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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2006
Commission File Number: 000-49887
NABORS INDUSTRIES LTD.
Incorporated in Bermuda
Mintflower Place
8 Par-La-Ville Road
Hamilton, HM08
Bermuda
(441) 292-1510
98-0363970
(I.R.S. Employer Identification No.)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Name of each |
Title of each class |
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exchange on which registered |
Common shares, $.001 par value per share
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The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
None.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
YES o NO þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
The aggregate market value of the 242,446,805 common shares, par value $.001 per share, held by
non-affiliates of the registrant, based upon the closing price of our common shares as of the last
business day of our most recently completed second fiscal quarter, June 30, 2006, of $33.79 per
share as reported on the New York Stock Exchange, was $8,192,277,541. Common shares held by each
officer and director and by each person who owns 5% or more of the outstanding common shares have
been excluded in that such persons may be deemed affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of common shares, par value $.001 per share, outstanding as of February 22, 2007 was
278,315,153. In addition, our subsidiary, Nabors Exchangeco (Canada) Inc., had 168,738
exchangeable shares outstanding as of February 22, 2007 that are exchangeable for Nabors common
shares on a one-for-one basis, and have essentially identical rights as Nabors Industries Ltd.
common shares, including but not limited to voting rights and the right to receive dividends, if
any.
DOCUMENTS INCORPORATED BY REFERENCE (to the extent indicated herein)
Specified portions of the 2007 Notice of Annual Meeting of Shareholders and the definitive Proxy
Statement to be distributed in connection with the 2007 annual meeting of shareholders (Part III)
NABORS INDUSTRIES LTD.
Form 10-K Annual Report
For the Fiscal Year Ended December 31, 2006
Table of Contents
Our internet address is www.nabors.com. We make available free of charge through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission
(the SEC). In addition, a glossary of drilling terms used in this document and documents
relating to our corporate governance (such as committee charters, governance guidelines and other
internal policies) can be found on our website. The SEC maintains an
internet site (www.sec.gov)
that contains reports, proxy and information statements and other information regarding issuers
that file electronically with the SEC.
FORWARD-LOOKING STATEMENTS
We often discuss expectations regarding our future markets, demand for our products and
services, and our performance in our annual and quarterly reports, press releases, and other
written and oral statements. Statements that relate to matters that are not historical facts are
forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act. These forward-looking statements are
based on an analysis of currently available competitive, financial and economic data and our
operating plans. They are inherently uncertain and investors should recognize that events and
actual results could turn out to be significantly different from our expectations. By way of
illustration, when used in this document, words such as anticipate, believe, expect, plan,
intend, estimate, project, will, should, could, may, predict and similar
expressions are intended to identify forward-looking statements.
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You should consider the following key factors when evaluating these forward-looking
statements:
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fluctuations in worldwide prices of and demand for natural gas and oil; |
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fluctuations in levels of natural gas and oil exploration and development activities; |
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fluctuations in the demand for our services; |
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the existence of competitors, technological changes and developments in the oilfield services industry; |
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the existence of operating risks inherent in the oilfield services industry; |
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the existence of regulatory and legislative uncertainties; |
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the possibility of changes in tax laws; |
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the possibility of political instability, war or acts of terrorism in any of the
countries in which we do business; and |
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general economic conditions. |
Our businesses depend, to a large degree, on the level of spending by oil and gas companies
for exploration, development and production activities. Therefore, a sustained increase or
decrease in the price of natural gas or oil, which could have a material impact on exploration,
development and production activities, could also materially affect our financial position, results
of operations and cash flows.
The above description of risks and uncertainties is by no means all-inclusive, but is designed
to highlight what we believe are important factors to consider. For a more detailed description of
risk factors, please see Part I Item 1A. Risk Factors.
Unless the context requires otherwise, references in this Annual Report on Form 10-K to we,
us, our, or Nabors means Nabors Industries Ltd. and, where the context requires, includes our
subsidiaries.
PART I
ITEM 1. BUSINESS
Introduction.
Nabors is the largest land drilling contractor in the world with approximately 615 land
drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48
states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. We
are also one of the largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 610 land workover and well-servicing rigs in the United States,
primarily in the southwestern and western United States, and approximately 190 land workover and
well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and
drilling rigs, and owns 48 platform, 19 jack-up units and five barge rigs in the United States and
multiple international markets. These rigs provide well-servicing, workover and drilling services.
We have a 50% ownership interest in a joint venture in Saudi Arabia, which owns 18 rigs. We also
offer a wide range of ancillary well-site services, including engineering, transportation,
construction, maintenance, well logging, directional drilling, rig instrumentation, data collection
and other support services in selected domestic and international markets. We time charter a fleet
of 29 marine transportation and supply vessels, which provide transportation of drilling materials,
supplies and crews for offshore operations. During the first quarter of 2006 we began to offer
subcontracted logistics services for onshore drilling and well-servicing operations in Canada using
helicopters and fixed-winged aircraft. We manufacture and lease or sell top drives for a broad
range of drilling applications, directional drilling systems, rig instrumentation and data
collection equipment, pipeline handling equipment and rig reporting software. We have also made
selective investments in oil and gas exploration, development and production activities.
Nabors was formed as a Bermuda-exempt company on December 11, 2001. Through predecessors and
acquired entities, Nabors has been continuously operating in the drilling sector since the early
1900s. Our principal executive offices are located at Mintflower Place, 8 Par-La-Ville Road,
Hamilton, HM08, Bermuda. Our phone number at our principal executive offices is (441) 292-1510.
Our Fleet of Rigs.
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Land Rigs. A land-based drilling rig generally consists of engines, a drawworks, a
mast (or derrick), pumps to circulate the drilling fluid (mud) under various pressures,
blowout preventers, drill string and related equipment. The engines |
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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 workover or well-servicing rig consists of a mobile
carrier, engine, drawworks and a mast. The primary function of a workover or 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. Because of size and cost considerations, well-servicing and workover rigs are used
for these operations rather than the larger drilling rigs. Land-based drilling rigs are moved
between well sites and between geographic areas of operations by using our fleet of cranes,
loaders and transport vehicles. Well-servicing rigs are generally self-propelled units and
heavier capacity workover rigs are either self-propelled or trailer mounted and include
auxiliary equipment, which is either transported on trailers or moved with trucks. |
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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. |
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Jack-up Rigs. Jack-up rigs are mobile, self-elevating drilling
and workover platforms equipped with legs that can be lowered to
the ocean floor until a foundation is established to support the
hull, which contains the drilling and/or workover equipment,
jacking system, crew quarters, loading and unloading facilities,
storage areas for bulk and liquid materials, helicopter landing
deck and other related equipment. The rig legs may operate
independently or have a mat attached to the lower portion of the
legs in order to provide a more stable foundation in soft bottom
areas. Many of our jack-up rigs are of cantilever design a
feature that permits the drilling platform to be extended out from
the hull, allowing it to perform drilling or workover operations
over adjacent, fixed platforms. Nabors shallow workover jack-up
rigs generally are subject to a maximum water depth of
approximately 125 feet, while some of our jack-up rigs may drill
in water depths as shallow as 13 feet. Nabors also has deeper
water depth capacity jack-up rigs that are capable of drilling at
depths between eight feet and 150 to 250 feet. The water depth
limit of a particular rig is determined by the length of the rigs
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. The rig is then towed to the new drilling site. |
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Inland Barge Rigs. One of Nabors barge rigs is a full-size
drilling unit. Nabors also owns two workover inland barge rigs.
These barges are designed to perform plugging and abandonment,
well service or workover services in shallow inland, coastal or
offshore waters. Our barge rigs can operate at depths between
three and 20 feet. |
Additional information regarding the geographic markets in which we operate and our business
segments can be found in Note 18 of the Notes to Consolidated Financial Statements included in Part
II, Item 8. below.
Customers; Types of Drilling Contracts.
Our customers include major oil and gas companies, foreign national oil and gas companies and
independent oil and gas companies. No customer accounted for greater than 10% of consolidated
revenues in 2006 or in 2005.
On land in the U.S. Lower 48 states and Canada, we have historically been contracted on a
single-well basis, with extensions subject to mutual agreement on pricing and other significant
terms. Beginning in late 2004, as a result of increasing demand for drilling services, our
customers started entering into longer term contracts with durations ranging from one to three
years. Under these contracts our rigs are committed to one customer over that term. Increasingly,
these contracts are being signed for three-year terms for newly constructed rigs. Contracts
relating to offshore drilling and land drilling in Alaska and international markets generally
provide for longer terms, usually from one to five years. Offshore workover projects are often on
a single-well basis. We generally are awarded drilling contracts through competitive bidding,
although we occasionally enter into contracts by direct negotiation. Most of our single-well
contracts are subject to termination by the customer on short notice, but some can be firm for a
number of wells or a period of time, and may provide for early termination compensation in certain
circumstances. 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.
In recent years, all of our drilling contracts have been daywork contracts. A daywork
contract generally provides for a basic rate per day when drilling (the dayrate for us providing a
rig and crew) and for lower rates when the rig is moving, or
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when drilling operations are
interrupted or restricted by equipment breakdowns, adverse weather conditions or other
conditions beyond our control. In addition, daywork contracts may provide for a lump sum fee for
the mobilization and demobilization of the rig, which in most cases approximates our incurred
costs. A daywork contract differs from a footage contract (in which the drilling contractor is
paid on the basis of a rate per foot drilled) and a turnkey contract (in which the drilling
contractor is paid for drilling a well to a specified depth for a fixed price).
Well Servicing and Workover Services.
Although some wells in the United States flow oil to the surface without mechanical
assistance, most are in mature production areas that require pumping or some other form of
artificial lift. Pumping oil wells characteristically require more maintenance than flowing wells
because of the operation of the mechanical pumping equipment installed.
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Well-Servicing/Maintenance Services. We provide maintenance
services on the mechanical apparatus used to pump or lift oil from
producing wells. These services include, among other things,
repairing and replacing pumps, sucker rods and tubing. We provide
the rigs, equipment and crews for these tasks, which are performed
on both oil and natural gas wells, but which are more commonly
required on oil wells. Maintenance services typically take less
than 48 hours to complete. Well-servicing rigs generally are
provided to customers on a call-out basis. We are paid an hourly
rate and work typically is performed five days a week during
daylight hours. |
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Workover Services. Producing oil and natural gas wells
occasionally require major repairs or modifications, called
workovers. Workovers normally are carried out with a
well-servicing rig that includes additional specialized accessory
equipment, which may include rotary drilling equipment, mud pumps,
mud tanks and blowout preventers. A workover may last anywhere
from a few days to several weeks. We are paid an hourly rate and
work is generally performed seven days a week, 24 hours a day. |
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Completion Services. The kinds of activities necessary to carry
out a workover operation are essentially the same as those that
are required to complete a well when it is first drilled. The
completion process may involve selectively perforating the well
casing at the depth of discrete producing zones, stimulating and
testing these zones and installing down-hole equipment. The
completion process may take a few days to several weeks. We are
paid an hourly rate and work is generally performed seven days a
week, 24 hours a day. |
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Production and Other Specialized Services. We also can provide
other specialized services, including onsite temporary
fluid-storage facilities, the provision, removal and disposal of
specialized fluids used during certain completion and workover
operations, and the removal and disposal of salt water that often
is produced in conjunction with the production of oil and natural
gas. We also provide plugging services for wells from which the
oil and natural gas has been depleted or further production has
become uneconomical. We are paid an hourly or a per unit rate, as
applicable, for these services. |
Oil and Gas Investments.
Through our Ramshorn business unit, Nabors makes selective investments in oil and gas
exploration, development and production operations. Additional information about recent activities
for this segment can be found in Part II, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Oil and Gas.
Other Services.
Canrig Drilling Technology Ltd., our drilling technologies subsidiary, manufactures top
drives, which are installed on both onshore and offshore drilling rigs. Our top drives are
marketed throughout the world. During the last three years, approximately 72% of our top drive
sales were made to other Nabors companies. We also rent top drives and provide top drive
installation, repair and maintenance services to our customers. Canrig Drilling Technology Canada
Ltd., our newly acquired drilling technology subsidiary, manufactures catwalks and wrenches which
are installed on both onshore and offshore drilling rigs. During the first seven months of
operations, approximately 56% of the equipment sales were made to other Nabors companies. Epoch
Well Services, Inc., our well services subsidiary, offers rig instrumentation equipment, including
sensors, proprietary RIGWATCH software and computerized equipment that monitors the real-time
performance of a rig. In addition, Epoch specializes in daily reporting software for drilling
operations, making this data available through the internet via mywells.com. Epoch also provides
mudlogging services. Ryan Energy Technologies, Inc., another one of our subsidiaries, manufactures
and sells directional drilling and rig instrumentation and data collection services to oil and gas
exploration and service companies. Nabors has a 50% interest in Peak Oilfield Services Company, a
general partnership with a subsidiary of Cook Inlet Region, Inc., a leading Alaskan native
corporation. Peak Oilfield Services provides heavy
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equipment to move drilling rigs, water, other
fluids and construction materials, primarily on Alaskas North Slope and in the
Cook Inlet region. The partnership also provides construction and maintenance for ice roads, pads,
facilities, equipment, drill sites and pipelines. Nabors also has a 50% interest in Alaska
Interstate Construction, a limited liability company whose other primary partner is Cook Inlet
Region, Inc. Alaska Interstate Construction is a general contractor involved in the construction
of roads, bridges, dams, drill sites and other facility sites, as well as providing mining support
in Alaska. Revenues are derived from services to companies engaged in mining and public works.
Our subsidiary, Peak USA Energy Services, Ltd., provides hauling and maintenance services for
customers in the U.S. Lower 48 states. Nabors Blue Sky Ltd. was formed through an acquisition
completed in the first quarter of 2006, and leases aircraft used for logistics services for onshore
drilling and well-servicing operations in Canada using helicopters and fixed-winged aircraft.
We time charter a fleet of 29 offshore support vessels, including one crew boat, which operate
in the Gulf of Mexico, Trinidad and the Middle East and provide marine transportation of drilling
materials, supplies and crews for offshore rig operations and support for other offshore
facilities. The supply vessels are used as freight-carrying vessels for bringing drill pipe,
tubing, casing, drilling mud and other equipment to drilling rigs and production platforms.
Our Employees.
As of December 31, 2006, Nabors employed approximately 25,218 persons, of whom approximately
3,204 were employed by unconsolidated affiliates. We believe our relationship with our employees
generally is good.
Certain rig employees in Argentina and Australia are represented by collective bargaining
units.
Seasonality.
Our Canadian and Alaskan drilling and workover operations are subject to seasonal variations
as a result of weather conditions and generally experience reduced levels of activity and financial
results during the second calendar quarter of each year. Seasonality does not have a material
impact on the remaining portions of our business. Our overall financial results reflect the
seasonal variations experienced in our Canadian and Alaskan operations.
Research and Development.
Research and development constitutes a growing part of our overall business. The effective
use of technology is critical to the maintenance of our competitive position within the drilling
industry. As a result of the importance of technology to our business, we expect to continue to
develop technology internally or to acquire technology through strategic acquisitions.
Industry/Competitive Conditions.
To a large degree, Nabors businesses depend on the level of capital spending by oil and gas
companies for exploration, development and production activities. A sustained increase or decrease
in the price of natural gas or oil could have a material impact on exploration, development and
production activities by our customers and could also materially affect our financial position,
results of operations and cash flows. See Part I Item 1A. Risk Factors Fluctuations in oil
and gas prices could adversely affect drilling activity and Nabors revenues, cash flows and
profitability.
Our industry remains competitive. Historically, the number of rigs has exceeded demand in
many of our markets, resulting in strong price competition. More recently, as a result of improved
demand for drilling services driven by a sustained high level of commodity prices, supply and
demand have been in balance in most of our markets, with demand actually exceeding supply in some
of our markets. This economic reality has resulted in an increase in rates being charged for rigs
across our North American, Offshore and International markets. Furthermore, over the last three
years, the dramatic increase in rates along with our customers willingness to enter into firm
three-year commitments has resulted in our building of new rigs in significant quantities for the
first time in over 20 years. However, as many existing rigs can be readily moved from one region
to another in response to changes in levels of activity and many of the total available contracts
are currently awarded on a bid basis, competition based on price for both existing and new rigs
still exists across all of our markets. The land drilling, workover and well-servicing market is
generally more competitive than the offshore market due to the larger number of rigs and market
participants.
In all of our geographic market areas, we believe 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
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ability to offer ancillary services. Increasingly, as the market requires additional rigs and as a result
of new build capacity,
the ability to deliver rigs within certain timeframes is becoming a competitive factor. In
international markets, experience in operating in certain environments and customer alliances, also
have been factors in the selection of Nabors.
Certain competitors are present in more than one of Nabors operating regions, although no one
competitor operates in all of these areas. In the U.S. Lower 48 states, there are several hundred
competitors with national, regional or local rig operations. In domestic land workover and
well-servicing, we compete with Key Energy Services, Inc. and with numerous other competitors
having smaller regional or local rig operations. In Canada and offshore, Nabors competes with many
firms of varying size, several of which have more significant operations in those areas than
Nabors. Internationally, Nabors competes directly with various contractors at each location where
it operates. Nabors believes that the market for land drilling, workover and well-servicing
contracts will continue to be competitive for the foreseeable future.
Our other operating segments represent a relatively smaller part of our business, and we have
numerous competitors in each area. Our Canrig subsidiary is one of the four major manufacturers of
top drives. Its largest competitors are National Oilwell Varco, Tesco and MH Pyramid. EPOCHs
largest competitors in the manufacture of rig instrumentation systems are Pason and National
Oilwell Varcos 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
Baker Hughes, Sperry Sun, Diversified, and Stratagraph in the Gulf Coast region, California and
Alaska. In the U.S. Lower 48 states, there are hundreds of rig transportation companies, and there
are at least three or four that compete with Peak USA in each of its operating regions. In Alaska,
Peak Oilfield 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, and Alaska Interstate Construction principally competes with Wilder
Construction Company and Cruz Construction Company for the construction of roads, bridges, dams,
drill sites and other facility sites.
Our Business Strategy.
Since 1987, with the installation of our current management team, Nabors has adhered to a
consistent strategy aimed at positioning our company to grow and prosper in good times and to
mitigate adverse effects during periods of poor market conditions. We have maintained a financial
posture that allows us to capitalize on market weakness and strength by adding to our business
base, thereby enhancing our upside potential. The principal elements of our strategy have been to:
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Maintain flexibility to respond to changing conditions. |
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Maintain a conservative and flexible balance sheet. |
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Build cost effectively a base of premium assets. |
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Build and maintain low operating costs through economies of scale. |
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Develop and maintain long-term, mutually attractive relationships with key customers and vendors. |
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Build a diverse business in long-term, sustainable and worthwhile geographic markets. |
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Recognize and seize opportunities as they arise. |
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Continually improve safety, quality and efficiency. |
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Implement leading edge technology where cost-effective to do so. |
Our business strategy is designed to allow us to grow and remain profitable in any market
environment. The major developments in our business in the past two years illustrate our
implementation of this strategy and its continuing success. Specifically, we have taken advantage
of the robust rig market to obtain a high volume of contracts for newly constructed rigs. A large
proportion of these rigs are subject to long-term contracts with creditworthy customers with the
most significant impact occurring in our U.S. Lower 48 Land Drilling, International and Canadian
operations. This will not only expand our operations with the latest state-of-the-art rigs, which
should better weather downturns in market activity, but eventually replace the oldest least capable
rigs in our existing fleet.
Acquisitions
and Divestitures.
We have grown from a land drilling business centered in the U.S. Lower 48 states, Canada and
Alaska to an international business with operations on land and offshore in many of the major oil,
gas and geothermal markets in the world. At the beginning of 1990, our fleet consisted of 44 land
drilling rigs in Canada, Alaska and in various international markets. Today, Nabors worldwide
fleet consists of approximately 615 land drilling rigs, approximately 610 domestic and 190
international land workover and well-servicing rigs, 48 offshore
platform rigs, 19 jack-up units, five
barge rigs and a large component of trucks and fluid hauling vehicles. This growth was fueled in
part by strategic acquisitions. Although Nabors continues to examine opportunities, there can be
no assurance that attractive rigs or other acquisition opportunities will
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continue to be available, that the pricing will be economical or that we will be successful in
making such acquisitions in the future.
On January 3, 2006, we completed an acquisition of 1183011 Alberta Ltd., a wholly-owned
subsidiary of Airborne Energy Solutions Ltd., through the purchase of all common shares outstanding
for cash for a total purchase price of Cdn. $41.7 million (U.S. $35.8 million). In addition, we
assumed debt, net of working capital, totaling approximately Cdn. $10.0 million (U.S. $8.6
million). Nabors Blue Sky Ltd. (formerly 1183011 Alberta Ltd.) owns 42 helicopters and fixed-wing
aircraft and owns and operates a fleet of heliportable well-service equipment.
On May 31, 2006,
we completed an acquisition of Pragma Drilling Equipment Ltd.s business,
which manufactures catwalks, iron roughnecks and other related oilfield equipment, through an asset
purchase consisting primarily of intellectual property for a total purchase price of Cdn. $36.5
million (U.S. $33.1 million). Additional cash purchase
consideration, up to a maximum of Cdn. $12.0 million (U.S. $10.3 million), will be due if certain specified financial performance targets are
achieved over a one-year period commencing on June 30, 2006.
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.
New Rig Build Program.
Since early 2005, we have expanded our capital expenditure programs and are building new rigs
in significant quantities for the first time in over 20 years. The majority of these expenditures
are for new state-of-the-art drilling rigs, nearly all of which are secured by term contracts that
provide surety of cash flow to pay for a substantial portion of the associated capital investment.
In conjunction with these programs, we have ordered 134 new drilling
rigs and received 53 of these prior to February
7, 2007, of which 49 land rigs and 4 offshore rigs are currently working. As of February 7, 2007,
we had signed contracts or letters of intent for 117 of these rigs; 80 for our U.S. Lower 48 Land
Drilling operations, 6 for our Canadian drilling operations, 2 for
our Alaskan operations, 2 for our U.S. Offshore operations and 27
for our International operations. Additionally, our Canadian drilling unit is adding 13 coiled
tubing/stem drilling rigs to its fleet; 6 of which are already working and 7 of which, we
expect to be delivered during 2007 and 2008. Additionally, our well-servicing unit expects to add
approximately 200 newly built workover and well-servicing rigs to meet growing demand for their
services. Forty of these rigs have been delivered as of February 7, 2007 and the balance is expected
to be in service by the end of 2008.
Environmental
Compliance.
Nabors does not presently anticipate that compliance with currently applicable environmental
regulations and controls will significantly change its competitive position, capital spending or
earnings during 2007. Nabors believes it is in material compliance with applicable environmental
rules and regulations, and the cost of such compliance is not material to the business or financial
condition of Nabors. For a more detailed description of the environmental laws and regulations
applicable to Nabors operations, see below under Part I
Item 1A. Risk Factors Changes to or
noncompliance with governmental regulation or exposure to environmental liabilities could adversely
affect Nabors results of operations.
ITEM 1A. RISK FACTORS
In addition to the other information set forth elsewhere in this Form 10-K, the following
factors should be carefully considered when evaluating Nabors.
Fluctuations in oil and gas prices could adversely affect drilling activity and our revenues, cash
flows and profitability
Our 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, may affect both the demand for,
and the supply of, oil and gas. Weather conditions, governmental regulation (both in the United
States and elsewhere), levels of consumer demand, the availability of pipeline capacity, and other
factors beyond our control may also affect the supply of and demand for oil and gas. We believe
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 our
services and could have a material adverse effect on our revenues, cash flows and profitability.
Lower oil and gas prices could also cause our
7
customers to seek to terminate, renegotiate or fail to honor our drilling contracts; affect the
fair market value of our rig fleet which in turn could trigger a write-down for accounting
purposes; affect our ability to retain skilled rig personnel; and affect our ability to obtain
access to capital to finance and grow our business. There can be no assurances as to the future
level of demand for our services or future conditions in the oil and gas and oilfield services
industries.
We operate in a highly competitive industry with excess drilling capacity, which may adversely
affect our results of operations
The oilfield services industry in which we operate is very competitive. Contract drilling
companies compete primarily on a regional basis, and competition may vary significantly from region
to region at any particular time. Many drilling, workover and well-servicing rigs can be moved
from one region to another in response to changes in levels of activity and provided market
conditions warrant, which may result in an oversupply of rigs in an area. In many markets in which
we operate, the number of rigs available for use exceeds the demand for rigs, resulting in price
competition. Most drilling and workover contracts are awarded on the basis of competitive bids,
which also results in price competition. The land drilling market generally is more competitive
than the offshore drilling market because there are larger numbers of rigs and competitors.
The nature of our operations presents inherent risks of loss that, if not insured or indemnified
against, could adversely affect our results of operations
Our operations are subject to many hazards inherent in the drilling, workover and
well-servicing industries, including blowouts, cratering, explosions, fires, loss of well control,
loss of hole, damaged or lost drilling equipment and damage or loss from inclement weather or
natural disasters. Any of these hazards could result in personal injury or death, damage to or
destruction of equipment and facilities, suspension of operations, environmental damage and damage
to the property of others. Our offshore operations are also subject to the hazards of marine
operations including capsizing, grounding, collision, damage from hurricanes and heavy weather or
sea conditions and unsound ocean bottom conditions. In addition, our international operations are
subject to risks of war, civil disturbances or other political events. Generally, drilling
contracts provide for the division of responsibilities between a drilling company and its customer,
and we seek to obtain indemnification from our customers by contract for certain of these risks.
To the extent that we are unable to transfer such risks to customers by contract or indemnification
agreements, we seek protection through insurance. However, there is no assurance that such
insurance or indemnification agreements will adequately protect us against liability from all of
the consequences of the hazards described above. The occurrence of an event not fully insured or
indemnified against, or the failure of a customer or insurer to meet its indemnification or
insurance obligations, could result in substantial losses. In addition, there can be no assurance
that insurance will be available to cover any or all of these risks, 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. It is possible that we will face continued
upward pressure in our upcoming insurance renewals and deductibles will be higher, and certain
insurance coverage either will be unavailable or more expensive than it has been in the past.
Moreover, our insurance coverage generally provides that we assume a portion of the risk in the
form of a deductible. We may choose to increase the levels of deductibles (and thus assume a
greater degree of risk) from time to time in order to minimize the overall cost to the Company.
The profitability of our international operations could be adversely affected by war, civil
disturbance or political or economic turmoil
We derive a significant portion of our business from international markets, including major
operations in Canada, the Middle East, the Far East and South and Central America. These
operations are subject to various risks, including the risk of war, civil disturbances and
governmental activities that may limit or disrupt markets, restrict the movement of funds or result
in the deprivation of contract rights or the taking of property without fair compensation. In
certain countries, our operations may be subject to the additional risk of fluctuating currency
values and exchange controls. In the international markets in which we operate, we are subject to
various laws and regulations that govern the operation and taxation of our business and the import
and export of our equipment from country to country, the imposition, application and interpretation
of which can prove to be uncertain.
Changes to or noncompliance with governmental regulation or exposure to environmental liabilities
could adversely affect our results of operations
The drilling of oil and gas wells is subject to various federal, state, local and foreign
laws, rules and regulations. Our cost of compliance with these laws and regulations may be
substantial. For example, federal law imposes a variety of regulations on responsible parties
related to the prevention of oil spills and liability for damages from such spills. As an
8
owner and operator of onshore and offshore rigs and transportation equipment, we may be deemed to
be a responsible party under federal law. In addition, our well-servicing, workover and production
services operations routinely involve the handling of significant amounts of waste materials, some
of which are classified as hazardous substances. Our operations and facilities are subject to
numerous state and federal environmental laws, rules and regulations, including, without
limitation, laws concerning the containment and disposal of hazardous substances, oilfield waste
and other waste materials, the use of underground storage tanks and the use of underground
injection wells. We generally require customers to contractually assume responsibility for
compliance with environmental regulations. However, we are not always successful in allocating to
customers all of these risks nor is there any assurance that the customer will be financially able
to bear those risks assumed.
We employ personnel responsible for monitoring environmental compliance and arranging for
remedial actions that may be required from time to time and also use outside experts to advise on
and assist with our environmental compliance efforts. Liabilities are recorded when the need for
environmental assessments and/or remedial efforts become known or probable and the cost can be
reasonably estimated.
Laws protecting the environment generally have become more stringent than in the past and are
expected to continue to become more so. Violation of environmental laws and regulations can lead
to the imposition of administrative, civil or criminal penalties, remedial obligations, and in some
cases injunctive relief. Such violations could also result in liabilities for personal injuries,
property damage, and other costs and claims.
Under the Comprehensive Environmental Response, Compensation and Liability Act, also known as
CERCLA or Superfund, and related state laws and regulations, liability can be imposed jointly on
the entire group of responsible parties or separately on any one of the responsible parties,
without regard to fault or the legality of the original conduct on certain classes of persons that
contributed to the release of a hazardous substance into the environment. Under CERCLA, such
persons may be liable for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources.
Changes in federal and state environmental regulations may also negatively impact oil and
natural gas exploration and production companies, which in turn could have a material adverse
effect on us. For example, legislation has been proposed from time to time in Congress which would
reclassify certain oil and natural gas production wastes as hazardous wastes, which would make the
reclassified wastes subject to more stringent handling, disposal and clean-up requirements. If
enacted, such legislation could dramatically increase operating costs for oil and natural gas
companies and could reduce the market for our services by making many wells and/or oilfields
uneconomical to operate.
The Oil Pollution Act of 1990, as amended, contains provisions specifying responsibility for
removal costs and damages resulting from discharges of oil into navigable waters or onto the
adjoining shorelines. In addition, the Outer Continental Shelf Lands Act provides the federal
government with broad discretion in regulating the leasing of offshore oil and gas production
sites. Because our offshore support vessel operations rely on offshore oil and gas exploration and
production, if the government were to exercise its authority under this law to restrict the
availability of offshore oil and gas leases, such an action could have a material adverse effect on
our offshore support vessel operations.
Recent legislation could curtail our ability to time charter vessels in U.S. coastwise trade
Our Sea Mar division time charters supply vessels to offshore operators in U.S. waters. The
vessels are owned by one of our financing company subsidiaries, but are operated and managed by a
U.S. citizen-controlled company pursuant to long-term bareboat charters. As a result of recent
legislation, beginning in August 2007, Sea Mar will no longer be able to use this arrangement to
qualify vessels for employment in the U.S. coastwise trade. Accordingly, we will be required to
restructure the arrangement, redeploy the vessels outside the U.S., or sell the vessels by no later
than such time.
As of December 31, 2006, the net assets of Sea Mar totaled approximately $154.4 million.
During 2006 Sea Mar had income before income taxes totaling $43.3 million.
As a holding company, we depend on our subsidiaries to meet our financial obligations
We are a holding company with no significant assets other than the stock of our subsidiaries.
In order to meet our financial needs, we rely exclusively on repayments of interest and principal
on intercompany loans made by us to our operating subsidiaries and income from dividends and other
cash flow from such subsidiaries. There can be no assurance that our operating subsidiaries will
generate sufficient net income to pay upstream dividends or cash flow to make payments of interest
and principal to us in respect of their intercompany loans. In addition, from time to time, our
operating subsidiaries
9
may enter into financing arrangements which may contractually restrict or prohibit such upstream
payments to us. There may also be adverse tax consequences associated with making dividend
payments upstream.
We do not currently intend to pay dividends
We have not paid any cash dividends on our common shares since 1982. Nabors does not
currently intend to pay any cash dividends on its common shares. However, we note that there have
been recent positive industry trends and changes in tax law providing more favorable treatment of
dividends. As a result, we can give no assurance that we will not reevaluate our position on
dividends in the future.
Because our option, warrant and convertible securities holders have a considerable number of common
shares available for issuance and resale, significant issuances or resales in the future may
adversely affect the market price of our common shares
As of February 22, 2007, we had 800,000,000 authorized common shares, of which
278,315,153 shares were outstanding. In addition, 39,948,230 common shares were reserved for
issuance pursuant to option and employee benefit plans, and 99,156,387 shares were reserved for
issuance upon conversion or repurchase of outstanding zero coupon convertible debentures and zero
coupon senior exchangeable notes. In addition, up to 168,738 of our common shares could be
issuable on exchange of the shares of Nabors Exchangeco (Canada) Inc. We also may sell up to $700
million of securities of various types in connection with a shelf registration statement declared
effective on January 16, 2003 by the SEC. The sale, or availability for sale, of substantial
amounts of our common shares in the public market, whether directly by us or resulting from the
exercise of warrants or options (and, where applicable, sales pursuant to Rule 144) or the
conversion into common shares, or repurchase of debentures and notes using common shares, would be
dilutive to existing security holders, could adversely affect the prevailing market price of our
common shares and could impair our ability to raise additional capital through the sale of equity
securities.
Provisions of our organizational documents may deter a change of control transaction and decrease
the likelihood of a shareholder receiving a change of control premium
Our board of directors is divided into three classes, with each class serving a staggered
three-year term. In addition, our board of directors has the authority to issue a significant
amount of common shares and up to 25,000,000 preferred shares and to determine the price, rights
(including voting rights), conversion ratios, preferences and privileges of the preferred shares,
in each case without further vote or action by the holders of the common shares. Although we have
no present plans to issue preferred shares, the classified board and our boards ability to issue
additional preferred shares may discourage, delay or prevent changes in control of Nabors that are
not supported by our board, thereby possibly preventing certain of our shareholders from realizing
a possible premium on their shares. In addition, the requirement in the indenture for our $2.75 billion
senior exchangeable notes due 2011 and Series B of
our $700 million zero coupon senior exchangeable notes due 2023 to pay a make-whole premium in the
form of an increase in the exchange rate in certain circumstances could have the effect of making a
change in control of Nabors more expensive.
We have a substantial amount of debt outstanding
As a result of the completion of the private placement of $2.75 billion 0.94% senior
exchangeable notes due 2011 during the second quarter of 2006, and the redemption of 93% or $769.8
million of our $1.2 billion zero coupon senior convertible debentures due 2021 during the first
quarter of 2006 (resulting in a remaining outstanding balance for our zero coupon senior
convertible debentures of approximately $82.8 million as of December 31, 2006), we have
approximately $4.0 billion in debt outstanding, resulting in a gross funded debt to capital ratio
of 0.50:1 and a net funded debt to capital ratio of 0.37:1 at December 31, 2006. The gross funded
debt to capital ratio is calculated by dividing funded debt by funded debt plus deferred tax
liabilities net of deferred tax assets plus capital. Funded debt is defined as the sum of (1)
short-term borrowings, (2) current portion of long-term debt and (3) long-term debt. Capital is
defined as shareholders equity. The net funded debt to capital ratio is calculated by dividing
net funded debt by net funded debt plus deferred tax liabilities net of deferred tax assets plus
capital. Net funded debt is defined as the sum of (1) short-term borrowings, (2) current portion of
long-term debt and (3) long-term debt reduced by the sum of cash and cash equivalents and
short-term and long-term investments. Capital is defined as shareholders equity. Both of these
ratios are methods for calculating the amount of leverage a company has in relation to its capital.
As a result of these transactions, we have increased our indebtedness by approximately $2.0
billion during 2006, which could adversely affect our senior unsecured debt rating, the ratings of
our outstanding indebtedness and the value of our notes.
Our ability to perform under new contracts and to grow our business as forecasted depends to a
substantial degree on timely delivery of rigs and equipment from our suppliers
10
The forecasted growth in the operating revenues and net income for our Contract Drilling
subsidiaries depends to a substantial degree on the timely delivery of rigs and equipment from our
suppliers as part of our recently expanded capital programs. We can give no assurances that our
suppliers will meet expected delivery schedules for delivery of these new rigs and equipment.
Delays in the delivery of new rigs and equipment could cause us to fail to meet our operating
forecasts and could subject us to late delivery penalties under contracts with our customers.
We may have additional tax liabilities
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and calculations where the ultimate
tax determination is uncertain. We are regularly under audit by tax authorities. Although we
believe our tax estimates are reasonable, the final determination of tax audits and any related
litigation could be materially different than that which is reflected in historical income tax
provisions and accruals. Based on the results of an audit or litigation, a material effect on our
financial position, income tax provision, net income, or cash flows in the period or periods for
which that determination is made could result.
It is possible that future changes to tax laws (including tax treaties) could have an impact
on our ability to realize the tax savings recorded to date as well as future tax savings as a
result of our corporate reorganization, depending on any responsive action taken by us.
