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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, 2002
COMMISSION FILE NUMBER: 000-49887
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NABORS INDUSTRIES LTD.
INCORPORATED IN BERMUDA
2ND FLOOR, INTERNATIONAL TRADING CENTRE
WARRENS
P.O. BOX 905E
ST. MICHAEL, BARBADOS
(246) 421-9471
98-0363970
(I.R.S. Employer Identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Shares, $.001 par value per share The American Stock Exchange, LLC
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this Form 10-K, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [X] NO [ ]
The aggregate market value of the 124,063,360 common shares 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 28, 2002, of $35.30 per share as reported on the American Stock
Exchange, was $4,379,436,608. 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 March
14, 2003 was 145,234,077.
DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)
Specified portions of the 2002 Annual Report to Stockholders (Parts I,
II and IV)
Specified portions of the 2003 Notice of Annual Meeting of Stockholders and
Proxy Statement (Part III)
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NABORS INDUSTRIES LTD.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
Item 1. Business 1
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I. Introduction 1
II. Description of Business 2
A. Our Fleet of Rigs 2
B. Types of Drilling Contracts 4
C. Well Servicing and Workover Services 5
D. Manufacturing and Logistics Services 6
E. Our Employees 7
F. Seasonality 7
G. Research and Development 7
III. Customers; Markets; Industry Conditions and Trends 8
A. Contract Drilling 8
B. Manufacturing and Logistics 9
C. Industry Conditions 10
D. Competitive Conditions 11
IV. Recent Developments 12
A. Operating Results 12
B. Corporate Reorganization 13
C. Corporate Governance 13
D. Acquisitions 13
V. Our Business Strategy 14
VI. Risk Factors 17
VII. Acquisitions and Divestitures 21
VIII. Environmental Compliance 23
IX. Available Information 23
Item 2. Properties 23
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Item 3. Legal Proceedings 24
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Item 4. Submission of Matters to a Vote of Security Holders 24
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 24
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I. Market and Stock Prices 24
II. Dividend Policy 29
III. Shareholder Matters 30
Item 6. Selected Financial Data 30
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of
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Operations 30
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
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Item 8. Financial Statements and Supplementary Data 30
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
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Disclosure 30
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PART III
Item 10. Directors and Executive Officers of the Registrant 30
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Item 11. Executive Compensation 31
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Item 12. Security Ownership of Certain Beneficial Owners and Management 31
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Item 13. Certain Relationships and Related Transactions 31
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Item 14 Controls and Procedures 31
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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
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FORWARD-LOOKING STATEMENTS
We often discuss expectations regarding our markets, demand for our products
and services, and our future performance in our annual and quarterly reports,
press releases, and other written and oral statements. Such statements,
including statements in this document and the documents incorporated by
reference that relate to matters that are not historical facts are
"forward-looking statements" within the meaning of the safe harbor provisions
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These "forward-looking statements" are based on our
analysis of currently available competitive, financial and economic data and
our operating plans. They are inherently uncertain and investors must recognize
that events and actual results could turn out to be significantly different
from our expectations.
You should consider the following key factors when evaluating these forward
looking statements:
o fluctuations in worldwide prices and demand for natural gas and oil;
o fluctuations in levels of natural gas and crude oil exploration and
development activities;
o fluctuations in the demand for our services;
o the existence of competitors, technological changes and developments
in the oilfield services industry;
o the existence of operating risks inherent in the oilfield services
industry;
o the existence of regulatory and legislative uncertainties;
o the possibility of changes in tax laws;
o the possibility of political instability, war or acts of terrorism in
any of the countries in which we do business; and
o 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 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 1 -
BUSINESS - RISK FACTORS".
Unless the context requires otherwise, references in this Annual Report on Form
10-K to "Nabors," "we," "us," or "our" refer to Nabors Industries Ltd. and,
where the context requires, includes subsidiaries.
PART I
Please see the Glossary of Drilling Terms included as Annex A to this document
for a brief explanation of drilling terms used throughout this document.
ITEM 1. BUSINESS
I. INTRODUCTION.
Nabors Industries Ltd. became the publicly traded parent company of the Nabors
group of companies, effective June 24, 2002, pursuant to the corporate
reorganization described below in the section entitled "Recent Developments -
Corporate Reorganization." Our common shares are traded on the American Stock
Exchange under the symbol "NBR."
We, together with our subsidiaries, are the largest land drilling contractor in
the world, with almost 600 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 and Africa. We are also one
of the largest land well-servicing and workover contractors in the United
States and Canada. We own over 900 land workover and well-servicing rigs in the
United
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States, and over 200 land workover and well-servicing rigs in Canada.
Nabors is a leading provider of offshore platform workover and drilling rigs
and owns 43 platform, 16 jack-up and three barge rigs in the Gulf of Mexico and
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.
To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including oilfield management,
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services. Our land transportation and hauling fleet includes approximately 240
rig and oilfield equipment hauling tractor-trailers and a number of cranes,
loaders and light-duty vehicles. We maintain over 290 fluid hauling trucks,
approximately 700 fluid storage tanks, eight salt water disposal wells and
other auxiliary equipment used in domestic drilling, workover and
well-servicing operations. In addition, we own a fleet of 30 marine
transportation and support vessels, primarily in the Gulf of Mexico, which
provide transportation of drilling materials, supplies and crews for offshore
operations. We manufacture and lease or sell top drives for a broad range of
drilling applications, directional drilling systems, rig instrumentation and
data collection equipment, and rig reporting software.
Our overall business is conducted through two major segments: (1) Contract
Drilling and (2) Manufacturing and Logistics. Our Contract Drilling segment
includes our drilling, workover and well-servicing operations, on land and
offshore. Our Manufacturing and Logistics segment includes our marine
transportation and supply services, top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and logistics
operations.
