,240
Gross profit(1) 98,327 88,833 84,956 72,197
Operating income 57,019 48,747 45,105 31,467
Net income 39,692 35,732 28,538 21,026
Earnings per share:
Basic $ .39 $ .35 $ .28 $ .21
Diluted $ .36 $ .33 $ .27 $ .20
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1997
---------------------------------------------------------
Quarter Ended
(In thousands, except ---------------------------------------------------------
per share amounts) December 31,(2) March 31, June 30, September 30,
--------------- --------- -------- -------------
<S> <C> <C> <C> <C>
Revenues $217,077 $238,683 $267,911 $305,632
Gross profit(1) 54,439 61,217 80,686 95,181
Operating income 23,612 28,202 45,193 57,754
Net income 20,115 21,441 31,132 42,120
Earnings per share:
Basic $ .22 $ .22 $ .32 $ .42
Diluted $ .20 $ .21 $ .29 $ .38
</TABLE>
(1) Gross profit represents revenues minus direct costs, and excludes
depreciation expense, general and administrative expenses and merger
expenses.
(2) Retroactively restated to include Adcor, which was merged with the Company
in January 1997.
61
<PAGE> 62
THIRTEEN
SEGMENT INFORMATION
The Company adopted SFAS 131 during 1998, and accordingly, the Transition
Period, 1997 and 1996 segment information has been restated in order to conform
to the presentation in the current year. The Company's eight business units
(nine in 1997 and 1996) have been aggregated into two reportable segments,
specifically (1) contract drilling and (2) manufacturing and logistics, based on
the nature of the services provided, the class of customers, the methods used to
provide services and other economic characteristics. The contract drilling
segment which consists of the Company's Alaska, Canada, US Lower 48,
International, Offshore and UK North Sea (in 1997 and 1996) drilling operations,
provides oil and gas land drilling, offshore platform drilling and offshore
platform workover and related services. The manufacturing and logistics segment
consists of the Company's Canrig, Epoch and Peak operating units that
manufacture top drives, manufacture drilling instrumentation systems and provide
construction and logistics services, respectively.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note 1). Inter-segment sales are
recorded at cost or cost plus a profit margin. The Company evaluates the
performance of its segments based on operating income.
The following table sets forth financial information with respect to the
Company and its reportable segments:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended September 30,
December 31, December 31, ----------------------------
(In thousands) 1998 1997 1997 1996
------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:(1)
Contract drilling $ 872,717 $ 280,373 $ 940,941 $ 657,509
Manufacturing and logistics(2) 111,188 31,316 115,051 76,956
Other(3) (15,748) (8,883) (26,689) (14,722)
----------- ----------- ----------- -----------
$ 968,157 $ 302,806 $ 1,029,303 $ 719,743
----------- ----------- ----------- -----------
Depreciation:
Contract drilling $ 79,976 $ 19,335 $ 62,572 $ 42,559
Manufacturing and logistics 5,402 1,061 3,964 3,061
Other(4) (429) (83) (145) 497
----------- ----------- ----------- -----------
$ 84,949 $ 20,313 $ 66,391 $ 46,117
----------- ----------- ----------- -----------
Operating income (loss):
Contract drilling $ 181,793 $ 64,596 $ 157,879 $ 82,941
Manufacturing and logistics 15,861 5,653 13,428 7,317
Other(4) (15,316) (6,050) (16,546) (13,159)
----------- ----------- ----------- -----------
182,338 64,199 154,761 77,099
Consolidated interest expense (15,463) (3,979) (16,520) (11,884)
Consolidated interest income 1,480 93 3,422 2,695
Consolidated other income 31,626 2,303 40,747 13,690
----------- ----------- ----------- -----------
Consolidated income before income taxes $ 199,981 $ 62,616 $ 182,410 $ 81,600
----------- ----------- ----------- -----------
Total assets:
Contract drilling $ 1,334,378 $ 1,159,844 $ 1,106,390 $ 693,254
Manufacturing and logistics(5) 83,980 69,761 66,585 47,545
Other(4) 31,884 51,701 61,257 130,475
----------- ----------- ----------- -----------
$ 1,450,242 $ 1,281,306 $ 1,234,232 $ 871,274
----------- ----------- ----------- -----------
Capital expenditures:
Contract drilling $ 305,620 $ 83,136 $ 391,446 $ 168,582
Manufacturing and logistics 8,530 1,994 12,689 7,276
Other(4) (686) (1,092) (7,467) (1,375)
----------- ----------- ----------- -----------
$ 313,464 $ 84,038 $ 396,668 $ 174,483
----------- ----------- ----------- -----------
</TABLE>
(1) One customer represented approximately 11% of consolidated revenues during
1998. Both of the Company's reportable segments recorded sales to this
customer.