On May 31, 2006, Nabors International Finance Inc. (NIFI), a wholly-owned U.S. subsidiary of
Nabors, received from the U.S. Internal Revenue Service (the IRS) two Notices of Proposed
Adjustment (NOPA) in connection with an audit of NIFI for tax years 2002 and 2003. One NOPA
proposes to deny a deduction of $85.1 million in interest expense in our 2002 tax year relating to
intercompany indebtedness incurred in connection with our inversion transaction in June 2002
whereby we were reorganized as a Bermuda company. The second NOPA proposes to deny a deduction of
$207.6 million in the same item of interest expense in our 2003 tax year. On August 9, 2006, NIFI
received a Revenue Agent Report, asserting the adjustments relating to the two NOPAs referred to
above. On September 18, 2006, NIFI filed a protest with the IRS related to the two adjustments and
we intend to contest the IRS position vigorously. We previously had obtained advice from our tax
advisors that the deduction of such amounts was appropriate and more recently that the position of
the IRS lacks merit. At the end of 2003 the Company paid off approximately one-half of the
intercompany indebtedness incurred in connection with the inversion. It is likely that the IRS will
propose the disallowance of these deductions upon audit of NIFIs 2004, 2005 and 2006 tax years.
We currently have not recorded any reserves for such proposed adjustments.
On
September 14, 2006, Nabors Drilling International Limited (NDIL), a wholly-owned Bermuda
subsidiary of Nabors, received a Notice of Assessment (the Notice) from the Mexican Servicio de
Administracion Tributaria (the SAT) in connection with the audit of NDILs Mexican branch for tax
year 2003. The Notice proposes to deny a depreciation expense deduction that relates to drilling
rigs operating in Mexico in 2003, as well as a deduction for payments made to an affiliated company
for the provision of labor services in Mexico. The amount assessed by the SAT is approximately
$19.8 million (including interest and penalties). Nabors and its tax advisors previously concluded
that the deduction of said amounts was appropriate and more recently that the position of the SAT
lacks merit. Nabors has not recorded any reserves for the adjustments proposed by the SAT. NDILs
Mexican branch took similar deductions for depreciation and labor expenses in 2004, 2005 and 2006.
It is likely that the SAT will propose the disallowance of these deductions upon audit of NDILs
Mexican branchs 2004, 2005 and 2006 tax years.
Proposed tax legislation could mitigate or eliminate the benefits of our 2002 reorganization as a
Bermuda company
Various
bills have been introduced in Congress which could reduce or eliminate the tax
benefits associated with our reorganization as a Bermuda company.
Legislation enacted by Congress in 2004 provides that a corporation
that reorganized in a foreign jurisdiction on or after March 4,
2003 shall be treated as a domestic corporation for United States
federal income tax purposes. Nabors reorganization was completed
June 24, 2002. The Senate recently passed a bill that would,
among other things, beginning January 1, 2007, make the 2004
legislation applicable to certain companies that completed such
reorganizations on or after March
20, 2002. The House version of this bill that
does not contain such provisions.
Because we cannot predict whether legislation will ultimately be adopted, no assurance can be
given that the tax benefits associated with our reorganization will ultimately accrue to the
benefit of the Company and its shareholders. It is possible that future changes to the tax laws
(including tax treaties) could have an impact on our ability to realize the tax savings recorded to
date as well as future tax savings resulting from our reorganization.
Legal proceedings could affect our financial condition and results of operations
We are from time to time subject to legal proceedings which include employment, tort,
intellectual property and other claims, including most recently, a purported shareholder derivative
action related to our stock option grants and related practices, procedures and accounting. We
also are subject to complaints or allegations from former, current or prospective employees from
time to time, alleging violations of employment-related laws. Lawsuits or claims could result in
decisions against us which could have a material adverse effect on our financial condition or
results of operations.
We are the subject of an SEC informal inquiry related to our stock option granting practices and
procedures, the outcome of which could adversely affect our business.
In a letter dated December 28, 2006, the SEC staff advised us that it had commenced an informal
inquiry regarding our stock option grants and related practices, procedures and accounting. We are
cooperating with this inquiry. A more detailed discussion of this matter is contained in Item 3.
Legal Proceedings. It is not possible at this early stage to predict the likely outcome of this
inquiry or whether the SEC staff will take a position contrary to the Companys position, but it is
possible the ultimate result of the inquiry could have an adverse effect on us, our consolidated
financial position, results of operations and cash flows.
11
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
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 and own various helicopters, fixed-wing aircraft and
heliportable well-service equipment, which are used to support drilling and logistics operations.
Nabors and its subsidiaries own or lease executive and administrative office space in
Hamilton, Bermuda (principal executive office); Houston, Texas; Anchorage, Alaska; Harvey, Houma,
New Iberia and Lafayette, Louisiana; Bakersfield, California; Magnolia, Texas; Calgary, Red Deer
and Nisku, Alberta, Canada; Sanaa, Yemen; Dubai, U.A.E.; Dhahran, Saudi Arabia; Anaco, Venezuela;
and Luanda, Angola. We also own or lease a number of facilities and storage yards used in support
of operations in each of our geographic markets.
Nabors and its subsidiaries own certain mineral interests in connection with their investing
and operating activities. Nabors does not consider these properties to be material to its overall
operations.
Additional information about our properties can be found in Notes 2 and 6 (each, under the
caption Property, Plant and Equipment) and 14 (under the caption Operating Leases) of the Notes to
Consolidated Financial Statements in Part II, Item 8. below. The revenues and property, plant and
equipment by geographic area for the fiscal years ended December 31, 2004, 2005 and 2006, can be
found in Note 18 of the Notes to Consolidated Financial Statements in Part II, Item 8. below. A
description of our rig fleet is included under the caption Introduction in Part I, Item 1.
Business.
Nabors management believes that our existing equipment and facilities and our planned
expansion of our equipment and facilities through our capital expenditure programs currently in
process are adequate to support our current level of operations as well as an expansion of drilling
operations in those geographical areas where we may expand.
ITEM 3. LEGAL PROCEEDINGS
Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in
the ordinary course of business. We estimate the range of our liability related to pending
litigation when we believe the amount and range of loss can be estimated. We record our best
estimate of a loss when the loss is considered probable. When a liability is probable and there is
a range of estimated loss with no best estimate in the range, we record the minimum estimated
liability related to the lawsuits or claims. As additional information becomes available, we
assess the potential liability related to our pending litigation and claims and revise our
estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate
outcome may differ from our estimates. In the opinion of management and based on liability
accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not
expected to have a material adverse effect on our consolidated financial position or cash flows,
although they could have a material adverse effect on our results of operations for a particular
reporting period.
During the quarter ended June 30, 2006, we settled a lawsuit involving wage and hour claims
relating primarily to meal periods and travel time of current and former rig-based employees in our
California well-servicing business. Those claims were heard by an arbitrator during the fourth
quarter of 2005. On February 6, 2006, we received an interim award against us in the amount of
$25.6 million (plus attorneys fees and costs), which was accrued for in our consolidated
statements of income for the year ended December 31, 2005. As a result of subsequent proceedings
and the settlement, the final award was $24.3 million, which was paid during May 2006.
Additionally, on December 22, 2005, we received a grand jury subpoena from the United
States Attorneys Office in Anchorage, Alaska, seeking documents and information relating to an
alleged spill, discharge, overflow or cleanup of drilling mud or sludge involving one of our rigs
during March 2003. We are cooperating with the authorities in this matter.
12
The Company disclosed in a press release issued on December 27, 2006, that it was initiating a
voluntary further review of its option granting practices. The Company voluntarily contacted the
SEC on December 27, 2006, and informed them of the review. The staff of the SEC informed the
Company in a letter dated December 28, 2006, that it had initiated an informal inquiry into the
Companys option award practices. The Company has been and will continue to cooperate fully with
the SEC inquiry.
The voluntary review, which is now complete, was overseen by a committee consisting
of all of the Companys non employee directors. The committee engaged outside legal counsel, which
in turn engaged a forensic accounting expert to assist with the review (the Review Team). The
scope of the review included the granting of and accounting for certain employee equity awards to
both the senior executives of the Company and other employees from 1988 through 2006. The Review
Team made no finding of fraud or intentional wrongdoing.
The Review Team identified certain employee stock option awards for which the Company had
historically used an incorrect measurement date in determining the amount of compensation expense
to be recognized for such employee stock option awards. The Review Team determined that the use of these
incorrect measurement dates resulted primarily from incomplete
granting actions as of the previously used measurement dates. With respect to awards made to certain senior
executives, the Review Team found that the appropriate measurement date for certain awards made
on January 4, 1991 should have been March 5, 1991; the appropriate measurement date for certain
December 4, 1995 awards should have been January 8, 1996; the appropriate measurement date for
certain other December 4, 1995 awards should have been January 18, 1996; the appropriate
measurement date for certain December 12, 1996 awards should have been December 13, 1996; and the
appropriate measurement date for certain July 22, 1997 awards should have been August 5, 1997. The
aggregate effect of these measurement date differences results in additional compensation expense
which should have been recognized in the amount of $17.8 million over the vesting period of
the respective options.
With respect to certain annual and other incentive awards made to other employees, the
Review Team found that there were numerous instances where changes were made to awards
following the date of the meeting of the Compensation Committee. In numerous instances, there was
insufficient or inconclusive documentation to determine the date on which awards made to those
employees became final and were no longer subject to change. Accordingly, unless documentation
demonstrated that a different measurement date was appropriate, the Company used the date on which
annual bonuses were paid to employees as the revised measurement date for accounting purposes
because such date would represent a date on which the Company could conclude awards to employees
would have been finalized. The aggregate effect of these measurement date differences results in
additional compensation expense which should have been recognized in the amount of $33.8 million
over the vesting period of the respective options or restricted stock. The Company has
notified the Internal Revenue Service of its intent to participate in the program set forth in
Announcement 2007-18, Compliance Resolution Program for Employees Other than Corporate Insiders for
Additional 2006 Taxes Arising Under 409A due to the Exercise of Stock Rights. The cost to the
Company for participation in this compliance program will be approximately $3.9 million and will be
recorded as an expense during the first quarter of 2007.
The aggregate impact of the additional compensation expense, recorded as general and
administrative expense, related to the new measurement dates was $51.6 million on a pre-tax basis,
$38.3 million net of tax, or $.13 per diluted share, which was recorded as a non-cash charge during
the fourth quarter of 2006.
The Company has determined that no restatement of its historical financial statements is
necessary, because the effects of the revised measurement dates for the awards granted would not be
material in any fiscal year. If a stock-based compensation charge had been taken as a result of
the revised measurement dates, the net income of the Company for fiscal years 1991 through 2006
would have been reduced by $38.3 million in total. There would be no impact on revenue or cash
flow from operations as a result of using the revised measurement dates. The impact on net income
in individual fiscal years would have been as follows: fiscal 1991 ($.7 million); fiscal 1992 ($1.0
million); fiscal 1993 ($1.0 million); fiscal 1994 ($1.0 million); fiscal 1995 ($.3 million); fiscal
1996 ($2.1 million); fiscal 1997 (period ending September 30) ($9.5 million); fiscal 1997 (three-month period ending December 31) ($.3
million); fiscal 1998 ($1.4 million); fiscal 1999 ($1.9 million); fiscal 2000 ($2.7 million);
fiscal 2001 ($2.0 million); fiscal 2002 ($4.0 million); fiscal 2003 ($3.8 million); fiscal 2004
($2.9 million); fiscal 2005 ($3.0 million); and fiscal 2006 ($.7 million).
On February 6, 2007, a purported shareholder derivative action entitled Kenneth H. Karstedt v.
Eugene M. Isenberg, et al was filed in the United States District Court for the Southern District
of Texas against the Companys officers and directors, and against the Company as a nominal
defendant. The complaint alleges that stock options were priced retroactively and were improperly
accounted for, and alleges various causes of action based on that assertion. The complaint seeks,
among other things, payment by the defendants to the Company of damages allegedly suffered by it
and disgorgement of profits. The ultimate outcome of this matter
cannot be determined at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
STOCK PERFORMANCE GRAPH
The following graph illustrates comparisons of five-year cumulative total returns among Nabors
Industries Ltd., the S&P 500 Index and the Dow Jones Oil Equipment and Services Index. Total return
assumes $100 invested on December 31, 2001 in shares of Nabors Industries Ltd., the S&P 500 Index,
and the Dow Jones Oil Equipment and Services Index. It also assumes reinvestment of dividends and
is calculated at the end of each calendar year, December 31, 2002 to December 31, 2006.
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
Nabors Industries Ltd. |
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103 |
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121 |
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149 |
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221 |
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173 |
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S&P 500 Index |
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78 |
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100 |
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111 |
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117 |
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135 |
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Dow Jones Oil Equipment and Services
Index |
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92 |
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106 |
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143 |
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217 |
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246 |
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I. |
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Market and Share Prices. |
Our common shares are traded on the New York Stock Exchange under the symbol NBR. At
December 31, 2006, there were approximately 2,015 shareholders of record. We have not paid any
cash dividends on our common shares since 1982. Nabors does not currently intend to pay any cash
dividends on its common shares. However, we note that there have been recent positive industry
trends and changes in tax law providing more favorable treatment of dividends. As a result, we can
give no assurance that we will not reevaluate our position on dividends in the future.
On December 13, 2005, our Board of Directors approved a two-for-one stock split
of our common shares to be effectuated in the form of a stock dividend. The stock dividend
was distributed on April 17, 2006 to shareholders of record on March 31, 2006. For all
balance sheets presented, capital in excess of par value was reduced by $.2 million and
common shares were increased by $.2 million.
14
The following table sets forth the reported
high and low sales prices of our common shares as
reported on the American Stock Exchange (through
November 2, 2005) and the New York Stock Exchange
(from November 3, 2005 through December 31, 2006)
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Price |
Calendar Year |
|
High |
|
Low |
|
2005 |
|
First quarter |
|
$ |
30.21 |
|
|
$ |
23.10 |
|
|
|
Second quarter |
|
|
31.03 |
|
|
|
25.38 |
|
|
|
Third quarter |
|
|
36.95 |
|
|
|
29.99 |
|
|
|
Fourth quarter |
|
|
39.94 |
|
|
|
29.80 |
|
|
2006 |
|
First quarter |
|
|
41.35 |
|
|
|
31.36 |
|
|
|
Second quarter |
|
|
40.71 |
|
|
|
29.75 |
|
|
|
Third quarter |
|
|
36.04 |
|
|
|
28.35 |
|
|
|
Fourth quarter |
|
|
34.62 |
|
|
|
27.26 |
|
|
The following table provides information relating to Nabors repurchase of common shares
during the fourth quarter of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
that May Yet Be |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Purchased Under the |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
Plans or |
Period |
|
Shares Purchased |
|
per Share |
|
Programs |
|
Programs(1) |
(In thousands, except per
share prices) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 October 31, 2006
|
|
|
99 |
|
|
$ |
29.44 |
|
|
|
99 |
|
|
$ |
406,300 |
|
|
|
|
(1) |
|
In July 2006 our Board of Directors authorized a share repurchase
program under which we may repurchase up to $500 million of our common shares in the
open market or in privately negotiated transactions. This program supersedes and
cancels our previous share repurchase program. Through December 31, 2006,
approximately $93.7 million of our common shares had been repurchased under this
program. As of December 31, 2006, we had $406.3 million of shares that still may be
purchased under the July 2006 share repurchase program. |
|
|
|
No common shares were repurchased during November or December 2006. |
|
|
See Part III, Item 12. for a description of securities authorized for issuance under equity
compensation plans. |
II. |
|
Dividend Policy. |
|
|
|
See Part I Item 1A. Risk Factors We do not currently intend to pay dividends. |
|
III. |
|
Shareholder Matters. |
Bermuda has exchange controls which apply to residents in respect of the Bermudian dollar. As
an exempt company, Nabors is considered to be nonresident for such controls; consequently, there
are no Bermuda governmental restrictions on the Companys ability to make transfers and carry out
transactions in all other currencies, including currency of the United States.
There is no reciprocal tax treaty between Bermuda and the United States regarding withholding
taxes. Under existing Bermuda law, there is no Bermuda income or withholding tax on dividends, if
any, paid by Nabors to its shareholders. Furthermore, no Bermuda tax or other levy is payable on
the sale or other transfer (including by gift or on the death of the shareholder) of Nabors common
shares (other than by shareholders resident in Bermuda).
ITEM 6. SELECTED FINANCIAL DATA
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
Operating Data (1) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
(In thousands, except per share amounts and ratio data) |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
4,820,162 |
|
|
$ |
3,459,908 |
|
|
$ |
2,394,031 |
|
|
$ |
1,880,003 |
|
|
$ |
1,466,443 |
|
|
|
|
|
Earnings from unconsolidated affiliates |
|
|
20,545 |
|
|
|
5,671 |
|
|
|
4,057 |
|
|
|
10,183 |
|
|
|
14,775 |
|
|
|
|
|
Investment income |
|
|
102,007 |
|
|
|
85,430 |
|
|
|
50,064 |
|
|
|
33,813 |
|
|
|
36,961 |
|
|
|
|
|
|
|
|
Total revenues and other income |
|
|
4,942,714 |
|
|
|
3,551,009 |
|
|
|
2,448,152 |
|
|
|
1,923,999 |
|
|
|
1,518,179 |
|
|
|
|
|
|
|
|
Costs and other deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs |
|
|
2,569,800 |
|
|
|
1,997,267 |
|
|
|
1,572,649 |
|
|
|
1,276,953 |
|
|
|
973,910 |
|
|
|
|
|
General and administrative expenses |
|
|
420,854 |
|
|
|
249,973 |
|
|
|
195,388 |
|
|
|
165,403 |
|
|
|
141,895 |
|
|
|
|
|
Depreciation and amortization |
|
|
371,127 |
|
|
|
291,638 |
|
|
|
254,939 |
|
|
|
226,528 |
|
|
|
187,665 |
|
|
|
|
|
Depletion |
|
|
38,580 |
|
|
|
46,894 |
|
|
|
45,460 |
|
|
|
8,599 |
|
|
|
7,700 |
|
|
|
|
|
Interest expense |
|
|
46,561 |
|
|
|
44,847 |
|
|
|
48,507 |
|
|
|
70,740 |
|
|
|
67,068 |
|
|
|
|
|
Losses (gains) on sales of long-lived
assets, impairment charges and other
expense (income), net |
|
|
24,873 |
|
|
|
46,440 |
|
|
|
(4,629 |
) |
|
|
1,153 |
|
|
|
(833 |
) |
|
|
|
|
|
|
|
Total costs and other deductions |
|
|
3,471,795 |
|
|
|
2,677,059 |
|
|
|
2,112,314 |
|
|
|
1,749,376 |
|
|
|
1,377,405 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,470,919 |
|
|
|
873,950 |
|
|
|
335,838 |
|
|
|
174,623 |
|
|
|
140,774 |
|
|
|
|
|
Income tax expense (benefit) |
|
|
450,183 |
|
|
|
225,255 |
|
|
|
33,381 |
|
|
|
(17,605 |
) |
|
|
19,285 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,020,736 |
|
|
$ |
648,695 |
|
|
$ |
302,457 |
|
|
$ |
192,228 |
|
|
$ |
121,489 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.52 |
|
|
$ |
2.08 |
|
|
$ |
1.02 |
|
|
$ |
.66 |
|
|
$ |
.42 |
|
|
|
|
|
Diluted |
|
$ |
3.40 |
|
|
$ |
2.00 |
|
|
$ |
.96 |
|
|
$ |
.62 |
|
|
$ |
.40 |
|
|
|
|
|
Weighted-average number of common shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
290,241 |
|
|
|
312,134 |
|
|
|
297,872 |
|
|
|
292,989 |
|
|
|
287,310 |
|
|
|
|
|
Diluted |
|
|
299,827 |
|
|
|
324,378 |
|
|
|
328,060 |
|
|
|
313,794 |
|
|
|
299,993 |
|
|
|
|
|
Capital expenditures and acquisitions of
businesses (2) |
|
$ |
1,997,971 |
|
|
$ |
1,003,269 |
|
|
$ |
544,429 |
|
|
$ |
353,138 |
|
|
$ |
702,843 |
|
|
|
|
|
Interest coverage ratio (3) |
|
|
39.2:1 |
|
|
|
26.1 : 1 |
|
|
|
13.1 : 1 |
|
|
|
6.3 : 1 |
|
|
|
5.5 : 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
Balance Sheet Data (1) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
(In thousands, except ratio data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, and short-term
and long-term investments |
|
$ |
1,653,285 |
|
|
$ |
1,646,327 |
|
|
$ |
1,411,047 |
|
|
$ |
1,579,090 |
|
|
$ |
1,345,799 |
|
|
|
|
|
Working capital |
|
|
1,650,496 |
|
|
|
1,264,852 |
|
|
|
821,120 |
|
|
|
1,529,691 |
|
|
|
1,077,602 |
|
|
|
|
|
Property, plant and equipment, net |
|
|
5,410,101 |
|
|
|
3,886,924 |
|
|
|
3,275,495 |
|
|
|
2,990,792 |
|
|
|
2,801,067 |
|
|
|
|
|
Total assets |
|
|
9,142,303 |
|
|
|
7,230,407 |
|
|
|
5,862,609 |
|
|
|
5,602,692 |
|
|
|
5,063,872 |
|
|
|
|
|
Long-term debt |
|
|
4,004,074 |
|
|
|
1,251,751 |
|
|
|
1,201,686 |
|
|
|
1,985,553 |
|
|
|
1,614,656 |
|
|
|
|
|
Shareholders equity |
|
$ |
3,536,653 |
|
|
$ |
3,758,140 |
|
|
$ |
2,929,393 |
|
|
$ |
2,490,275 |
|
|
$ |
2,158,455 |
|
|
|
|
|
Funded debt to capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (4) |
|
|
0.50:1 |
|
|
|
0.32 : 1 |
|
|
|
0.38 : 1 |
|
|
|
0.45 : 1 |
|
|
|
0.46 : 1 |
|
|
|
|
|
Net (5) |
|
|
0.37:1 |
|
|
|
0.08 : 1 |
|
|
|
0.15 : 1 |
|
|
|
0.20 : 1 |
|
|
|
0.23 : 1 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our acquisitions results of operations and financial position have been included beginning
on the respective dates of acquisition and include Pragma Drilling
Equipment Ltd. assets (May 2006),
1183011 Alberta Ltd. (January 2006), Sunset Well Service, Inc.
(August 2005), Alexander Drilling,
Inc. assets (June 2005), Phillips Trucking, Inc. assets (June 2005), Rocky Mountain Oil Tools,
Inc. assets (March 2005), Ryan Energy Technologies, Inc. (October 2002) and Enserco Energy
Service Company Inc. (April 2002). |
|
(2) |
|
Represents capital expenditures and the portion of the purchase price of acquisitions
allocated to fixed assets and goodwill based on their fair market value. |
|
(3) |
|
The interest coverage ratio is computed by calculating the sum of income before income taxes,
interest expense, depreciation and amortization, and depletion expense less investment income
and then dividing by interest expense. This ratio is a method for calculating the amount of
operating cash flows available to cover interest expense. |
16
|
|
|
(4) |
|
The gross funded debt to capital ratio is calculated by dividing funded debt by funded debt
plus deferred tax liabilities net of deferred tax assets plus capital. Funded debt is defined
as the sum of (1) short-term borrowings, (2) current portion of long-term debt and (3)
long-term debt. Capital is defined as shareholders equity. |
|
(5) |
|
The net funded debt to capital ratio is calculated by dividing net funded debt by net funded
debt plus deferred tax liabilities net of deferred tax assets plus capital. Net funded debt is
defined as the sum of (1) short-term borrowings, (2) current portion of long-term debt and (3)
long-term debt reduced by the sum of cash and cash equivalents and short-term and long-term
investments. Capital is defined as shareholders equity. |
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
MANAGEMENT OVERVIEW
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations is intended to help the reader understand the results of our operations and our
financial condition. This information is provided as a supplement to, and should be read in
conjunction with our consolidated financial statements and the accompanying notes to our
consolidated financial statements.
Nabors is the largest land drilling contractor in the world. We conduct oil, gas and
geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East, the Far East and Africa. Nabors also is one of the largest land
well-servicing and workover contractors in the United States and Canada and is a leading provider
of offshore platform workover and drilling rigs in the United States and multiple international
markets. To further supplement and complement our primary business, we offer a wide range of
ancillary well-site services, including engineering, transportation, construction, maintenance,
well logging, directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. During the first quarter of 2006, we
began to offer subcontracted logistics services for onshore drilling and well-servicing operations
in Canada using helicopter and fixed-winged aircraft. We have also made selective investments in
oil and gas exploration, development and production activities.
The majority of our business is conducted through our various Contract Drilling operating
segments, which include our drilling, workover and well-servicing operations, on land and offshore.
Our oil and gas exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in marine
transportation and supply services, drilling technology and top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and logistics operations are
aggregated in a category labeled Other Operating Segments for segment reporting purposes.
Our businesses depend, to a large degree, on the level of spending by oil and gas companies
for exploration, development and production activities. Therefore, a sustained increase or
decrease in the price of natural gas or oil, which could have a material impact on exploration,
development and production activities, could also materially affect our financial position, results
of operations and cash flows.
The magnitude of customer spending on new and existing wells is the primary driver of our
business. The primary determinate of customer spending is the degree of their cash flow and
earnings which are largely determined by natural gas prices in our U.S. Lower 48 Land Drilling,
Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil prices are the primary
determinate in our Alaskan, International and U.S. Land Well-servicing operations. The following
table sets forth natural gas and oil price data per Bloomberg for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase / (Decrease) |
|
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Commodity prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Henry Hub natural gas
spot price ($/million cubic
feet (mcf)) |
|
$ |
6.73 |
|
|
$ |
8.89 |
|
|
$ |
5.90 |
|
|
$ |
(2.16 |
) |
|
|
(24 |
%) |
|
$ |
2.99 |
|
|
|
51 |
% |
Average West Texas
intermediate crude oil spot
price ($/barrel) |
|
$ |
66.09 |
|
|
$ |
56.59 |
|
|
$ |
41.51 |
|
|
$ |
9.50 |
|
|
|
17 |
% |
|
$ |
15.08 |
|
|
|
36 |
% |
17
Operating revenues and earnings from unconsolidated affiliates for the year ended
December 31, 2006 totaled $4.8 billion, representing an increase of $1.4 billion, or 40%, compared
to the year ended December 31, 2005. Adjusted income derived from operating activities and net
income for the year ended December 31, 2006 totaled
$1.4 billion and $1.0 billion ($3.40 per
diluted share), respectively, representing increases of 64% and 57%, respectively, compared to the
year ended December 31, 2005. Operating revenues and earnings from unconsolidated affiliates for
the year ended December 31, 2005 totaled $3.5 billion, representing an increase of $1.1 billion, or
45%, compared to the year ended December 31, 2004. Adjusted income derived from operating
activities and net income for the year ended December 31, 2005 totaled $879.8 million and $648.7
million ($2.00 per diluted share), respectively, representing increases of 167% and 114%,
respectively, compared to the year ended December 31, 2004.
The increase in our operating results from 2005 to 2006 and from 2004 to 2005 resulted from
higher revenues during each sequential year realized by essentially all of our operating segments.
Revenues increased as a result of higher average dayrates and activity levels during 2006 compared
to 2005 and 2005 compared to 2004. This increase in average dayrates and activity reflects an
increase in demand for our services in these markets during these years, which resulted from
continuing higher expenditures by our customers for drilling and workover services as a result of
historically high oil and natural gas prices throughout 2005 and 2006.
Our operating results for 2007 are still expected to increase from levels realized during
2006, despite a moderating outlook for our North American natural gas related businesses, as a
result of slightly lower returns for our customers from average commodity price expectations that
are in line with last year in the face of higher costs and an influx of rig capacity additions to
these markets. The major factors that support our expectations of an improved year are:
1. |
|
The anticipated positive impact on our overall level of drilling and well-servicing activity
and margins resulting from new or substantially new rigs added as part of our expanded capital
program. |
|
|
|
Our new drilling rig construction program constitutes the majority of this
capital and a large proportion of these rigs are subject to long-term contracts
with creditworthy customers with the most significant impact occurring in our U.S.
Lower 48 Land Drilling, International and Canadian operations. |
|
|
|
|
Investments in new rigs for markets that, while are not characterized by
long-term contracts, have relatively high historical and currently high levels of
utilization and increasing dayrates. This constitutes the majority of the balance
of the new rig construction program and is largely benefiting our U.S. Well
Service, U.S. Offshore and Canadian businesses. |
|
|
|
|
Investments in other revenue producing assets that are in high demand such as
top drives, fluid hauling trucks, fluid storage tanks, rig moving trucks and
equipment and other similar auxiliary asset additions in high activity markets but
not characterized by term contracts. |
2. |
|
The number of term contracts covering our existing U.S. Lower 48 Land Drilling rigs
throughout 2007 and into 2008 which serve to mitigate the extent fleet utilization can decline
in a softening market. At December 31, 2006, approximately 67% of this businesses
anticipated 2007 adjusted income from operations was subject to term contracts. |
|
3. |
|
The extent of incremental income yet to be realized from 2006 and 2007 rig deployments most
of which are for multi-year contracts and further income increments from the expected renewals
of existing multi-year contracts to much higher current market rates. The largest potential
increases exist in our International markets followed by our Alaskan and U.S. Offshore
businesses. |
We anticipate that 2007 results for our U.S. Lower 48 Land Drilling and Canadian drilling
operations are likely going to be lower in 2007 than 2006 with a slower market and an influx of rig
capacity in the U.S. Lower 48 market and more extensive market weakness in Canada.
During the second quarter of 2006, our wholly-owned subsidiary, Nabors Delaware, placed $2.75
billion in five-year exchangeable notes with a 0.94% coupon interest rate and an original exchange
premium of 30%. In order to offset the potential dilution to our shares, Nabors Delaware entered
into a series of hedge transactions which effectively increased the exchange premium to 55%. In
the hedge transactions, Nabors Delaware purchased call options which will cover the net shares of
our common shares that would be deliverable to the note-holders upon exchange of the notes. In
order to partially offset the cost of the purchased call options (but which also limits the
anti-dilutive effect of the call options), we sold warrants to acquire approximately 60.0 million
of our common shares at a strike price of $54.64. The net cost of these hedge transactions was
approximately $162.4 million. These costs were accounted for as a reduction to shareholders
equity. A portion of the proceeds from the notes were also used to repurchase approximately 28.5
million shares of our common stock for approximately $1.0 billion, which further reduced
shareholders equity. These decreases to equity as a result of these transactions were partially
offset by a $215.9 million increase to equity related to a deferred tax asset representing the tax
benefits of the cost of the purchased call option, which was also accounted for through
shareholders equity. After the
18
consummation of this transaction, we had approximately $2.0
billion in cash and investments, which we believe puts us in an excellent position to capitalize on
future opportunities.
The following tables set forth certain information with respect to our reportable segments and
rig activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
|
Increase (Decrease) |
|
and rig activity) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 to 2005 |
|
|
2005 to 2004 |
|
Reportable segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues and
earnings from unconsolidated
affiliates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
1,890,302 |
|
|
$ |
1,306,963 |
|
|
$ |
748,999 |
|
|
$ |
583,339 |
|
|
|
45 |
% |
|
$ |
557,964 |
|
|
|
74 |
% |
U.S. Land Well-servicing |
|
|
704,189 |
|
|
|
491,704 |
|
|
|
360,010 |
|
|
|
212,485 |
|
|
|
43 |
% |
|
|
131,694 |
|
|
|
37 |
% |
U.S. Offshore |
|
|
221,676 |
|
|
|
158,888 |
|
|
|
132,778 |
|
|
|
62,788 |
|
|
|
40 |
% |
|
|
26,110 |
|
|
|
20 |
% |
Alaska |
|
|
110,718 |
|
|
|
85,768 |
|
|
|
83,835 |
|
|
|
24,950 |
|
|
|
29 |
% |
|
|
1,933 |
|
|
|
2 |
% |
Canada |
|
|
686,889 |
|
|
|
553,537 |
|
|
|
426,675 |
|
|
|
133,352 |
|
|
|
24 |
% |
|
|
126,862 |
|
|
|
30 |
% |
International |
|
|
746,460 |
|
|
|
552,656 |
|
|
|
444,289 |
|
|
|
193,804 |
|
|
|
35 |
% |
|
|
108,367 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling (2) |
|
|
4,360,234 |
|
|
|
3,149,516 |
|
|
|
2,196,586 |
|
|
|
1,210,718 |
|
|
|
38 |
% |
|
|
952,930 |
|
|
|
43 |
% |
Oil and Gas (3) |
|
|
59,431 |
|
|
|
62,913 |
|
|
|
65,303 |
|
|
|
(3,482 |
) |
|
|
(6 |
%) |
|
|
(2,390 |
) |
|
|
(4 |
%) |
Other Operating Segments (4) (5) |
|
|
626,840 |
|
|
|
355,278 |
|
|
|
205,615 |
|
|
|
271,562 |
|
|
|
76 |
% |
|
|
149,663 |
|
|
|
73 |
% |
Other reconciling items (6) |
|
|
(205,798 |
) |
|
|
(102,128 |
) |
|
|
(69,416 |
) |
|
|
(103,670 |
) |
|
|
(102 |
%) |
|
|
(32,712 |
) |
|
|
(47 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,840,707 |
|
|
$ |
3,465,579 |
|
|
$ |
2,398,088 |
|
|
$ |
1,375,128 |
|
|
|
40 |
% |
|
$ |
1,067,491 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income (loss) derived from
operating activities: (7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
821,821 |
|
|
$ |
464,570 |
|
|
$ |
93,573 |
|
|
$ |
357,251 |
|
|
|
77 |
% |
|
$ |
370,997 |
|
|
|
396 |
% |
U.S. Land Well-servicing |
|
|
199,944 |
|
|
|
107,728 |
|
|
|
57,712 |
|
|
|
92,216 |
|
|
|
86 |
% |
|
|
50,016 |
|
|
|
87 |
% |
U.S. Offshore |
|
|
65,328 |
|
|
|
38,783 |
|
|
|
20,611 |
|
|
|
26,545 |
|
|
|
68 |
% |
|
|
18,172 |
|
|
|
88 |
% |
Alaska |
|
|
17,542 |
|
|
|
16,608 |
|
|
|
16,052 |
|
|
|
934 |
|
|
|
6 |
% |
|
|
556 |
|
|
|
3 |
% |
Canada |
|
|
185,117 |
|
|
|
136,368 |
|
|
|
91,558 |
|
|
|
48,749 |
|
|
|
36 |
% |
|
|
44,810 |
|
|
|
49 |
% |
International |
|
|
208,705 |
|
|
|
135,588 |
|
|
|
89,211 |
|
|
|
73,117 |
|
|
|
54 |
% |
|
|
46,377 |
|
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling |
|
|
1,498,457 |
|
|
|
899,645 |
|
|
|
368,717 |
|
|
|
598,812 |
|
|
|
67 |
% |
|
|
530,928 |
|
|
|
144 |
% |
Oil and Gas |
|
|
4,065 |
|
|
|
10,194 |
|
|
|
13,736 |
|
|
|
(6,129 |
) |
|
|
(60 |
%) |
|
|
(3,542 |
) |
|
|
(26 |
%) |
Other Operating Segments |
|
|
74,095 |
|
|
|
34,966 |
|
|
|
(5,470 |
) |
|
|
39,129 |
|
|
|
112 |
% |
|
|
40,436 |
|
|
|
N/M |
(8) |
Other reconciling items (9) |
|
|
(136,271 |
) |
|
|
(64,998 |
) |
|
|
(47,331 |
) |
|
|
(71,273 |
) |
|
|
(110 |
%) |
|
|
(17,667 |
) |
|
|
(37 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,440,346 |
|
|
$ |
879,807 |
|
|
$ |
329,652 |
|
|
$ |
560,539 |
|
|
|
64 |
% |
|
$ |
550,155 |
|
|
|
167 |
% |
Interest expense |
|
|
(46,561 |
) |
|
|
(44,847 |
) |
|
|
(48,507 |
) |
|
|
(1,714 |
) |
|
|
(4 |
%) |
|
|
3,660 |
|
|
|
8 |
% |
Investment income |
|
|
102,007 |
|
|
|
85,430 |
|
|
|
50,064 |
|
|
|
16,577 |
|
|
|
19 |
% |
|
|
35,366 |
|
|
|
71 |
% |
Gains (losses) on sales of long-lived
assets, impairment charges and
other income (expense), net |
|
|
(24,873 |
) |
|
|
(46,440 |
) |
|
|
4,629 |
|
|
|
21,567 |
|
|
|
46 |
% |
|
|
(51,069 |
) |
|
|
N/M |
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,470,919 |
|
|
$ |
873,950 |
|
|
$ |
335,838 |
|
|
$ |
596,969 |
|
|
|
68 |
% |
|
$ |
538,112 |
|
|
|
160 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
|
Increase (Decrease) |
|
and rig activity) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 to 2005 |
|
|
2005 to 2004 |
|
Rig activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig years: (10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
|
255.5 |
|
|
|
235.9 |
|
|
|
199.0 |
|
|
|
19.6 |
|
|
|
8 |
% |
|
|
36.9 |
|
|
|
19 |
% |
U.S. Offshore |
|
|
16.4 |
|
|
|
15.6 |
|
|
|
14.4 |
|
|
|
0.8 |
|
|
|
5 |
% |
|
|
1.2 |
|
|
|
8 |
% |
Alaska |
|
|
8.6 |
|
|
|
7.1 |
|
|
|
6.9 |
|
|
|
1.5 |
|
|
|
21 |
% |
|
|
.2 |
|
|
|
3 |
% |
Canada |
|
|
53.3 |
|
|
|
53.0 |
|
|
|
46.5 |
|
|
|
0.3 |
|
|
|
1 |
% |
|
|
6.5 |
|
|
|
14 |
% |
International (11) |
|
|
97.1 |
|
|
|
82.3 |
|
|
|
67.7 |
|
|
|
14.8 |
|
|
|
18 |
% |
|
|
14.6 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rig years |
|
|
430.9 |
|
|
|
393.9 |
|
|
|
334.5 |
|
|
|
37.0 |
|
|
|
9 |
% |
|
|
59.4 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig hours: (12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Land Well-servicing |
|
|
1,256,141 |
|
|
|
1,216,453 |
|
|
|
1,137,914 |
|
|
|
39,688 |
|
|
|
3 |
% |
|
|
78,539 |
|
|
|
7 |
% |
Canada Well-servicing |
|
|
360,129 |
|
|
|
367,414 |
|
|
|
377,170 |
|
|
|
(7,285 |
) |
|
|
(2 |
%) |
|
|
(9,756 |
) |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rig hours |
|
|
1,616,270 |
|
|
|
1,583,867 |
|
|
|
1,515,084 |
|
|
|
32,403 |
|
|
|
2 |
% |
|
|
68,783 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These segments include our drilling, workover and well-servicing operations, on land and
offshore. |
|
|
|
(2) |
|
Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity
method, of $4.0 million, $(1.3) million and $1.6 million for the years ended December 31,
2006, 2005 and 2004, respectively. |
|
(3) |
|
Represents our oil and gas exploration, development and production operations. |
|
(4) |
|
Includes our marine transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and construction and
logistics operations. |
|
(5) |
|
Includes earnings from unconsolidated affiliates, accounted for by the equity method, of
$16.5 million, $7.0 million and $2.5 million for the years ended December 31, 2006, 2005 and
2004, respectively. |
|
(6) |
|
Represents the elimination of inter-segment transactions. |
|
(7) |
|
Adjusted income (loss) derived from operating activities is computed by: subtracting direct
costs, general and administrative expenses, and depreciation and amortization, and depletion
expense from Operating revenues and then adding Earnings from unconsolidated affiliates. Such
amounts should not be used as a substitute to those amounts reported under accounting
principles generally accepted in the United States of America (GAAP). However, management
evaluates the performance of our business units and the consolidated company based on several
criteria, including adjusted income (loss) derived from operating activities, because it
believes that this financial measure is an accurate reflection of the ongoing profitability of
our company. A reconciliation of this non-GAAP measure to income before income taxes, which
is a GAAP measure, is provided within the above table. |
|
(8) |
|
The percentage is so large that it is not meaningful. |
|
(9) |
|
Represents the elimination of inter-segment transactions and unallocated corporate expenses. |
|
(10) |
|
Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent
percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a
measure of the number of 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. |
|
(11) |
|
International rig years include our equivalent percentage ownership of rigs owned by
unconsolidated affiliates which totaled 4.0 years, 3.9 years and 4.0 years during the years
ended December 31, 2006, 2005 and 2004, respectively. |
|
(12) |
|
Rig hours represents the number of hours that our well-servicing rig fleet operated during
the year. |
SEGMENT RESULTS OF OPERATIONS
Contract Drilling
Our Contract Drilling operating segments contain one or more of the following operations:
drilling, workover and well-servicing, on land and offshore.