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 2nd Fl. International Trading Centre, Warrens, St.
Michael, Barbados. Our phone number at our principal executive offices is
(246) 421-9471.
II. DESCRIPTION OF BUSINESS.
A. OUR FLEET OF RIGS.
Our rigs include land-based rigs and offshore platform, jack-up and barge rigs.
Drilling rigs come in a wide variety of sizes and capabilities, and may include
specialized equipment, such as top drives, or have design features or
modifications for specialized drilling conditions, such as arctic drilling. The
rigs are classified by their depth capabilities and by whether their power
systems are mechanical or electric. They generally are powered by two to four
large diesel engines. An electric rig differs from a mechanical rig in that it
converts the diesel power into electricity to power the rig. This gives the rig
operator the ability to deliver the same amount of torque at high and low
speeds, permitting more finite control of the primary rig components, including
the drawworks and mud pumps. We believe this electric capability enhances
operating efficiency and safety, reduces drilling time and saves the customer
money, particularly in deeper applications. Because of these advantages, diesel
electric rigs, known in the industry as silicon-controlled rectifier or SCR
rigs, generally are preferred by our customers, and often enjoy higher
utilization and dayrates than similarly sized mechanical rigs.
Nabors' various types of rigs perform drilling, workover (major overhaul or
remediation of an existing wellbore and/or plugging and redrilling the well)
and well-servicing (routine repair and maintenance of mechanical problems). A
drilling rig can perform drilling, workover and well-servicing services,
depending on its configuration. However, primarily due to cost and size
considerations, a land drilling rig is rarely used for well-servicing or
workover applications. Instead, smaller, mobile well-servicing and workover
rigs are used. Offshore, a drilling rig is occasionally used for workover and
well-servicing applications, particularly if it is on location, because it is
more cost-effective to use a rig in place rather than bringing in an
alternative, special purpose rig. Each rig is rated for operations up to a
specific depth. The basic types of rigs operated by Nabors are described below.
o Land Rigs. A land-based drilling rig generally consists of engines, a
drawworks (which hoists and lowers the drill string in and out of the
well), a mast (or derrick), pumps to circulate the drilling fluid (mud)
under various pressures, blowout preventers, drill string and related
equipment. The engines power the different pieces of
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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. Typically,
land-based drilling, workover and well-servicing rigs can be readily
moved between well sites and between geographic areas of operations.
o Platform Rigs. Platform rigs provide offshore workover, drilling and
re-entry services. Our platform rigs have drilling and/or well-servicing
or workover equipment and machinery arranged in modular packages that are
transported to, and assembled and installed on, fixed offshore platforms
owned by the customer. Fixed offshore platforms are steel tower-like
structures that either stand on the ocean floor or are moored floating
structures. The top portion, or platform, sits above the water level and
provides the foundation upon which the platform rig is placed. Our fleet
of platform rigs includes:
o Minimum space, modular platform workover rigs with engines rated
750 horsepower or below, which include the 500 horsepower
Sundowner(R) series. These platform workover rigs are
self-elevating (that is, they can be off-loaded with the platform
crane, rather than requiring a separate barge and crane to
assemble), and are designed to fit the geometry of nearly any
producing platform without major modifications to either the rig
or the platform.
o Minimum space, modular platform workover and re-drilling rigs with
engines rated at horsepowers greater than 750, which include the
1000 horsepower Super Sundowner(R) rigs. These rigs, which are
enhanced versions of the modular platform workover rigs, have more
powerful mud pump systems and greater hook load capacities. This
enables the rigs to be used in more rigorous workover, re-entry,
side-tracking or horizontal drilling operations.
o Minimum Area, Self-Elevating, or MASE(R), drilling rigs are our
latest generation of modular platform rigs. They represent a
smaller and lighter, full-scale drilling rig patterned after the
Super Sundowner(R) but have higher horsepower, ranging from 1500
hp to 3000 hp.
o Modular Offshore Dynamic Series (MODS) platform rigs ranging from
1000 hp to 1500 hp are our newest addition to the modular rig
fleet. They have been reengineered to be lighter weight, and
dynamically capable to meet motion criteria of deepwater SPAR and
TLP platforms.
o API (American Petroleum Institute)-style drilling rigs have
similar capabilities to the MASE(R) rigs, but generally come in
larger modules. Unlike our other platform rigs, API-style rigs are
not self-elevating, and require a separate barge crane to load
onto, and off of, the platform.
o We also own several land rigs modified for offshore work for
drilling on mudslide and selected conventional offshore platforms.
These rigs generally are self-elevating and modular.
o 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. Independent leg rigs are better suited for
harsher or uneven seabed conditions and drilling locations where subsea
pipelines are present. 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
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drilling at depths between 8 feet and 150 to 250 feet. The water depth
limit of a particular rig is determined by the length of the rig's legs
and the operating environment. Moving a rig from one drill site to
another involves lowering the hull down into the water until it is
afloat and then jacking up its legs with the hull floating. The rig is
then towed to the new drilling site.
o 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 eight feet.
Additional information on the number and location of our rigs can be found
below under the caption "Business - Markets".
B. TYPES OF DRILLING CONTRACTS.
Our rigs are employed under individual contracts which extend either over a
stated period of time or the time required to drill a well or a stated number
of wells to a specified depth. On land in the U.S. Lower 48 states and Canada,
we typically contract on a single well basis, with extensions subject to mutual
agreement on pricing and other significant terms. 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 well-to-well contracts are
subject to termination by the customer on short notice, but some can be firm
for a number of wells or a period of time, and may provide for early
termination compensation in certain circumstances. The contract terms and rates
may differ depending on a variety of factors, including competitive conditions,
the geographical area, the geological formation to be drilled, the equipment
and services to be supplied, the on-site drilling conditions and the
anticipated duration of the work to be performed.