(2) Includes (losses) earnings of unconsolidated affiliates, accounted for by
the equity method, of $(.3) million, $0, $.5 million and $.1 million for
1998, the Transition Period, 1997 and 1996, respectively.
(3) Elimination of inter-segment manufacturing and logistics sales.
(4) Includes the elimination of inter-segment transactions and unallocated
corporate expenses, assets and capital expenditures.
(5) Includes $4.9 million, $3.8 million, $3.6 million and $2.7 million of
investments in affiliates accounted for by the equity method for 1998, the
Transition Period, 1997 and 1996, respectively.
62
<PAGE> 63
The following table sets forth financial information with respect to the
Company's operations by geographic area:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended September 30,
December 31, December 31, -------------------------
(In thousands) 1998 1997 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
United States $ 692,636 $ 236,508 $ 797,319 $ 503,622
Foreign 275,521 66,298 231,984 216,121
---------- ---------- ---------- ----------
$ 968,157 $ 302,806 $1,029,303 $ 719,743
---------- ---------- ---------- ----------
Property, plant and
equipment, net:
United States $ 823,561 $ 703,594 $ 642,394 $ 331,416
Foreign 303,593 219,808 218,999 179,787
---------- ---------- ---------- ----------
$1,127,154 $ 923,402 $ 861,393 $ 511,203
---------- ---------- ---------- ----------
</TABLE>
FOURTEEN
SUBSEQUENT EVENTS
During October 1998, the Company executed a definitive agreement with
Bayard, pursuant to which a wholly owned, special purpose subsidiary of the
Company will merge into Bayard. Pursuant to the merger agreement as amended,
each of the approximately 18.2 million Shares of Bayard will be exchanged for
0.3375 Shares of the Company and $.30 per Share in cash (approximately 6.14
million Shares and $5.5 million of cash in the aggregate). Approximately $120.0
million of Bayard debt will remain outstanding immediately following the merger
as an obligation of Bayard, which the Company does not intend to guarantee. The
merger which has received the necessary approvals, is subject to the
satisfaction of certain closing conditions, and is expected to close in the
second quarter of 1999. The merger will be accounted for under the purchase
method of accounting. 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.
During January 1999, the Company executed a definitive merger agreement
with Pool, pursuant to which each of the approximately 18.8 million Shares of
Pool not owned by the Company prior to the merger will be exchanged for 1.025
Shares of the Company (approximately 19.3 million Shares). As of December 31,
1998, Pool had approximately $172.8 million of long-term debt that will remain
an obligation of Pool after the acquisition. The merger, which is subject to
the approval of Pool's shareholders, the customary regulatory approvals and
other closing conditions, will be accounted for under the purchase method of
accounting and is expected to close during the second quarter of 1999. Pool
operates five drilling rigs in Alaska, a total of 57 drilling and workover rigs
in international areas, 25 offshore platform drilling rigs in the Gulf of Mexico
and 754 workover rigs in the United States. Pool also owns and operates 23
offshore supply vessels, more than 300 fluid hauling trucks and a large quantity
of fluid storage tanks.
On March 9, 1999, the Company issued $325.0 million of 6.80% senior
unsecured notes due April 15, 2004 (the "6.80% Notes"). Interest on the 6.80%
Notes is payable semi-annually on April 15 and October 15 each year, commencing
on October 15, 1999. The proceeds from the issuance of the 6.80% Notes are
expected to be used to repay certain short-term and long-term borrowings of the
Company and, if the acquisition of Bayard is completed, certain senior bank debt
and equipment notes of Bayard. The remaining proceeds will be used for general
corporate purposes, including but not limited to, working capital, investment in
subsidiaries, retirement of other indebtedness if economically prudent and
possible future business acquisitions.
63
<PAGE> 64
CORPORATE INFORMATION
Corporate Address
Nabors Industries, Inc.
515 West Greens Road
Suite 1200
Houston, Texas 77067
Telephone: (281) 874-0035
Fax: (281) 872-5205
Form 10-K
Copies may be obtained at no charge by writing to the Corporate Secretary at the
corporate office of the Company.
Transfer Agent
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303
Investor Contact
Dennis A. Smith
Director of Corporate Development
Independent Accountants
PricewaterhouseCoopers LLP
Houston, Texas
Price of Common Stock
As of December 31, 1998, there were 100,792,426 shares of Common Stock
outstanding held by 2,381 holders of record. The Common Stock is listed on the
American Stock Exchange under the symbol "NBR". The following table sets forth
the reported high and low sales prices of the Common Stock on the Composite Tape
for the calendar quarters indicated.