U.S. Lower 48 Land Drilling. The results of operations for this reportable segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
Increase |
and rig activity) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
1,890,302 |
|
|
$ |
1,306,963 |
|
|
$ |
748,999 |
|
|
$ |
583,339 |
|
|
|
45 |
% |
|
$ |
557,964 |
|
|
|
74 |
% |
Adjusted income derived from
operating activities |
|
$ |
821,821 |
|
|
$ |
464,570 |
|
|
$ |
93,573 |
|
|
$ |
357,251 |
|
|
|
77 |
% |
|
$ |
370,997 |
|
|
|
396 |
% |
Rig years |
|
|
255.5 |
|
|
|
235.9 |
|
|
|
199.0 |
|
|
|
19.6 |
|
|
|
8 |
% |
|
|
36.9 |
|
|
|
19 |
% |
The increase in our operating results from 2005 to 2006 and from 2004 to 2005 primarily
resulted from year-over-year increases in average dayrates and drilling activity, which is
reflected in the increase in rig years from 2005 to 2006 and from 2004 to 2005. Average dayrates
and activity levels improved during 2005 and 2006 as a result of an increase in demand for drilling
services, which resulted primarily from continuing higher price levels for natural gas during those
years.
20
U.S. Land Well-servicing. The results of operations for this reportable segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
Increase |
and rig activity) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
704,189 |
|
|
$ |
491,704 |
|
|
$ |
360,010 |
|
|
$ |
212,485 |
|
|
|
43 |
% |
|
$ |
131,694 |
|
|
|
37 |
% |
Adjusted income derived from
operating activities |
|
$ |
199,944 |
|
|
$ |
107,728 |
|
|
$ |
57,712 |
|
|
$ |
92,216 |
|
|
|
86 |
% |
|
$ |
50,016 |
|
|
|
87 |
% |
Rig hours |
|
|
1,256,141 |
|
|
|
1,216,453 |
|
|
|
1,137,914 |
|
|
|
39,688 |
|
|
|
3 |
% |
|
|
78,539 |
|
|
|
7 |
% |
The increase in our operating results from 2005 to 2006 and from 2004 to 2005 primarily
resulted from an increase in average dayrates and from higher well-servicing hours. This increase
in dayrates and well-servicing hours resulted from higher customer demand for our services in a
number of markets in which we operate, which was driven by a sustained level of higher oil prices.
U.S. Offshore. The results of operations for this reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
Increase |
and rig activity) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
221,676 |
|
|
$ |
158,888 |
|
|
$ |
132,778 |
|
|
$ |
62,788 |
|
|
|
40 |
% |
|
$ |
26,110 |
|
|
|
20 |
% |
Adjusted income derived from
operating activities |
|
$ |
65,328 |
|
|
$ |
38,783 |
|
|
$ |
20,611 |
|
|
$ |
26,545 |
|
|
|
68 |
% |
|
$ |
18,172 |
|
|
|
88 |
% |
Rig years |
|
|
16.4 |
|
|
|
15.6 |
|
|
|
14.4 |
|
|
|
0.8 |
|
|
|
5 |
% |
|
|
1.2 |
|
|
|
8 |
% |
The increase in operating results from 2005 to 2006 primarily resulted from an increase
in dayrates for our entire rig fleet due to higher customer demand for our services stemming from
higher natural gas prices. Additionally, our fourth quarter operating results for 2006 were
increased by $4.0 million of net business interruption insurance proceeds related to rigs of ours
that were significantly damaged during Hurricane Rita in the third quarter of 2005.
The increase in our operating results from 2004 to 2005 primarily resulted from increases in
average dayrates and from increased utilization for our jack-up rigs, both of which resulted from
improvement in demand for our drilling services in this market driven by increased natural gas
prices from 2004 to 2005. Furthermore, two new platform rigs added during the second quarter of
2004 contributed to our results for all of 2005. Additionally, our operating results for 2005 were
increased by $1.5 million of net business interruption insurance proceeds recorded during the third
quarter of 2005 related to one of our Super Sundowner rigs that was significantly damaged during
Hurricane Katrina in the third quarter of 2005 and by an additional $2.2 million of net business
interruption insurance proceeds recorded in the second quarter of 2005 related to one of our MODS
deepwater platform rigs significantly damaged during Hurricane Ivan in September 2004. We also
recorded involuntary conversion losses related to certain other rigs damaged during Hurricanes
Katrina and Rita during the third quarter of 2005 (see our discussion of gains (losses) on sales of
long-lived assets, impairment charges and other income (expense), net under Other Financial
Information below for further discussion of these losses).
Alaska. The results of operations for this reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
Increase |
and rig activity) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
110,718 |
|
|
$ |
85,768 |
|
|
$ |
83,835 |
|
|
$ |
24,950 |
|
|
|
29 |
% |
|
$ |
1,933 |
|
|
|
2 |
% |
Adjusted income derived from
operating activities |
|
$ |
17,542 |
|
|
$ |
16,608 |
|
|
$ |
16,052 |
|
|
$ |
934 |
|
|
|
6 |
% |
|
$ |
556 |
|
|
|
3 |
% |
Rig years |
|
|
8.6 |
|
|
|
7.1 |
|
|
|
6.9 |
|
|
|
1.5 |
|
|
|
21 |
% |
|
|
0.2 |
|
|
|
3 |
% |
The increase in operating results from 2005 to 2006 is primarily due to increases in
average dayrates and drilling activity levels resulting from new customer demand, and the
deployment and utilization of additional rigs in 2006 as
21
compared to 2005. The increase in 2006
was partially offset by increased labor and repairs and maintenance costs in 2006 as compared to
2005.
Results did not change significantly from 2004 to 2005 as average dayrates and drilling
activity levels in this market were substantially unchanged year-over-year. The improvement in
commodity prices, which has resulted in improved demand for our services and improved dayrates
across our other drilling segments did not result in these same improvements in Alaska. The mature
status of most of the larger existing fields in Alaska has led to diminished activity in recent
years, which has yet to recover despite the extended period of higher commodity prices. While
there are numerous projects in various stages of planning that are likely to result in incremental
activity, the extraordinarily long lead times and capital intensity of these projects makes it
difficult to predict when and to what extent they would impact our results. Meanwhile, Alaska
continues to generate positive cash flow and consume minimal capital, leaving us in a good position
to capitalize on future prospects in this market.
Canada. The results of operations for this reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
Increase
(Decrease) |
and rig activity) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
686,889 |
|
|
$ |
553,537 |
|
|
$ |
426,675 |
|
|
$ |
133,352 |
|
|
|
24 |
% |
|
$ |
126,862 |
|
|
|
30 |
% |
Adjusted income derived from
operating activities |
|
$ |
185,117 |
|
|
$ |
136,368 |
|
|
$ |
91,558 |
|
|
$ |
48,749 |
|
|
|
36 |
% |
|
$ |
44,810 |
|
|
|
49 |
% |
Rig years Drilling |
|
|
53.3 |
|
|
|
53.0 |
|
|
|
46.5 |
|
|
|
0.3 |
|
|
|
1 |
% |
|
|
6.5 |
|
|
|
14 |
% |
Rig hours Well-servicing |
|
|
360,129 |
|
|
|
367,414 |
|
|
|
377,170 |
|
|
|
(7,285 |
) |
|
|
(2 |
%) |
|
|
(9,756 |
) |
|
|
(3 |
%) |
The increase in our operating results from 2005 to 2006 and from 2004 to 2005 primarily
resulted from year-over-year increases in average dayrates and hourly rates for our Canadian
drilling and well-servicing operations, respectively, and from year-over-year increases in drilling
activity. Average dayrates and hourly rates and drilling activity levels improved as a result of
increased demand for our services in this market, which was driven by increased commodity prices
from 2005 to 2006 and from 2004 to 2005. The increases in drilling activity are reflected in the
year-over-year increases in rig years. Well-servicing hours decreased from 2005 to 2006 as lower
natural gas prices during the fourth quarter of 2006 reduced the demand for completion work on gas
wells. Well-servicing hours decreased from 2004 to 2005 primarily as a result of an unseasonably
wet summer during 2005 in certain of our operating areas, which restricted our ability to move our
well-servicing rigs. Our results for 2006, 2005 and 2004 were also positively impacted by the
strengthening of the Canadian dollar versus the U.S. dollar during those years.
International. The results of operations for this reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages |
|
Year Ended December 31, |
|
Increase |
and rig activity) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
746,460 |
|
|
$ |
552,656 |
|
|
$ |
444,289 |
|
|
$ |
193,804 |
|
|
|
35 |
% |
|
$ |
108,367 |
|
|
|
24 |
% |
Adjusted income derived from
operating activities |
|
$ |
208,705 |
|
|
$ |
135,588 |
|
|
$ |
89,211 |
|
|
$ |
73,117 |
|
|
|
54 |
% |
|
$ |
46,377 |
|
|
|
52 |
% |
Rig years |
|
|
97.1 |
|
|
|
82.3 |
|
|
|
67.7 |
|
|
|
14.8 |
|
|
|
18 |
% |
|
|
14.6 |
|
|
|
22 |
% |
The increase in operating results from 2005 to 2006 primarily resulted from an increase
in operations in Africa, Saudi Arabia, New Zealand, Columbia and Mexico, resulting from improved
demand for our services and improved dayrates in these markets which is reflected in the increase
in rig years from 2005 to 2006. Average dayrates and activity levels improved during 2005 and 2006
as a result of an increase in demand for drilling services, which resulted primarily from
continuing higher price levels for oil during 2006.
The increase in our operating results from 2004 to 2005 primarily resulted from an increase in
operations in South and Central America (primarily in Mexico, Colombia, Venezuela and Ecuador) and
in the Middle East (primarily in Saudi Arabia, the United Arab Emirates and Qatar) resulting from
improved demand for our services and improved dayrates in these markets during 2005 compared to
2004, and from a full year of results in 2005 from our accommodation units added to certain of our
markets in the Middle East during mid-2004.
22
Oil and Gas
This operating segment represents our oil and gas exploration, development and production
operations. The results of operations for this reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Decrease) |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
59,431 |
|
|
$ |
62,913 |
|
|
$ |
65,303 |
|
|
$ |
(3,482 |
) |
|
|
(6 |
%) |
|
$ |
(2,390 |
) |
|
|
(4 |
%) |
Adjusted income derived from
operating activities |
|
$ |
4,065 |
|
|
$ |
10,194 |
|
|
$ |
13,736 |
|
|
$ |
(6,129 |
) |
|
|
(60 |
%) |
|
$ |
(3,542 |
) |
|
|
(26 |
%) |
The decrease in our operating results from 2005 to 2006 primarily resulted from
a reduction in production stemming from the payout of one investment with El Paso Corporation in late 2005 and
the reversion of our net profits interest to an overriding royalty interest. The net impact of changes in commodity prices
from 2005 to 2006 further contributed to the decrease in operating results from 2005 to 2006.
Additionally, we incurred higher seismic costs and work-over expenses as compared to prior period
and also recorded an impairment of oil and gas properties totaling approximately $9.9 million that
was recorded as depletion expense. This impairment resulted from lower than expected performance
of certain asset groups. These decreases were partially offset by a $20.7 million gain on the sale
of certain leasehold interests in the first quarter of 2006.
The decrease in our operating results from 2004 to 2005 primarily resulted from the expected
decline in production under our contracts with El Paso Corporation that commenced in the fourth
quarter of 2003, which was partially offset by increased production resulting from new investments
in oil and gas properties and higher commodity prices during 2005. The decrease in adjusted income
derived from operating activities from 2004 to 2005 was also partially offset by lower expense
amounts recorded for dry holes during 2005 compared to 2004. During 2004, we recorded expense of
$2.4 million as a result of a dry hole offshore in the Gulf of Mexico and during 2005, we recorded
expense of $0.8 million as a result of a dry hole onshore in
South Texas and also recorded an impairment of oil and gas properties
totaling approximately $1.6 million as depletion expense. This
impairment resulted from lower than expected performance of certain
asset groups.
Other Operating Segments
These operations include our marine transportation and supply services, drilling technology
and top drive manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations. The results of operations for these operating segments are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Operating revenues and earnings
from unconsolidated affiliates |
|
$ |
626,840 |
|
|
$ |
355,278 |
|
|
$ |
205,615 |
|
|
$ |
271,562 |
|
|
|
76 |
% |
|
$ |
149,663 |
|
|
|
72 |
% |
Adjusted income (loss) derived
from operating activities |
|
$ |
74,095 |
|
|
$ |
34,966 |
|
|
$ |
(5,470 |
) |
|
$ |
39,129 |
|
|
|
112 |
% |
|
$ |
40,436 |
|
|
|
N/M |
(1) |
|
|
|
(1) |
|
The percentage is so large that it is not meaningful. |
The increase in our operating results from 2005 to 2006 primarily resulted from (i) increased
sales of top drives driven by the strengthening of the oil and gas drilling market and increased
equipment sales associated with the acquisition of Pragma Drilling Equipment Ltd. in May 2006, (ii)
increased demand for directional drilling, rig instrumentation and data collection services,
primarily driven by a strong U.S. market for directional drilling services as the number of
horizontal and directional wells drilled increased substantially, (iii) increased margins for our
marine transportation and supply services driven by higher average dayrates and higher utilization,
which was primarily driven by an improvement in the offshore drilling market that resulted in
increased demand for our services, and (iv) increased demand for construction and logistics
services.
The increase in our operating results from 2004 to 2005 primarily resulted from (i) increased
sales of top drives driven by the strengthening of the oil and gas drilling market during 2005,
(ii) increased demand for directional drilling, rig instrumentation and data collection services,
primarily driven by a strong Canadian market for directional drilling services as the number of
horizontal and directional wells drilled increased substantially from 2004 to 2005, and (iii)
increased margins
23
for our marine transportation and supply services driven by higher average dayrates during
2005 compared to 2004, primarily driven by an improvement in the offshore drilling market that
resulted in increased demand for our services.
OTHER FINANCIAL INFORMATION
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
General and administrative expenses |
|
$ |
420,854 |
|
|
$ |
249,973 |
|
|
$ |
195,388 |
|
|
$ |
170,881 |
|
|
|
68 |
% |
|
$ |
54,585 |
|
|
|
28 |
% |
General and administrative expenses
as a percentage of operating
revenues |
|
|
8.7 |
% |
|
|
7.2 |
% |
|
|
8.2 |
% |
|
|
1.5 |
% |
|
|
21 |
% |
|
|
(1.0 |
%) |
|
|
(12 |
%) |
General and administrative expenses increased from 2005 to 2006 primarily as a result of
increases in wages and burden for a majority of our operating segments compared to the prior year
period, which primarily resulted from an increase in the number of employees required to support
the increase in activity levels and from higher wages, and increased corporate compensation
expense, which primarily resulted from higher bonuses and non-cash compensation expenses recorded
for stock options and restricted stock grants during the year ended December 31, 2006 compared to
the prior year period. The increase was also due to the
$51.6 million additional compensation expense recorded during
the fourth quarter of 2006 relating to the review of option granting
practices performed by the Company as more fully described in
Note 3. For the year ended December 31, 2006, general and administrative expenses,
as a percentage of operating revenues, increased compared to the prior period due to the reasons
discussed above.
General and administrative expenses increased from 2004 to 2005 primarily as a result of
year-over-year increases in wages and burden for a majority of our operating segments, primarily
resulting from an increase in the number of employees required to support the increase in activity
levels and from higher wages, and increased corporate compensation expense, primarily resulting
from taxes paid on stock options exercised, expenses recorded for restricted stock grants and
higher bonuses during 2005. As a percentage of operating revenues, general and administrative
expenses decreased from 2004 to 2005 as these expenses were spread over a larger revenue base.
Depreciation and amortization, and depletion expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Depreciation and amortization
expense |
|
$ |
371,127 |
|
|
$ |
291,638 |
|
|
$ |
254,939 |
|
|
$ |
79,489 |
|
|
|
27 |
% |
|
$ |
36,699 |
|
|
|
14 |
% |
Depletion expense |
|
$ |
38,580 |
|
|
$ |
46,894 |
|
|
$ |
45,460 |
|
|
$ |
(8,314 |
) |
|
|
(18 |
%) |
|
$ |
1,434 |
|
|
|
3 |
% |
Depreciation and amortization expense. Depreciation and amortization expense increased
from 2005 to 2006 and from 2004 to 2005 as a result of depreciation on capital expenditures made
during 2004, 2005 and 2006, and year-over-year increases in average rig years for our U.S. Lower 48
Land Drilling, Canadian land drilling and International operations.
Depletion expense. Depletion expense decreased from 2005 to 2006 as a result of lower oil and
gas production due to the payout of the El Paso Red River program in late 2005. These decreases
were partially offset due to increases in depletion expense on non-El Paso properties due to
impairments of approximately $9.9 million. The impairments resulted from lower than expected
performance of certain asset groups.
Depletion expense increased from 2004 to 2005 as a result of production increases from
new investments in oil and gas properties, which were almost entirely offset by the decline in
production on oil and gas properties added through our El Paso investments in the fourth quarter of
2003.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Interest expense |
|
$ |
46,561 |
|
|
$ |
44,847 |
|
|
$ |
48,507 |
|
|
$ |
1,714 |
|
|
|
4 |
% |
|
$ |
(3,660 |
) |
|
|
(8 |
%) |
24
Interest expense increased from 2005 to 2006 as a result of the additional interest
expense related to the issuance of the $2.75 billion 0.94% senior exchangeable notes due 2011. This
increase was partially offset by interest expense reductions resulting from the redemption of 93%
or $769.8 million of our $82.8 million zero coupon convertible senior debentures due 2021 on
February 6, 2006. These zero coupon notes accreted at a rate of 2.5% per annum. See further
discussion of these transactions in Note 9 to our accompanying consolidated financial statements.
Interest expense decreased from 2004 to 2005 primarily as a result of the payment upon
maturity of our 6.8% senior notes totaling $305.3 million in April 2004.
Investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
Investment income |
|
$ |
102,007 |
|
|
$ |
85,430 |
|
|
$ |
50,064 |
|
|
$ |
16,577 |
|
|
|
19 |
% |
|
$ |
35,366 |
|
|
|
71 |
% |
Investment income increased from 2005 to 2006 as a result of higher interest income
earned on investments in cash and short-term and long-term investments due to rising interest rates
and a higher average investment balance related to the proceeds from the issuance of the $2.75
billion 0.94% senior exchangeable notes due 2011 received in May 2006. The proceeds from the note
issuance were reduced by approximately $1.2 billion, which
represents the cost of the purchase of the call options and the
buy back of our stock, net of the sale of warrants. In addition, earnings on our long-term
investments increased during 2006 as compared to the prior year period. The increase was partially
reduced in 2006 compared to the prior year periods by reduced gains realized from the sale of
equity securities.
Investment income increased from 2004 to 2005 as a result of (i) increased returns realized on
our marketable security portfolios during 2005 compared to 2004, resulting from the positive impact
of higher interest rates on our investments in interest-bearing marketable debt securities, (ii) a
gain realized upon the redemption of certain of our non-marketable securities during 2005, and
(iii) higher earnings on our non-marketable securities accounted for under the equity method of
accounting recorded during 2005.
Gains (losses) on sales of long-lived assets, impairment charges and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Increase (Decrease) |
(In thousands, except percentages) |
|
2006 |
|
2005 |
|
2004 |
|
2006 to 2005 |
|
2005 to 2004 |
|
Gains (losses) on sales of long-
lived assets, impairment charges
and other income (expense), net |
|
$ |
(24,873 |
) |
|
$ |
(46,440 |
) |
|
$ |
4,629 |
|
|
$ |
21,567 |
|
|
|
46 |
% |
|
$ |
(51,069 |
) |
|
|
N/M |
(1) |
|
|
|
(1) |
|
The percentage is so large that it is not meaningful. |
The amount of gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net for 2006 primarily includes losses on sales of long-lived assets of
approximately $21.6 million, of which approximately $12.4 million relates to asset impairment
charges. The amounts of gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net for 2005 include (1) increases to litigation reserves of approximately $27.2
million during 2005, which primarily relates to the wage and hour claims litigation in our
California well servicing business discussed in Note 14 to our accompanying consolidated financial
statements, and (2) losses on long-lived assets of approximately $18.8 million, which primarily
consists of involuntary conversion losses recorded as a result of Hurricanes Katrina and Rita
during the third quarter of 2005 totaling approximately $7.8 million and net losses recorded on
sales or retirements of other long-lived assets during 2005 totaling approximately $11.1 million.
Income tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
31 |
% |
|
|
26 |
% |
|
|
10 |
% |
25
The increase in our effective income tax rate from 2005 to 2006 and from 2004 to 2005
resulted from a higher proportion of our taxable income being generated in the U.S. during 2006
compared to 2005 and during 2005 compared to 2004. Income generated in the U.S. is generally taxed
at a higher rate than in international jurisdictions in which we operate. Additionally, our
effective tax rate for 2006 was increased as a result of a $36.2 million current tax expense
relating to the redemption of common shares held by a foreign parent of a U.S. based Nabors
subsidiary and decreased by an approximate $20.5 million deferred tax benefit recorded as a result
of changes in Canadian laws that incrementally reduce statutory tax rates for both federal and
provincial taxes over the next four years. Our effective tax rate for 2004 decreased by the
release of certain tax reserves, which were determined to no longer be necessary, resulting in a
reduction in deferred income tax expense (non-cash) totaling approximately $16.0 million.
Significant judgment is required in determining our worldwide provision for income taxes. In
the ordinary course of our business, there are many transactions and calculations where the
ultimate tax determination is uncertain. We are regularly under audit by tax authorities.
Although we believe our tax estimates are reasonable, the final determination of tax audits and any
related litigation could be materially different than that which is reflected in historical income
tax provisions and accruals. Based on the results of an audit or litigation, a material effect on
our financial position, income tax provision, net income, or cash flows in the period or periods
for which that determination is made could result.
In October 2004 the U.S. Congress passed and the President signed into law the American Jobs
Creation Act of 2004 (the Act). The Act did not impact the corporate reorganization completed by
Nabors effective June 24, 2002, that made us a foreign entity. It is possible that future changes
to tax laws (including tax treaties) could have an impact on our ability to realize the tax savings
recorded to date as well as future tax savings as a result of our corporate reorganization,
depending on any responsive action taken by Nabors.
We expect our effective tax rate during 2007 to be in the 30%-32% range because we expect a
higher proportion of our income to be generated in the U.S. We are subject to income taxes in both
the United States and numerous foreign jurisdictions. Application of FIN 48 is required in financial statements effective for periods beginning after December 15, 2006. Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 is likely to cause greater volatility in income statements as more items are recognized discretely within income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our cash flows depend, to a large degree, on the level of spending by oil and gas companies
for exploration, development and production activities. Sustained increases or decreases in the
price of natural gas or oil could have a material impact on these activities, and could also
materially affect our cash flows. Certain sources and uses of cash, such as the level of
discretionary capital expenditures, purchases and sales of investments, issuances and repurchases
of debt and of our common shares are within our control and are adjusted as necessary based on
market conditions. The following is a discussion of our cash flows for the years ended December
31, 2006 and 2005.
Operating Activities Net cash provided by operating activities totaled $1.5 billion during
2006 compared to net cash provided by operating activities of $1.0 billion during 2005. The
increase in net cash provided by operating activities from 2005 to 2006 was primarily attributable
to the 57% increase in net income for fiscal 2006. During 2006 and 2005, net income was increased
for non-cash items such as depreciation and amortization, depletion, and deferred income tax
expense and was reduced for changes in our working capital (primarily accounts receivable) and
other balance sheet accounts.
Investing Activities Net cash used for investing activities totaled $1.8 billion during 2006
compared to net cash used for investing activities of $958.2 million during 2005. During 2006 and
2005 cash was primarily used for capital expenditures. See a discussion of our expanded capital
program discussed under Future Cash Requirements below.
Financing Activities Net cash provided by financing activities
totaled $418.3 million
during 2006 compared to net cash provided by financing activities of $102.6 million during 2005.
During 2006, cash was provided by approximately $2.72 billion in net proceeds from the issuance of
the $2.75 billion 0.94% senior exchangeable notes due 2011 by Nabors Delaware, our receipt of
proceeds totaling $25.7 million from the exercise of options to acquire our common shares by our
employees, and by approximately $421.2 million from the sale of the warrants. During 2006, cash
was used for the purchase of call options in the amount of $583.6 million, the redemption of 93% of
our zero coupon senior convertible debentures due 2021 for a total redemption price of $769.8
million and for repurchases of our common shares in the open market
for $1.4 billion. During 2005,
cash was provided by our receipt of proceeds totaling $194.5 million from the exercise of options
to acquire our common shares by our employees and was used for the repurchase of our common shares
in the open market totaling $99.5 million.
26
Future Cash Requirements
As of December 31, 2006, we had long-term debt, including current maturities, of $4.0 billion
and cash and cash equivalents and investments of $1.7 billion.
Nabors Delawares $2.75 billion 0.94% senior exchangeable notes due 2011 provide that upon an
exchange of these notes, it will be required to pay holders of the notes, in lieu of common shares,
cash up to the principal amount of the notes and our common shares for any amount exceeding the
principal amount of the notes required to be paid pursuant to the terms of the note indentures.
The notes cannot be exchanged until the price of our shares exceeds approximately $59.57 for at
least 20 trading days during the period of 30 consecutive trading days ending on the last trading
day of the previous calendar quarter; or during the five business days immediately following any
ten consecutive trading day period in which the trading price per note for each day of that period
was less than 95% of the product of the sale price of Nabors common shares and the then applicable
exchange rate; or upon the occurrence of specified corporate transactions set forth in the
indenture.
The $700 million zero coupon senior exchangeable notes provide that upon an exchange of these
notes, we will be required to pay holders of the notes, in lieu of common shares, cash up to the
principal amount of the notes and, at our option, consideration in the form of either cash or our
common shares for any amount above the principal amount of the notes required to be paid pursuant
to the terms of the note indentures. The notes cannot be exchanged
until the price of our shares
exceeds $42.06 for at least 20 trading days during the period of 30 consecutive trading days ending
on the last trading day of the previous calendar quarter, or with respect to all calendar quarters
beginning on or after July 1, 2008, $38.56 on such last trading day, or subject to certain
exceptions, during the five business day period after any ten consecutive trading day period in
which the trading price per note for each day of that period was less than 95% of the product of
the sale price of Nabors common shares and the then applicable exchange rate; or if Nabors
Delaware calls the notes for redemption; or upon the occurrence of specified corporate transactions
described in the note indenture. See a detailed discussion of the terms of these notes included in
Note 9 to our accompanying consolidated financial statements in Part II, Item 8.
As of December 31, 2006, we had outstanding purchase commitments of approximately $567.4
million, primarily for rig-related enhancing, construction and sustaining capital expenditures.
Total capital expenditures over the next twelve months, including these outstanding purchase
commitments, are currently expected to be approximately $1.7 $1.8 billion, including currently
planned rig-related enhancing, construction and sustaining capital expenditures. This amount
could change significantly based on market conditions and new business opportunities. The level of
our outstanding purchase commitments and our expected level of capital expenditures over the next
twelve months represent a number of capital programs that are currently underway or planned. These
programs will result in an expansion in the number of drilling and well-servicing rigs that we own
and operate and will consist primarily of land drilling and well-servicing rigs. The increase in
capital expenditures is expected across a majority of our operating segments, most significantly
within our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, Canadian, and International
operations.
On September 22, 2006, we entered into an agreement with First Reserve Corporation to form a
new joint venture, NFR Energy LLC, to invest in oil and gas exploration opportunities worldwide.
First Reserve Corporation is a private equity firm specializing in the energy industry. Each party
initially will hold an equal interest in the new entity and has committed to fund its proportionate
share of $1.0 billion in equity. NFR Energy LLC will pursue development and exploration projects
with both existing customers of ours and with other operators in a variety of forms including
operated and non-operated working interests, joint ventures, farm-outs and acquisitions. NFR
Energy LLC has not commenced operations and has not received funding as of December 31, 2006 by
either party.
We have historically completed a number of acquisitions and will continue to evaluate
opportunities to acquire assets or businesses to enhance our operations. Several of our previous
acquisitions were funded through issuances of our common shares. Future acquisitions may be paid
for using existing cash or issuance of debt or Nabors shares. Such capital expenditures and
acquisitions will depend on our view of market conditions and other factors.
See our discussion of guarantees issued by Nabors that could have a potential impact on our
financial position, results of operations or cash flows in future periods included under
Off-Balance Sheet Arrangements (Including Guarantees) below.
The following table summarizes our contractual cash obligations as of December 31, 2006:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period |
(In thousands) |
|
Total |
|
< 1 Year |
|
1-3 Years |
|
3-5 Years |
|
Thereafter |
|
|
|
Contractual cash obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
4,014,557 |
|
|
$ |
|
|
|
$ |
925,000 |
(1) |
|
$ |
2,814,557 |
(2) |
|
$ |
275,000 |
|
Interest |
|
|
237,920 |
|
|
|
51,600 |
|
|
|
103,201 |
|
|
|
68,338 |
|
|
|
14,781 |
|
Operating leases (3) |
|
|
31,863 |
|
|
|
10,324 |
|
|
|
13,154 |
|
|
|
6,377 |
|
|
|
2,008 |
|
Purchase commitments (4) |
|
|
567,375 |
|
|
|
567,365 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Employment contracts (3) |
|
|
9,018 |
|
|
|
2,598 |
|
|
|
4,728 |
|
|
|
1,692 |
|
|
|
|
|
Pension funding obligations (5) |
|
|
950 |
|
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
4,861,683 |
|
|
$ |
632,837 |
|
|
$ |
1,046,093 |
|
|
$ |
2,890,964 |
|
|
$ |
291,789 |
|
|
|
|
|
|
|
(1) |
|
Represents the $700 million zero coupon senior exchangeable notes, which can be put to us
on June 15, 2008 and can be exchanged for cash in certain circumstances including when the
price of our shares exceeds approximately $42.06 for the required period of time and also
includes the $225 million senior notes due August 15, 2009. |
|
(2) |
|
Includes the $2.75 billion senior exchangeable notes due 2011 and the remainder of the $82
million zero coupon senior debentures due 2021, which can be put to us on February 5, 2011. |
|
(3) |
|
See Note 14 to our accompanying consolidated financial statements. |
|
(4) |
|
Purchase commitments include agreements to purchase goods or services that are enforceable
and legally binding and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate
timing of the transaction. |
|
(5) |
|
See Note 12 to our accompanying consolidated financial statements. |
In July 2006, our Board of Directors authorized a share repurchase program under which we may
repurchase up to $500 million of our common shares in the open market or in privately negotiated
transactions. This program supersedes and cancels our previous share repurchase program. Through
December 31, 2006, approximately $93.7 million of our common shares had been repurchased under this
program. As of December 31, 2006, we had $406.3 million of shares that still may be purchased
under the July 2006 share repurchase program.
Financial Condition and Sources of Liquidity
Our primary sources of liquidity are cash and cash equivalents, marketable and non-marketable
securities and cash generated from operations. As of December 31, 2006, we had cash and cash
equivalents and investments of $1.7 billion (including $513.3 million of long-term investments) and
working capital of $1.7 billion. This compares to cash and cash equivalents and investments of
$1.6 billion (including $222.8 million of long-term investments) and working capital of $1.3
billion as of December 31, 2005.
Our funded debt to capital ratio was 0.50:1 as of December 31, 2006 and 0.32:1 as of December
31, 2005. Our net funded debt to capital ratio was 0.37:1 as of December 31, 2006 and 0.08:1 as of
December 31, 2005. The gross funded debt to capital ratio is calculated by dividing funded debt by
funded debt plus deferred tax liabilities net of deferred tax assets plus capital. Funded debt is
defined as the sum of (1) short-term borrowings, (2) current portion of long-term debt and (3)
long-term debt. Capital is defined as shareholders equity. The net funded debt to capital ratio
is calculated by dividing net funded debt by net funded debt plus deferred tax liabilities net of
deferred tax assets plus capital. Net funded debt is defined as the sum of (1) short-term
borrowings, (2) current portion of long-term debt and (3) long-term debt reduced by the sum of cash
and cash equivalents and short-term and long-term investments. Capital is defined as shareholders
equity.
Both of these ratios are a method for calculating the amount of leverage a company has in
relation to its capital. Long-term investments consist of investments in overseas funds investing
primarily in a variety of public and private U.S. and non-U.S. securities (including asset-backed
securities and mortgage-backed securities, global structured asset securitizations, whole loan
mortgages, and participations in whole loans and whole loan mortgages). These investments are
classified as non-marketable, because they do not have published fair values. Our interest
coverage ratio was 39.2:1 as of December 31, 2006, compared to 26.1:1 as of December 31, 2005. The
interest coverage ratio is computed by calculating the sum of income before income taxes, interest
expense, depreciation and amortization, and depletion expense less investment income and then
dividing by interest expense. This ratio is a method for calculating the amount of operating cash
flows available to cover interest expense.