Drilling contracts provide for compensation on a daywork, footage or turnkey
basis. In each case, we provide the rig and crews. The principal differences
among the types of contracts are set forth below.
o Daywork Contracts. A daywork contract generally provides for a basic rate
per day when drilling (the dayrate) and for lower rates when the rig is
moving, or when drilling operations are interrupted or restricted by
equipment breakdowns, actions of the customer or adverse weather
conditions or other conditions beyond our control. In addition, daywork
contracts may provide for a lump sum fee for the mobilization and
demobilization of the rig, which in most cases approximates our incurred
costs.
o Footage Contracts. Under footage contracts we typically run casing and
provide drill bits. We receive payment on the basis of a rate per foot
drilled. The customer continues to provide drilling mud, casing,
cementing and well design expertise. If we drill the well in less time
than was estimated, then we have the opportunity to improve our margins
over those that would be attainable under a daywork contract to the
same depth. If, however, we take longer to drill the well than we
estimated, our margins will be lower. In footage contracts we bear the
cost of the services and supplies that we provide until the well has
been drilled to the agreed depth. Such contracts therefore require us
to make significant up-front working capital commitments prior to
receiving payment. Footage contracts generally contain greater risks
for a contractor such as Nabors than daywork contracts, but fewer risks
than turnkey contracts. Under footage contracts, the contractor assumes
certain risks associated with loss of hole from fire, blowout and other
drilling risks. However, footage contracts generally protect the
contractor from such risks when unexpected drilling conditions such as
abnormal pressure, impenetrable geologic formation or loss circulation
zones are present.
o Turnkey Contracts. In turnkey contracts, we drill a well to a specified
depth for a fixed price regardless of the time required or the problems
encountered in drilling the well. On a turnkey well, we provide
technical expertise and engineering services, as well as most of the
equipment required to complete the well, and we are compensated only
when the agreed scope of work has been satisfied. In addition, we often
subcontract for related services and we manage the drilling process. In
turnkey contracts, we bear the cost of performing the drilling services
until the well has been drilled, and accordingly, such contracts
require us to make significant
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working capital commitments. We also generally agree to furnish
services such as testing, coring and casing the hole and other
services, which are not normally provided by a drilling contractor
working under a daywork contract. If the well is not completed to the
specified depth, we may not receive the turnkey price. Turnkey
contracts generally involve a higher degree of risk to us than daywork
and footage contracts because we assume greater risks (including risk
of blowout, loss of hole, stuck drill pipe, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors'
services, supplies, cost escalation and personnel) and bear the cost of
unanticipated downhole problems and price escalation. Generally,
however, our agreements limit catastrophic risks associated with
blowout, redrill and pollution to a specific sum. The customer assumes
the risk of losses in excess of the agreed level. If the well is
successfully drilled without undue delay or complication, our margins
under these types of contracts are usually greater than under daywork
and footage contracts.
During 2002 substantially all of our drilling contracts were on a daywork
basis. Our preferred strategy is to operate drilling rigs under daywork
contracts. However, we continually analyze market conditions, customer
requirements, rig demand and the experience of our personnel to determine how
to contract our fleet most profitably. In addition, we may seek alternative
accommodations with certain customers as a means of ensuring long-term drilling
commitments and healthy customer relations, including, potentially, entering
into footage or turnkey contracts on occasion. Because of this, there can be no
assurance that we will not suffer a loss that is not insured as a result of
entering into such higher risk contracts, and any such uninsured loss could
have a material adverse effect on our financial position, cash flows and
results of operations.
C. WELL SERVICING AND WORKOVER SERVICES.
Industry sources estimate that there are approximately 914,000 producing oil
wells in the world today, of which approximately 558,000 are in the United
States. In addition, there are approximately 327,000 producing natural gas
wells in the United States and a large number in the rest of the world (Penn
Well; Spears and Associates). 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. The extent and
type of services we provide on producing wells is dependent upon many
variables. The following is a summary of our well-servicing and workover
services.
o 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. Well-servicing rigs
have the same basic components as drilling rigs (that is, a derrick, a
hoisting mechanism and an engine). Many of these rigs also have pumps
and tanks that can be used for circulating fluids into and out of the
well. Maintenance jobs 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.
o Workover Services. In addition to needing periodic maintenance,
producing oil and natural gas wells occasionally require major repairs
or modifications, called "workovers." Workovers may be needed, for
example, to remedy equipment failures, plug back the bottom of a well
to reduce the amount of water being produced with the oil and natural
gas, clean out and re-complete a well if production has declined,
repair leaks, or convert a producing well to an injection well for
secondary or enhanced recovery projects. These extensive workover
operations 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,
depending upon the particular type of workover operation. Most of
Nabors' well-servicing rigs are designed and can be equipped to handle
the more complex workover operations. A workover may last anywhere from
a few days to several weeks.
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o 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. Oil and gas production companies often
find it more efficient to move a larger and more expensive drilling rig
off location after an oil or natural gas well has been drilled and to
move in a specialized well-servicing rig to perform completion
operations. Our rigs often are used for this purpose. The completion
process may take a few days to several weeks.
o Production and Other Specialized Services. We provide other specialized
services that are required, or can be used effectively, in conjunction
with the previously described basic services. These services may
include provision of 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. On a limited basis we provide
conventional coil tubing services used primarily to clean out
wellbores. To complete the well life-cycle, we also provide plugging
services for wells from which the oil and natural gas has been depleted
or further production has become uneconomical.