<TABLE>
<CAPTION>
Stock Price
--------------------
Calendar Year High Low
-------- --------
<S> <C> <C>
1996 Fourth quarter 21 1/2 13 1/4
-------- --------
1997 First quarter 22 14 3/4
Second quarter 25 1/16 17 3/4
Third quarter 40 7/8 24 7/8
Fourth quarter 46 13/16 26
-------- --------
1998 First quarter 31 9/16 19 15/16
Second quarter 27 3/8 19 3/4
Third quarter 21 7/16 11 3/4
Fourth quarter 20 11/16 12 1/16
-------- --------
</TABLE>
PRINCIPAL OPERATING SUBSIDIARIES
Nabors Alaska Drilling, Inc.
Anchorage, Alaska
James Denney, President
Nabors Drilling
International Limited
Houston, Texas
Siegfried Meissner, President
Nabors Drilling USA, Inc.
Houston, Texas
Larry P. Heidt, President
Nabors Drilling Limited
Nisku, Alberta
Duane A. Mather, President
Peak Oilfield Services
Company
Anchorage, Alaska
Michael R. O'Conner,
President
Sundowner Offshore
Services, Inc.
Houston, Texas
Jerry C. Shanklin, President
Nabors Offshore Drilling, Inc.
Houston, Texas
Jerry C. Shanklin, President
CANRIG Drilling
Technology, Ltd.
Magnolia, Texas
Allan Richardson, President
EPOCH Well Logging, Inc.
Bakersfield, California
Christopher P. Papouras,
President
DIRECTORS
Eugene M. Isenberg
Chairman and Chief Executive
Officer, Nabors Industries, Inc.
Anthony G. Petrello
President and Chief Operating
Officer, Nabors Industries, Inc.
Richard A. Stratton
Vice Chairman,
Nabors Industries, Inc.
Gary T. Hurford
President, Hunt Oil Company
Hans W. Schmidt
Formerly Director,
Deutag Drilling
Myron M. Sheinfeld
Attorney,
Sheinfeld, Maley & Kay
Jack Wexler
International Business
Consultant
Martin J. Whitman
Chief Executive Officer,
M.J. Whitman, Inc.
Chairman, Danielson
Holding Corporation
Chairman, Third
Avenue Trust
OFFICERS
Eugene M. Isenberg
Chairman and Chief
Executive Officer
Anthony G. Petrello
President and Chief
Operating Officer
Richard A. Stratton
Vice Chairman
Daniel McLachlin
Vice President - Administration
and Corporate Secretary
Bruce P. Koch
Vice President - Finance
Design: Savage Design Group, Inc., Houston, Texas
64
<PAGE> 65
[LOGO] NABORS INDUSTRIES, INC.
515 West Greens Road Suite 1200 Houston, Texas 77067 281-874-0035
<PAGE> 1
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARY NAME JURISDICTION
--------------- ------------
<S> <C>
Canrig Drilling Technology Ltd. Delaware
Epoch Well Logging, Inc. California
Nabors Alaska Drilling, Inc. Alaska
Nabors Corporate Services, Inc. Delaware
Nabors Drilling International Limited Delaware
Nabors Drilling Limited Canada
Nabors Drilling USA, Inc. Delaware
Nabors International, Inc. Delaware
Nabors Offshore Drilling, Inc. Delaware
Peak Oilfield Services Company (50% ownership) Alaska
Sundowner Offshore Services, Inc. Nevada
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Nabors Industries, Inc. on Form S-8 (Registration Numbers
333-57129, 333-11313, 33-87322, 33-87324, 33-47521, 33-45097, 33-36229, 33-56000
and 33-54858), on Form S-4 (Registration Number 333-72397) and on Form S-3
(Registration Number 333-25233) of our report dated February 2, 1999 on our
audits of the consolidated financial statements of Nabors Industries, Inc. and
Subsidiaries at December 31, 1998 and 1997 and for the year in the period ended
December 31, 1998, the three months in the period ended December 31, 1997 and
the year in the period ended September 30, 1997, which reports are included in
this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,748
<SECURITIES> 6,702
<RECEIVABLES> 177,977
<ALLOWANCES> 3,673
<INVENTORY> 25,740
<CURRENT-ASSETS> 265,515
<PP&E> 1,528,708
<DEPRECIATION> 401,554
<TOTAL-ASSETS> 1,450,242
<CURRENT-LIABILITIES> 244,358
<BONDS> 217,034
0
0
<COMMON> 10,138
<OTHER-SE> 857,331
<TOTAL-LIABILITY-AND-EQUITY> 1,450,242
<SALES> 968,157
<TOTAL-REVENUES> 968,157
<CGS> 623,844
<TOTAL-COSTS> 623,844
<OTHER-EXPENSES> 161,975
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,463
<INCOME-PRETAX> 199,981
<INCOME-TAX> 74,993
<INCOME-CONTINUING> 124,988
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,988
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.16
</TABLE>