We have three letter of credit facilities with various banks as of December 31, 2006.
Availability and borrowings under our credit facilities as of December 31, 2006 are as follows:
28
|
|
|
|
|
(In thousands) |
|
|
|
|
Credit available |
|
$ |
147,545 |
|
Letters of credit outstanding |
|
|
(108,580 |
) |
|
|
|
|
Remaining availability |
|
$ |
38,965 |
|
|
|
|
|
We have a shelf registration statement on file with the SEC to allow us to offer, from time to
time, up to $700 million in debt securities, guarantees of debt securities, preferred shares,
depository shares, common shares, share purchase contracts, share purchase units and warrants. We
currently have not issued any securities registered under this registration statement.
Our current cash and cash equivalents, investments in marketable and non-marketable securities
and projected cash flows generated from current operations are expected to more than adequately
finance our purchase commitments, our debt service requirements, and all other expected cash
requirements for the next twelve months. However, as discussed under Future Cash Requirements
above, the $2.75 billion, 0.94% senior exchangeable notes and $700 million zero coupon senior
exchangeable notes can be exchanged when the price of our shares exceeds $59.57 and $42.06,
respectively, for the required periods of time, resulting in our payment of the principal amount of
the notes, or $2.75 billion and $700 million, respectively, in cash.
On February 22, 2007, the market price for our shares closed at $30.58. If the market price
threshold of $59.57 or $42.06 was exceeded and the notes were exchanged, the required cash payment
could have a significant impact on our level of cash and cash equivalents and investments available
to meet our other cash obligations. Nabors management believes that the holders of
these notes would not be likely to exchange the notes as it would be more economically beneficial
to them if they sold the notes on the open market. However, there can be no assurance that the
holders would not exchange the notes. Further, management believes that we have the ability to
access capital markets or otherwise obtain financing in order to satisfy any payment obligations
that might arise upon exchange of these notes and that any cash payment due of this magnitude, in
addition to our other cash obligations, will not ultimately have a material adverse impact on our
liquidity or financial position. Our ability to access capital markets or to otherwise obtain
sufficient financing is enhanced by our senior unsecured debt ratings as provided by Moodys
Investor Service and Fitch Ratings, which are currently A3 and A-, respectively, and our
historical ability to access those markets as needed.
See our discussion of the impact of changes in market conditions on our derivative financial
instruments discussed under Item 7A. Quantitative and Qualitative Disclosures About Market Risk
below.
OFF-BALANCE SHEET ARRANGEMENTS (INCLUDING GUARANTEES)
We are a party to certain transactions, agreements or other contractual arrangements defined
as off-balance sheet arrangements that could have a material future effect on our financial
position, results of operations, liquidity and capital resources. The most significant of these
off-balance sheet arrangements involve agreements and obligations in which we provide financial or
performance assurance to third parties. Certain of these agreements serve as guarantees, including
standby letters of credit issued on behalf of insurance carriers in conjunction with our workers
compensation insurance program and other financial surety instruments such as bonds. We have also
guaranteed payment of contingent consideration in conjunction with certain acquisitions in 2005 and
2006. Potential contingent consideration is based on future operating results of those businesses
(Note 4). In addition, we have provided indemnifications to certain third parties which serve as
guarantees. These guarantees include indemnification provided by Nabors to our share transfer
agent and our insurance carriers. We are not able to estimate the potential future maximum
payments that might be due under our indemnification guarantees.
Management believes the likelihood that we would be required to perform or otherwise incur any
material losses associated with any of these guarantees is remote. The following table summarizes
the total maximum amount of financial and performance guarantees issued by Nabors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount |
|
(In thousands) |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Thereafter |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial standby letters of
credit and other financial
surety instruments |
|
$ |
102,356 |
|
|
$ |
1,195 |
|
|
$ |
100 |
|
|
$ |
25 |
|
|
$ |
103,676 |
|
Contingent consideration in
acquisitions |
|
|
10,297 |
|
|
|
1,063 |
|
|
|
1,063 |
|
|
|
2,124 |
|
|
|
14,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,653 |
|
|
$ |
2,258 |
|
|
$ |
1,163 |
|
|
$ |
2,149 |
|
|
$ |
118,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
OTHER MATTERS
Recent Legislation, Coast Guard Regulations and Actions
Our Sea Mar division time charters supply vessels to offshore operators in U.S. waters. The
vessels are owned by one of our financing company subsidiaries, but are operated and managed by a
U.S. citizen-controlled company pursuant to long-term bareboat charters. As a result of recent
legislation, beginning in August 2007, Sea Mar will no longer be able to use this arrangement to
qualify vessels for employment in the U.S. coastwise trade. Accordingly, we will be required to
restructure the arrangement, redeploy the vessels outside the United States, or sell the vessels by
no later than such time.
As of December 31, 2006, the net assets of Sea Mar totaled approximately $154.4 million.
During 2006 Sea Mar had income before income taxes totaling $43.3 million.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, which prescribes a comprehensive model
for how a company should recognize, measure, present and disclose in its financial statements
uncertain tax positions that the company has taken or expects to take on a tax return. Under FIN
48, the financial statements will reflect expected future tax consequences of such positions
presuming the taxing authorities full knowledge of the position and all relevant facts, but
without considering time values. FIN 48 is likely to cause greater volatility in income statements
as more items are recognized discretely within income tax expense. Application of FIN 48 is
required in financial statements effective for periods beginning after December 15, 2006. FIN 48
revises disclosure requirements and will require an annual tabular roll-forward of unrecognized tax
benefits. We expect to adopt FIN 48 beginning January 1, 2007. We are currently evaluating the
impact that this interpretation may have on our consolidated financial statements. Any adjustment
required as a result of the adoption of FIN 48, which may be material, will be recorded to retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements. This statement establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The provisions of SFAS 157 should be applied
prospectively as of the beginning of the fiscal year in which SFAS 157 is initially applied, except
in limited circumstances. We expect to adopt SFAS 157 beginning January 1, 2008. We are currently
evaluating the impact that this pronouncement may have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R). This statement requires companies to recognize a net liability or asset to report the
funded status of their defined benefit pension and other postretirement benefit plans in its
statement of financial position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. SFAS 158 is required to be applied in financial
statements effected for periods ending after December 15, 2006. The adoption of SFAS 158
did not have a material impact on our consolidated results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115. This statement
permits entities to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of
the beginning of an entitys first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No. 157. We expect to adopt SFAS
159 beginning January 1, 2008. We are currently evaluating the
impact that this pronouncement may
have on our consolidated financial statements.
The Company has several stock-based employee compensation plans, which are more fully
described in Note 3 to our accompanying consolidated financial statements. Prior to January 1,
2006, we accounted for awards granted under those plans following the recognition and measurement
principles of Accounting Principles Bulletin Opinion No. 25, Accounting for Stock Issued
to Employees, (APB 25) and related interpretations.
Under APB 25, no compensation expense is recognized when the option price is
equal to the market price of the underlying stock on the date of
award. We generally did not recognize compensation expense in
connection with stock option awards to employees, directors and
officers under our plans. See Note 3 and Item 3. Legal
Proceedings. Under the provisions of FASB Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
(SFAS 123), the pro forma effects on income for stock options were instead disclosed in a footnote to
the financial statements. Compensation expense was recorded in the income statement for restricted
stock awards over the vesting period of the award.
Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement
of Financial Accounting Standards No. 123(R), Share-Based Payment, (SFAS 123-R), using the
modified prospective application
30
method. Under this transition method, the Company will record compensation expense for all
stock option awards granted after the date of adoption and for the unvested portion of previously
granted stock option awards that remain outstanding at the date of adoption. The amount of
compensation cost recognized was based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123. Results for prior periods have not been restated.
As a result of adopting SFAS 123-R on January 1, 2006, Nabors income before income taxes and
net income for the year ended December 31, 2006 was $16.6 million, and $12.4 million lower,
respectively, than if we had continued to account for share-based compensation under APB 25. Basic
and diluted earnings per share were $.04 and $.05 lower,
respectively, for the year ended December
31, 2006 as a result of adopting SFAS 123-R. See the disclosures required upon adoption of SFAS
123-R in Note 3 to our accompanying consolidated financial statements.
Related Party Transactions
Pursuant to his employment agreement entered into in October 1996, we provided an unsecured,
non-interest bearing loan of approximately $2.9 million to Nabors Deputy Chairman, President and
Chief Operating Officer. The loan was repaid to the Company on October 8, 2006.
Pursuant to their employment agreements, Nabors and its Chairman and Chief Executive Officer,
Deputy Chairman, President and Chief Operating Officer, and certain other key employees entered
into split-dollar life insurance agreements pursuant to which we paid a portion of the premiums
under life insurance policies with respect to these individuals and, in certain instances, members
of their families. Under these agreements, we are reimbursed for such premiums upon the occurrence
of specified events, including the death of an insured individual. Any recovery of premiums paid
by Nabors could potentially be limited to the cash surrender value of these policies under certain
circumstances. As such, the values of these policies are recorded at their respective cash
surrender values in our consolidated balance sheets. We have made premium payments to date
totaling $11.2 million related to these policies. The cash surrender value of these policies of
approximately $10.3 million and $10.1 million is included in other long-term assets in our
consolidated balance sheets as of December 31, 2006 and 2005, respectively.
Under the Sarbanes-Oxley Act of 2002, the payment of premiums by Nabors under the agreements
with our Chairman and Chief Executive Officer and with our Deputy Chairman, President and Chief
Operating Officer may be deemed to be prohibited loans by us to these individuals. We have paid no
premiums related to our agreements with these individuals since the adoption of the Sarbanes-Oxley
Act and have postponed premium payments related to our agreements with these individuals.
In the ordinary course of business, we enter into various rig leases, rig transportation and
related oilfield services agreements with our Alaskan and Saudi Arabian unconsolidated affiliates
at market prices. Revenues from business transactions with these affiliated entities totaled $99.2
million, $82.3 million and $63.2 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Expenses from business transactions with these affiliated entities totaled $4.7
million, $4.0 million and $3.3 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Additionally, we had accounts receivable from these affiliated entities of $41.2
million and $33.1 million as of December 31, 2006 and 2005, respectively. We had accounts payable
to these affiliated entities of $0.3 million and $2.2 million as of December 31, 2006 and 2005,
respectively, and long-term payables with these affiliated entities of $6.6 million and $5.8
million as of December 31, 2006 and 2005, respectively, which is included in other long-term
liabilities.
Additionally, we own certain marine vessels that are chartered under a bareboat charter
arrangement to Sea Mar Management LLC, an entity in which we own a 25% interest. Under the
requirements of FASB Interpretation No. 46R this entity was consolidated by Nabors beginning in
2004.
During the fourth quarter of 2006, the Company entered into a transaction with Shona Energy
Company, LLC (Shona), a company in which Mr. Payne,
an outside director of the Company, is the Chairman and Chief Executive Officer.
Pursuant to the transaction, a subsidiary of the Company acquired and
holds a minority interest of less than 20% of the issued and outstanding common shares of Shona in
exchange for certain rights derived from an oil and gas concession held by that subsidiary.
Critical Accounting Estimates
31
The preparation of our financial statements in conformity with GAAP requires management to
make certain estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the
balance sheet date and the amounts of revenues and expenses recognized during the reporting period.
We analyze our estimates based on our historical experience and various other assumptions that we
believe to be reasonable under the circumstances. However, actual results could differ from such
estimates. The following is a discussion of our critical accounting estimates. Management
considers an accounting estimate to be critical if:
|
|
|
it requires assumptions to be made that were uncertain at the time the estimate was
made; and |
|
|
|
|
changes in the estimate or different estimates that could have been selected could
have a material impact on our consolidated financial position or results of
operations. |
For a summary of all of our significant accounting policies, see Note 2 to the accompanying
consolidated financial statements.
Depreciation of Property, Plant and Equipment The drilling, workover and well-servicing
industries are very capital intensive. Property, plant and equipment represented 59% of our total
assets as of December 31, 2006, and depreciation constituted 11% of our total costs and other
deductions for the year ended December 31, 2006.
Depreciation for our primary operating assets, drilling and workover rigs, is calculated based
on the units-of-production method over an approximate 4,900-day period, with the exception of our
jack-up rigs which are depreciated over an 8,030-day period, after provision for salvage value.
When our drilling and workover rigs are not operating, a depreciation charge is provided using the
straight-line method over an assumed depreciable life of 20 years, with the exception of our
jack-up rigs, where a 30-year depreciable life is used.
Depreciation on our buildings, well-servicing rigs, oilfield hauling and mobile equipment,
marine transportation and supply vessels, aircraft equipment, and other machinery and equipment is
computed using the straight-line method over the estimated useful life of the asset after provision
for salvage value (buildings 10 to 30 years; well-servicing rigs 3 to 15 years; marine
transportation and supply vessels 10 to 25 years; aircraft equipment 5 to 20 years; oilfield
hauling and mobile equipment and other machinery and equipment 3 to 10 years).
These depreciation periods and the salvage values of our property, plant and equipment were
determined through an analysis of the useful lives of our assets and based on our experience with
the salvage values of these assets. Periodically, we review our depreciation periods and salvage
values for reasonableness given current conditions. Depreciation of property, plant and equipment
is therefore based upon estimates of the useful lives and salvage value of those assets.
Estimation of these items requires significant management judgment. Accordingly, management
believes that accounting estimates related to depreciation expense recorded on property, plant and
equipment are critical.
There have been no factors related to the performance of our portfolio of assets, changes in
technology or other factors that indicate that these lives do not continue to be appropriate.
Accordingly, for the years ended December 31, 2006, 2005 and 2004, no significant changes have been
made to the depreciation rates applied to property, plant and equipment, the underlying assumptions
related to estimates of depreciation, or the methodology applied. However, certain events could
occur that would materially affect our estimates and assumptions related to depreciation.
Unforeseen changes in operations or technology could substantially alter managements assumptions
regarding our ability to realize the return on our investment in operating assets and therefore
affect the useful lives and salvage values of our assets.
Impairment of Long-Lived Assets As discussed above, the drilling, workover and
well-servicing industries are very capital intensive, which is evident in the fact that our
property, plant and equipment represented 59% of our total assets as of December 31, 2006. Other
long-lived assets subject to impairment consist primarily of goodwill, which represented 4% of our
total assets as of December 31, 2006. We review our long-lived assets for impairment when events
or changes in circumstances indicate that the carrying amounts of such assets may not be
recoverable. In addition, we review goodwill and intangible assets with indefinite lives for
impairment annually, as required by SFAS No. 142, Goodwill and Other Intangible Assets. An
impairment loss is recorded in the period in which it is determined that the carrying amount of the
long-lived asset is not recoverable. Such determination requires us to make judgments regarding
long-term forecasts of future revenues and costs related to the assets subject to review in order
to determine the future cash flows associated with the asset or, in the case of goodwill, our
reporting units. These long-term forecasts are uncertain in that they require assumptions about
demand for our products and services, future market conditions, technological advances in the
industry, and changes in regulations governing the industry. Significant and unanticipated changes
to the assumptions could require a provision for impairment in a future period. As the
determination of whether impairment charges should be recorded on our long-lived assets is subject
32
to significant management judgment and an impairment of these assets could result in a
material charge on our consolidated statements of income, management believes that accounting
estimates related to impairment of long-lived assets are critical.
Assumptions made in the determination of future cash flows are made with the involvement of
management personnel at the operational level where the most specific knowledge of market
conditions and other operating factors exists. For the years ended December 31, 2006, 2005 and
2004, no significant changes have been made to the methodology utilized to determine future cash
flows.
Given the nature of the evaluation of future cash flows and the application to specific assets
and specific times, it is not possible to reasonably quantify the impact of changes in these
assumptions.
Income Taxes Deferred taxes represent a substantial liability for Nabors. For financial
reporting purposes, management determines our current tax liability as well as those taxes incurred
as a result of current operations yet deferred until future periods. In accordance with the
liability method of accounting for income taxes as specified in SFAS No. 109, Accounting for
Income Taxes, the provision for income taxes is the sum of income taxes both currently payable and
deferred. Currently payable taxes represent the liability related to our income tax return for the
current year while the net deferred tax expense or benefit represents the change in the balance of
deferred tax assets or liabilities reported on our consolidated balance sheets. The tax effects of
unrealized gains and losses on investments and derivative financial instruments are recorded
through accumulated other comprehensive income (loss) within shareholders equity. The changes in
deferred tax assets or liabilities are determined based upon changes in differences between the
basis of assets and liabilities for financial reporting purposes and the basis of assets and
liabilities for tax purposes as measured by the enacted tax rates that management estimates will be
in effect when these differences reverse. In addition to estimating the future tax rates
applicable to the reversal of tax differences, management must also make certain assumptions
regarding whether tax differences are permanent or temporary, management must estimate the timing
of their reversal, and whether taxable operating income in future periods will be sufficient to
fully recognize any gross deferred tax assets. Valuation allowances are established to reduce
deferred tax assets when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. In determining the need for valuation allowances, management has
considered and made judgments and estimates regarding estimated future taxable income and ongoing
prudent and feasible tax planning strategies. These judgments and estimates are made for each tax
jurisdiction in which we operate as the calculation of deferred taxes is completed at that level.
Further, under U.S. federal tax law, the amount and availability of loss carryforwards (and certain
other tax attributes) are subject to a variety of interpretations and restrictive tests applicable
to Nabors and our subsidiaries. The utilization of such carryforwards could be limited or
effectively lost upon certain changes in ownership. Accordingly, although we believe substantial
loss carryforwards are available to us, no assurance can be given concerning the realization of
such loss carryforwards, or whether or not such loss carryforwards will be available in the future.
These loss carryforwards are also considered in our calculation of taxes for each jurisdiction in
which we operate. Additionally, we record reserves for uncertain tax positions which are subject
to a significant level of management judgment related to the ultimate resolution of those tax
positions. Accordingly, management believes that the estimate related to the provision for income
taxes is critical to our results of operations. We have received notifications from the IRS on
various matters as a result of IRS audits of certain tax years. See Item 1A. Risk Factors We
may have additional tax liabilities and Note 10 under Item 8. Financial Statements and
Supplementary Data for additional discussion.
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and calculations where the ultimate
tax determination is uncertain. We are regularly under audit by tax authorities. Although we
believe our tax estimates are reasonable, the final determination of tax audits and any related
litigation could be materially different than that which is reflected in historical income tax
provisions and accruals. Based on the results of an audit or litigation, a material effect on our
financial position, income tax provision, net income, or cash flows in the period or periods for
which that determination is made could result.
For the years ended December 31, 2006, 2005 and 2004, management made no material changes in
its assumptions regarding the determination of the provision for income taxes. However, certain
events could occur that would materially affect managements estimates and assumptions regarding
the deferred portion of our income tax provision, including estimates of future tax rates
applicable to the reversal of tax differences, the classification of timing differences as
temporary or permanent, reserves recorded for uncertain tax positions, and any valuation allowance
recorded as a reduction to our deferred tax assets. Managements assumptions related to the
preparation of our income tax provision have historically proved to be reasonable in light of the
ultimate amount of tax liability due in all taxing jurisdictions.
For
the year ended December 31, 2006, our provision for income taxes was $450.2 million,
consisting of $231.9 million of current tax expense and $218.3 million of deferred tax expense.
Changes in managements estimates and
33
assumptions regarding the tax rate applied to deferred tax assets and liabilities, the ability
to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences
could potentially impact the provision for income taxes. Changes in these assumptions could
potentially change the effective tax rate. A 1% change in the
effective tax rate from 31% to 32%
would increase the current year income tax provision by approximately
$14.7 million.
Self-Insurance Reserves Our operations are subject to many hazards inherent in the drilling,
workover and well-servicing industries, including blowouts, cratering, explosions, fires, loss of
well control, loss of hole, damaged or lost drilling equipment and damage or loss from inclement
weather or natural disasters. Any of these hazards could result in personal injury or death,
damage to or destruction of equipment and facilities, suspension of operations, environmental
damage and damage to the property of others. Generally, drilling contracts provide for the
division of responsibilities between a drilling company and its customer, and we seek to obtain
indemnification from our customers by contract for certain of these risks. To the extent that we
are unable to transfer such risks to customers by contract or indemnification agreements, we seek
protection through insurance. However, there is no assurance that such insurance or
indemnification agreements will adequately protect us against liability from all of the
consequences of the hazards described above. Moreover, our insurance coverage generally provides
that we assume a portion of the risk in the form of a deductible or self-insured retention.
Based on the risks discussed above, it is necessary for us to estimate the level of our
liability related to insurance and record reserves for these amounts in our consolidated financial
statements. Reserves related to self-insurance are based on the facts and circumstances specific
to the claims and our past experience with similar claims. The actual outcome of self-insured
claims could differ significantly from estimated amounts. We maintain actuarially-determined
accruals in our consolidated balance sheets to cover self-insurance retentions for workers
compensation, employers liability, general liability and automobile liability claims. These
accruals are based on certain assumptions developed utilizing historical data to project future
losses. Loss estimates in the calculation of these accruals are adjusted based upon actual claim
settlements and reported claims. These loss estimates and accruals recorded in our financial
statements for claims have historically been reasonable in light of the actual amount of claims
paid.
As the determination of our liability for self-insured claims is subject to significant
management judgment and in certain instances is based on actuarially estimated and calculated
amounts, and such liabilities could be material in nature, management believes that accounting
estimates related to self-insurance reserves are critical.
For the years ended December 31, 2006, 2005 and 2004, no significant changes have been made to
the methodology utilized to estimate insurance reserves. For purposes of earnings sensitivity
analysis, if the December 31, 2006 reserves for insurance were adjusted (increased or decreased) by
10%, total costs and other deductions would have changed by $13.0 million, or 0.4%.
Fair Value of Assets Acquired and Liabilities Assumed We have completed a number of
acquisitions in recent years as discussed in Note 4 to our accompanying consolidated financial
statements. In conjunction with our accounting for these acquisitions, it was necessary for us to
estimate the values of the assets acquired and liabilities assumed in the various business
combinations, which involved the use of various assumptions. These estimates may be affected by
such factors as changing market conditions, technological advances in the industry or changes in
regulations governing the industry. The most significant assumptions, and the ones requiring the
most judgment, involve the estimated fair values of property, plant and equipment, and the
resulting amount of goodwill, if any. Unforeseen changes in operations or technology could
substantially alter managements assumptions and could result in lower estimates of values of
acquired assets or of future cash flows. This could result in impairment charges being recorded in
our consolidated statements of income. As the determination of the fair value of assets acquired
and liabilities assumed is subject to significant management judgment and a change in purchase
price allocations could result in a material difference in amounts recorded in our consolidated
financial statements, management believes that accounting estimates related to the valuation of
assets acquired and liabilities assumed are critical.
The determination of the fair value of assets and liabilities are based on the market for the
assets and the settlement value of the liabilities. These estimates are made by management based
on our experience with similar assets and liabilities. For the years ended December 31, 2006, 2005
and 2004, no significant changes have been made to the methodology utilized to value assets
acquired or liabilities assumed. As we have not recorded any significant impairment charges on
property, plant and equipment or goodwill in any of the years ended December 31, 2006, 2005 and
2004, our estimates of the fair values of assets acquired and liabilities assumed have proved to be
reliable.
Given the nature of the evaluation of the fair value of assets acquired and liabilities
assumed and the application to specific assets and liabilities, it is not possible to reasonably
quantify the impact of changes in these assumptions.
34
Share-Based Compensation We have typically compensated our executives and employees through
the awarding of stock options. Based on the requirements of SFAS 123(R), which we adopted on
January 1, 2006, we account for stock option awards in 2006 using a fair-value based method,
resulting in compensation expense for stock option awards being recorded in our consolidated
statements of income. Additionally, under the provisions of SFAS No. 148, Accounting for
Stock-Based Compensation an Amendment to FAS 123, we are currently required to disclose the
effect on our net income and earnings per share as if we had applied the fair value recognition
provisions of SFAS 123 to the periods presented in our consolidated statements of income; or the
years ended December 31, 2005 and 2004. This tabular disclosure is included in Note 3 to our
accompanying consolidated financial statements. Determining the fair value of stock-based awards
at the grant date requires judgment, including estimating the expected term of stock options, the
expected volatility of our stock and expected dividends. In addition, judgment is also required in
estimating the amount of stock-based awards that are expected to be forfeited. As the
determination of these various assumptions is subject to significant management judgment and
different assumptions could result in material differences in amounts recorded in our consolidated
financial statements beginning in the first quarter of 2006 and in our disclosure presented in the
footnotes to our accompanying consolidated financial statements for the years ended December 31,
2005, 2004 and 2003, management believes that accounting estimates related to the valuation of
stock options are critical.
The assumptions used to estimate the fair market value of our stock options are based on
historical and expected performance of our common shares in the open market, expectations with
regard to the pattern with which our employees will exercise their options and the likelihood that
dividends will be paid to holders of our common shares. For the years ended December 31, 2006,
2005 and 2004, no significant changes have been made to the methodology utilized to determine the
assumptions used in these calculations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to certain market risks arising from the use of financial instruments in the
ordinary course of business. This risk arises primarily as a result of potential changes in the
fair market value of financial instruments that would result from adverse fluctuations in foreign
currency exchange rates, credit risk, interest rates, and marketable and non-marketable security
prices as discussed below.
Foreign Currency Risk We operate in a number of international areas and are involved in
transactions denominated in currencies other than U.S. dollars, which exposes us to foreign
exchange rate risk. The most significant exposures arise in connection with our operations in
Canada, which usually are substantially unhedged.
At various times, we utilize local currency borrowings (foreign currency-denominated debt),
the payment structure of customer contracts and foreign exchange contracts to selectively hedge our
exposure to exchange rate fluctuations in connection with monetary assets, liabilities, cash flows
and commitments denominated in certain foreign currencies. A foreign exchange contract is a
foreign currency transaction, defined as an agreement to exchange different currencies at a given
future date and at a specified rate. A hypothetical 10% decrease in the value of all our foreign
currencies relative to the U.S. dollar as of December 31, 2006 would result in a $9.1 million
decrease in the fair value of our net monetary assets denominated in currencies other than U.S.
dollars.
Credit Risk Our financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents, investments and marketable and non-marketable
securities, accounts receivable and our range cap and floor derivative instrument. Cash
equivalents such as deposits and temporary cash investments are held by major banks or investment
firms. Our investments in marketable and non-marketable securities are managed within established
guidelines which limit the amounts that may be invested with any one issuer and which provide
guidance as to issuer credit quality. We believe that the credit risk in such instruments is
minimal. In addition, our trade receivables are with a variety of U.S., international and
foreign-country national oil and gas companies. Management considers this credit risk to be
limited due to the financial resources of these companies. We perform ongoing credit evaluations
of our customers and we generally do not require material collateral. However, we do occasionally
require prepayment of amounts from customers whose creditworthiness is in question prior to
provision of services to those customers. We maintain reserves for potential credit losses, and
such losses have been within managements expectations.
Interest Rate, and Marketable and Non-marketable Security Price Risk Our financial
instruments that are potentially sensitive to changes in interest rates include the $2.75 billion
0.94% senior exchangeable notes due 2011, our $82.8 million zero coupon convertible senior
debentures, our $700 million zero coupon senior exchangeable notes, our 4.875% and 5.375% senior
notes, our range cap and floor derivative instrument, our investments in debt securities (including
corporate, asset-backed, U.S. Government, Government agencies, foreign government, mortgage-backed
debt and mortgage-
35
CMO debt securities) and our investments in overseas funds investing primarily in a variety of
public and private U.S. and non-U.S. securities (including asset-backed securities and
mortgage-backed securities, global structured asset securitizations, whole loan mortgages, and
participations in whole loans and whole loan mortgages), which are classified as non-marketable
securities.
We may utilize derivative financial instruments that are intended to manage our exposure to
interest rate risks. We account for derivative financial instruments under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, (collectively, SFAS 133, as
amended). The use of derivative financial instruments could expose us to further credit risk and
market risk. Credit risk in this context is the failure of a counterparty to perform under the
terms of the derivative contract. When the fair value of a derivative contract is positive, the
counterparty would owe us, which can create credit risk for us. When the fair value of a
derivative contract is negative, we would owe the counterparty, and therefore, we would not be
exposed to credit risk. We attempt to minimize credit risk in derivative instruments by entering
into transactions with major financial institutions that have a significant asset base. Market
risk related to derivatives is the adverse effect to the value of a financial instrument that
results from changes in interest rates. We try to manage market risk associated with interest-rate
contracts by establishing and monitoring parameters that limit the type and degree of market risk
that we undertake.
Our $700 million zero coupon senior exchangeable notes include a contingent interest
provision, discussed under Liquidity and Capital Resources above, which qualifies as an embedded
derivative under SFAS 133, as amended. This embedded derivative is required to be separated from
the notes and valued at its fair value at the inception of the note indenture. Any subsequent
change in fair value of this embedded derivative would be recorded in our consolidated statements
of income. The fair value of the contingent interest provision at inception of the note indenture
was nominal. In addition, there was no significant change in the fair value of this embedded
derivative through December 31, 2006, resulting in no impact on our consolidated statements of
income for the year ended December 31, 2006.
On October 21, 2002, we entered into an interest rate swap transaction with a third-party
financial institution to hedge our exposure to changes in the fair value of $200 million of our
fixed rate 5.375% senior notes due 2012, which has been designated as a fair value hedge under SFAS
133, as amended. Additionally, on October 21, 2002, we purchased a LIBOR range cap and sold a
LIBOR floor, in the form of a cashless collar, with the same third-party financial institution with
the intention of mitigating and managing our exposure to changes in the three-month U.S. dollar
LIBOR rate. This transaction does not qualify for hedge accounting treatment under SFAS 133, as
amended, and any change in the cumulative fair value of this transaction is reflected as a gain or
loss in our consolidated statements of income. In June 2004 we unwound $100 million of the $200
million range cap and floor derivative instrument. During the fourth quarter of 2005, we unwound
the interest rate swap resulting in a loss of $2.7 million, which has been deferred and will be
recognized as an increase to interest expense over the remaining life of our 5.375% senior notes
due 2012. During the years ended December 31, 2005 and 2004, we recorded interest savings related
to our interest rate swap agreement accounted for as a fair value hedge of $2.7 million and $6.5
million, respectively, which served to reduce interest expense.
The fair value of our range cap and floor transaction is recorded as a derivative asset,
included in other long-term assets, and totaled approximately $2.3 million and $1.5 million as of
December 31, 2006 and 2005, respectively. We recorded gains of approximately $1.4 million, $1.1
million and $2.4 million for the years ended December 31, 2006, 2005 and 2004, respectively,
related to this derivative instrument; such amounts are included in losses (gains) on sales of
long-lived assets, impairment charges and other expense (income), net in our consolidated
statements of income.
A hypothetical 10% adverse shift in quoted interest rates as of December 31, 2006 would
decrease the fair value of our range cap and floor derivative instrument by approximately $1.0
million.
Fair Value of Financial Instruments The fair value of our fixed rate long-term debt is
estimated based on quoted market prices or prices quoted from third-party financial institutions.
The carrying and fair values of our long-term debt, including the current portion, are as follows:
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
2005 |
|
(In thousands, |
|
Effective |
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Fair |
|
except interest rates) |
|
Interest Rate |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Interest Rate |
|
|
Carrying Value |
|
|
Value |
|
$2.75 billion 0.94%
senior exchangeable
notes due May 2011 |
|
|
1.09 |
% |
|
$ |
2,750,000 |
|
|
$ |
2,628,725 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
$700 million zero
coupon senior
exchangeable notes
due June 2023 |
|
|
0.32 |
% |
|
|
700,000 |
|
|
|
730,380 |
|
|
|
0 |
% |
|
|
700,000 |
|
|
|
826,700 |
|
5.375% senior notes
due August 2012 |
|
|
5.67 |
% (1) |
|
|
271,470 |
(2) |
|
|
270,545 |
|
|
|
4.52 |
% (1) |
|
|
270,844 |
(2) |
|
|
278,285 |
|
4.875% senior notes
due August 2009 |
|
|
5.09 |
% |
|
|
224,296 |
|
|
|
221,749 |
|
|
|
5.00 |
% |
|
|
224,030 |
|
|
|
224,730 |
|
$82.8 million zero
coupon convertible
senior debentures
due February
2021 |
|
|
2.94 |
% (3) |
|
|
58,308 |
|
|
|
50,354 |
|
|
|
2.5 |
% (3) |
|
|
824,789 |
|
|
|
822,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,004,074 |
|
|
$ |
3,901,753 |
|
|
|
|
|
|
$ |
2,019,663 |
|
|
$ |
2,152,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the effect of interest savings realized from the interest rate swap executed on
October 21, 2002. |
|
(2) |
|
Includes $2.7 million as of December 31, 2005 related to the unamortized loss on the interest
rate swap that was unwound during the fourth quarter of 2005 and $4.6 million as of December
31, 2004 related to the fair value of the interest rate swap. |
|
(3) |
|
Represents the rate at which accretion of the original discount at issuance of these
debentures is charged to interest expense. |
The fair values of our cash equivalents, trade receivables and trade payables approximate
their carrying values due to the short-term nature of these instruments. Our cash and cash
equivalents and short-term and long-term investments are included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
(In thousands, |
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
except interest rates) |
|
Fair Value |
|
|
Interest Rates |
|
|
Life (Years) |
|
|
Fair Value |
|
|
Interest Rates |
|
|
Life (Years) |
|
Cash and cash
equivalents |
|
$ |
700,549 |
|
|
|
4.12%-5.37 |
% |
|
|
0.1 |
|
|
$ |
565,001 |
|
|
|
2.87%-4.44 |
% |
|
|
.1 |
|
Available-for-sale
marketable equity
securities |
|
|
117,220 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
99,216 |
|
|
|
N/A |
|
|
|
N/A |
|
Marketable debt
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
and CDs |
|
|
16,778 |
|
|
|
5.04%-5.69 |
% |
|
|
.3 |
|
|
|
269,053 |
|
|
|
3.91%-4.74 |
% |
|
|
.3 |
|
Corporate debt
securities |
|
|
131,079 |
|
|
|
4.86%-5.76 |
% |
|
|
1.0 |
|
|
|
276,755 |
|
|
|
1.58%-4.91 |
% |
|
|
.9 |
|
Government
agencies debt
securities |
|
|
61,318 |
|
|
|
5.05%-5.76 |
% |
|
|
.7 |
|
|
|
47,139 |
|
|
|
1.25%-4.19 |
% |
|
|
.5 |
|
Mortgage-backed
debt securities |
|
|
1,373 |
|
|
|
5.20%-5.69 |
% |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-CMO
debt securities |
|
|
49,629 |
|
|
|
4.99%-5.98 |
% |
|
|
1.0 |
|
|
|
5,081 |
|
|
|
3.89%-5.00 |
% |
|
|
1.2 |
|
Asset-backed debt
securities |
|
|
62,070 |
|
|
|
4.60%-5.83 |
% |
|
|
1.0 |
|
|
|
161,280 |
|
|
|
1.68%-4.62 |
% |
|
|
.9 |
|
Non-marketable
securities |
|
|
513,269 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
235,641 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,653,285 |
|
|
|
|
|
|
|
|
|
|
$ |
1,659,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Our investments in marketable debt securities listed in the above table and a portion of our
investment in non-marketable securities are sensitive to changes in interest rates. Additionally,
our investment portfolio of marketable debt and equity securities, which are carried at fair value,
expose us to price risk. A hypothetical 10% decrease in the market prices for all marketable
securities as of December 31, 2006 would decrease the fair value of our available-for-sale
securities by $43.9 million.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
|
|
|
|
|
|
|
Page No. |
|
Managements Report on Internal Control Over Financial Reporting |
|
|
40 |
|
Report of Independent Registered Public Accounting Firm |
|
|
41 |
|
Consolidated Balance Sheets as of December 31, 2006 and 2005 |
|
|
43 |
|
Consolidated Statements of Income for the Years Ended
December 31, 2006, 2005 and 2004 |
|
|
44 |
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004 |
|
|
45 |
|
Consolidated Statements of Changes in Shareholders Equity for the
Years Ended December 31, 2006, 2005 and 2004 |
|
|
46 |
|
Notes
to Consolidated Financial Statements |
|
|
49 |
|
39
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a material
effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate,
this risk.
Management conducted an evaluation of the effectiveness of the Companys internal control over
financial reporting based on the framework in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, management concluded that the Companys internal control over financial reporting was
effective as of December 31, 2006. Managements assessment of the effectiveness of the Companys
internal control over financial reporting as of December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report included herein which expresses an unqualified opinion on managements assessment of the
effectiveness of internal control over financial reporting as of December 31, 2006.