D. MANUFACTURING AND LOGISTICS SERVICES.
Through various subsidiaries and joint ventures, Nabors provides additional
well-site services that comprise our manufacturing and logistics segment. These
services can be packaged with our contract drilling services or provided on a
stand-alone basis to operators or other contractors. They include top drive
sales and rentals, mudlogging services, rig instrumentation equipment rentals
and sales, rig reporting software, construction and maintenance services and
transportation services. Sales by these ancillary service providers to other
Nabors companies reduce our costs for similar third-party products and
services. These units also generate revenues through sales to third parties.
o Top Drives. Our Canrig drilling technologies subsidiary manufactures top
drives, which are installed on both onshore and offshore drilling rigs to
improve drilling efficiency. Rigs equipped with top drives enjoy more
finite control and directional orientation than rigs without, and can trip
drill string in and out of the well faster and more safely by handling
preassembled "doubles" and "triples" of pipe. Top drives also allow the
drill string to be simultaneously hoisted and rotated, which provides
better well control and reduces the incidence of stuck pipe, yielding time
and cost savings.
o Mudlogging, Rig Instrumentation and Software. Our EPOCH well services
subsidiary provides mudlogging services. Mudlogging involves the
analysis of exhausted drill cuttings to discern certain information
about the presence of hydrocarbons, rates of penetration and the nature
of the formation. EPOCH also offers rig instrumentation equipment,
including sensors, proprietary RIGWATCH(TM)software and computerized
equipment that monitors the real-time performance of a rig. In
addition, EPOCH specializes in daily reporting software for drilling
operations, including via the internet via mywells.com. Our Ryan Energy
Technology subsidiaries manufacture and sell directional drilling and
rig instrumentation and data collection services to oil and gas
exploration and service companies in the United States, Canada, and
Venezuela.
o Construction, Land Transportation and Related Services. 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 equipment to move
drilling rigs, water, other fluids and construction materials,
primarily on Alaska's North Slope and in the Cook Inlet region. The
partnership also provides construction and maintenance for ice roads,
pads, facilities, equipment, drill sites and pipelines. In addition,
the partnership provides tank cleaning services to oil customers along
the Trans-Alaska pipeline and in the Valdez area. Peak Oilfield
Services provides miscellaneous maintenance services for the Prudhoe
Bay Unit. Our Peak USA subsidiary provides similar hauling and
maintenance services for customers in the U.S. Lower 48. We also have
an investment in an arctic road and site construction company.
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o Offshore Support Services. Nabors' fleet of offshore support vessels
provides marine transportation of drilling materials, supplies and crews
for offshore rig operations and support for other offshore facilities. We
also provide offshore logistical support to drilling and workover
operations, pipe laying and other construction, production platforms and
geophysical operations.
We provide onshore transportation and support services through long-term
contracts or on a short-term demand basis. Long-term service contracts may be
negotiated or awarded by competitive bidding. Whether provided on a long-term
or short-term basis, equipment and labor usually are billed separately at
specified hourly rates. These hourly rates vary depending upon numerous
factors, including types of equipment and labor, and duration of the work.
Offshore support vessel operations are conducted throughout the year 24 hours a
day, seven days a week, under vessel charters, which may range from several
days to several years. Some reduction in vessel utilization and charter rates
may be experienced during winter months due to seasonal declines in offshore
activities. We are paid on a daily rate basis for vessel charters.
From time to time, we provide drilling engineering and integrated project
management services, ranging from well design and engineering expertise to site
preparation and road construction. We offer these services to help customers
eliminate or reduce management overhead which would otherwise be necessary to
supervise such services. Such services have not been significant in the past,
and are not expected to be significant in the near term.
E. OUR EMPLOYEES.
As of December 31, 2002, Nabors employed approximately 15,261 persons, of whom
approximately 2,231 were employed by unconsolidated affiliates. We believe our
relationship with our employees generally is good.
On October 18, 2000, the National Labor Relations Board confirmed the selection
of a collective bargaining representative at our Alaska drilling subsidiary.
The unit covers most non-supervisory drilling and related field personnel
working on or about our rigs within the State of Alaska. Negotiations with the
union commenced during 2000; an agreement was reached with representatives of
the union in December 2002; was submitted to the union membership for
ratification; and was rejected by the membership in the first quarter 2003. We
anticipate that the continuation of a collective bargaining unit at our Alaska
drilling subsidiary will not have any material adverse impact on the operations
of that entity or Nabors as a whole. During the first quarter 2003 the National
Labor Relations Board commenced a suit against Nabors asserting that a Nabors
subsidiary committed an unfair labor practice in failing to adequately bargain
with the collective bargaining representative in connection with a change in
Nabors' medical insurance program and that suit is ongoing. Nabors denies the
allegations, believes that it has meritorious defenses and further believes
that the outcome of any litigation regarding the dispute would not have a
material adverse effect upon Nabors.
Certain rig employees in Argentina and Australia are represented by collective
bargaining units.
F. 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. As our Canadian and Alaskan operations
become a more significant portion of our overall business, our overall
financial results should reflect the seasonal variations experienced in our
Canadian and Alaskan operations.
G. RESEARCH AND DEVELOPMENT.
Research and development does not constitute a material part of our overall
business. However, technology is of growing importance to our business and
management expects to maintain its competitive position technologically with
the internal development of technology or through strategic acquisitions.
Nabors' engineers have obtained new patents during the past year and have
patent applications pending for new technology associated with drilling
activities. Our patents generally cover designs for various types of oilfield
7
equipment and methods for conducting certain oilfield activities. We use some
of these designs and methods in the conduct of our business. The patents expire
at various times through the year 2019. We also have several trademarks and
service marks that we use in various aspects of our business. These include
Sundowner(R), MASE(R) TRU VU(R) and RIGWATCH(TM). While management believes
Nabors' patent and trademark rights are valuable, their expiration or loss
would not have a material adverse effect on our financial position or results
of operations. The costs associated with our research and development are not
material to Nabors.