40
Report of Independent Registered Public Accounting Firm
Nabors Industries Ltd. and Subsidiaries
To the Shareholders and Board of Directors of Nabors Industries Ltd.:
We have completed integrated audits of Nabors Industries Ltd.s consolidated financial statements
and of its internal control over financial reporting as of December 31, 2006, in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in shareholders equity present fairly, in all
material respects, the financial position of Nabors Industries Ltd. and its subsidiaries at
December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Companys 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 the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, effective January 1, 2006, the
Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, using the modified prospective application method.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2006 based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the COSO. The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
41
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 1, 2007
42
CONSOLIDATED BALANCE SHEETS
Nabors Industries Ltd. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
700,549 |
|
|
$ |
565,001 |
|
Short-term investments |
|
|
439,467 |
|
|
|
858,524 |
|
Accounts receivable, net |
|
|
1,109,738 |
|
|
|
822,104 |
|
Inventory |
|
|
100,487 |
|
|
|
51,292 |
|
Deferred income taxes |
|
|
38,081 |
|
|
|
199,196 |
|
Other current assets |
|
|
116,534 |
|
|
|
121,191 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,504,856 |
|
|
|
2,617,308 |
|
|
|
|
|
|
|
|
|
|
Long-term investments |
|
|
513,269 |
|
|
|
222,802 |
|
Property, plant and equipment, net |
|
|
5,410,101 |
|
|
|
3,886,924 |
|
Goodwill, net |
|
|
362,269 |
|
|
|
341,939 |
|
Other long-term assets |
|
|
351,808 |
|
|
|
161,434 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,142,303 |
|
|
$ |
7,230,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
|
|
|
$ |
767,912 |
|
Trade accounts payable |
|
|
459,179 |
|
|
|
336,589 |
|
Accrued liabilities |
|
|
294,958 |
|
|
|
224,336 |
|
Income taxes payable |
|
|
100,223 |
|
|
|
23,619 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
854,360 |
|
|
|
1,352,456 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
4,004,074 |
|
|
|
1,251,751 |
|
Other long-term liabilities |
|
|
162,744 |
|
|
|
151,415 |
|
Deferred income taxes |
|
|
584,472 |
|
|
|
716,645 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,605,650 |
|
|
|
3,472,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common shares, par value $.001 per share: |
|
|
|
|
|
|
|
|
Authorized common shares 800,000;
issued 299,333 and 315,393, respectively |
|
|
299 |
|
|
|
315 |
|
Capital in excess of par value |
|
|
1,637,204 |
|
|
|
1,590,968 |
|
Unearned compensation |
|
|
|
|
|
|
(15,649 |
) |
Accumulated other comprehensive income |
|
|
201,261 |
|
|
|
192,980 |
|
Retained earnings |
|
|
2,473,373 |
|
|
|
1,989,526 |
|
Less: treasury shares, at cost, 22,340 common shares |
|
|
(775,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
3,536,653 |
|
|
|
3,758,140 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
9,142,303 |
|
|
$ |
7,230,407 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF INCOME
Nabors Industries Ltd. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues and other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
4,820,162 |
|
|
$ |
3,459,908 |
|
|
$ |
2,394,031 |
|
Earnings from unconsolidated affiliates |
|
|
20,545 |
|
|
|
5,671 |
|
|
|
4,057 |
|
Investment income |
|
|
102,007 |
|
|
|
85,430 |
|
|
|
50,064 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues and other income |
|
|
4,942,714 |
|
|
|
3,551,009 |
|
|
|
2,448,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and other deductions: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs |
|
|
2,569,800 |
|
|
|
1,997,267 |
|
|
|
1,572,649 |
|
General and administrative expenses |
|
|
420,854 |
|
|
|
249,973 |
|
|
|
195,388 |
|
Depreciation and amortization |
|
|
371,127 |
|
|
|
291,638 |
|
|
|
254,939 |
|
Depletion |
|
|
38,580 |
|
|
|
46,894 |
|
|
|
45,460 |
|
Interest expense |
|
|
46,561 |
|
|
|
44,847 |
|
|
|
48,507 |
|
Losses (gains) on sales of long-lived
assets,
impairment charges and other expense
(income), net |
|
|
24,873 |
|
|
|
46,440 |
|
|
|
(4,629 |
) |
|
|
|
|
|
|
|
|
|
|
Total costs and other deductions |
|
|
3,471,795 |
|
|
|
2,677,059 |
|
|
|
2,112,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,470,919 |
|
|
|
873,950 |
|
|
|
335,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
231,860 |
|
|
|
30,517 |
|
|
|
20,867 |
|
Deferred |
|
|
218,323 |
|
|
|
194,738 |
|
|
|
12,514 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
|
450,183 |
|
|
|
225,255 |
|
|
|
33,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,020,736 |
|
|
$ |
648,695 |
|
|
$ |
302,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.52 |
|
|
$ |
2.08 |
|
|
$ |
1.02 |
|
Diluted |
|
$ |
3.40 |
|
|
$ |
2.00 |
|
|
$ |
.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
290,241 |
|
|
|
312,134 |
|
|
|
297,872 |
|
Diluted |
|
|
299,827 |
|
|
|
324,378 |
|
|
|
328,060 |
|
The accompanying notes are an integral part of these consolidated financial statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nabors Industries Ltd. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,020,736 |
|
|
$ |
648,695 |
|
|
$ |
302,457 |
|
Adjustments to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
371,127 |
|
|
|
291,638 |
|
|
|
254,939 |
|
Depletion |
|
|
38,580 |
|
|
|
46,894 |
|
|
|
45,460 |
|
Deferred income tax expense |
|
|
218,323 |
|
|
|
194,738 |
|
|
|
12,514 |
|
Deferred financing costs amortization |
|
|
6,241 |
|
|
|
4,880 |
|
|
|
5,058 |
|
Pension liability amortization |
|
|
485 |
|
|
|
401 |
|
|
|
856 |
|
Discount amortization on long-term debt |
|
|
3,798 |
|
|
|
20,729 |
|
|
|
20,244 |
|
Amortization of loss on hedges |
|
|
554 |
|
|
|
218 |
|
|
|
151 |
|
Losses on long-lived assets, net |
|
|
22,648 |
|
|
|
19,465 |
|
|
|
874 |
|
Gains on investments, net |
|
|
(46,260 |
) |
|
|
(40,197 |
) |
|
|
(20,638 |
) |
Gains on derivative instruments |
|
|
(1,363 |
) |
|
|
(1,076 |
) |
|
|
(2,363 |
) |
Share-based compensation |
|
|
79,888 |
|
|
|
4,819 |
|
|
|
|
|
Foreign currency transaction losses (gains) |
|
|
354 |
|
|
|
465 |
|
|
|
(755 |
) |
Equity in earnings of unconsolidated affiliates, net of
dividends |
|
|
(18,111 |
) |
|
|
(2,600 |
) |
|
|
(2,057 |
) |
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(279,686 |
) |
|
|
(271,969 |
) |
|
|
(129,684 |
) |
Inventory |
|
|
(48,631 |
) |
|
|
(21,704 |
) |
|
|
(4,905 |
) |
Other current assets |
|
|
(31,536 |
) |
|
|
(6,808 |
) |
|
|
9,792 |
|
Other long-term assets |
|
|
(106,357 |
) |
|
|
811 |
|
|
|
9,001 |
|
Trade accounts payable and accrued liabilities |
|
|
145,046 |
|
|
|
121,850 |
|
|
|
84,646 |
|
Income taxes payable |
|
|
71,767 |
|
|
|
8,262 |
|
|
|
(7,503 |
) |
Other long-term liabilities |
|
|
38,655 |
|
|
|
9,989 |
|
|
|
(14,889 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,486,258 |
|
|
|
1,029,500 |
|
|
|
563,198 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments |
|
|
(1,135,525 |
) |
|
|
(745,743 |
) |
|
|
(919,936 |
) |
Sales and maturities of investments |
|
|
1,325,903 |
|
|
|
749,562 |
|
|
|
908,609 |
|
Cash paid for acquisitions of businesses, net |
|
|
(82,407 |
) |
|
|
(46,201 |
) |
|
|
|
|
Deposits released (held) on acquisitions |
|
|
35,844 |
|
|
|
(36,005 |
) |
|
|
|
|
Investment in affiliates |
|
|
(2,433 |
) |
|
|
|
|
|
|
(200 |
) |
Capital expenditures |
|
|
(1,927,407 |
) |
|
|
(907,316 |
) |
|
|
(544,429 |
) |
Proceeds from sales of assets and insurance claims |
|
|
17,556 |
|
|
|
27,463 |
|
|
|
6,879 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(1,768,469 |
) |
|
|
(958,240 |
) |
|
|
(549,077 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of warrants |
|
|
421,162 |
|
|
|
|
|
|
|
|
|
Purchase of exchangeable note hedge |
|
|
(583,550 |
) |
|
|
|
|
|
|
|
|
Increase in cash overdrafts |
|
|
2,154 |
|
|
|
10,805 |
|
|
|
9,974 |
|
Proceeds from long-term debt |
|
|
2,750,000 |
|
|
|
|
|
|
|
|
|
Reduction in long-term debt |
|
|
(769,789 |
) |
|
|
(424 |
) |
|
|
(302,411 |
) |
Debt issuance costs |
|
|
(28,683 |
) |
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares |
|
|
25,682 |
|
|
|
194,464 |
|
|
|
71,248 |
|
Repurchase of common shares |
|
|
(1,402,840 |
) |
|
|
(99,483 |
) |
|
|
|
|
Tax benefit related to the exercise of stock options |
|
|
4,139 |
|
|
|
|
|
|
|
|
|
Termination payment for interest rate swap |
|
|
|
|
|
|
(2,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
418,275 |
|
|
|
102,626 |
|
|
|
(221,189 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(516 |
) |
|
|
6,406 |
|
|
|
12,040 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
135,548 |
|
|
|
180,292 |
|
|
|
(195,028 |
) |
Cash and cash equivalents, beginning of period |
|
|
565,001 |
|
|
|
384,709 |
|
|
|
579,737 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
700,549 |
|
|
$ |
565,001 |
|
|
$ |
384,709 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
Nabors Industries Ltd. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
Gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Capital in |
|
(Losses) on |
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Par |
|
Excess of |
|
Marketable |
|
Translation |
|
|
|
|
|
Retained |
|
Treasury |
|
Shareholders |
(In thousands) |
|
Shares |
|
Value |
|
Par Value |
|
Securities |
|
Adjustment |
|
Other |
|
Earnings |
|
Shares |
|
Equity |
|
|
|
Balances,
December 31, 2003 |
|
|
293,312 |
|
|
$ |
294 |
|
|
$ |
1,270,215 |
|
|
$ |
4,969 |
|
|
$ |
98,723 |
|
|
$ |
(4,109 |
) |
|
$ |
1,120,183 |
|
|
$ |
|
|
|
$ |
2,490,275 |
|
|
|
|
Comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302,457 |
|
|
|
|
|
|
|
302,457 |
|
Translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,797 |
|
Unrealized gains
on marketable
securities, net of
income tax benefit
of $1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,395 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment for
gains included in
net income, net of
income taxes of
$850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,093 |
) |
Pension liability
amortization, net
of income taxes of
$233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
396 |
|
Amortization of loss
on cash flow
hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
Total
comprehensive
income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,698 |
) |
|
|
52,797 |
|
|
|
547 |
|
|
|
302,457 |
|
|
|
|
|
|
|
351,103 |
|
|
|
|
Issuance of common
shares for stock
options exercised |
|
|
6,090 |
|
|
|
6 |
|
|
|
71,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,248 |
|
Nabors Exchangeco
shares exchanged |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of stock
option deductions |
|
|
|
|
|
|
|
|
|
|
16,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,767 |
|
|
|
|
Subtotal |
|
|
6,410 |
|
|
|
6 |
|
|
|
88,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,015 |
|
|
|
|
Balances,
December 31, 2004 |
|
|
299,722 |
|
|
$ |
300 |
|
|
$ |
1,358,224 |
|
|
$ |
271 |
|
|
$ |
151,520 |
|
|
$ |
(3,562 |
) |
|
$ |
1,422,640 |
|
|
$ |
|
|
|
$ |
2,929,393 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Capital in |
|
|
|
|
|
(Losses) on |
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Par |
|
Excess of |
|
Unearned |
|
Marketable |
|
Translation |
|
|
|
|
|
Retained |
|
Treasury |
|
Shareholders |
(In thousands) |
|
Shares |
|
Value |
|
Par Value |
|
Compensation |
|
Securities |
|
Adjustment |
|
Other |
|
Earnings |
|
Shares |
|
Equity |
|
|
|
Balances,
December 31, 2004 |
|
|
299,722 |
|
|
$ |
300 |
|
|
$ |
1,358,224 |
|
|
$ |
|
|
|
$ |
271 |
|
|
$ |
151,520 |
|
|
$ |
(3,562 |
) |
|
$ |
1,422,640 |
|
|
$ |
|
|
|
$ |
2,929,393 |
|
|
|
|
Comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648,695 |
|
|
|
|
|
|
|
648,695 |
|
Translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,589 |
|
Unrealized gains
on marketable
securities, net of
income taxes
of $812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,987 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment for
gains included in
net income, net
of
income taxes of
$131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,393 |
) |
Pension liability
amortization, net
of income taxes of
$148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
253 |
|
Minimum pension
liability
adjustment, net of
income taxes of
$615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(836 |
) |
|
|
|
|
|
|
|
|
|
|
(836 |
) |
Amortization of
loss
on cash flow
hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
Total
comprehensive
income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,594 |
|
|
|
26,589 |
|
|
|
(432 |
) |
|
|
648,695 |
|
|
|
|
|
|
|
693,446 |
|
|
|
|
Issuance of common
shares for stock
options exercised |
|
|
18,396 |
|
|
|
17 |
|
|
|
194,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,464 |
|
Nabors Exchangeco
shares exchanged |
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of
common shares |
|
|
(3,578 |
) |
|
|
(2 |
) |
|
|
(17,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,809 |
) |
|
|
|
|
|
|
(99,483 |
) |
Tax effect of stock
option deductions |
|
|
|
|
|
|
|
|
|
|
35,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,501 |
|
Restricted shares
issued |
|
|
653 |
|
|
|
|
|
|
|
21,163 |
|
|
|
(21,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of
restricted shares |
|
|
(20 |
) |
|
|
|
|
|
|
(695 |
) |
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
unearned
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,819 |
|
|
|
|
Subtotal |
|
|
15,671 |
|
|
|
15 |
|
|
|
232,744 |
|
|
|
(15,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,809 |
) |
|
|
|
|
|
|
135,301 |
|
|
|
|
Balances,
December 31, 2005 |
|
|
315,393 |
|
|
$ |
315 |
|
|
$ |
1,590,968 |
|
|
$ |
(15,649 |
) |
|
$ |
18,865 |
|
|
$ |
178,109 |
|
|
$ |
(3,994 |
) |
|
$ |
1,989,526 |
|
|
$ |
|
|
|
$ |
3,758,140 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Capital in |
|
|
|
|
|
(Losses) on |
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Par |
|
Excess of |
|
Unearned |
|
Marketable |
|
Translation |
|
|
|
|
|
Retained |
|
Treasury |
|
Shareholders |
(In thousands) |
|
Shares |
|
Value |
|
Par Value |
|
Compensation |
|
Securities |
|
Adjustment |
|
Other |
|
Earnings |
|
Shares |
|
Equity |
|
|
|
Balances,
December 31, 2005 |
|
|
315,393 |
|
|
$ |
315 |
|
|
$ |
1,590,968 |
|
|
$ |
(15,649 |
) |
|
$ |
18,865 |
|
|
$ |
178,109 |
|
|
$ |
(3,994 |
) |
|
$ |
1,989,526 |
|
|
$ |
|
|
|
$ |
3,758,140 |
|
|
|
|
Comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020,736 |
|
|
|
|
|
|
|
1,020,736 |
|
Translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,949 |
) |
Unrealized gains
on marketable
securities, net of
income taxes
of $623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,620 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment for
gains included in
net income, net of
income tax
benefit of $12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,085 |
) |
Pension liability
amortization, net
of income taxes of
$180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
305 |
|
Minimum pension
liability
adjustment, net of
income taxes of
$140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
239 |
|
Amortization of
loss
on cash flow
hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
Total
comprehensive
income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,535 |
|
|
|
(6,949 |
) |
|
|
695 |
|
|
|
1,020,736 |
|
|
|
|
|
|
|
1,029,017 |
|
|
|
|
Adoption of SFAS
123-R |
|
|
|
|
|
|
|
|
|
|
(15,649 |
) |
|
|
15,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
shares for stock
options exercised |
|
|
1,226 |
|
|
|
1 |
|
|
|
25,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,682 |
|
Nabors Exchangeco
shares exchanged |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of call
options |
|
|
|
|
|
|
|
|
|
|
(583,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(583,550 |
) |
Sale of warrants |
|
|
|
|
|
|
|
|
|
|
421,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,162 |
|
Tax benefit from
the purchase of
call options |
|
|
|
|
|
|
|
|
|
|
215,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,914 |
|
Repurchase and
retirement of
common shares |
|
|
(17,935 |
) |
|
|
(18 |
) |
|
|
(90,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(536,889 |
) |
|
|
|
|
|
|
(627,356 |
) |
Repurchase of 22,340
treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(775,484 |
) |
|
|
(775,484 |
) |
Tax effect of
exercised stock
option deductions |
|
|
|
|
|
|
|
|
|
|
(6,761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,761 |
) |
Grants of
restricted stock
awards |
|
|
651 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Forfeitures of
restricted stock
awards |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation |
|
|
|
|
|
|
|
|
|
|
79,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,888 |
|
|
|
|
Subtotal |
|
|
(16,060 |
) |
|
|
(16 |
) |
|
|
46,236 |
|
|
|
15,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(536,889 |
) |
|
|
(775,484 |
) |
|
|
(1,250,504 |
) |
|
|
|
Balances,
December 31, 2006 |
|
|
299,333 |
|
|
$ |
299 |
|
|
$ |
1,637,204 |
|
|
$ |
|
|
|
$ |
33,400 |
|
|
$ |
171,160 |
|
|
$ |
(3,299 |
) |
|
$ |
2,473,373 |
|
|
$ |
(775,484 |
) |
|
$ |
3,536,653 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nabors Industries Ltd. and Subsidiaries
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nabors is the largest land drilling contractor in the world, with approximately 615 land
drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48
states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. We
are also one of the largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 610 land workover and well-servicing rigs in the United States,
primarily in the southwestern and western United States, and approximately 190 land workover and
well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and
drilling rigs, and owns 48 platform, 19 jack-up units and five barge rigs in the United States and
multiple international markets. These rigs provide well-servicing, workover and drilling services.
We have a 50% ownership interest in a joint venture in Saudi Arabia, which owns 18 rigs. We also
offer a wide range of ancillary well-site services, including engineering, transportation,
construction, maintenance, well logging, directional drilling, rig instrumentation, data collection
and other support services in selected domestic and international markets. We time charter a fleet
of 29 marine transportation and supply vessels, which provide transportation of drilling materials,
supplies and crews for offshore operations. During the first quarter of 2006 we began to offer
subcontracted logistics services for onshore drilling and well-servicing operations in Canada using
helicopters and fixed-winged aircraft. We manufacture and lease or sell top drives for a broad
range of drilling applications, directional drilling systems, rig instrumentation and data
collection equipment, pipeline handling equipment and rig reporting software. We also have made
selective investments in oil and gas exploration, development and production activities.
The majority of our business is conducted through our various Contract Drilling operating
segments, which include our drilling, workover and well-servicing operations, on land and offshore.
Our oil and gas exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in marine
transportation and supply services, drilling technology and top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and logistics operations are
aggregated in a category labeled Other Operating Segments for segment reporting purposes.
Our Sea Mar division time charters supply vessels to offshore operators in U.S. waters. The
vessels are owned by one of our financing company subsidiaries, but are operated and managed by a
U.S. citizen-controlled company pursuant to long-term bareboat charters. As a result of recent
legislation, beginning in August 2007, Sea Mar will no longer be able to use this arrangement to
qualify vessels for employment in the U.S. coastwise trade. Accordingly, we will be required to
restructure the arrangement, redeploy the vessels outside the U.S., or sell the vessels by no later
than such time.
The accompanying consolidated financial statements and related footnotes are presented in
accordance with accounting principles generally accepted in the United States of America (GAAP).
Certain reclassifications have been made to prior periods to conform to the current period
presentation, with no effect on our consolidated financial position, results of operations or cash
flows.
On December 15, 2005, our Board of Directors approved a two-for-one stock split of our common
shares to be effectuated in the form of a stock dividend. The stock dividend was distributed on
April 17, 2006 to shareholders of record on March 31, 2006. All common share, per share, stock
option and restricted stock amounts included in the accompanying Consolidated Financial Statements
and related notes have been restated to reflect the effect of the stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of Nabors, all majority-owned
subsidiaries, and all non-majority owned subsidiaries required to be consolidated under Financial
Accounting Standards Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51
49
(FIN 46R), which are not material to our financial position,
results of operations or cash flows. All significant intercompany accounts and transactions are
eliminated in consolidation.
Investments in operating entities where we have the ability to exert significant influence,
but where we do not control their operating and financial policies, are accounted for using the
equity method. Our share of the net income of these entities is recorded as Earnings from
unconsolidated affiliates in our consolidated statements of income, and our investment in these
entities is carried as a single amount in our consolidated balance sheets. Investments in net
assets of unconsolidated affiliates accounted for using the equity method totaled $98.0 million and
$71.2 million as of December 31, 2006 and 2005, respectively, and are included in other long-term
assets in our consolidated balance sheets. Similarly, investments in certain offshore funds
classified as non-marketable are accounted for using the equity method of accounting based on our
ownership interest in each fund. Our share of the gains and losses of these funds is recorded in
investment income in our consolidated statements of income, and our investments in these funds are
included in long-term investments in our consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and various other short-term investments
with original maturities of three months or less.
Investments
Marketable securities consist of equity securities, certificates of deposit, corporate debt
securities, U.S. Government debt securities, Government agencies debt securities, foreign
government debt securities, mortgage-backed debt securities and asset-backed debt securities.
Securities classified as available-for-sale or trading are stated at fair value. Unrealized
holding gains and temporary losses for available-for-sale securities are excluded from earnings
and, until realized, are reported net of taxes in a separate component of shareholders equity.
Other than temporary losses are included in earnings. Unrealized and realized 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 specific
identification method is used. In accordance with this method, the cost of the equity securities
sold is determined using the specific cost of the security when originally purchased.
We are also invested in overseas funds investing primarily in a variety of public and private
U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed securities,
global structured asset securitizations, whole loan mortgages, and participations in whole loans
and whole loan mortgages). These investments are classified as non-marketable, because they do not
have published fair values. We account for these funds under the equity method of
accounting based on our percentage ownership interest and recognize
gains or losses, as investment
income, on a quarterly basis based on changes in the net asset value of our investment.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method and includes the cost of materials, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment, including renewals and betterments, are stated at cost, while
maintenance and repairs are expensed currently. Interest costs applicable to the construction of
qualifying assets are capitalized as a component of the cost of such assets. We provide for the
depreciation of our drilling and workover rigs using the units-of-production method over an
approximate 4,900-day period, with the exception of our jack-up rigs which are depreciated over an
8,030-day period, after provision for salvage value. When our drilling and workover rigs are not
operating, a depreciation charge is provided using the straight-line method over an assumed depreciable life of 20 years, with the exception of our jack-up rigs,
where a 30-year depreciable life is used.
50
Depreciation on our buildings, well-servicing rigs, oilfield hauling and mobile equipment,
marine transportation and supply vessels, aircraft equipment, and other machinery and equipment is
computed using the straight-line method over the estimated useful life of the asset after provision
for salvage value (buildings 10 to 30 years; well-servicing rigs 3 to 15 years; marine
transportation and supply vessels 10 to 25 years; aircraft equipment 5 to 20 years; oilfield
hauling and mobile equipment and other machinery and equipment 3 to 10 years). Amortization of
capitalized leases is included in depreciation and amortization expense. Upon retirement or other
disposal of fixed assets, the cost and related accumulated depreciation are removed from the
respective accounts and any gains or losses are included in our results of operations.
We review our assets for impairment when events or changes in circumstances indicate that the
net book value of property, plant and equipment may not be recovered over its remaining service
life. Provisions for asset impairment are charged to income when the sum of estimated future cash
flows, on an undiscounted basis, is less than the assets net book value. Impairment charges are
recorded using discounted cash flows which requires the estimation of dayrates and utilization, and
such estimates can change based on market conditions, technological advances in the industry or
changes in regulations governing the industry. We recorded impairment charges of approximately
$12.4 million in 2006 related to asset retirements (Note 16). Impairment charges are included in
losses (gains) on sales of long-lived assets, impairment charges and other expense (income), net in
the consolidated statements of income. There were no impairment charges related to assets held for
use recorded by Nabors in 2005 or 2004. Damage incurred to certain of our rigs during Hurricanes
Katrina and Rita in the third quarter of 2005 resulted in a reduction in the carrying value of
certain of our assets of approximately $13.1 million. This reduction in carrying value of our
assets was partially offset by an amount of proceeds expected to be received from insurance, which
is recorded as an insurance receivable and included in other current assets in our consolidated
balance sheets as of December 31, 2005. The net involuntary conversion loss recognized during 2005
resulting from these hurricanes totaling $7.8 million is included in losses (gains) on long-lived
assets, impairment charges and other expense (income), net in our consolidated statements of
income.
Oil and Gas Properties
We follow the successful efforts method of accounting for our oil and gas activities. Under
the successful efforts method, lease acquisition costs and all development costs are capitalized.
Proved oil and gas properties are reviewed when circumstances suggest the need for such a review
and, if required, the proved properties are written down to their estimated fair value. Unproved
properties are reviewed quarterly to determine if there has been impairment of the carrying value,
with any such impairment charged to expense in that period. We recorded impairment charges of
approximately $9.9 million and $1.6 million during 2006 and 2005, respectively, related to our oil and gas properties. There were no
impairment charges related to our oil and gas properties in 2004. Estimated fair value
includes the estimated present value of all reasonably expected future production, prices, and
costs. Exploratory drilling costs are capitalized until the results are determined. If proved
reserves are not discovered, the exploratory drilling costs are expensed. Interest costs related
to financing major oil and gas projects in progress are capitalized until the projects are
evaluated or until the projects are substantially complete and ready for their intended use if the
projects are evaluated as successful. Other exploratory costs are expensed as incurred. Our
provision for depletion is based on the capitalized costs as determined above and is determined on
a property-by-property basis using the units-of-production method, with costs being amortized over
proved developed reserves.
Goodwill
Goodwill represents the cost in excess of fair value of the net assets of companies acquired.
We review goodwill and intangible assets with indefinite lives for impairment annually. The change
in the carrying amount of goodwill for our various Contract Drilling segments and our Other
Operating Segments for the years ended December 31, 2006 and 2005 is as follows:
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and |
|
|
Cumulative |
|
|
Balance |
|
|
|
Balance as of |
|
|
Purchase Price |
|
|
Translation |
|
|
as of December 31, |
|
(In thousands) |
|
December 31, 2004 |
|
|
Adjustments |
|
|
Adjustment |
|
|
2005 |
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48
Land Drilling |
|
$ |
29,976 |
|
|
$ |
178 |
|
|
$ |
|
|
|
$ |
30,154 |
|
U.S. Land Well-
servicing |
|
|
43,741 |
|
|
|
7,045 |
|
|
|
|
|
|
|
50,786 |
|
U.S. Offshore |
|
|
18,003 |
|
|
|
|
|
|
|
|
|
|
|
18,003 |
|
Alaska |
|
|
19,995 |
|
|
|
|
|
|
|
|
|
|
|
19,995 |
|
Canada |
|
|
149,497 |
|
|
|
|
|
|
|
5,055 |
|
|
|
154,552 |
|
International |
|
|
18,983 |
|
|
|
|
|
|
|
|
|
|
|
18,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract
Drilling |
|
|
280,195 |
|
|
|
7,223 |
|
|
|
5,055 |
|
|
|
292,473 |
|
Other Operating
Segments |
|
|
47,030 |
|
|
|
2,331 |
|
|
|
105 |
|
|
|
49,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
327,225 |
|
|
$ |
9,554 |
|
|
$ |
5,160 |
|
|
$ |
341,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and |
|
|
Cumulative |
|
|
Balance |
|
|
|
Balance as of |
|
|
Purchase Price |
|
|
Translation |
|
|
as of December 31, |
|
(In thousands) |
|
December 31, 2005 |
|
|
Adjustments |
|
|
Adjustment |
|
|
2006 |
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48
Land Drilling |
|
$ |
30,154 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,154 |
|
U.S. Land Well-
servicing |
|
|
50,786 |
|
|
|
53 |
|
|
|
|
|
|
|
50,839 |
|
U.S. Offshore |
|
|
18,003 |
|
|
|
|
|
|
|
|
|
|
|
18,003 |
|
Alaska |
|
|
19,995 |
|
|
|
|
|
|
|
|
|
|
|
19,995 |
|
Canada |
|
|
154,552 |
|
|
|
|
|
|
|
(395 |
) |
|
|
154,157 |
|
International |
|
|
18,983 |
|
|
|
|
|
|
|
|
|
|
|
18,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract
Drilling |
|
|
292,473 |
|
|
|
53 |
|
|
|
(395 |
) |
|
|
292,131 |
|
Other Operating
Segments |
|
|
49,466 |
|
|
|
20,815 |
|
|
|
(143 |
) |
|
|
70,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
341,939 |
|
|
$ |
20,868 |
|
|
$ |
(538 |
) |
|
$ |
362,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Oil and Gas segment does not have any goodwill. Goodwill totaling approximately $9.5
million is expected to be deductible for tax purposes.
Derivative Financial Instruments
We record derivative financial instruments (including certain derivative instruments embedded
in other contracts) in our consolidated balance sheets at fair value as either assets or
liabilities. The accounting for changes in the fair value of a derivative instrument depends on
the intended use of the derivative and the resulting designation, which is established at the
inception of a derivative. Accounting for derivatives qualifying as fair value hedges allows a
derivatives gains and losses to offset related results on the hedged item in the statement of
income. For derivative instruments designated as cash flow hedges, changes in fair value, to the
extent the hedge is effective, are recognized in other comprehensive income until the hedged item
is recognized in earnings. Hedge effectiveness is measured quarterly based on the relative
cumulative changes in fair value between the derivative contract and the hedged item over time.
Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. Any
change in fair value of derivative financial instruments that are speculative in nature and do not
qualify for hedge accounting treatment is also recognized immediately in earnings. Proceeds
received upon termination of derivative financial instruments qualifying as fair value hedges are
deferred and amortized into income over the remaining life of the hedged item using the effective interest rate method.
52
Litigation and Insurance Reserves
We estimate our reserves related to litigation and insurance based on the facts and
circumstances specific to the litigation and insurance claims and our past experience with similar
claims. We maintain actuarially-determined accruals in our consolidated balance sheets to cover
self-insurance retentions (Note 14). We estimate the range of our liability related to pending
litigation when we believe the amount and range of loss can be estimated. We record our best
estimate of a loss when the loss is considered probable. When a liability is probable and there is
a range of estimated loss with no best estimate in the range, we record the minimum estimated
liability related to the lawsuits or claims. As additional information becomes available, we
assess the potential liability related to our pending litigation and claims and revise our
estimates.
Revenue Recognition
We recognize revenues and costs on daywork contracts daily as the work progresses. For
certain contracts, we receive lump-sum payments for the mobilization of rigs and other drilling
equipment. Deferred fees related to mobilization periods are recognized over the term of the
related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas
in which a contract has not been secured are expensed as incurred. We defer recognition of revenue
on amounts received from customers for prepayment of services until those services are provided.
We recognize revenue for top drives and instrumentation systems we manufacture when the
earnings process is complete. This generally occurs when products have been shipped, title and
risk of loss have been transferred, collectibility is probable, and pricing is fixed and
determinable.
We recognize, as operating revenue, proceeds from business interruption insurance claims in
the period that the applicable proof of loss documentation is received. Proceeds from casualty
insurance settlements in excess of the carrying value of damaged assets are recognized in losses
(gains) on sales of long-lived assets, impairment charges and other expense (income), net in the
period that the applicable proof of loss documentation is received.
We recognize reimbursements received for out-of-pocket expenses incurred as revenues and
account for out-of-pocket expenses as direct costs.
We recognize revenue on our interests in oil and gas properties as production occurs and title
passes.
Income Taxes
We are a Bermuda-exempt company and are not subject to income taxes in Bermuda. Consequently,
income taxes have been provided based on the tax laws and rates in effect in the countries in which
our operations are conducted and income is earned. The income taxes in these jurisdictions vary
substantially. Our effective tax rate for financial statement purposes will continue to fluctuate
from year to year as our operations are conducted in different taxing jurisdictions.
For U.S. and other foreign jurisdiction income tax purposes, we have net operating and
other loss carryforwards that we are required to assess annually for potential valuation
allowances. We consider the sufficiency of existing temporary differences and expected future
earnings levels in determining the amount, if any, of valuation allowance required against such
carryforwards and against deferred tax assets.
We do not provide for U.S. or foreign income or withholding taxes on unremitted earnings of
all U.S. and certain foreign entities, as these earnings are considered permanently reinvested.
Unremitted earnings, representing tax basis accumulated earnings and profits, totaled approximately
$397.5 million, $303.5 million and $289.9 million as of December 31, 2006, 2005 and 2004,
respectively. It is not practicable to estimate the amount of deferred income taxes associated
with these unremitted earnings.
53
In circumstances where our drilling rigs and other assets are operating in certain foreign
taxing jurisdictions, and it is expected that we will redeploy such assets before they give rise to
future tax consequences, we do not recognize any deferred tax liabilities on the earnings from
these assets.
Nabors realizes an income tax benefit associated with certain stock options issued under its
stock option plans. This benefit, which is not reflected in our consolidated income statements,
results in a reduction in income taxes payable and an increase in capital in excess of par value.
Foreign Currency Translation
For certain of our foreign subsidiaries, such as those in Canada and Argentina, the local
currency is the functional currency, and therefore translation gains or losses associated with
foreign-denominated monetary accounts are accumulated in a separate section of shareholders
equity. For our other international subsidiaries, the U.S. dollar is the functional currency, and
therefore local currency transaction gains and losses, arising from remeasurement of payables and
receivables denominated in local currency, are included in our consolidated statements of income.
Share-Based Compensation
Prior to January 1, 2006, we accounted for awards granted under our stock-based employee
compensation plans following the recognition and measurement principles of Accounting Principles
Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations. Under APB 25, no compensation expense is recognized when the option price is equal to the market price of the underlying
stock on the date of award. We generally did not recognize compensation expense in connection with stock option awards to employees,
directors and officers under our plans. See Note 3. Under the provisions of SFAS 123, the pro forma effects on
income for stock options were instead disclosed in a footnote to the financial statements.
Compensation expense was recorded in the income statement for restricted stock awards over the
vesting period of the award.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123(R), Share-Based Payment, (SFAS 123-R), using the modified prospective application method.
Under this transition method, the Company will record compensation expense for all stock option
awards granted after the date of adoption and for the unvested portion of previously granted stock
option awards that remain outstanding at the date of adoption. The amount of compensation cost
recognized was based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123. Results for prior periods have not been restated.
Cash Flows
We treat the redemption price, including accrued original issue discount, on our convertible
debt instruments as a financing activity for purposes of reporting cash flows in our consolidated
statements of cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
certain estimates and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet
date and the amounts of revenues and expenses recognized during the reporting period. Actual
results could differ from such estimates. Areas where critical accounting estimates are made by
management include:
|
|
|
depreciation and amortization of property, plant and equipment |
|
|
|
|
impairment of long-lived assets |
|
|
|
|
income taxes |
|
|
|
|
litigation and insurance reserves |
|
|
|
|
fair value of assets acquired and liabilities assumed |
|
|
|
|
share-based compensation |
54
Recent Accounting Pronouncements
In June 2006 the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, which prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that the company has taken
or expects to take on a tax return. Under FIN 48, the financial statements will reflect expected
future tax consequences of such positions presuming the taxing authorities full knowledge of the
position and all relevant facts, but without considering time values. FIN 48 is likely to cause
greater volatility in income statements as more items are recognized discretely within income tax
expense. Application of FIN 48 is required in financial statements effective for periods beginning
after December 15, 2006. FIN 48 revises disclosure requirements and will require an annual tabular
roll-forward of unrecognized tax benefits. We expect to adopt FIN 48 beginning January 1, 2007.