III. CUSTOMERS; MARKETS; INDUSTRY CONDITIONS AND TRENDS.
Our customers include major oil and gas companies, foreign national oil and gas
companies and independent oil and gas companies. No customer accounted for in
excess of 10% of consolidated revenues in 2002 or in 2001.
Nabors operates in two primary business segments within the oilfield services
industry - contract drilling and manufacturing and logistics. Within these
segments, we conduct business in the following distinct markets or business
lines:
o Contract Drilling: We provide drilling, workover, and
well-servicing services on land and offshore in the U.S. Lower 48
states, Canada and Alaska and in international markets.
o Manufacturing and Logistics: We manufacture and lease or sell top
drives, drilling instrumentation systems, rig reporting software,
and provide drilling technology services domestically and
internationally; and provide construction, logistics services and
marine transportation and support services in Alaska and the U.S.
Lower 48 states.
Additional information regarding the geographic markets in which we operate and
our business segments can be found in Note 19 of the Notes to Consolidated
Financial Statements on pages 95 through 97 of our 2002 Annual Report and is
incorporated into this document by reference.
A. CONTRACT DRILLING.
1. U.S. LAND DRILLING. In Alaska, we market 15 arctic land
drilling, workover and well-servicing rigs on the North Slope, and 3 land
rigs and one platform rig in the Cook Inlet area of South Central Alaska.
Sixteen of these rigs are SCR rigs, and twelve are equipped with top drive
units. Fifteen are capable of performing drilling or workover operations to
depths of 15,000 feet or deeper.
All of the North Slope rigs are designed to operate in severe arctic conditions
and 14 employ wheel or track mounted systems engineered by Nabors to permit
efficient movement of the rigs from well to well and over ice or gravel roads.
Nine of these rigs are also partially or totally self-propelled to further
facilitate movement and maneuverability. Thirteen of the North Slope rigs have
been designed with spacing capability that allows them to move between reduced
well spacing on drilling pads without disrupting production. In addition, our
arctic rigs generally incorporate environmental protection features such as dry
mud and fluid containment systems.
We currently market approximately 290 drilling rigs in the U.S. Lower 48
market. Approximately 180 of our land drilling rigs in the U.S. Lower 48 states
are diesel electric rigs controlled by a computerized SCR system. Approximately
210 are capable of drilling to 15,000 feet or deeper. In addition, we own 62
portable top drives for use on our rigs, depending on customer requirements.
Nabors had approximately 94 land drilling rigs and 249 workover/well-servicing
rigs stacked in the U.S. Lower 48 states at December 31, 2002. During September
2000, we implemented a capital expenditure program to refurbish, recommission
and, in many cases, upgrade our stacked, domestic drilling fleet to meet an
increased demand for additional rigs. As part of this program, we
recommissioned 113 rigs and partially completed an additional 32 rigs for an
aggregate of approximately $230 million in capital expenditures. Because of
declining market conditions in the U.S. Lower 48 market, we terminated this
program in the fourth quarter of 2001. We will continue to evaluate the market
and may upgrade, refurbish or use the remaining stacked rigs for spare parts as
conditions warrant.
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2. U.S. LAND WELL-SERVICING. Our domestic land
well-servicing, workover and production services operation has locations in
many of the major oil and natural gas producing fields in the U.S. Lower 48
states. This operation currently provides services in eight states and is
divided into six separate geographic districts: California, West Texas, East
Texas, South Texas, Oklahoma, and the Rocky Mountains. We actively market
approximately 500 well-servicing rigs (including one land rig drilling on a
platform off the coast of California), in Texas, California, Oklahoma, New
Mexico, North Dakota, Montana, Utah and Louisiana.
3. U.S. OFFSHORE. Nabors currently performs domestic offshore
drilling and offshore workover and well-servicing through its subsidiaries. The
domestic offshore subsidiaries currently operate a fleet of 38 rigs, including
27 platform rigs (six Sundowner(R) rigs, three 700 hp or below rigs, two Super
Sundowner(R) rigs, three concentric tubing rigs, three greater than 750 hp rigs,
five self-elevating drilling rigs and five API-style platform drilling rigs),
eight jack-up workover rigs and three inland barge rigs. Ten of our platform
rigs are capable of operating at well depths of 20,000 feet. Over half of our
platform rigs are specifically designed for workover drilling.
Most of our domestic offshore fleet operates in the U.S. Gulf of Mexico. The
remaining rigs are platforms operating in offshore California and Alaska.
4. CANADA. We have a fleet of 81 drilling rigs in Canada.
Twenty-six rigs in the fleet are diesel electric SCR rigs, two are A/C
electric powered, 22 are equipped with top drives and 16 are capable of
drilling to 15,000 feet or deeper. Nabors also has a fleet of approximately 209
land well servicing / workover rigs in Canada. Many of the rigs in our Canadian
fleet are capable of working under arctic and sub-arctic conditions.
5. INTERNATIONAL. We conduct our international operations
primarily through Nabors Drilling International Limited and its subsidiaries.
Internationally, we provide drilling, workover and well-servicing services,
both onshore and offshore, with specialized rigs designed and fabricated to
meet various types of operating conditions. The International land group
actively markets approximately 67 land drilling rigs, 38 workover/well-servicing
rigs and 2 pulling units. Of these, over 42 are SCR rigs, 28 are equipped with
top drives and 31 are capable of drilling to depths of 15,000 feet or deeper. We
operate 18 of these rigs through a joint venture in Saudi Arabia (7 drilling and
11 workover/well-servicing rigs).