We are currently evaluating the impact that this interpretation may have on our consolidated
financial statements. Any adjustment required as a result of the
adoption of FIN 48, which may be material, will be
recorded to retained earnings.
In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements. This statement
establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The provisions of SFAS 157 should be applied prospectively as of the beginning of the
fiscal year in which SFAS 157 is initially applied, except in limited circumstances. We expect to
adopt SFAS 157 beginning January 1, 2008. We are currently evaluating the impact that this
pronouncement may have on our consolidated financial statements.
In September 2006 the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R). This statement requires companies to recognize a net liability or asset to report the
funded status of their defined benefit pension and other postretirement benefit plans in its
statement of financial position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. SFAS 158 is required to be applied in financial
statements effected for periods ending after December 15, 2006. The adoption of SFAS 158
did not have a material impact on our consolidated results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115. This statement
permits entities to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of
the beginning of an entitys first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No. 157. We expect to adopt SFAS
159 beginning January 1, 2008. We are currently evaluating the
impact that this pronouncement may
have on our consolidated financial statements.
3. SHARE-BASED COMPENSATION
The
Company disclosed in a press release issued on December 27, 2006, that it was initiating a
voluntary further review of its option granting practices. The Company voluntarily contacted the
SEC on December 27, 2006, and informed them of the review. The staff of the SEC informed the
Company in a letter dated December 28, 2006, that it had initiated an informal inquiry into the
Companys option award practices. The Company has been and will continue to cooperate fully with
the SEC inquiry.
The voluntary review, which is now complete, was overseen by a committee consisting
of all of the Companys nonemployee directors. The committee engaged outside legal counsel, which
in turn engaged a forensic accounting expert to assist with the review (the Review Team). The
scope of the review included the granting of and accounting for certain employee equity awards to
both the senior executives of the Company and other employees from 1988 through 2006. The Review
Team made no finding of fraud or intentional wrongdoing.
The Review Team identified certain employee stock option awards for which the Company had
historically used an incorrect measurement date in determining the amount of compensation expense
to be recognized for such employee stock option awards. The Review
Team determined that the use of these
incorrect measurement dates resulted primarily from incomplete
granting actions as of the previously used measurement dates. With respect to awards made to certain senior
executives, the Review Team found that the appropriate measurement date for certain awards made
on January 4, 1991 should have been March 5, 1991; the appropriate measurement date for certain
December 4, 1995 awards should have been January 8, 1996; the appropriate measurement date for
certain other December 4, 1995 awards should have been January 18, 1996; the appropriate
measurement date for certain December 12, 1996 awards should have been December 13, 1996; and the
appropriate measurement date for certain July 22, 1997 awards should have been August 5, 1997. The
aggregate effect of these measurement date differences results in additional compensation expense
which should have been recognized in the amount of $17.8 million over the vesting period of
the respective options.
With respect to certain annual and other incentive awards made to other employees, the
Review Team found that there were numerous instances where changes were made to awards
following the date of the meeting of the Compensation Committee. In numerous instances, there was
insufficient or inconclusive documentation to determine the date on which awards made to those
employees became final and were no longer subject to change. Accordingly, unless documentation
demonstrated that a different measurement date was appropriate, the Company used the date on which
annual bonuses were paid to employees as the revised measurement date for accounting purposes
because such date would represent a date on which the Company could conclude awards to employees
would have been finalized. The aggregate effect of these measurement date differences results in
additional compensation expense which should have been recognized in the amount of $33.8 million
over the vesting period of the respective options or restricted stock. The Company has
notified the Internal Revenue Service of its intent to participate in the program set forth in
Announcement 2007-18, Compliance Resolution Program for Employees Other than Corporate Insiders for
Additional 2006 Taxes Arising Under 409A due to the Exercise of Stock Rights. The cost to the
Company for participation in this compliance program will be approximately $3.9 million and will be
recorded as an expense during the first quarter of 2007.
The aggregate impact of the additional compensation expense, recorded as general and
administrative expense, related to the new measurement dates was $51.6 million on a pre-tax basis,
$38.3 million net of tax, or $.13 per diluted share, which was recorded as a non-cash charge during
the fourth quarter of 2006.
The Company has determined that no restatement of its historical financial statements is
necessary, because the effects of the revised measurement dates for the awards granted would not be
material in any fiscal year. If a stock-based compensation charge had been taken as a result of
the revised measurement dates, the net income of the Company for fiscal years 1991 through 2006
would have been reduced by $38.3 million in total. There would be no impact on revenue or cash
flow from operations as a result of using the revised measurement dates. The impact on net income
in individual fiscal years would have been as follows: fiscal 1991 ($.7 million); fiscal 1992 ($1.0
million); fiscal 1993 ($1.0 million); fiscal 1994 ($1.0 million); fiscal 1995 ($.3 million); fiscal
1996 ($2.1 million); fiscal 1997 (period ending September 30) ($9.5 million); fiscal 1997 (three-month period ending December 31) ($.3
million); fiscal 1998 ($1.4 million); fiscal 1999 ($1.9 million); fiscal 2000 ($2.7 million);
fiscal 2001 ($2.0 million); fiscal 2002 ($4.0 million); fiscal 2003 ($3.8 million); fiscal 2004
($2.9 million); fiscal 2005 ($3.0 million); and fiscal 2006 ($.7 million).
As a result of adopting SFAS 123-R on January 1, 2006, Nabors income before income taxes and
net income for the year ended December 31, 2006, were $16.6 million and $12.4 million lower,
respectively, than if we had continued to account for share-based compensation under APB 25.
Basic and diluted earnings per share were $.04 and $.05 lower,
respectively, for the year ended
December 31, 2006, as a result of adopting SFAS 123-R.
Compensation expense related to awards of restricted stock was recognized before the adoption
of SFAS 123-R. Compensation expense for restricted stock totaled $11.8 million and $4.8 million
for the years ended December 31, 2006 and 2005, respectively, and is included in direct costs and
general and administrative expenses in our consolidated statements of income. Total stock-based
compensation expense, which includes both stock options and
restricted stock totaled $79.9 million
for the year ended December 31, 2006. Stock-based compensation expense has been allocated to our
various operating segments (Note 18).
Prior to adoption of SFAS 123-R, Nabors presented all tax benefits of deductions resulting
from the exercise of options as operating cash flows in the Consolidated Statements of Cash Flows.
SFAS 123-R requires the cash flows resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as financing cash flows. The
actual tax benefit realized from options exercised during the year
ended December 31, 2006 was $5.2
million.
Under the provisions of SFAS 123-R, the recognition of unearned compensation, a contra-equity
account representing the amount of unrecognized restricted stock compensation expense, is no longer
required. Therefore, in the first quarter of 2006 the unearned compensation amount that was
included in our December 31, 2005 consolidated balance sheet in the amount of $15.6 million was
reduced to zero with a corresponding decrease to capital in excess of par value.
55
Prior Period Pro Forma Presentation
Under the modified prospective application method, results for prior periods have not been
restated to reflect the effects of implementing SFAS 123-R. The following pro forma information,
as required by SFAS No. 148 Accounting for Stock-Based Compensation an Amendment to FAS 123,
is presented for comparative purposes and illustrates the effect on our net income and earnings per
share as if we had applied the provisions of SFAS 123-R effective January 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
(In thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
648,695 |
|
|
$ |
302,457 |
|
Add: Stock-based compensation expense,
relating to restricted stock awards,
included in reported net income, net of
related tax effects |
|
|
3,635 |
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under the
fair value method for all awards,
net of related tax effects |
|
|
(72,281 |
) |
|
|
(22,530 |
) |
|
|
|
|
|
|
|
Pro forma net income-basic |
|
|
580,049 |
|
|
|
279,927 |
|
Add: Interest expense on assumed conversion
of our zero coupon convertible/exchangeable
senior debentures/notes, net of tax |
|
|
|
|
|
|
12,438 |
|
|
|
|
|
|
|
|
Adjusted pro forma net income-diluted |
|
$ |
580,049 |
|
|
$ |
292,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basicas reported |
|
$ |
2.08 |
|
|
$ |
1.02 |
|
Basicpro forma |
|
$ |
1.86 |
|
|
$ |
.94 |
|
|
|
|
|
|
|
|
|
|
Dilutedas reported |
|
$ |
2.00 |
|
|
$ |
.96 |
|
Dilutedpro forma |
|
$ |
1.79 |
|
|
$ |
.89 |
|
Stock Option Plans
As of December 31, 2006, we have several stock option plans under which options to purchase
Nabors common shares may be granted to key officers, directors and managerial employees of Nabors
and its subsidiaries. Options granted under the plans generally are at prices equal to the fair market value
of the shares on the date of the grant. Options granted under the plans generally are exercisable
in varying cumulative periodic installments after one year. In the case of certain key executives,
options granted under the plans are subject to accelerated vesting related to targeted common share
prices, or may vest immediately on the grant date. Options granted under the plans cannot be
exercised more than ten years from the date of grant. Options to purchase 9.9 million and 11.8
million Nabors common shares remained available for grant as of December 31, 2006 and 2005,
respectively. Of the common shares available for grant as of December 31, 2006, approximately 8.9
million of these shares are also available for issuance in the form of restricted shares.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model that uses the assumptions for the risk-free interest rate, volatility,
dividend yield and the expected term of the options. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of
the option. Expected volatilities are based on implied volatilities from traded options on the
Nabors common shares, historical volatility of Nabors common shares, and other factors. We do
not assume any dividend yield, as the Company does not pay dividends. We use historical data to
estimate the expected term of the options and employee terminations within the option-pricing
model; separate groups of employees that have similar historical exercise behavior are considered
separately for valuation purposes. The expected term of the options represents the period of time
that the options granted are expected to be outstanding.
56
We also
consider an estimated forfeiture rate for these option awards,
and we only recognize compensation cost for those shares that are expected to vest, on a
straight-line basis over the requisite service period of the award, which is generally the vesting
term of three to four years. The forfeiture rate is based on historical experience. Estimated
forfeitures have been adjusted to reflect actual forfeitures during
2006.
There were no stock options granted, and as a result, no fair value determinations were made
during the year ended December 31, 2006. For stock options granted during the years ended December
31, 2005 and 2004, respectively, the following weighted average assumptions were utilized:
risk-free interest rates of 4.13% and 2.49%; volatility of 29.50% and 31.00%; dividend yield of
0.0% for both periods; and expected life of 3.4 years and 4.0 years. Stock option transactions
under the Companys various stock-based employee compensation plans are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted Average |
|
|
Remaining |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
Value |
|
(In thousands, except exercise price) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2005 |
|
|
38,559 |
|
|
$ |
21.87 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,226 |
) |
|
|
20.95 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(161 |
) |
|
|
22.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2006 |
|
|
37,172 |
|
|
|
21.89 |
|
|
4.94 years |
|
$ |
318,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2006 |
|
|
34,302 |
|
|
|
21.85 |
|
|
4.76 years |
|
$ |
297,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of
the options outstanding, 34.3 million, 31.5 million and 38.0 million were exercisable at
weighted average exercise prices of $21.85, $22.03 and $14.53, as of December 31, 2006, 2005 and
2004, respectively. The weighted average grant-date fair value of options granted during the years
ended December 31, 2005 and 2004 was $9.21, and $6.72, respectively. There were no options granted
during the year ended December 31, 2006.
A summary of our nonvested stock options as of December 31, 2006, and the changes during the
year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date Fair |
|
Nonvested Stock Options |
|
Outstanding |
|
|
Value |
|
(In thousands, except fair values) |
Nonvested as of December 31, 2005 |
|
|
7,051 |
|
|
$ |
7.17 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(4,056 |
) |
|
|
7.32 |
|
Forfeited |
|
|
(125 |
) |
|
|
7.10 |
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2006 |
|
|
2,870 |
|
|
$ |
6.95 |
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years ended December 31, 2006, 2005
and 2004 was $17.8 million, $336.1 million and $72.4 million, respectively. The total fair value
of options vested during the years ended December 31, 2006, 2005
and 2004 was $30.1 million, $102.9 million and
$27.0 million, respectively.
As of December 31, 2006, there was $6.9 million of total future compensation cost related to
nonvested options. That cost is expected to be recognized over a weighted-average period of less
than one year. We expect substantially all of the nonvested options to vest.
Restricted Stock and Restricted Stock Units
Our stock compensation plans allow grants of restricted stock. Restricted stock is issued on
the grant date, but is restricted as to transferability. Restricted stock vests in varying
periodic installments ranging from 3 to 4 years.
57
A
summary of our restricted stock as of December 31, 2006, and the changes during the year
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date Fair |
|
Restricted Stock |
|
Outstanding |
|
|
Value |
|
(In thousands, except fair values) |
Nonvested as of December 31, 2005 |
|
|
710 |
|
|
$ |
28.86 |
|
Granted |
|
|
764 |
|
|
|
32.92 |
|
Vested |
|
|
(142 |
) |
|
|
28.71 |
|
Forfeited |
|
|
(58 |
) |
|
|
30.57 |
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2006 |
|
|
1,274 |
|
|
$ |
31.14 |
|
|
|
|
|
|
|
|
The fair value of restricted stock vested during the year ended December 31, 2006 is $4.8
million. There was not any restricted stock that vested during the year ended December 31, 2005.
See Note 11.
As of December 31, 2006, there was $26.1 million of total future compensation cost related to
nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average
period of 1.2 years. We expect substantially all of the nonvested restricted stock awards to vest.
During
February 2007, the Company awarded 699,637 and 464,085 shares of
restricted stock to its Chairman and Chief Executive Officer; and its
Deputy Chairman, President and Chief Operating Officer, respectively.
These awards had an aggregate value at the date of grant of
$35.2 million and vest over a period of three years.
4. ACQUISITIONS
On January 3, 2006, we completed an acquisition of 1183011 Alberta Ltd., a wholly-owned
subsidiary of Airborne Energy Solutions Ltd., through the purchase of all common shares outstanding
for cash for a total purchase price of Cdn. $41.7 million (U.S. $35.8 million). In addition, we
assumed debt, net of working capital, totaling approximately Cdn. $10.0 million (U.S. $8.6
million). Nabors Blue Sky Ltd. (formerly 1183011 Alberta Ltd.) owns 42 helicopters and fixed-wing
aircraft and owns and operates a fleet of heliportable well-service equipment. The purchase price
has been allocated based on final valuations of the fair value of assets acquired and liabilities
assumed as of the acquisition date and resulted in goodwill of approximately U.S. $18.8 million.
On May 31, 2006, we completed an acquisition of Pragma Drilling Equipment Ltd.s business,
which manufactures catwalks, iron roughnecks and other related oilfield equipment, through an asset
purchase consisting primarily of intellectual property for a total purchase price of Cdn. $36.5
million (U.S. $33.1 million). Additional cash purchase consideration, up to a maximum of Cdn. $12
million (U.S. $10.3 million), will be due if certain specified financial performance targets are
achieved over a one-year period commencing on June 30, 2006. The purchase price has been allocated
based on preliminary estimates of the fair market value of assets acquired and liabilities assumed
as of the acquisition date and resulted in goodwill of approximately U.S. $2.1 million. The
purchase price allocation is subject to adjustments as additional information becomes available and
will be finalized by March 31, 2007. Any contingent consideration payable in the future will be
recorded as goodwill.
5. CASH AND CASH EQUIVALENTS AND INVESTMENTS
Certain information related to our cash and cash equivalents and investments in marketable
securities follows:
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
Fair |
|
|
Holding |
|
|
Holding |
|
|
Fair |
|
|
Holding |
|
|
Holding |
|
(In thousands) |
|
Value |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Gains |
|
|
Losses |
|
Cash and cash
equivalents |
|
$ |
700,549 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
565,001 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
marketable equity
securities |
|
|
117,220 |
|
|
|
38,197 |
|
|
|
(1,740 |
) |
|
|
99,216 |
|
|
|
21,912 |
|
|
|
(642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
and CDs |
|
|
16,778 |
|
|
|
|
|
|
|
(6 |
) |
|
|
269,053 |
|
|
|
|
|
|
|
(24 |
) |
Corporate debt
securities |
|
|
131,079 |
|
|
|
154 |
|
|
|
|
|
|
|
276,755 |
|
|
|
|
|
|
|
(414 |
) |
Government
agencies debt
securities |
|
|
61,318 |
|
|
|
106 |
|
|
|
|
|
|
|
47,139 |
|
|
|
|
|
|
|
(290 |
) |
Mortgage-backed
debt securities |
|
|
1,373 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-CMO
debt securities |
|
|
49,629 |
|
|
|
19 |
|
|
|
|
|
|
|
5,081 |
|
|
|
|
|
|
|
(43 |
) |
Asset-backed debt
securities |
|
|
62,070 |
|
|
|
|
|
|
|
(9 |
) |
|
|
161,280 |
|
|
|
|
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable
debt securities |
|
$ |
322,247 |
|
|
$ |
284 |
|
|
$ |
(15 |
) |
|
$ |
759,308 |
|
|
$ |
|
|
|
$ |
(860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our cash and cash equivalents, short-term and long-term investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Cash and cash equivalents |
|
$ |
700,549 |
|
|
$ |
565,001 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
Available-for-sale marketable
equity securities |
|
|
117,220 |
|
|
|
99,216 |
|
Marketable debt securities |
|
|
322,247 |
|
|
|
759,308 |
|
Non-marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
|
439,467 |
|
|
|
858,524 |
|
Long-term investments in non-marketable securities |
|
|
513,269 |
|
|
|
222,802 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents
and investments |
|
$ |
1,653,285 |
|
|
$ |
1,646,327 |
|
|
|
|
|
|
|
|
The estimated fair values of our corporate, U.S. Government, Government agencies,
mortgage-backed, mortgage-CMO and asset-backed debt securities at December 31, 2006, by contractual
maturity, are shown below. Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to repay obligations without prepayment penalties and
we may elect to sell the securities prior to the maturity date (Note 2).
|
|
|
|
|
|
|
Estimated |
|
|
|
Fair Value |
|
(In thousands) |
|
2006 |
|
Marketable debt securities: |
|
|
|
|
Due in one year or less |
|
$ |
143,782 |
|
Due after one year through five years |
|
|
178,465 |
|
|
|
|
|
|
|
$ |
322,247 |
|
|
|
|
|
Certain information regarding our marketable debt and equity securities is presented below:
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and
maturities |
|
$ |
1,324,882 |
|
|
$ |
688,275 |
|
|
$ |
838,816 |
|
Realized gains, net of
realized losses |
|
|
3,073 |
|
|
|
16,524 |
|
|
|
13,943 |
|
6. PROPERTY, PLANT AND EQUIPMENT
The major components of our property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Land |
|
$ |
29,065 |
|
|
$ |
22,413 |
|
Buildings |
|
|
74,048 |
|
|
|
40,271 |
|
Drilling, workover and well-servicing rigs, and related
equipment |
|
|
5,749,260 |
|
|
|
4,565,792 |
|
Marine transportation and supply vessels |
|
|
156,593 |
|
|
|
152,167 |
|
Oilfield hauling and mobile equipment |
|
|
383,387 |
|
|
|
237,303 |
|
Other machinery and equipment |
|
|
71,095 |
|
|
|
36,323 |
|
Oil and gas properties |
|
|
344,423 |
|
|
|
195,146 |
|
Construction in process (1) |
|
|
625,719 |
|
|
|
332,779 |
|
|
|
|
|
|
|
|
|
|
|
7,433,590 |
|
|
|
5,582,194 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization |
|
|
(1,868,075 |
) |
|
|
(1,578,506 |
) |
accumulated depletion on oil and gas properties |
|
|
(155,414 |
) |
|
|
(116,764 |
) |
|
|
|
|
|
|
|
|
|
$ |
5,410,101 |
|
|
$ |
3,886,924 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to amounts capitalized for new or substantially new drilling, workover and
well-servicing rigs that were under construction and had not yet been placed in service as of
December 31, 2006 or 2005. |
Repair and maintenance expense included in direct costs in our consolidated statements of
income totaled $410.6 million, $327.5 million and $253.0 million for the years ended December 31,
2006, 2005 and 2004, respectively.
Interest costs of $9.5 million, $4.2 million and $1.9 million were capitalized during the
years ended December 31, 2006, 2005 and 2004, respectively.
7. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Our principal operations accounted for using the equity method include a construction
operation (50% ownership) and a logistics operation (50% ownership) in Alaska, and drilling and
workover operations located in Saudi Arabia (50% ownership). These unconsolidated affiliates are
integral to our operations in those locations. See Note 13 for a discussion of transactions with
these related parties.
Combined condensed financial data for investments in unconsolidated affiliates accounted for
using the equity method of accounting is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Current assets |
|
$ |
154,136 |
|
|
$ |
105,073 |
|
Long-term assets |
|
|
182,310 |
|
|
|
155,104 |
|
Current liabilities |
|
|
91,815 |
|
|
|
67,954 |
|
Long-term liabilities |
|
|
49,340 |
|
|
|
40,201 |
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Gross revenues |
|
$ |
486,347 |
|
|
$ |
346,127 |
|
|
$ |
256,303 |
|
Gross margin |
|
|
85,700 |
|
|
|
46,722 |
|
|
|
33,911 |
|
Net income |
|
|
45,123 |
|
|
|
16,119 |
|
|
|
14,184 |
|
Nabors earnings from
unconsolidated affiliates |
|
|
20,545 |
|
|
|
5,671 |
|
|
|
4,057 |
|
The financial data presented above as of and for the years ended December 31, 2006 and 2005
does not include Sea Mar Management LLC, as this entity was consolidated beginning in 2004 under
the requirements of FIN 46R.
Cumulative undistributed earnings of our unconsolidated affiliates included in our retained
earnings as of December 31, 2006 and 2005 totaled approximately $64.7 million and $46.6 million,
respectively.
8. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
We may be exposed to certain market risks arising from the use of financial instruments in the
ordinary course of business. This risk arises primarily as a result of potential changes in the
fair market value of financial instruments that would result from adverse fluctuations in foreign
currency exchange rates, credit risk, interest rates, and marketable and non-marketable security
prices as discussed below.
Foreign Currency Risk
We operate in a number of international areas and are involved in transactions denominated in
currencies other than U.S. dollars, which exposes us to foreign exchange rate risk. The most
significant exposures arise in connection with our operations in Canada, which usually are
substantially unhedged.
At various times, we utilize local currency borrowings (foreign currency-denominated debt),
the payment structure of customer contracts and foreign exchange contracts to selectively hedge our
exposure to exchange rate fluctuations in connection with monetary assets, liabilities, cash flows
and commitments denominated in certain foreign currencies. A foreign exchange contract is a
foreign currency transaction, defined as an agreement to exchange different currencies at a given
future date and at a specified rate.
Credit Risk
Our financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash equivalents, investments in marketable and non-marketable securities, accounts
receivable and our range cap and floor derivative instrument. Cash equivalents such as deposits
and temporary cash investments are held by major banks or investment firms. Our investments in
marketable and non-marketable securities are managed within established guidelines which limit the
amounts that may be invested with any one issuer and which provide guidance as to issuer credit
quality. We believe that the credit risk in such instruments is minimal. In addition, our trade
receivables are with a variety of U.S., international and foreign-country national oil and gas
companies. Management considers this credit risk to be limited due to the financial resources of
these companies. We perform ongoing credit evaluations of our customers and we generally do not
require material collateral. However, we do occasionally require prepayment of amounts from
customers whose creditworthiness is in question prior to provision of services to those customers.
We maintain reserves for potential credit losses, and such losses have been within managements
expectations.
Interest Rate and Marketable and Non-marketable Security Price Risk
Our financial instruments that are potentially sensitive to changes in interest rates
include our $2.75 billion, 0.94% senior exchangeable notes, our $82.8 million zero coupon convertible senior debentures (93% of which were put to us on
February 6, 2006), our $700 million zero coupon senior exchangeable notes, our 4.875% and
5.375% senior notes, our range cap and floor derivative
61
instrument, our investments in debt securities (including corporate, asset-backed, U.S.
Government, Government agencies, foreign government, mortgage-backed debt and mortgage-CMO debt
securities) and our investments in overseas funds investing primarily in a variety of public and
private U.S. and non-U.S. securities (including asset-backed securities and mortgage-backed
securities, global structured asset securitizations, whole loan mortgages, and participations in
whole loans and whole loan mortgages), which are classified as non-marketable securities.
We may utilize derivative financial instruments that are intended to manage our exposure to
interest rate risks. The use of derivative financial instruments could expose us to further credit
risk and market risk. Credit risk in this context is the failure of a counterparty to perform
under the terms of the derivative contract. When the fair value of a derivative contract is
positive, the counterparty would owe us, which can create credit risk for us. When the fair value
of a derivative contract is negative, we would owe the counterparty, and therefore, we would not be
exposed to credit risk. We attempt to minimize credit risk in derivative instruments by entering
into transactions with major financial institutions that have a significant asset base. Market
risk related to derivatives is the adverse effect to the value of a financial instrument that
results from changes in interest rates. We try to manage market risk associated with interest-rate
contracts by establishing and monitoring parameters that limit the type and degree of market risk
that we undertake.
Our $700 million zero coupon senior exchangeable notes include a contingent interest
provision, discussed in Note 8 below, which qualifies as an embedded derivative. This embedded
derivative is separated from the notes and valued at its fair value at the inception of the note
indenture. Any subsequent change in fair value of this embedded derivative would be recorded in
our consolidated statements of income. The fair value of the contingent interest provision at
inception of the note indenture was nominal. In addition, there was no significant change in the
fair value of this embedded derivative through December 31, 2006, resulting in no impact on our
consolidated statements of income for the year ended December 31, 2006.
On October 21, 2002, we entered into an interest rate swap transaction with a third-party
financial institution to hedge our exposure to changes in the fair value of $200 million of our
fixed rate 5.375% senior notes due 2012, which has been designated as a fair value hedge.
Additionally, on October 21, 2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the
form of a cashless collar, with the same third-party financial institution with the intention of
mitigating and managing our exposure to changes in the three-month U.S. dollar LIBOR rate. This
transaction does not qualify for hedge accounting treatment, and any change in the cumulative fair
value of this transaction will be reflected as a gain or loss in our consolidated statements of
income. In June 2004 we unwound $100 million of the $200 million range cap and floor derivative
instrument. During the fourth quarter of 2005, we unwound the interest rate swap resulting in a
loss of $2.7 million, which has been deferred and will be recognized as an increase to interest
expense over the remaining life of our 5.375% senior notes due 2012. During the years ended
December 31, 2005 and 2004, we recorded interest savings related to our interest rate swap
agreement accounted for as a fair value hedge of $2.7 million and $6.5 million, respectively,
which served to reduce interest expense.
The fair value of our range cap and floor transaction is recorded as a derivative asset,
included in other long-term assets, and totaled approximately $2.3 million and $1.5 million as of
December 31, 2006 and 2005, respectively. We recorded gains of approximately $1.4 million, $1.1
million and $2.4 million for the years ended December 31, 2006, 2005 and 2004, related to this
derivative instrument; such amounts are included in losses (gains) on sales of long-lived assets,
impairment charges and other expense (income), net in our consolidated statements of income.
Fair Value of Financial Instruments
The fair value of our fixed rate long-term debt is estimated based on quoted market prices or
prices quoted from third-party financial institutions. The carrying and fair values of our
long-term debt, including the current portion, are as follows:
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
(In thousands) |
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
$2.75 billion, 0.94% senior
exchangeable notes
due May 2011 |
|
$ |
2,750,000 |
|
|
$ |
2,628,725 |
|
|
$ |
|
|
|
$ |
|
|
$700 million zero coupon
senior exchangeable notes
due June 2023 |
|
|
700,000 |
|
|
|
730,380 |
|
|
|
700,000 |
|
|
|
826,700 |
|
5.375% senior notes due
August 2012 |
|
|
271,470 |
(1) |
|
|
270,545 |
(1) |
|
|
270,844 |
|
|
|
278,285 |
|
4.875% senior notes due
August 2009 |
|
|
224,296 |
|
|
|
221,749 |
|
|
|
224,030 |
|
|
|
224,730 |
|
$82.8 million zero coupon
convertible senior debentures
due February 2021 |
|
|
58,308 |
|
|
|
50,354 |
|
|
|
824,789 |
|
|
|
822,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,004,074 |
|
|
$ |
3,901,753 |
|
|
$ |
2,019,663 |
|
|
$ |
2,152,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount presented as of December 31, 2006 includes $2.3 million related to the unamortized
loss on the interest rate swap executed on October 21, 2002 and unwound during the fourth
quarter of 2005. |
The fair values of our cash equivalents, trade receivables and trade payables approximate
their carrying values due to the short-term nature of these instruments.
We maintain an investment portfolio of short-term and long-term investments that exposes us to
price risk (Note 5). The short-term investments are carried at fair market value and include
$439.5 million and $858.5 million in securities classified as available-for-sale as of December 31,
2006 and 2005, respectively. Certain of our long-term investments are also carried at fair value
(Note 2). The fair value of our long-term investments totaled $513.3 million and $235.6 million as
of December 31, 2006 and 2005, respectively. We had no investments classified as trading as of
December 31, 2006 and 2005.
9. DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
$2.75 billion, 0.94% senior exchangeable
notes
due May 2011 |
|
$ |
2,750,000 |
|
|
$ |
|
|
$700 million zero coupon senior
exchangeable
notes due June 2023 |
|
|
700,000 |
|
|
|
700,000 |
|
5.375% senior notes due August 2012 (1) (2) |
|
|
271,470 |
|
|
|
270,844 |
|
4.875% senior notes due August 2009 (1) |
|
|
224,296 |
|
|
|
224,030 |
|
$82.8 million zero coupon convertible
senior debentures due February 2021 (1) |
|
|
58,308 |
|
|
|
824,789 |
|
|
|
|
|
|
|
|
|
|
|
4,004,074 |
|
|
|
2,019,663 |
|
Less: current portion |
|
|
|
|
|
|
767,912 |
|
|
|
|
|
|
|
|
|
|
$ |
4,004,074 |
|
|
$ |
1,251,751 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The carrying amount of our 4.875% and 5.375% senior notes, and our $82.8 million zero coupon
convertible senior debentures as of December 31, 2005, included in the table above, are net of
unamortized discounts of approximately $0.7 million, $1.3 million and $24.5 million,
respectively. |
|
(2) |
|
The amount presented for the year ended December 31, 2006 includes $2.3 million related to
the unamortized loss on the interest rate swap executed on October 21, 2002 and unwound during
the fourth quarter of 2005 (Note 8). The amount presented for the year ended December 31,
2005 includes $2.7 million related to the unamortized loss on the interest rate swap. |
63
As of December 31, 2006, the maturities of our long-term debt for each of the five years after
2006 and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
Assuming Zero Coupon |
|
|
|
Convertible Debentures are |
|
|
|
Paid at |
|
|
Paid at First |
|
(In thousands) |
|
Maturity |
|
|
Put Date |
|
2007 |
|
$ |
|
|
|
$ |
|
|
2008 |
|
|
|
|
|
|
700,000 |
(1) |
2009 |
|
|
225,000 |
|
|
|
225,000 |
|
2010 |
|
|
|
|
|
|
|
|
2011 |
|
|
2,750,000 |
(2) |
|
|
2,814,557 |
(3) |
Thereafter |
|
|
1,057,765 |
(4) |
|
|
275,000 |
|
|
|
|
|
|
|
|
|
|
$ |
4,032,765 |
|
|
$ |
4,014,557 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents our $700 million zero coupon senior exchangeable notes due 2023 which can be put
to us on June 15, 2008. |
|
(2) |
|
Represents our $2.75 billion 0.94% senior exchangeable notes due 2011. |
|
(3) |
|
Represents our $2.75 billion 0.94% senior exchangeable notes due 2011 and the remainder of
our $82.8 million zero coupon convertible senior debentures due 2021, which can be put back to
us on February 5, 2011. |
|
(4) |
|
Includes our $82.8 million zero coupon convertible senior debentures due 2021, $700 million
of our zero coupon senior exchangeable notes due 2023, and $275 million of our senior notes
due 2012. |
$2.75 billion Senior Exchangeable Notes Due May 2011
On May 23, 2006, Nabors Industries, Inc. (Nabors Delaware), our wholly-owned subsidiary,
completed a private placement of $2.5 billion aggregate principal amount of 0.94% senior
exchangeable notes due 2011 that are fully and unconditionally guaranteed by us. On June 8, 2006,
the initial purchasers exercised their option to purchase an additional $250 million of the 0.94%
senior exchangeable notes due 2011, increasing the aggregate issuance of such notes to $2.75
billion. Nabors Delaware sold the notes to the initial purchasers in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The notes
were reoffered by the initial purchasers of the notes to qualified institutional buyers under Rule
144A of the Securities Act. Nabors and Nabors Delaware filed a registration statement on Form S-3
pursuant to the Securities Act with respect to resale of the notes and shares received in exchange
for the notes on August 21, 2006. The notes bear interest at a rate of 0.94% per year payable
semiannually on May 15 and November 15 of each year, beginning on November 15, 2006. Debt issuance
costs of $28.7 million were capitalized in connection with the issuance of the notes in other
long-term assets in our consolidated balance sheet and are being amortized through May 2011.
The notes are exchangeable into cash and, if applicable, Nabors common shares based on an
exchange rate of the equivalent value of 21.8221 Nabors common shares per $1,000 principal amount
of notes (which is equal to an initial exchange price of approximately $45.83 per share), subject
to adjustment during the 30 calendar days ending at the close of business on the business day
immediately preceding the maturity date and prior thereto only under the following circumstances:
(1) during any calendar quarter (and only during such calendar quarter), if the closing price of
Nabors common shares for at least 20 trading days in the 30 consecutive trading days ending on the
last trading day of the immediately preceding calendar quarter is more than 130% of the applicable
exchange rate; (2) during the five business day period after any ten consecutive trading day period
in which the trading price per note for each day of that period was less than 95% of the product of the closing sale price of Nabors common shares and the exchange rate of the note;
and (3) upon the occurrence of specified corporate transactions set forth in the indenture.
64
The notes are unsecured and are effectively junior in right of payment to any of Nabors
Delawares future secured debt. The notes will rank equally with any of Nabors Delawares other
existing and future unsubordinated debt and will be senior in right of payment to any of Nabors
Delawares future subordinated debt. Our guarantee of the note is unsecured and ranks equal in
right of payments to all of our unsecured and unsubordinated indebtedness from time to time
outstanding. Holders of the notes, who exchange their notes in connection with a change in
control, as defined in the indenture, may be entitled to a make-whole premium in the form of an
increase in the exchange rate. Additionally, in the event of a change in control, the holders of
the notes may require Nabors Delaware to purchase all or a portion of their notes at a purchase
price equal to 100% of the principal amount of notes, plus accrued and unpaid interest, if any.
Upon exchange of the notes, a holder will receive for each note exchanged an amount in cash equal
to the lesser of (i) $1,000 or (ii) the exchange value, determined in the manner set forth in the
indenture. In addition, if the exchange value exceeds $1,000 on the exchange date, a holder will
also receive a number of Nabors common shares for the exchange value in excess of $1,000 equal to
such excess divided by the exchange price.
In connection with the sale of the notes, Nabors Delaware entered into exchangeable note hedge
transactions with respect to our common shares. The call options are designed to cover, subject to
customary anti-dilution adjustments, the net number of our common shares that would be deliverable
to exchanging noteholders in the event of an exchange of the notes. Nabors Delaware paid an
aggregate amount of approximately $583.6 million of the proceeds from the sale of the notes to
acquire the call options.
Nabors also entered into separate warrant transactions at the time of the sale of the notes
whereby we sold warrants which give the holders the right to acquire approximately 60.0 million of
our common shares at a strike price of $54.64 per share. On exercise of the warrants, we have the
option to deliver cash or our common shares equal to the difference between the then market price
and strike price. All of the warrants will be exercisable and will expire on August 15, 2011. We
received aggregate proceeds of approximately $421.2 million from the sale of the warrants and used
$353.4 million of the proceeds to purchase 10.0 million of Nabors common shares.
The purchased call options and sold warrants are separate contracts entered into by Nabors and
Nabors Delaware with two financial institutions, and are not part of the terms of the notes and
will not affect the holders rights under the notes. The purchased call options are expected to
offset the potential dilution upon exchange of the notes in the event that the market value per
share of our common shares at the time of exercise is greater than the strike price of the
purchased call options, which corresponds to the initial exchange price of the notes and is
simultaneously subject to certain customary adjustments. The warrants will effectively increase
the exchange price of the notes to $54.64 per share of our common shares, from the perspective of
Nabors, representing a 55% premium based on the last reported bid price of $35.25 per share on May
17, 2006. In accordance with Emerging Issues Task Force Issue No. 00-19, Accounting for
Derivative Financial Instruments Indexed To and Potentially Settled In, a Companys Own Stock and
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, we recorded the exchangeable note hedge and warrants in capital in excess
of par value as of the transaction date, and will not recognize subsequent changes in fair value.