The International offshore group markets eight 1000 hp platform rigs, two 600
hp platform rigs, three 2000 hp platform rigs and seven jack-up rigs. Five of
the 1000 hp rigs and all the 2000 hp rigs are equipped with top drive units. We
have offshore rigs currently operating in Trinidad (one 2000 hp platform and
one jack-up), Brazil (one 1000 hp platform and one jack-up), Australia (one
1000 hp platform), Congo (one 1000 hp platform), Italy (one 1000 hp platform),
Mexico (three 1000 hp platform rigs, two 2000 hp platform rigs and one
jack-up), Malaysia (one 1000 hp platform rig), and the Middle East (four
jack-ups, of which one is owned by our Saudi joint venture). One 600 hp
platform rig is being mobilized to India and a second 600 hp platform rig is en
route to the Mediterranean.
Additional information regarding our rig fleet can be found on pages 28 through
31 of the 2002 Annual Report.
B. MANUFACTURING AND LOGISTICS.
We manufacture top drives at our Magnolia, Texas facility. We market our top
drives throughout the United States and Canada, and to various international
markets, to customers serving the oil and gas industry. In 2002 and 2001, 31%
and 71% of our top drive sales, respectively, were made to other Nabors
companies. We also rent top drives and provide top drive installation, repair
and maintenance services to our customers.
We manufacture our rig instrumentation systems and develop our rig reporting
and related software in Houston, Texas. We sell or lease these products to
customers within the oil and gas industry, domestically and abroad. We provide
mudlogging services within the U.S. Lower 48 states and Alaska. Substantial
portions of our sales are made to other Nabors companies.
9
We also provide site and road construction, rig transportation, fluid hauling
and related oilfield services in Alaska, principally through our Peak Oilfield
Services joint venture. In the U.S. Lower 48 states we provide rig
transportation and related services through our Peak USA Energy Services
subsidiary, primarily to our domestic onshore drilling operations.
Our offshore support vessels, which operate primarily in the Gulf of Mexico,
provide marine transportation of drilling materials, supplies and crews for
offshore rig operations and support for other offshore facilities. We also
provide offshore logistical support to drilling and workover operations,
pipe-laying and other construction, production platforms and geophysical
operations. Nabors markets 28 support vessels, including ten Super 200 platform
supply vessels, 12 conventional offshore supply vessels, six mini-supply
vessels, one oceanographic research vessel and one anchor handling tug supply
vessel. Our supply vessels are used as freight-carrying vessels for drill pipe,
tubing, casing, drilling mud and other equipment to drilling rigs and
production platforms. Lengths for our supply vessels range from 166 to 220
feet. Our mini-supply vessels are used primarily in support of well service and
production operations, such as moving offshore pipe, fluids and equipment for
offshore workovers. Mini-supply vessel lengths range from 130 to 145 feet. Our
research vessel, which is 175 feet in length, is used to carry equipment and
personnel necessary to perform oceanographic surveys. Our anchor-handling tug
supply vessel is used to tow rigs to offshore locations and position anchors of
floating drilling rigs and pipe-laying vessels. The vessel is 200 feet long,
with 6,140 horsepower, and can also be used as a supply vessel.
Nabors' domestic onshore well-servicing and workover operation also provides
production services consisting chiefly of fluid hauling and fluid storage tank
rental. The production services assets, located primarily in Texas, consist of
over 290 fluid hauling trucks and eight salt water disposal wells, which are
utilized for the transportation and disposal of drilling and used completion
fluids and salt water produced from operating wells, and approximately 700
fluid storage tanks, which are utilized for the storage of fluids used in the
fracturing of producing zones during the completion or workover of wells.
C. INDUSTRY CONDITIONS.
To a large degree, Nabors' businesses depend on the level of 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 and production activities by our customers and
could also affect materially our financial position, results of operations and
cash flows. See "Part I - Item 1 - Risk Factors - Fluctuations in oil and gas
prices could adversely affect drilling activity and Nabors' revenues, cash
flows and profitability."
The oil and gas industry has been subject to extreme volatility in recent years
because of significant changes in the demand, supply and pricing of natural gas
and oil. In 2000 the price of natural gas and oil improved substantially. The
primary contributing factors associated with these price increases were the
convergence of supply and demand for natural gas and oil brought about by
secular global economic growth and the increasing difficulty, expense and long
lead times involved in adding to supply. Rising demand and difficulty in
finding and developing additional supply brought the U.S. land rig market to
the point where the demand for rigs far exceeded supply. The same situation
existed, to a lesser extent, in Canada and U.S Offshore markets. This
high-demand, low-supply environment had a positive impact on our industry.
The tightening of the supply-demand balance continued during the first half of
2001 and along with a colder-than-normal winter provided a catalyst for a spike
in natural gas demand, which led to a rapid escalation in natural gas prices.
While high natural gas prices fueled a sharp increase in drilling utilization
and margins, they soon had an adverse effect on many elements of industrial
demand, particularly petrochemicals, and that portion of electric generation
that could utilize more economical fuels. Demand was also impacted by a general
contraction in the nation's economy beginning in the second half of 2001. These
factors led to downward pressure on natural gas prices, leading to a sharp
reduction in drilling activity.
Natural gas and oil prices began to recover in the first quarter of 2002 as a
result of falling natural gas production and low storage levels. However, a
recovery in North American drilling activity did not materialize until early
2003. This time lag in spending was attributable to the need for significantly
higher natural gas prices to offset the increased cost and risk of finding and
developing incremental gas production along with confidence that prices will
sustain at such levels. Sufficiently higher prices did not materialize until
the fourth quarter of 2002 and there is generally a two to three quarter lead
time in implementing increased spending following higher cash flow.
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The higher-than-anticipated pricing for natural gas and oil has continued into
2003, and the continued fall in natural gas production and storage levels
resulting from lower drilling activity is increasing the likelihood that higher
average prices will be sustained over the intermediate term. We expect these
factors to result in an improvement in North American drilling activity during
2003.
D. COMPETITIVE CONDITIONS.
Our industry remains very competitive. The number of rigs continues to exceed
demand in many of our markets, resulting in strong price competition. Many rigs
can be readily moved from one region to another in response to changes in
levels of activity, which may result in an oversupply of rigs in such areas.
Many of the total available contracts are currently awarded on a bid basis,
which further increases competition based on price. The land drilling, workover
and well-servicing market is generally more competitive than the offshore
market due to the larger number of rigs and companies.
In all of our geographic market areas, price and availability and condition of
equipment are the most significant factors in determining which drilling
contractor is awarded a job. Other factors include the availability of trained
personnel possessing the required specialized skills; the overall quality of
service and safety record; and domestically, the ability to offer ancillary
services. In international markets, experience in operating in certain
environments and customer alliances 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 smaller national, regional
or local rig operations. In domestic land workover and well-servicing, we
compete with Key Energy Services, Inc., which owns over 1,400 U.S. workover and
well-servicing rigs (according to its public filings), and with numerous other
competitors having smaller regional or local rig operations. In the Alaska
market, Nabors has two primary competitors, Doyon Drilling, Inc. and Nordic
Calista Services. Kuukpik Drilling has also made attempts to enlarge its
presence in this market. 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. Although Nabors believes it has a
strong competitive position in the domestic land drilling, workover and
well-servicing sector, certain of our competitors internationally and offshore
may be better positioned in certain markets, allowing them to compete more
effectively.
The contract drilling, workover and well-servicing industry has been cyclical
historically, with significant volatility in profitability and rig values. This
industry cyclicality has been due to changes in the level of domestic oil and
gas exploration and development activity and the available supply of drilling
rigs. From 1982 until 1996, the contract drilling business was severely
impacted by the decline and continued instability in the prices of oil and
natural gas following a period of significant increase in new drilling rig
capacity. Rising prices in 1997 gave way to a steep decline that continued
through 1998 and most of 1999. Although the market improved substantially in
2000 and the first half of 2001, the rapid, severe downturn in the latter half
of the year illustrates the dependence of the industry on natural gas and oil
prices.
Our manufacturing and logistics segment represents a relatively smaller part of
our business, and we have numerous competitors in each area in which we operate
who may have greater resources and may be better positioned than Nabors. Our
Canrig subsidiary is one of the six major manufacturers of top drives. Its
largest competitors are Varco, Tesco and National Oilwell. EPOCH's largest
competitor in the manufacture of rig instrumentation systems is Varco's Totco
subsidiary. Mudlogging services are provided by a number of entities that serve
the oil and gas industry on a regional basis. EPOCH competes for mudlogging
customers with Sperry Sun and Baker Hughes in the Gulf Coast region, California
and Alaska. In the U.S. Lower 48 states, there are hundreds of rig
transportation
11
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. We also compete with
numerous offshore support vessel operators in the Gulf of Mexico on the
basis of quality of service, price, vessel suitability and availability and
reputation.
IV. RECENT DEVELOPMENTS.
A. OPERATING RESULTS.
Operating revenues and Earnings from unconsolidated affiliates for 2002 totaled
$1.5 billion, representing a decrease of $746.9 million, or 34%, as compared to
2001. Adjusted income derived from operating activities and net income for 2002
totaled $170.0 million and $121.5 million ($.81 per diluted share),
respectively, representing decreases of 68% and 66%, respectively, as compared
to 2001.
The decrease in our operating results during 2002 primarily results from a
decline in business conditions in several of our key North American markets,
resulting in reduced rig utilization and average gross margins. The depressed
price for natural gas and oil over the period beginning in the third quarter of
2001 through the latter part of the second quarter of 2002 resulted in
decreased spending by our customers for our services during the second half of
2001 and for all of 2002.
This decreased spending and corresponding decline in our rig activity resulted
in declining profitability for Nabors over that period. These lower activity
levels were experienced by a majority of our North American business units,
with the sharpest decline coming from our U.S. Land Drilling business. The
decrease in North American land and offshore drilling activity is illustrated
by the drilling industry's lower total active land and offshore rig count. The
average U.S. Land, Canadian Land and U.S. offshore rig counts during 2002 were
lower by 29%, 23% and 26%, respectively, than the 2001 period. Also
contributing to the overall decline in our operating results was a decline in
activity for our U.S. Land Well-servicing and workover business, driven
primarily by lower rig utilization due to the overall weak market, and the loss
of some higher margin workover rigs and an offshore platform operation during
the second half of 2002.
Natural gas prices are the primary driver of our U.S. Lower 48 land, Canadian
and U.S. Offshore operations while oil prices are the primary driver of our
Alaskan, International and U.S. Well-servicing operations. The Henry Hub
natural gas spot price (per Bloomberg) averaged $3.37 per million cubic feet
(mcf) during 2002, down from the $3.96 per mcf average during 2001. West Texas
intermediate spot oil prices (per Bloomberg) averaged $26.17 per barrel during
2002, up slightly from $25.96 per barrel during 2001. Beginning in the first
quarter of 2002 a tightening in natural gas and oil supply resulted in an
improvement in natural gas and oil prices. Natural gas and oil prices averaged
$3.76 per mcf and $28.29 per barrel, respectively, during the last six months
of 2002. A substantial portion of this improvement in prices occurred during
the fourth quarter, when natural gas prices averaged $4.31 per mcf. As discussed
above, these price increases did not result in a corresponding strengthening of
our key North American markets until early 2003.