We also recognized a deferred tax asset of $215.9 million in the second quarter of 2006 for the
effect of the future tax benefits related to the exchangeable note hedge.
We intend to use the remaining proceeds of the offering for general corporate purposes, which
may include capital expenditures, acquisitions, retirement of other indebtedness and additional
repurchases of Nabors common shares.
4.875% Senior Notes Due August 2009 and 5.375% Senior Notes Due August 2012
On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect, wholly-owned subsidiaries,
issued $225 million aggregate principal amount of 4.875% senior notes due 2009 that are fully and
unconditionally guaranteed by Nabors and Nabors Industries, Inc. (Nabors Delaware). Concurrently
with this offering by Nabors Holdings, Nabors Delaware issued $275 million aggregate principal
amount of 5.375% senior notes due 2012, which are fully and unconditionally guaranteed by Nabors. Both issues of senior notes
were resold by a placement agent to qualified institutional buyers under Rule 144A of the
Securities Act of 1933, as amended. Interest on each issue of senior notes is payable
semi-annually on February 15 and August 15 of each year, beginning on February 15, 2003.
65
Both issues are unsecured and are effectively junior in right of payment to any of their
respective issuers future secured debt. The senior notes rank equally in right of payment with
any of their respective issuers future unsubordinated debt and are senior in right of payment to
any of such issuers subordinated debt. The guarantees of Nabors Delaware and Nabors with respect
to the senior notes issued by Nabors Holdings, and the guarantee of Nabors with respect to the
senior notes issued by Nabors Delaware, are similarly unsecured and have a similar ranking to the
series of senior notes so guaranteed.
Subject to certain qualifications and limitations, the indentures governing the senior notes
issued by Nabors Holdings and Nabors Delaware limit the ability of Nabors and its subsidiaries to
incur liens and to enter into sale and lease-back transactions. In addition, such indentures limit
the ability of Nabors, Nabors Delaware and Nabors Holdings to enter into mergers, consolidations or
transfers of all or substantially all of such entitys assets unless the successor company assumes
the obligations of such entity under the applicable indenture.
$700 million Zero Coupon Senior Exchangeable Notes Due June 2023
On June 10, 2003, Nabors Delaware, our wholly-owned subsidiary, completed a private placement
of $700 million aggregate principal amount of zero coupon senior exchangeable notes due 2023 that
are fully and unconditionally guaranteed by us. The notes were reoffered by the initial purchaser
of the notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as
amended, and outside the United States in accordance with Regulation S under the Securities Act.
Nabors and Nabors Delaware filed a registration statement on Form S-3 pursuant to the Securities
Act with respect to the notes on August 8, 2003. The notes do not bear interest, do not accrete
and have a zero yield to maturity, unless Nabors Delaware becomes obligated to pay contingent
interest as defined in the related note indenture.
We used a portion of the net proceeds from the issuance of the notes to redeem the remaining
outstanding principal amount of Nabors Delawares $825 million zero coupon convertible senior
debentures due 2020 on June 20, 2003 and our associated guarantees (see discussion below under the
caption Other Debt Transactions). The remainder of the proceeds of the notes were invested in
cash and marketable securities.
The notes are unsecured and are effectively junior in right of payment to any of Nabors
Delawares future secured debt. The notes rank equally with any of Nabors Delawares other
existing and future unsecured and unsubordinated debt and are senior in right of payment to any of
Nabors Delawares subordinated debt. The guarantee of Nabors is similarly unsecured and have a
similar ranking to the notes so guaranteed. Holders of the notes have the right to require Nabors
Delaware to repurchase the notes at a purchase price equal to 100% of the principal amount of the
notes plus contingent interest and additional amounts, if any, on June 15, 2008, June 15, 2013 and
June 15, 2018 or upon a fundamental change as described in the related note indenture.
Nabors Delaware is obligated to pay contingent interest during any six-month period from June
15 to December 14 or from December 15 to June 14 commencing on or after June 15, 2008 for which the
average trading price of the notes for each day of the applicable five trading day reference period
equals or exceeds 120% of the principal amount of the notes as of the day immediately preceding the
first day of the applicable six-month interest period. The amount of contingent interest payable
per note in respect to any six-month period will equal 0.185% of the principal amount of a note.
The five day trading reference period means the five trading days ending on the second trading day
immediately preceding the relevant six-month interest period.
The notes are exchangeable at the option of the holders into the equivalent value of 28.5306
common shares of Nabors per $1,000 principal amount of notes (subject to adjustment for certain
events) if any of the following circumstances occur: (1) if in any calendar quarter beginning after
the quarter ending September 30, 2003, the closing sale price per share of Nabors common shares
for at least 20 trading days during the period of 30 consecutive trading days ending on the last
trading day of the previous calendar quarter is greater than or equal to 120%, or with respect to all calendar quarters beginning on or after July 1, 2008,
110%, of the applicable exchange price per share of the Nabors common shares on such last trading
day (the initial exchange price per share is $35.05 and is subject to adjustment for certain events
detailed in the note indenture; 120% of this initial price per share is $42.06 and 110% of this
initial price per share is $38.56), (2) subject to certain exceptions, during the five business day
period after any ten consecutive trading day period in which the trading price per $1,000 principal
amount of notes for each day of such ten trading day period was less than 95% of the product of the
closing sale price of
66
Nabors common shares and the exchange rate of such note, (3) if Nabors Delaware calls the notes for redemption, or (4) upon the occurrence of specified corporate
transactions described in the note indenture. See the discussion below related to the method of
settlement required upon exchange of these notes. The $700 million notes can be put to us on June
15, 2008, June 15, 2013 and June 15, 2018, for a purchase price equal to 100% of the principal
amount of the notes plus contingent interest and additional amounts, if any.
In October 2004 we executed a supplemental indenture relating to our $700 million zero coupon
senior exchangeable notes providing that upon an exchange of these notes, we will in all
circumstances, except when we are in default under the indenture, elect to pay holders of these
debt instruments, in lieu of common shares, cash up to the principal amount of the instruments and,
at our option, consideration in the form of either cash or our common shares for any amount above
the principal amount of the instruments required to be paid pursuant to the terms of the indenture.
Additionally, the supplemental indenture provides that if the instruments are put to us at various
dates commencing June 15, 2008, we will in all circumstances elect to pay holders of these debt
instruments cash upon such repurchase. The number of common shares that will be issued, if we
choose to deliver common shares for any amount due to the holders of the notes above the principal
amount of the notes, will be equal to the amount due in excess of the principal amount of the notes
divided by the market price of our common shares. For these purposes, the market price means the
average of the sale prices of our common shares for the five trading day period ending on the third
business day prior to the applicable purchase date.
In December 2004, we concluded an offer to exchange Series B of our $700 million zero coupon
senior exchangeable notes due 2023 for our existing $700 million zero coupon senior exchangeable
notes. This exchange of shares removed the obligation under these notes where we would be required
to issue shares upon conversion when we are in default under the indenture related to the notes.
Series B of our $700 million zero coupon senior exchangeable notes have substantially similar terms
to our existing $700 million zero coupon senior exchangeable notes as supplemented, except that, in
addition to the elimination of the default language discussed above, the Series B exchanged notes
contain additional anti-dilution protection for cash dividends and tender or exchange offers for
our common shares at above-market prices, and provide for payment of a make-whole premium in
certain circumstances upon exchange in connection with certain fundamental changes involving
Nabors. The exchange resulted in an aggregate principal amount of $699.9 million of Series B of
our $700 million zero coupon senior exchangeable notes being issued to those holders of the
original series of $700 million zero coupon senior exchangeable notes, leaving $.1 million of the
original series of notes outstanding as of December 31, 2006.
$82.8 million Zero Coupon Convertible Senior Debentures Due February 2021
On February 6, 2006, we redeemed 93% of our $1.2 billion zero coupon senior convertible
debentures due 2021 for a total redemption price of $769.8 million; an amount equal to the issue
price of $679.9 million plus accrued original issue discount of $89.9 million to the date of
repurchase (resulting in a remaining outstanding balance for our zero coupon senior convertible
debentures of approximately $82.8 million as of December 31, 2006). We treat the redemption price,
including accrued original discount, on our convertible debt instruments as a financing activity
for purposes of reporting cash flows in our consolidated statements of cash flows.
The original principal amount of these debentures upon issuance was $1.381 billion, of which
$180.8 million had been redeemed prior to 2005. The original issue price of these debentures is
$608.41 per $1,000 principal amount at maturity. The yield to maturity is 2.5% compounded
semi-annually with no periodic cash payments of interest. At the holders option, the remaining
debentures may be put to us on February 5, 2011. Additionally, at the holders option, the
remaining debentures may be converted, at any time prior to maturity or their earlier redemption,
into the equivalent value of 14.149 common shares per $1,000 principal amount at maturity. The conversion rate is subject to adjustment under formulae set forth in the
indenture in certain events, including: (1) the issuance of
Nabors common shares as a dividend or
distribution of common shares; (2) certain subdivisions and combinations of the common shares; (3)
the issuance to all holders of common shares of certain rights or warrants to purchase common
shares; (4) the distribution of common shares, other than
Nabors common shares to Nabors
shareholders, or evidences of Nabors indebtedness or of assets; and (5) distribution consisting of
cash, excluding any quarterly cash dividend on the common shares to the extent that the aggregate
cash dividend per common share in any quarter does not exceed certain amounts. See the discussion
below related to the method of settlement required upon conversion of these debentures.
67
In October 2004 we executed a supplemental indenture (similar to the supplemental indenture
for our $700 million zero coupon senior exchangeable notes discussed above) relating to our $82.8
million zero coupon convertible senior debentures providing that upon a conversion of these
convertible debt instruments, we would in all circumstances, except when we are in default under
the indenture, elect to pay holders of these debt instruments, in lieu of common shares, cash up to
the principal amount of the instruments and, at our option, consideration in the form of either
cash or our common shares for any amount above the principal amount of the instruments required to
be paid pursuant to the terms of the indenture. Additionally, the supplemental indenture provided
that if the instruments were put to us at various dates commencing February 5, 2006, we will in all
circumstances elect to pay holders of these debt instruments cash upon such repurchase.
Because 93% of our $82.8 million zero coupon convertible senior debentures were put to us on
February 6, 2006, the outstanding principal amount of those debentures of $767.9 million was
included in current liabilities in our balance sheet as of December 31, 2005.
6.8% Senior Notes Due April 2004
On April 15, 2004, we made a payment of $305.3 million upon maturity of our 6.8% senior notes,
representing principal of $295.3 million and accrued interest of $10.0 million.
Other Debt Transactions
On May 23, 2006, Nabors International Management Ltd. (NIML), a direct wholly-owned
subsidiary of Nabors borrowed from affiliates of the initial
purchasers of the $2.75 billion senior exchangeable notes, $650 million pursuant to a
90-day senior unsecured loan. The proceeds of the loan were used to purchase 18.4 million of
Nabors common shares, which are held in treasury. The unsecured loan was paid in full on June 30,
2006.
Short-Term Borrowings
We have three letter of credit facilities with various banks as of December 31, 2006. We did
not have any short-term borrowings outstanding at December 31, 2006 and 2005. Availability and
borrowings under our credit facilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Credit available |
|
$ |
147,545 |
|
|
$ |
125,113 |
|
Letters of credit outstanding |
|
|
(108,580 |
) |
|
|
(85,248 |
) |
|
|
|
|
|
|
|
Remaining availability |
|
$ |
38,965 |
|
|
$ |
39,865 |
|
|
|
|
|
|
|
|
10. INCOME TAXES
Income before income taxes was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Domestic and foreign summary: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
972,278 |
|
|
$ |
428,454 |
|
|
$ |
25,709 |
|
Foreign |
|
|
498,641 |
|
|
|
445,496 |
|
|
|
310,129 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,470,919 |
|
|
$ |
873,950 |
|
|
$ |
335,838 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes have been provided based upon the tax laws and rates in the countries in which
operations are conducted and income is earned. We are a Bermuda-exempt company. Bermuda does not
impose corporate income taxes. Our U.S. subsidiaries are subject to a U.S. federal tax rate of
35%.
Income tax expense (benefit) consisted of the following:
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
165,599 |
|
|
$ |
5,957 |
|
|
$ |
4,955 |
|
Foreign |
|
|
50,335 |
|
|
|
23,755 |
|
|
|
15,868 |
|
State |
|
|
15,926 |
|
|
|
805 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,860 |
|
|
|
30,517 |
|
|
|
20,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
194,219 |
|
|
|
139,030 |
|
|
|
(20,300 |
) |
Foreign |
|
|
8,845 |
|
|
|
47,568 |
|
|
|
32,471 |
|
State |
|
|
15,259 |
|
|
|
8,140 |
|
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,323 |
|
|
|
194,738 |
|
|
|
12,514 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
450,183 |
|
|
$ |
225,255 |
|
|
$ |
33,381 |
|
|
|
|
|
|
|
|
|
|
|
Nabors is not subject to tax in Bermuda. A reconciliation of the differences between taxes on
income before income taxes computed at the appropriate statutory rate and our reported provision
for income taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Income tax provision at statutory rate
(Bermuda rate of 0%) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Taxes on U.S. and foreign earnings
(losses) at greater than the Bermuda rate |
|
|
399,656 |
|
|
|
216,395 |
|
|
|
32,528 |
|
Increase in valuation allowance |
|
|
4,574 |
|
|
|
3,058 |
|
|
|
2,805 |
|
Effect of change in tax rate (Canada) |
|
|
(21,382 |
) |
|
|
(12 |
) |
|
|
(2,204 |
) |
Stock redemption withholding |
|
|
36,150 |
|
|
|
|
|
|
|
|
|
State income taxes |
|
|
31,185 |
|
|
|
5,814 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
450,183 |
|
|
$ |
225,255 |
|
|
$ |
33,381 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
31 |
% |
|
|
26 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
In 2006, 2005 and 2004 we provided a valuation allowance against net operating loss (NOL)
carryforwards in various foreign tax jurisdictions based on our consideration of existing temporary
differences and expected future earnings levels in those jurisdictions. Our effective tax rate for
2006 was increased as a result of a $36.2 million current tax expense relating to the redemption of
common shares held by a foreign parent of a U.S. based Nabors subsidiary and decreased by an
approximate $20.5 million deferred tax benefit recorded as a result of changes in Canadian laws
that incrementally reduce statutory tax rates for both federal and provincial taxes over the next
four years. Our effective tax rate for 2004 was positively impacted by the release of certain tax
reserves, which were determined to no longer be necessary, resulting in a reduction in deferred
income tax expense (non-cash) totaling approximately $16.0 million ($.10 per diluted share).
The significant components of our deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
60,221 |
|
|
$ |
190,967 |
|
Tax credit carryforwards |
|
|
|
|
|
|
11,467 |
|
Accrued expenses not currently deductible for
tax and other |
|
|
13,479 |
|
|
|
54,125 |
|
Less: Valuation allowance |
|
|
(22,140 |
) |
|
|
(17,566 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net of valuation
allowance |
|
|
51,560 |
|
|
|
238,993 |
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Exchangeable note hedge |
|
|
215,914 |
|
|
|
|
|
Depreciation and depletion for tax in excess
of book expense |
|
|
(652,326 |
) |
|
|
(714,359 |
) |
Tax deductible items not expensed for book
purposes |
|
|
(159,353 |
) |
|
|
(40,532 |
) |
Unrealized gain on marketable securities |
|
|
(2,186 |
) |
|
|
(1,551 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(597,951 |
) |
|
|
(756,442 |
) |
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
|
(546,391 |
) |
|
|
(517,449 |
) |
Less: net current asset portion |
|
|
38,081 |
|
|
|
199,196 |
|
|
|
|
|
|
|
|
Net long-term deferred tax liability |
|
$ |
(584,472 |
) |
|
$ |
(716,645 |
) |
|
|
|
|
|
|
|
For U.S. federal income tax purposes, we have NOL carryforwards of approximately $56.2 million
that, if not utilized, will expire at various times from 2017 to 2018. The NOL carryforwards for
alternative minimum tax purposes are approximately $26.3 million. Additionally, we have foreign
NOL carryforwards of approximately $151.0 million that, if not utilized, will expire at various
times from 2007 to 2016.
The NOL carryforwards by year of expiration:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Total |
|
|
U.S. Federal |
|
|
Foreign |
|
2007 |
|
|
6,712 |
|
|
|
|
|
|
|
6,712 |
|
2008 |
|
|
4,911 |
|
|
|
|
|
|
|
4,911 |
|
2009 |
|
|
15,195 |
|
|
|
|
|
|
|
15,195 |
|
2010 |
|
|
21,258 |
|
|
|
|
|
|
|
21,258 |
|
2011 |
|
|
3,034 |
|
|
|
|
|
|
|
3,034 |
|
2012 |
|
|
3,205 |
|
|
|
|
|
|
|
3,205 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
10,849 |
|
|
|
|
|
|
|
10,849 |
|
2015 |
|
|
17,869 |
|
|
|
|
|
|
|
17,869 |
|
2016 |
|
|
6,895 |
|
|
|
|
|
|
|
6,895 |
|
2017 |
|
|
38,463 |
|
|
|
38,463 |
|
|
|
|
|
2018 |
|
|
17,722 |
|
|
|
17,722 |
|
|
|
|
|
Subtotal: expiring NOLs |
|
|
146,113 |
|
|
|
56,185 |
|
|
|
89,928 |
|
|
|
|
|
|
|
|
|
|
|
Non-expiring NOLs |
|
|
61,075 |
|
|
|
|
|
|
|
61,075 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
207,188 |
|
|
$ |
56,185 |
|
|
$ |
151,003 |
|
|
|
|
|
|
|
|
|
|
|
In addition, for state income tax purposes, we have net operating loss carryforwards of
approximately $158.7 million that, if not utilized, will expire at various times from 2007 to 2026.
Under U.S. federal tax law, the amount and availability of loss carryforwards (and certain
other tax attributes) are subject to a variety of interpretations and restrictive tests applicable
to Nabors and our subsidiaries. The utilization of such carryforwards could be limited or
effectively lost upon certain changes in ownership. Accordingly, although we believe substantial
loss carryforwards are available to us, no assurance can be given concerning such loss
carryforwards, or whether or not such loss carryforwards will be available in the future.
In October 2004 the U.S. Congress passed and the President signed into law the American Jobs
Creation Act of 2004 (the Act). The Act did not impact the corporate reorganization completed by
Nabors effective June 24, 2002, that made us a foreign entity. It is possible that future changes
to tax laws (including tax treaties) could have an impact on our ability to realize the tax savings
recorded to date as well as future tax savings as a result of our corporate reorganization,
depending on any responsive action taken by Nabors.
11. COMMON SHARES
70
Common Shares
The authorized share capital of Nabors consists of 800 million common shares, par value $.001
per share, and 25 million preferred shares, par value $.001 per share. Common shares issued were
299,332,578 and 315,393,236 at $.001 par value as of December 31, 2006 and 2005, respectively.
During 2006 and 2005, we repurchased and retired 17.9 million and 3.6 million of our common
shares, respectively, in the open market for $627.4 million and $99.5 million, respectively
During 2006 and 2005 the Compensation Committee of our Board of Directors granted restricted
stock awards to certain of our executive officers, other key employees, and independent directors.
In conjunction with these grants, we awarded 764,024 and 735,242 restricted shares at an average
market price of $32.92 and $28.86 to these individuals for 2006 and 2005, respectively. See Note 3
for a summary of our restricted stock as of December 31, 2006.
During 2006, 2005 and 2004, our employees exercised options to acquire 1,226,000, 18,396,000,
and 6,090,000 of our common shares, respectively.
In conjunction with our acquisition of Ryan in October 2002 and our acquisition of Enserco in
April 2002, we issued 760,528 and 7,098,164 exchangeable shares of Nabors Exchangeco (Canada) Inc.,
an indirectly wholly-owned Canadian subsidiary of Nabors, respectively, of which 438,986 and
5,277,052 exchangeable shares were immediately exchanged for our common shares, respectively.
Through December 31, 2003, an additional 1,386,142 exchangeable shares were exchanged for our
common shares and during 2006, 2005 and 2004, respectively, an additional 44,874, 220,350 and
319,738 exchangeable shares were exchanged for our common shares, leaving a total of 171,550
exchangeable shares outstanding as of December 31, 2006.
The exchangeable shares of Nabors Exchangeco are exchangeable for Nabors common shares on a
one-for-one basis. The exchangeable shares are included in capital in excess of par value.
12. PENSION, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Pension Plans
In conjunction with our acquisition of Pool Energy Services Co. in November 1999, we acquired
the assets and liabilities of a defined benefit pension plan, the Pool Company Retirement Income
Plan. Benefits under the plan are frozen and participants were fully vested in their accrued
retirement benefit on December 31, 1998.
We
adopted SFAS No. 158 as of December 31, 2006. The adoption
did not have a material impact on our consolidated results of
operations, financial condition or the disclosures herein.
Summarized information on the Pool pension plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
17,016 |
|
|
$ |
15,750 |
|
Interest cost |
|
|
989 |
|
|
|
943 |
|
Actuarial (gain) loss |
|
|
(236 |
) |
|
|
805 |
|
Benefit payments |
|
|
(472 |
) |
|
|
(482 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year (1) |
|
$ |
17,297 |
|
|
$ |
17,016 |
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
11,953 |
|
|
$ |
11,112 |
|
Actual return on plan assets |
|
|
1,132 |
|
|
|
296 |
|
Employer contribution |
|
|
1,340 |
|
|
|
1,027 |
|
Benefit payments |
|
|
(472 |
) |
|
|
(482 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
13,953 |
|
|
$ |
11,953 |
|
|
|
|
|
|
|
|
Funded status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(3,344 |
) |
|
$ |
(5,063 |
) |
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance
sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
$ |
(3,344 |
) |
|
$ |
(5,063 |
) |
|
|
|
|
|
|
|
Components of net periodic benefit cost
(recognized in our consolidated statements of
income): |
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
989 |
|
|
$ |
943 |
|
Expected return on plan assets |
|
|
(806 |
) |
|
|
(742 |
) |
Recognized net actuarial loss |
|
|
301 |
|
|
|
200 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
484 |
|
|
$ |
401 |
|
|
|
|
|
|
|
|
Weighted average assumptions: |
|
|
|
|
|
|
|
|
Weighted average discount rate |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected long-term rate of return on plan assets |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2006 and 2005, the accumulated benefit obligation is the same as the
projected benefit obligation. |
For the years ended December 31, 2006, 2005 and 2004, the net
actuarial loss amounts
included in accumulated other comprehensive income (loss) in the consolidated statements of
shareholders equity were approximately $3.9 million, $4.8 million and $3.7 million, respectively.
There
were no other components, such as prior service costs or transition
obligations relating to pension costs recorded within accumulated
other comprehensive income (loss) during 2006, 2005 and 2004.
The amount included in accumulated other comprehensive income (loss) in the consolidated
statements of shareholders equity that is expected to be recognized as a component of net periodic
benefit cost during 2007 is approximately $.2 million.
We analyze the historical performance of investments in equity and debt securities, together
with current market factors such as inflation and interest rates to help us make assumptions
necessary to estimate a long-term rate of return on plan assets. Once this estimate is made, we
review the portfolio of plan assets and make adjustments thereto that we believe are necessary to
reflect a diversified blend of investments in equity and debt securities that is capable of
achieving the estimated long-term rate of return without assuming an unreasonable level of
investment risk.
The measurement date used to determine pension measurements for the plan is December 31.
Our weighted-average asset allocations as of December 31, 2006 and 2005, by asset category are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
2006 |
|
|
2005 |
|
Equity securities |
|
|
55 |
% |
|
|
57 |
% |
Debt securities |
|
|
45 |
% |
|
|
41 |
% |
Other |
|
|
|
|
|
|
2 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
We invest plan assets based on a total return on investment approach, pursuant to which the
plan assets include a diversified blend of investments in equity and debt securities toward a goal
of maximizing the long-term rate of return without assuming an unreasonable level of investment
risk. We determine the level of risk based on an analysis of plan liabilities, the extent to which
the value of the plan assets satisfies the plan liabilities and our financial condition. Our
investment policy includes target allocations approximating 55% investment in equity securities and
45% investment in debt securities. The equity portion of the plan assets represents growth and
value stocks of small, medium and large companies. We measure and monitor the investment risk of
the plan assets both on a quarterly basis and annually when we assess plan liabilities.
72
We expect to contribute approximately $1.0 million to the Pool pension plan in 2007. This is
based on the sum of (1) the minimum contribution for the 2006 plan year that will be made in 2007
and (2) the estimated minimum required quarterly contributions for the 2007 plan year. We made
contributions to the Pool pension plan in 2006 and 2005 totaling $1.3 million and $1.0 million,
respectively.
As of December 31, 2006, we expect that benefits to be paid in each of the next five fiscal
years after 2006 and in the aggregate for the five fiscal years thereafter will be as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
2007 |
|
$ |
505 |
|
2008 |
|
|
556 |
|
2009 |
|
|
599 |
|
2010 |
|
|
636 |
|
2011 |
|
|
701 |
|
2012 2016 |
|
|
4,929 |
|
Certain of Nabors employees are covered by defined contribution plans. Our contributions to
the plans are based on employee contributions and totaled $12.0 million and $9.0 million for the
years ended December 31, 2006 and 2005, respectively. Nabors does not provide postemployment
benefits to its employees.
Postretirement Benefits Other Than Pensions
Prior to the date of our acquisition, Pool provided certain postretirement healthcare and life
insurance benefits to eligible retirees who had attained specific age and years of service
requirements. Nabors terminated this plan at the date of acquisition (November 24, 1999). A
liability of approximately $.2 million and $.3 million is recorded in our consolidated balance
sheets as of December 31, 2006 and 2005, respectively, to cover the estimated costs of
beneficiaries covered by the plan at the date of acquisition.
13. RELATED PARTY TRANSACTIONS
Pursuant to his employment agreement entered into in October 1996, we provided an unsecured,
non-interest bearing loan of approximately $2.9 million to Nabors Deputy Chairman, President and
Chief Operating Officer. The loan was repaid to the Company on October 8, 2006.
Pursuant to their employment agreements, Nabors and its Chairman and Chief Executive Officer,
Deputy Chairman, President and Chief Operating Officer, and certain other key employees entered
into split-dollar life insurance agreements pursuant to which we pay a portion of the premiums
under life insurance policies with respect to these individuals and, in certain instances, members
of their families. Under these agreements, we are reimbursed for such premiums upon the occurrence
of specified events, including the death of an insured individual. Any recovery of premiums paid
by Nabors could potentially be limited to the cash surrender value of these policies under certain
circumstances. As such, the values of these policies are recorded at their respective cash
surrender values in our consolidated balance sheets. We have made premium payments to date
totaling $11.2 million related to these policies. The cash surrender value of these policies of
approximately $10.3 million and $10.1 million is included in other long-term assets in our
consolidated balance sheets as of December 31, 2006 and 2005, respectively.
Under the Sarbanes-Oxley Act of 2002, the payment of premiums by Nabors under the agreements
with our Chairman and Chief Executive Officer and with our Deputy Chairman, President and Chief
Operating Officer may be deemed to be prohibited loans by us to these individuals. We have paid no
premiums related to our agreements with these individuals since the adoption of the Sarbanes-Oxley
Act and have postponed premium payments related to our agreements with these individuals.
In the ordinary course of business, we enter into various rig leases, rig transportation and
related oilfield services agreements with our Alaskan and Saudi Arabian unconsolidated affiliates
at market prices. Revenues from business transactions with these affiliated entities totaled $99.2 million, $82.3 million and
$63.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. Expenses from business transactions with these
73
affiliated entities totaled $4.7 million, $4.0 million and $3.3
million for the years ended December 31, 2006, 2005 and 2004, respectively. Additionally, we had
accounts receivable from these affiliated entities of $41.2 million and $33.1 million as of
December 31, 2006 and 2005, respectively. We had accounts payable to these affiliated entities of
$0.3 million and $2.2 million as of December 31, 2006 and 2005, respectively, and long-term
payables with these affiliated entities of $6.6 million and $5.8 million as of December 31, 2006
and 2005, respectively, which is included in other long-term liabilities.
Additionally, we own certain marine vessels that are chartered under a bareboat charter
arrangement to Sea Mar Management LLC, an entity in which we own a 25% interest. Under the
requirements of FIN 46R, this entity was consolidated by Nabors beginning in 2004.
During the fourth quarter of 2006, the Company entered into a transaction with Shona Energy
Company, LLC (Shona), a company in which Mr. Payne,
an outside director of the Company, is the Chairman and Chief Executive Officer.
Pursuant to the transaction, a subsidiary of the Company acquired and holds a minority interest of less than 20% of the issued and outstanding common shares of Shona in
exchange for certain rights derived from an oil and gas concession held by that subsidiary.
14. COMMITMENTS AND CONTINGENCIES
Commitments
Operating Leases
Nabors and its subsidiaries occupy various facilities and lease certain equipment under
various lease agreements. The minimum rental commitments under non-cancelable operating leases,
with lease terms in excess of one year subsequent to December 31, 2006, are as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
2007 |
|
$ |
10,324 |
|
2008 |
|
|
8,867 |
|
2009 |
|
|
4,287 |
|
2010 |
|
|
3,486 |
|
2011 |
|
|
2,891 |
|
Thereafter |
|
|
2,008 |
|
|
|
|
|
|
|
$ |
31,863 |
|
|
|
|
|
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 $21.6 million, $20.1 million and $19.2 million for the years ended December 31,
2006, 2005 and 2004, respectively.
Employment Contracts
We have entered into employment contracts with certain of our employees. Our minimum salary
and bonus obligations under these contracts as of December 31, 2006 are as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
2007 |
|
$ |
2,598 |
|
2008 |
|
|
2,407 |
|
2009 |
|
|
2,320 |
|
2010 |
|
|
1,693 |
|
2011 and thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
9,018 |
|
|
|
|
|
Nabors Chairman and Chief Executive Officer, Eugene M. Isenberg, and its Deputy Chairman,
President and Chief Operating Officer, Anthony G. Petrello, have employment agreements which were
amended and restated effective October 1, 1996 and which currently are due to expire on September
30, 2010.
74
Mr. Isenbergs employment agreement was originally negotiated with a creditors committee in
1987 in connection with the reorganization proceedings of Anglo Energy, Inc., which subsequently
changed its name to Nabors. These contractual arrangements subsequently were approved by the
various constituencies in those reorganization proceedings, including equity and debt holders, and
confirmed by the United States Bankruptcy Court.
Mr. Petrellos employment agreement was first entered into effective October 1, 1991. Mr.
Petrellos employment agreement was agreed upon as part of arms length negotiations with the Board
before he joined Nabors in October 1991, and was reviewed and approved by the Compensation
Committee of the Board and the full Board of Directors at that time.
The employment agreements for Messrs. Isenberg and Petrello were amended in 1994 and 1996.
These amendments were approved by the Compensation Committee of the Board and the full Board of
Directors at that time.
The employment agreements provide for an initial term of five years with an evergreen
provision which automatically extended the agreement for an additional one-year term on each
anniversary date, unless Nabors provided notice to the contrary ten days prior to such anniversary.
The Board of Directors in March 2006 exercised its election to fix the expiration date of the
employment agreements for Messrs. Isenberg and Petrello, and accordingly, these agreements will
expire at the end of their current term at September 30, 2010.
In addition to a base salary, the employment agreements provide for annual cash bonuses in an
amount equal to 6% and 2%, for Messrs. Isenberg and Petrello, respectively, of Nabors net cash
flow (as defined in the respective employment agreements) in excess of 15% of the average
shareholders equity for each fiscal year. (Mr. Isenbergs cash bonus formula originally was set
at 10% in excess of a 10% return on shareholders equity and he has voluntarily reduced it over
time to its 6% in excess of 15% level.) Mr. Petrellos bonus is subject to a minimum of $700,000
per year. In 16 of the last 17 years, Mr. Isenberg has agreed voluntarily to accept a lower annual
cash bonus (i.e., an amount lower than the amount provided for under his employment agreement) in
light of his overall compensation package. Mr. Petrello has agreed voluntarily to accept a lower
annual cash bonus (i.e., an amount lower than the amount provided for under his employment
agreement) in light of his overall compensation package in 13 of the last 16 years.
Mr. Isenberg voluntarily agreed to amend his employment agreement in March 2006 (the 2006
Amendment). Under the 2006 Amendment, Mr. Isenberg agreed to reduce the annual cash bonus to an
amount equal to 3% of Nabors net cash flow (as defined in his employment agreement) in excess of
15% of the average shareholders equity for 2006. For 2007 through the expiration date of the
employment agreement, the annual cash bonus will return to 6% of Nabors net cash flow in excess of
15% of the average shareholders equity for each fiscal year.
For
2006, the annual cash bonuses for Messrs. Isenberg and Petrello
pursuant to the formula described in their employment agreements were
$43.2 million and $28.7 million, respectively. In light of their
overall compensation package including significant restricted stock
awards (see Note 3), they agreed to accept cash bonuses in the amount
of $22.0 million and $14.6 million, respectively.
Messrs. Isenberg and Petrello also are eligible for awards under Nabors equity plans and may
participate in annual long-term incentive programs and pension and welfare plans, on the same basis
as other executives; and may receive special bonuses from time to time as determined by the Board.
Termination in the event of death, disability, or termination without cause. In the
event that either Mr. Isenbergs or Mr. Petrellos employment agreement is terminated (i) upon
death or disability (as defined in the respective employment agreements), (ii) by Nabors prior to
the expiration date of the employment agreement for any reason other than for Cause (as defined in
the respective employment agreements) or (iii) by either individual for Constructive Termination
Without Cause (as defined in the respective employment agreements), each would be entitled to
receive within 30 days of the triggering event (a) all base salary which would have been payable
through the expiration date of the contract or three times his then current base salary, whichever
is greater; plus (b) the greater of (i) all annual cash bonuses which would have been payable through the expiration
date; (ii) three times the highest bonus (including the imputed value of grants of stock awards and
stock options), paid during the last three fiscal years prior to termination; or (iii) three times
the highest annual cash bonus payable for each of the three previous fiscal years prior to
termination, regardless of whether the amount was paid. In computing any amount due
75
under (b)(i) and (iii) above, the calculation is made without regard to the 2006 Amendment reducing Mr.
Isenbergs bonus percentage as described above. If, by way of example, these provisions had
applied at December 31, 2006, Mr. Isenberg would have been entitled to a payment of approximately
$329 million, subject to a true-up equal to the amount of cash bonus he would have earned under
the formula during the remaining term of the agreement, based upon actual results, but would not be
less than approximately $264 million. Similarly, with respect to Mr. Petrello, had these
provisions applied at December 31, 2006, Mr. Petrello would have been entitled to a payment of
approximately $112 million, subject to a true-up equal to the amount of cash bonus he would have
earned under the formula during the remaining term of the agreement, based upon actual results, but
would not be less than approximately $103 million. These payment amounts are based on historical
data and are not intended to be estimates of future payments required under the agreements.
Depending upon future operating results, the true-up could result in the payment of amounts which
are significantly higher. In addition, the affected individual is entitled to receive (a) any
unvested restricted stock outstanding, which shall immediately and fully vest; (b) any unvested
outstanding stock options, which shall immediately and fully vest; (c) any amounts earned, accrued
or owing to the executive but not yet paid (including executive benefits, life insurance,
disability benefits and reimbursement of expenses and perquisites), which shall be continued
through the later of the expiration date or three years after the termination date; (d) continued
participation in medical, dental and life insurance coverage until the executive receives
equivalent benefits or coverage through a subsequent employer or until the death of the executive
or his spouse, whichever is later; and (e) any other or additional benefits in accordance with
applicable plans and programs of Nabors. For Mr. Isenberg, as of December 31, 2006, the value of
unvested restricted stock was approximately $9.9 million and the value of in-the-money unvested
stock options was approximately $4.3 million. For Mr. Petrello, as of December 31, 2006, the value
of unvested restricted stock was approximately $5.0 million and the value of in-the-money unvested
stock options was approximately $2.2 million. Estimates of the cash value of Nabors obligations
to Messrs. Isenberg and Petrello under (c), (d) and (e) above are included in the payment amounts
above.
The Board of Directors in March 2006 exercised its election to fix the expiration date of the
employment agreements for Messrs. Isenberg and Petrello. Messrs. Isenberg and Petrello have
informed the Board of Directors that they have reserved their rights under their employment
agreements with respect to the notice setting the expiration dates of their employment agreements,
including whether such notice could trigger an acceleration of certain payments pursuant to their
employment agreements.
Termination in the event of a Change in Control. In the event that Messrs. Isenbergs
or Petrellos termination of employment is related to a Change in Control (as defined in their
respective employment agreements), they would be entitled to receive a cash amount equal to the
greater of (a) one dollar less than the amount that would constitute an excess parachute payment
as defined in Section 280G of the Internal Revenue Code, or (b) the cash amount that would be due
in the event of a termination without cause, as described above. If, by way of example, there was
a change of control event that applied on December 31, 2006, then the payments to Messrs. Isenberg
and Petrello would be approximately $329 million and $112 million, respectively. These payment
amounts are based on historical data and are not intended to be estimates of future payments
required under the agreements. Depending upon future operating results, the true-up could result
in the payment of amounts which are significantly higher. In addition, they would receive (a) any
unvested restricted stock outstanding, which shall immediately and fully vest; (b) any unvested
outstanding stock options, which shall immediately and fully vest; (c) any amounts earned, accrued
or owing to the executive but not yet paid (including executive benefits, life insurance,
disability benefits and reimbursement of expenses and perquisites), which shall be continued
through the later of the expiration date or three years after the termination date; (d) continued
participation in medical, dental and life insurance coverage until the executive receives
equivalent benefits or coverage through a subsequent employer or until the death of the executive
or his spouse, whichever is later; and (e) any other or additional benefits in accordance with
applicable plans and programs of Nabors. For Mr. Isenberg, as of December 31, 2006, the value of
unvested restricted stock was approximately $9.9 million and the value of in-the-money unvested
stock options was approximately $4.3 million. For Mr. Petrello, as of December 31, 2006, the value
of unvested restricted stock was approximately $5.0 million and the value of in-the-money unvested
stock options was approximately $2.2 million. The cash value of Nabors obligations to Messrs.
Isenberg and Petrello under (c), (d) and (e) above are included in the payment amounts above. Also, they would receive additional stock options immediately exercisable for
five years to acquire a number of shares of common stock equal to the highest number of options
granted during any fiscal year in the previous three fiscal years, at an option exercise price
equal to the average closing price during the 20 trading days prior to the event which resulted in
the change of control. If, by way of example, there was a change of control
76
event that applied at
December 31, 2006, Mr. Isenberg would have received 3,366,666 options valued at approximately $36
million and Mr. Petrello would have received 1,683,332 options valued at approximately $18 million,
in each case based upon a Black Scholes analysis. Finally, in the event that an excise tax was
applicable, they would receive a gross-up payment to make them whole with respect to any excise
taxes imposed by Section 4999 of the Internal Revenue Code. With respect to the preceding
sentence, by way of example, if there was a change of control event that applied on December 31,
2006, and assuming that the excise tax were applicable to the transaction, then the additional
payments to Messrs. Isenberg and Petrello for the gross-up would
be up to approximately $146 million
and $51 million, respectively.
Other Obligations. In addition to salary and bonus, each of Messrs. Isenberg and
Petrello receive group life insurance at an amount at least equal to three times their respective
base salaries, various split-dollar life insurance policies, reimbursement of expenses, various
perquisites and a personal umbrella insurance policy in the amount of $5 million. Premiums payable
under the split dollar life insurance policies were suspended as a result of the adoption of the
Sarbanes Oxley Act of 2002.
New Joint Venture
On September 22, 2006, we entered into an agreement with First Reserve Corporation to form a
new joint venture, NFR Energy LLC, to invest in oil and gas exploitation opportunities worldwide.
First Reserve Corporation is a private equity firm specializing in the energy industry. Each party
initially will hold an equal interest in the new entity and has committed to fund its proportionate
share of $1.0 billion in equity. NFR Energy LLC will pursue development and exploration projects
with both existing customers of ours and with other operators in a variety of forms including
operated and non-operated working interests, joint ventures, farm-outs and acquisitions. NFR
Energy LLC has not commenced operations and has not received funding as of December 31, 2006 by
either party.
Contingencies
Income Tax Contingencies
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and calculations where the ultimate
tax determination is uncertain. We are regularly under audit by tax authorities. Although we
believe our tax estimates are reasonable, the final determination of tax audits and any related
litigation could be materially different than that which is reflected in historical income tax
provisions and accruals. Based on the results of an audit or litigation, a material effect on our
financial position, income tax provision, net income, or cash flows in the period or periods for
which that determination is made could result.
It is possible that future changes to tax laws (including tax treaties) could have an impact
on our ability to realize the tax savings recorded to date as well as future tax savings as a
result of our corporate reorganization, depending on any responsive action taken by us.
On May 31, 2006, Nabors International Finance Inc. (NIFI), a wholly-owned U.S. subsidiary of
Nabors, received from the U.S. Internal Revenue Service (the IRS) two Notices of Proposed
Adjustment (NOPA) in connection with an audit of NIFI for tax years 2002 and 2003. One NOPA
proposes to deny a deduction of $85.1 million in interest expense in our 2002 tax year relating to
intercompany indebtedness incurred in connection with our inversion transaction in June 2002
whereby we were reorganized as a Bermuda company. The second NOPA proposes to deny a deduction of
$207.6 million in the same item of interest expense in our 2003 tax year. On August 9, 2006, NIFI
received a Revenue Agent Report, asserting the adjustments relating to the two NOPAs referred to
above. On September 18, 2006, NIFI filed a protest with the IRS related to the two adjustments and
we intend to contest the IRS position vigorously. We previously had obtained advice from our tax
advisors that the deduction of such amounts was appropriate and more recently that the position of
the IRS lacks merit. At the end of 2003 the Company paid off approximately one-half of the intercompany indebtedness incurred in
connection with the inversion. It is likely that the IRS will propose the disallowance of these
deductions upon audit of NIFIs 2004, 2005 and 2006 tax years. We currently have not recorded any
reserves for such proposed adjustments.
77
On
September 14, 2006, Nabors Drilling International Limited (NDIL), a wholly-owned Bermuda
subsidiary of Nabors, received a Notice of Assessment (the Notice) from the Mexican Servicio de
Administracion Tributaria (the SAT) in connection with the audit of NDILs Mexican branch for tax
year 2003. The Notice proposes to deny a depreciation expense deduction that relates to drilling
rigs operating in Mexico in 2003, as well as a deduction for payments made to an affiliated company
for the provision of labor services in Mexico. The amount assessed by the SAT is approximately
$19.8 million (including interest and penalties). Nabors and its tax advisors previously concluded
that the deduction of said amounts was appropriate and more recently that the position of the SAT
lacks merit. Nabors has not recorded any reserves for the adjustments proposed by the SAT. NDILs
Mexican branch took similar deductions for depreciation and labor expenses in 2004, 2005 and 2006.
It is likely that the SAT will propose the disallowance of these deductions upon audit of NDILs
Mexican branchs 2004, 2005 and 2006 tax years.
Self-Insurance Accruals
We are self-insured for certain losses relating to workers compensation, employers
liability, general liability, automobile liability and property damage. Effective April 1, 2006,
with our insurance renewal, certain changes have been made to our insurance coverage increasing our
self-insured retentions. Our domestic workers compensation program continues to be subject to a
$1.0 million per occurrence deductible. Employers liability and Jones Act cases are subject to a
$2.0 million deductible. Automobile liability continues at a $.5 million deductible. We are
assuming an additional $3.0 million corridor deductible for domestic workers compensation claims.
General liability claims continue to be subject to a $5.0 million deductible. However, as a result
of insurance market conditions following hurricanes Katrina and Rita, we are now subject to higher
deductibles for removal of wreckage and debris and collision liability claims depending on the
insured value of the individual rigs.
In addition, we are subject to a $1.0 million deductible for all land rigs except for
those located in Alaska, and a $5.0 million deductible for all our Alaska and offshore rigs with
the exception of the Pool Arabia rigs, which are subject to a $2.5 million deductible. This
applies to all kinds of risks of physical damage except for named windstorms in the U.S. Gulf of
Mexico. The deductible for named windstorms in the U.S. Gulf of Mexico is $25.0 million per
occurrence. Also, the maximum coverage for named windstorms in the U.S. Gulf of Mexico is $50.0
million in this policy year.
Political risk insurance is procured for select operations in South America, Africa, the
Middle East and Asia. Losses are subject to a $0.25 million deductible, except for Colombia, which
is subject to a $0.5 million deductible. There is no assurance that such coverage will adequately
protect Nabors against liability from all potential consequences.
As of December 31, 2006 and 2005, our self-insurance accruals totaled $129.7 million and
$116.7 million, respectively, and our related insurance recoveries/receivables were $7.5 million
and $8.0 million, respectively.
Litigation
Nabors and its subsidiaries are defendants or otherwise involved in a number of lawsuits in
the ordinary course of business. We estimate the range of our liability related to pending
litigation when we believe the amount and range of loss can be estimated. We record our best
estimate of a loss when the loss is considered probable. When a liability is probable and there is
a range of estimated loss with no best estimate in the range, we record the minimum estimated
liability related to the lawsuits or claims. As additional information becomes available, we
assess the potential liability related to our pending litigation and claims and revise our
estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate
outcome may differ from our estimates. In the opinion of management and based on liability
accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not
expected to have a material adverse effect on our consolidated financial position or cash flows,
although they could have a material adverse effect on our results of operations for a particular
reporting period.
During the quarter ended June 30, 2006, we settled a lawsuit involving wage and hour claims
relating primarily to meal periods and travel time of current and former rig-based employees in our
California well-servicing business. Those claims were heard by an arbitrator during the fourth
quarter of 2005. On February 6, 2006, we received an interim award against us in the amount of
$25.6 million (plus attorneys fees and costs), which was accrued for in our consolidated
statements of income for the year ended December 31, 2005. As a result of subsequent proceedings
and the settlement, the final award was $24.3 million, which was paid during May 2006.
Additionally, on December 22, 2005, we received a grand jury subpoena from the United States
Attorneys Office in Anchorage, Alaska, seeking documents and information relating to an alleged
spill, discharge, overflow or cleanup of drilling mud or sludge involving one of our rigs during
March 2003. We are cooperating with the authorities in this matter.
On February 6, 2007, a purported shareholder derivative action entitled Kenneth H. Karstedt v.
Eugene M. Isenberg, et al was filed in the United States District Court for the Southern District
of Texas against the Companys officers and directors, and against the Company as a nominal
defendant. The complaint alleges that stock options were priced retroactively and were improperly
accounted for, and alleges various causes of action based on that assertion. The complaint seeks,
among other things, payment by the defendants to the Company of damages allegedly suffered by it
and disgorgement of profits. The ultimate outcome of this matter cannot be determined at this
time. See Note 3 for further discussion relating to the stock option review performed by the
Company.
In a letter dated December 28, 2006, the SEC staff advised us that it had commenced an
informal inquiry regarding our stock option grants and related practices, procedures and
accounting. We are cooperating with this inquiry. A more detailed discussion of this matter is
contained in Note 3. It is not possible at this early stage to predict the
likely outcome of this inquiry or whether the SEC staff will take a position contrary to the
Companys position, but it is possible the ultimate result of the inquiry could have an adverse
effect on us, our consolidated financial position, results of operations and cash flows.
78
Guarantees
We enter into various agreements and obligations providing financial or performance assurance
to third parties. Certain of these agreements serve as guarantees, including standby letters of
credit issued on behalf of insurance carriers in conjunction with our
workers compensation
insurance program and other financial surety instruments such as bonds. We have also guaranteed
payment of contingent consideration in conjunction with certain acquisitions in 2005 and 2006.
Potential contingent consideration is based on future operating results of those businesses. In
addition, we have provided indemnifications to certain third parties which serve as guarantees.
These guarantees include indemnification provided by Nabors to our share transfer agent and our
insurance carriers. We are not able to estimate the potential future maximum payments that might
be due under our indemnification guarantees.
Management believes the likelihood that we would be required to perform or otherwise incur any
material losses associated with any of these guarantees is remote. The following table summarizes
the total maximum amount of financial and performance guarantees issued by Nabors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount |
|
(In thousands) |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Thereafter |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial standby letters of
credit and other financial
surety instruments |
|
$ |
102,356 |
|
|
$ |
1,195 |
|
|
$ |
100 |
|
|
$ |
25 |
|
|
$ |
103,676 |
|
Contingent consideration in
acquisition |
|
|
10,297 |
|
|
|
1,063 |
|
|
|
1,063 |
|
|
|
2,124 |
|
|
|
14,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,653 |
|
|
$ |
2,258 |
|
|
$ |
1,163 |
|
|
$ |
2,149 |
|
|
$ |
118,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the numerators and denominators of the basic and diluted earnings per
share computations is as follows:
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income (numerator): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
1,020,736 |
|
|
$ |
648,695 |
|
|
$ |
302,457 |
|
Add interest expense on assumed
conversion of our zero coupon
senior convertible/exchangeable
debentures/notes, net
of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
$2.75 billion due 2011 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
$82.8 million due 2021 (2) |
|
|
|
|
|
|
|
|
|
|
12,438 |
|
$700 million due 2023 (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income diluted |
|
$ |
1,020,736 |
|
|
$ |
648,695 |
|
|
$ |
314,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.52 |
|
|
$ |
2.08 |
|
|
$ |
1.02 |
|
Diluted |
|
$ |
3.40 |
|
|
$ |
2.00 |
|
|
$ |
.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding basic (4) |
|
|
290,241 |
|
|
|
312,134 |
|
|
|
297,872 |
|
Net effect of dilutive stock options,
warrants and restricted stock awards
based on the treasury stock method |
|
|
9,446 |
|
|
|
10,146 |
|
|
|
13,207 |
|
Assumed conversion of our zero
coupon senior convertible/exchangeable
debentures/notes: |
|
|
|
|
|
|
|
|
|
|
|
|
$2.75 billion due 2011 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
$82.8 million due 2021 (2) |
|
|
|
|
|
|
|
|
|
|
16,981 |
|
$700 million due 2023 (3) |
|
|
140 |
|
|
|
2,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding diluted |
|
|
299,827 |
|
|
|
324,378 |
|
|
|
328,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Diluted earnings per share for the year ended December 31, 2006 does not include any
incremental shares issuable upon the exchange of the $2.75 billion 0.94% senior exchangeable
notes. The number of shares that we would be required to issue upon exchange consists of only
the incremental shares that would be issued above the principal amount of the notes, as we are
required to pay cash up to the principal amount of the notes exchanged. We would only issue
an incremental number of shares upon exchange of these notes, and such shares are only
included in the calculation of the weighted-average number of shares outstanding in our
diluted earnings per share calculation, when the price of our shares exceeds $45.83 on the
last trading day of the quarter, which did not occur during any period for the year ended
December 31, 2006. The $2.75 billion notes were issued during the quarter ended June 30, 2006
and had no effect on prior years earnings per share calculation. |
|
(2) |
|
Diluted earnings per share for the year ended December 31, 2006 excludes approximately 1.2
million potentially dilutive shares initially issuable upon the
conversion of the $82.8 million
zero coupon convertible senior debentures. Diluted earnings per share for the year ended
December 31, 2005 excludes approximately 17.0 million potentially dilutive shares initially
issuable upon the conversion of these debentures. Such shares did not impact our calculation
of dilutive earnings per share for those periods, as we are required to pay cash up to the
principal amount of any debentures converted resulting from the issuance of a supplemental
indenture relating to the debentures in October 2004. We would only issue an incremental
number of shares upon conversion of these debentures, and such shares would only be included
in the calculation of the weighted-average number of shares outstanding in our diluted
earnings per share calculation if the price of our shares exceeded approximately $49.
Diluted earnings per share for the year ended December 31, 2004 reflects the assumed
conversion of our $82.8 million zero coupon convertible senior debentures, as the conversion
in that year would have been dilutive. |
|
(3) |
|
Diluted earnings per share for the years ended December 31, 2006 and 2005 reflects the
assumed conversion of our $700 million zero coupon senior exchangeable notes resulting in the
inclusion of the incremental number of shares that we would be required to issue upon exchange
of these notes. The number of shares that we would be required to issue upon exchange
consists of only the incremental shares that would be issued above the principal amount of the
notes, as we are required to pay cash up to the principal amount of the notes exchanged. We
would only issue an incremental number of shares upon exchange of these notes, and such shares
are only included in the calculation of the weighted-average number of shares outstanding in
our diluted earnings per share calculation, when the price of our shares exceeds $35.05 on the
last trading day of the quarter. This was |
80
|
|
|
|
|
the case for the quarter ended March 31, 2006 and the three months ended December 31, 2005 and
are therefore included in the weighted-average number of shares outstanding in our diluted
earnings per share calculation for the years ended December 31, 2006 and 2005. Diluted earnings
per share for the year ended December 31, 2004 does not include any incremental shares issuable
upon the exchange of our $700 million zero coupon senior exchangeable notes as the price of our
shares did not exceed $35.05 during any measurement period for that year. |
|
(4) |
|
Includes the following weighted-average number of common shares of Nabors and weighted
average number of exchangeable shares of Nabors Exchangeco, respectively: 290.0 million and .2
million shares for the year ended December 31, 2006; 311.7 million and .4 million shares for
the year ended December 31, 2005; and 297.3 million and .6 million shares for the year ended
December 31, 2004. The exchangeable shares of Nabors Exchangeco
are exchangeable for Nabors'
common shares on a one-for-one basis, and have essentially identical rights as Nabors
Industries Ltd. common shares, including but not limited to voting rights and the right to
receive dividends, if any. |
For all periods presented, the computation of diluted earnings per share excludes outstanding
stock options and warrants with exercise prices greater than the average market price of Nabors
common shares, because the inclusion of such options and warrants would be anti-dilutive. The
number of options and warrants that were excluded from diluted earnings per share that would
potentially dilute earnings per share in the future were 2,995,447 shares during 2006, 761,378
shares during 2005 and 13,902,474 shares during 2004. In any period during which the average market
price of Nabors common shares exceeds the exercise prices of these stock options and warrants,
such stock options and warrants will be included in our diluted earnings per share computation
using the treasury stock method of accounting. Restricted stock will similarly be included in our
diluted earnings per share computation using the treasury stock method of accounting in any period
where the amount of restricted stock exceeds the number of shares assumed repurchased in those
periods based upon future unearned compensation.
16. |
|
SUPPLEMENTAL BALANCE SHEET, INCOME STATEMENT AND CASH FLOW
INFORMATION |
Accounts receivable is net of an allowance for doubtful accounts of $14.9 million and $11.4
million as of December 31, 2006 and 2005, respectively.
Accrued liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
Accrued compensation |
|
$ |
136,276 |
|
|
$ |
88,071 |
|
Deferred revenue |
|
|
65,747 |
|
|
|
19,542 |
|
Workers compensation liabilities |
|
|
28,032 |
|
|
|
37,458 |
|
Interest payable |
|
|
13,024 |
|
|
|
9,728 |
|
Litigation reserves |
|
|
4,536 |
|
|
|
30,182 |
(1) |
Other accrued liabilities |
|
|
47,343 |
|
|
|
39,355 |
|
|
|
|
|
|
|
|
|
|
$ |
294,958 |
|
|
$ |
224,336 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount primarily relates to an interim judgment received against us in the amount of
$25.6 million related to a class-action arbitration hearing regarding compensation issues
brought on behalf of field employees for our well-servicing unit operations in California
(Note 14). |
Investment income includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Interest income |
|
$ |
54,606 |
|
|
$ |
41,415 |
|
|
$ |
22,572 |
|
Gains on marketable and
non-marketable securities, net |
|
|
46,260 |
|
|
|
43,007 |
|
|
|
20,638 |
|
Dividend and other investment
income |
|
|
1,141 |
|
|
|
1,008 |
|
|
|
6,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,007 |
|
|
$ |
85,430 |
|
|
$ |
50,064 |
|
|
|
|
|
|
|
|
|
|
|
81
Losses (gains) on sales of long-lived assets, impairment charges and other expense (income),
net includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Losses (gains) on sales,
retirements and involuntary
conversions of long-lived assets |
|
$ |
21,579 |
(3) |
|
|
18,831 |
(1) |
|
$ |
874 |
|
Litigation reserves |
|
|
2,217 |
|
|
|
27,195 |
(2) |
|
|
(1,601 |
) |
Foreign currency transaction
losses
(gains) |
|
|
380 |
|
|
|
465 |
|
|
|
(755 |
) |
(Gains) losses on derivative
instruments |
|
|
(1,361 |
) |
|
|
(1,078 |
) |
|
|
(2,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2,058 |
|
|
|
1,027 |
|
|
|
(784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,873 |
|
|
$ |
46,440 |
|
|
$ |
(4,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount includes involuntary conversion losses recorded as a result of Hurricanes Katrina
and Rita during the third quarter of 2005 of approximately $7.8 million, net of expected
insurance proceeds. |
|
(2) |
|
This amount primarily relates to an interim judgment received against us in the amount of $25.6
million related to a class-action arbitration hearing regarding compensation issues brought on
behalf of field employees for our well-servicing unit operations in California (Note 14). |
|
(3) |
|
This amount includes $12.4 million in impairment charges
related to asset retirements during 2006. There were no asset
impairments recorded during 2005 and 2004. |
Supplemental cash flow information for the years ended December 31, 2006, 2005 and 2004 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash paid for income taxes |
|
$ |
157,209 |
|
|
$ |
25,480 |
|
|
$ |
29,306 |
|
Cash paid for interest, net of capitalized interest |
|
|
28,605 |
|
|
|
28,507 |
|
|
|
27,899 |
|
Acquisitions of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
|
79,070 |
|
|
|
38,682 |
|
|
|
|
|
Goodwill |
|
|
20,815 |
|
|
|
9,554 |
|
|
|
|
|
Liabilities assumed or created |
|
|
(17,293 |
) |
|
|
(2,035 |
) |
|
|
|
|
Common stock of acquired company previously owned |
|
|
|
|
|
|
|
|
|
|
|
|
Equity consideration issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions of businesses |
|
|
82,592 |
|
|
|
46,201 |
|
|
|
|
|
Cash acquired in acquisitions of businesses |
|
|
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions of businesses, net |
|
$ |
82,407 |
|
|
$ |
46,201 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
17. |
|
UNAUDITED QUARTERLY FINANCIAL INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
(In thousands, except |
|
Quarter Ended |
per share amounts) |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
Operating revenues and
Earnings from
unconsolidated
affiliates (1) |
|
$ |
1,168,325 |
|
|
$ |
1,127,370 |
|
|
$ |
1,250,184 |
|
|
$ |
1,294,828 |
|
Net income |
|
|
256,763 |
|
|
|
233,433 |
|
|
|
292,751 |
|
|
|
237,789 |
(3) |
|
Earnings per share: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.82 |
|
|
$ |
.79 |
|
|
$ |
1.05 |
|
|
$ |
.86 |
|
Diluted |
|
$ |
.79 |
|
|
$ |
.77 |
|
|
$ |
1.02 |
|
|
$ |
.84 |
(3) |
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
(In thousands, except |
|
Quarter Ended |
per share amounts) |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
Operating revenues and
Earnings from
unconsolidated
affiliates (4) |
|
$ |
785,731 |
|
|
$ |
770,541 |
|
|
$ |
893,345 |
|
|
$ |
1,015,962 |
|
Net income |
|
|
127,414 |
|
|
|
131,805 |
|
|
|
178,857 |
|
|
|
210,619 |
|
Earnings per share: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.42 |
|
|
$ |
.42 |
|
|
$ |
.57 |
|
|
$ |
.67 |
|
Diluted |
|
$ |
.40 |
|
|
$ |
.41 |
|
|
$ |
.55 |
|
|
$ |
.64 |
|
|
|
|
(1) |
|
Includes earnings (losses) from unconsolidated
affiliates, net, accounted for by the equity
method, of $4.4 million, $9.4 million, $5.7 million and $1.1 million, respectively. |
|
|
(2) |
|
Earnings per share is computed independently for each of the quarters presented. Therefore,
the sum of the quarterly earnings per share may not equal the total computed for the year. |
|
|
(3) |
|
Includes non-cash compensation expense recorded for stock
options and restricted stock of $51.6 million on a pre-tax
basis, $38.3 million net of tax or $.14 per diluted share
in the fourth quarter of 2006.
See Note 3. |
|
|
(4) |
|
Includes earnings (losses) from unconsolidated
affiliates, net, accounted for by the equity
method, of $2.0 million, $5.2 million, $.1 million and $(1.6) million, respectively. |
As of December 31, 2006, we operate our business out of 14 operating segments. Our six
Contract Drilling operating segments are engaged in drilling, workover and well-servicing
operations, on land and offshore, and represent reportable segments. These operating segments
consist of our Alaska, U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, U.S. Offshore, Canada
and International business units. Our oil and gas operating segment, Ramshorn Investments, Inc.,
is engaged in the exploration for, development of and production of oil and gas and is included in
our Oil and Gas reportable segment. Our Other Operating Segments, consisting of Canrig Drilling
Technology Ltd., Epoch Well Services, Inc., Peak Oilfield Service Company, Peak USA Energy
Services, Ltd., Ryan Energy Technologies, Sea Mar, a division of Pool Well Services Co., and Nabors
Blue Sky Ltd. (formerly 1183011 Alberta Ltd.), are engaged in the manufacturing of top drives,
manufacturing of drilling instrumentation systems, construction and logistics services, trucking
and logistics services, manufacturing and marketing of directional drilling and rig instrumentation
systems, directional drilling, rig instrumentation and data collection services, marine
transportation and supply services, and heliportable well services, respectively. These Other
Operating Segments do not meet the criteria included in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information for disclosure, individually or in the aggregate, as
reportable segments.
The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies (Note 2). Inter-segment sales are recorded at cost or cost plus a
profit margin. We evaluate the performance of our segments based on adjusted income derived from
operating activities.
The following table sets forth financial information with respect to our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating revenues and earnings
from unconsolidated affiliates: |
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
1,890,302 |
|
|
$ |
1,306,963 |
|
|
$ |
748,999 |
|
U.S. Land Well-servicing |
|
|
704,189 |
|
|
|
491,704 |
|
|
|
360,010 |
|
U.S. Offshore |
|
|
221,676 |
|
|
|
158,888 |
|
|
|
132,778 |
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Alaska |
|
|
110,718 |
|
|
|
85,768 |
|
|
|
83,835 |
|
Canada |
|
|
686,889 |
|
|
|
553,537 |
|
|
|
426,675 |
|
International |
|
|
746,460 |
|
|
|
552,656 |
|
|
|
444,289 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling (1) |
|
|
4,360,234 |
|
|
|
3,149,516 |
|
|
|
2,196,586 |
|
Oil and Gas |
|
|
59,431 |
|
|
|
62,913 |
|
|
|
65,303 |
|
Other Operating Segments (2) |
|
|
626,840 |
|
|
|
355,278 |
|
|
|
205,615 |
|
Other reconciling items (3) |
|
|
(205,798 |
) |
|
|
(102,128 |
) |
|
|
(69,416 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,840,707 |
|
|
$ |
3,465,579 |
|
|
$ |
2,398,088 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, and
depletion: |
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
106,399 |
|
|
$ |
90,979 |
|
|
$ |
77,498 |
|
U.S. Land Well-servicing |
|
|
43,217 |
|
|
|
28,065 |
|
|
|
21,940 |
|
U.S. Offshore |
|
|
31,253 |
|
|
|
24,272 |
|
|
|
21,650 |
|
Alaska |
|
|
13,012 |
|
|
|
12,550 |
|
|
|
11,954 |
|
Canada |
|
|
54,924 |
|
|
|
46,384 |
|
|
|
36,802 |
|
International |
|
|
95,045 |
|
|
|
71,035 |
|
|
|
62,776 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling |
|
|
343,850 |
|
|
|
273,285 |
|
|
|
232,620 |
|
Oil and Gas |
|
|
38,580 |
|
|
|
46,894 |
|
|
|
45,460 |
|
Other Operating Segments |
|
|
31,303 |
|
|
|
20,440 |
|
|
|
22,945 |
|
Other reconciling items (3) |
|
|
(4,026 |
) |
|
|
(2,087 |
) |
|
|
(626 |
) |
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization,
and depletion |
|
$ |
409,707 |
|
|
$ |
338,532 |
|
|
$ |
300,399 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted income (loss) derived from
operating activities: (4) |
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
821,821 |
|
|
$ |
464,570 |
|
|
$ |
93,573 |
|
U.S. Land Well-servicing |
|
|
199,944 |
|
|
|
107,728 |
|
|
|
57,712 |
|
U.S. Offshore |
|
|
65,328 |
|
|
|
38,783 |
|
|
|
20,611 |
|
Alaska |
|
|
17,542 |
|
|
|
16,608 |
|
|
|
16,052 |
|
Canada |
|
|
185,117 |
|
|
|
136,368 |
|
|
|
91,558 |
|
International |
|
|
208,705 |
|
|
|
135,588 |
|
|
|
89,211 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling |
|
|
1,498,457 |
|
|
|
899,645 |
|
|
|
368,717 |
|
Oil and Gas |
|
|
4,065 |
|
|
|
10,194 |
|
|
|
13,736 |
|
Other Operating Segments (2) |
|
|
74,095 |
|
|
|
34,966 |
|
|
|
(5,470 |
) |
|
|
|
|
|
|
|
|
|
|
Total segment adjusted income derived
from operating activities |
|
|
1,576,617 |
|
|
|
944,805 |
|
|
|
376,983 |
|
Other reconciling items (5) |
|
|
(136,271 |
) |
|
|
(64,998 |
) |
|
|
(47,331 |
) |
Interest expense |
|
|
(46,561 |
) |
|
|
(44,847 |
) |
|
|
(48,507 |
) |
Investment income |
|
|
102,007 |
|
|
|
85,430 |
|
|
|
50,064 |
|
Gains (losses) on sales of long-lived
assets,
impairment charges and other income
(expense), net |
|
|
(24,873 |
) |
|
|
(46,440 |
) |
|
|
4,629 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,470,919 |
|
|
$ |
873,950 |
|
|
$ |
335,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Capital expenditures and acquisitions
of businesses: (6) |
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
726,171 |
|
|
$ |
357,441 |
|
|
$ |
155,612 |
|
U.S. Land Well-servicing |
|
|
224,812 |
|
|
|
113,910 |
|
|
|
35,335 |
|
U.S. Offshore |
|
|
98,618 |
|
|
|
22,218 |
|
|
|
46,622 |
|
Alaska |
|
|
27,145 |
|
|
|
5,364 |
|
|
|
4,293 |
|
Canada |
|
|
222,727 |
|
|
|
112,415 |
|
|
|
76,635 |
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
International |
|
|
382,911 |
|
|
|
315,199 |
|
|
|
161,115 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling |
|
|
1,682,384 |
|
|
|
926,547 |
|
|
|
479,612 |
|
Oil and Gas |
|
|
155,681 |
|
|
|
59,263 |
|
|
|
55,303 |
|
Other Operating Segments |
|
|
146,895 |
|
|
|
23,687 |
|
|
|
13,824 |
|
Other reconciling items (5) |
|
|
13,011 |
|
|
|
(6,228 |
) |
|
|
(4,310 |
) |
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
1,997,971 |
|
|
$ |
1,003,269 |
|
|
$ |
544,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling: (7) |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Lower 48 Land Drilling |
|
$ |
2,210,070 |
|
|
$ |
1,513,618 |
|
|
$ |
1,125,812 |
|
U.S. Land Well-servicing |
|
|
597,082 |
|
|
|
389,002 |
|
|
|
274,785 |
|
U.S. Offshore |
|
|
456,889 |
|
|
|
366,354 |
|
|
|
412,493 |
|
Alaska |
|
|
221,927 |
|
|
|
202,315 |
|
|
|
206,142 |
|
Canada |
|
|
1,059,243 |
|
|
|
1,109,627 |
|
|
|
946,362 |
|
International |
|
|
2,006,941 |
|
|
|
1,436,234 |
|
|
|
1,127,185 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Contract Drilling |
|
|
6,552,152 |
|
|
|
5,017,150 |
|
|
|
4,092,779 |
|
Oil and Gas |
|
|
328,114 |
|
|
|
127,834 |
|
|
|
93,169 |
|
Other Operating Segments (8) |
|
|
638,600 |
|
|
|
387,422 |
|
|
|
325,950 |
|
Other reconciling items (5) |
|
|
1,623,437 |
|
|
|
1,698,001 |
|
|
|
1,350,711 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,142,303 |
|
|
$ |
7,230,407 |
|
|
$ |
5,862,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity
method, of $4.0 million, $(1.3) million and $1.6 million for the years ended December 31,
2006, 2005 and 2004, respectively. |
|
(2) |
|
Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity
method, of $16.5 million, $7.0 million and $2.5 million for the years ended December 31, 2006,
2005 and 2004, respectively. |
|
(3) |
|
Represents the elimination of inter-segment transactions. |
|
(4) |
|
Adjusted income (loss) derived from operating activities is computed by: subtracting direct
costs, general and administrative expenses, and depreciation and amortization, and depletion
expense from operating revenues and then adding earnings from unconsolidated affiliates. Such
amounts should not be used as a substitute to those amounts reported under GAAP. However,
management evaluates the performance of our business units and the consolidated company based
on several criteria, including adjusted income (loss) derived from operating activities,
because it believes that this financial measure is an accurate reflection of the ongoing
profitability of our company. A reconciliation of this non-GAAP measure to income before
income taxes, which is a GAAP measure, is provided within the above table. |
|
(5) |
|
Represents the elimination of inter-segment transactions and unallocated corporate expenses,
assets and capital expenditures. |
|
(6) |
|
Includes the portion of the purchase price of acquisitions allocated to fixed assets and
goodwill based on their fair market value. |
|
(7) |
|
Includes $39.6 million, $35.3 million and $35.2 million of investments in unconsolidated
affiliates accounted for by the equity method as of December 31, 2006, 2005 and 2004,
respectively. |
|
(8) |
|
Includes $58.5 million, $35.9 million and $31.9 million of investments in unconsolidated
affiliates accounted for by the equity method as of December 31, 2006, 2005 and 2004,
respectively. |
The following table sets forth financial information with respect to Nabors operations by
geographic area:
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(In thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating revenues and earnings from
unconsolidated affiliates: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
3,254,172 |
|
|
$ |
2,296,050 |
|
|
$ |
1,505,082 |
|
Foreign |
|
|
1,586,535 |
|
|
|
1,169,529 |
|
|
|
893,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,840,707 |
|
|
$ |
3,465,579 |
|
|
$ |
2,398,088 |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
3,211,023 |
|
|
$ |
2,131,598 |
|
|
$ |
1,854,674 |
|
Foreign |
|
|
2,199,078 |
|
|
|
1,755,326 |
|
|
|
1,420,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,410,101 |
|
|
$ |
3,886,924 |
|
|
$ |
3,275,495 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
165,264 |
|
|
$ |
165,211 |
|
|
$ |
155,656 |
|
Foreign |
|
|
197,005 |
|
|
|
176,728 |
|
|
|
171,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
362,269 |
|
|
$ |
341,939 |
|
|
$ |
327,225 |
|
|
|
|
|
|
|
|
|
|
|
19. |
|
CONDENSED CONSOLIDATING FINANCIAL INFORMATION |
Nabors has fully and unconditionally guaranteed all of the issued public debt securities of
Nabors Delaware, and Nabors and Nabors Delaware have fully and unconditionally guaranteed the $225
million 4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect subsidiary.
The following condensed consolidating financial information is included so that separate
financial statements of Nabors Delaware and Nabors Holdings are not required to be filed with the
SEC. The condensed consolidating financial statements present investments in both consolidated and
unconsolidated affiliates using the equity method of accounting.
The following condensed consolidating financial information presents: condensed consolidating
balance sheets as of December 31, 2006 and 2005, statements of income and cash flows for each of
the three years in the period ended December 31, 2006 of (a) Nabors, parent/guarantor, (b) Nabors
Delaware, issuer of public debt securities guaranteed by Nabors and guarantor of the $225 million
4.875% senior notes issued by Nabors Holdings, (c) Nabors Holdings, issuer of the $225 million
4.875% senior notes, (d) the non-guarantor subsidiaries, (e) consolidating adjustments necessary
to consolidate Nabors and its subsidiaries and (f) Nabors on a consolidated basis.
86
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Nabors |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Nabors |
|
|
Delaware |
|
|
Nabors |
|
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
(Parent/ |
|
|
(Issuer/ |
|
|
Holdings |
|
|
(Non- |
|
|
Consolidating |
|
|
Consolidated |
|
(In thousands) |
|
Guarantor) |
|
|
Guarantor) |
|
|
(Issuer) |
|
|
Guarantors) |
|
|
Adjustments |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,874 |
|
|
$ |
2,394 |
|
|
$ |
8 |
|
|
$ |
683,273 |
|
|
$ |
|
|
|
$ |
700,549 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439,467 |
|
|
|
|
|
|
|
439,467 |
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,109,738 |
|
|
|
|
|
|
|
1,109,738 |
|
Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|