As had been expected, we realized improvements in our International, Canadian
and U.S. Offshore businesses during the fourth quarter of 2002, which were
offset by lower results in our U.S. Land Drilling and U.S. Well-servicing
businesses. We expect an improvement in all of our business units in 2003 given
the high level of natural gas and oil prices sustained during the latter part
of 2002 and the beginning of 2003.
12
Additional information regarding our financial condition and results can be
found on pages 44 through 65 of the Nabors Industries Ltd. 2002 Annual Report,
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations".
B. CORPORATE REORGANIZATION.
Effective June 24, 2002, Nabors became the successor to Nabors Industries, Inc.
("Nabors Delaware") following a corporate reorganization. The reorganization
was accomplished through a merger of an indirect, newly formed Delaware
subsidiary of Nabors into Nabors Delaware. Nabors Delaware was the surviving
company in the merger and became a wholly owned subsidiary of Nabors. Upon
consummation of the merger, all outstanding shares of Nabors Delaware common
stock automatically converted into the right to receive Nabors common shares,
with the result that the shareholders of Nabors Delaware on the date of the
merger became the shareholders of Nabors. Nabors and its subsidiaries continue
to conduct the businesses previously conducted by Nabors Delaware and its
subsidiaries. The reorganization was accounted for as a reorganization of
entities under common control and, accordingly, it did not result in any
changes to the consolidated amounts of assets, liabilities and stockholders'
equity.
The Board of Nabors Delaware approved the reorganization transaction because
international activities are an important part of our current business and we
believe that our international operations will continue to grow in the future
and be benefited by the reorganization. Expansion of our international business
is an important part of our current business strategy and significant growth
opportunities exist in the international marketplace. We believe that
reorganizing as a Bermuda company will allow us to implement our business
strategy more effectively. In addition, we believe that the reorganization
should increase our access to international capital markets and acquisition
opportunities, increase our attractiveness to non-U.S. investors, improve
global cash management, improve our global tax position and result in a more
favorable corporate structure for expansion of our current business.
Several members of the United States Congress have proposed legislation that,
if enacted, would have the effect of eliminating the tax benefits of the
reorganization. During 2002 the Senate Finance Committee approved legislation
that, for the United States federal tax purposes, would treat a corporation
such as Nabors that reorganizes in a foreign jurisdiction as a domestic
corporation and, thus, such foreign corporation would be subject to United
States federal income tax. Substantially similar legislation was introduced
during 2002 by the Chairman of the House Committee on Ways and Means. The
proposed legislation did not pass during the 2002 session of Congress but is
expected to be reintroduced during 2003 and may have a retroactive effective
date for transactions completed after March 20, 2002. If any of the proposed
legislation were enacted with the currently proposed effective dates, the
expected tax savings from the reorganization will not be realized.
In light of such events and if and when any such legislation is enacted, we
will consider the effects of the legislation and will evaluate all strategic
alternatives that may be appropriate.
C. CORPORATE GOVERNANCE.
During 2002 and early 2003 the Board of Directors of Nabors adopted new
charters for each of the Audit Committee and Compensation Committee of the
Board of Directors and new Corporate Governance Principles for the full Board.
The Corporate Governance Principles, among other things, require a substantial
majority of the Board to consist of directors independent from management,
require directors to own at least $100,000 of Nabors stock, set a retirement
age for new directors, provide for executive sessions of the independent
directors, and provide for an annual evaluation of Nabors' Chief Executive
Officer. The Board also elected Mr. Whitman as the "lead independent" director.
D. ACQUISITIONS.
On March 18, 2002, we acquired, for cash, 20.5% of the issued and outstanding
shares of Enserco Energy Service Company, Inc., a Canadian publicly-held
corporation, for Cdn. $15.50 per share for a total price of Cdn. $83.2 million
(U.S. $52.6 million). On April 26, 2002, we completed our acquisition of
Enserco by purchasing their remaining outstanding shares for Cdn. $15.65 per
share, paying cash of Cdn. $100.1 million (U.S. $64.1 million) and issuing
13
3,549,082 exchangeable shares of Nabors Exchangeco (Canada) Inc., an indirect
wholly-owned Canadian subsidiary of Nabors, of which 2,638,526 exchangeable
shares were immediately exchanged for shares of Nabors Delaware common stock in
accordance with the instructions of the holders of those shares. The Nabors
Exchangeco shares are exchangeable for Nabors common shares, at each holder's
option, on a one-for-one basis and are listed on the Toronto Stock Exchange.
Additionally, these exchangeable shares have essentially identical rights as
Nabors common shares, including but not limited to voting rights and the right
to receive dividends, if any, and will be automatically exchanged upon the
occurrence of certain events. The value of the Nabors Exchangeco shares issued
totaled Cdn. $254.2 million, or U.S. $162.8 million. In addition, we assumed
Enserco debt totaling Cdn. $33.4 million (U.S. $21.4 million). The Enserco
purchase price was 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 Cdn. $158.7 million (U.S. $101.3
million).
Enserco provided land drilling, well-servicing and workover services in Canada
and operated a fleet of 193 well-servicing rigs and 30 drilling rigs as of the
acquisition date. The Enserco acquisition increased our position in Canada with
assets that are relatively new and in excellent condition, allowing us to
provide services to many of our key U.S. customers who have increased their
presence in Canada because of its increasingly strategic importance to the
North American gas supply market.
On October 9, 2002, we acquired Ryan Energy Technologies Inc., a corporation
incorporated under the laws of Alberta, Canada pursuant to a plan of
arrangement approved by the securityholders of Ryan and the Court of Queen's
Bench of Alberta. Pursuant to the arrangement, Exchangeco acquired all of the
issued and outstanding common shares of Ryan in exchange for approximately Cdn.
$22.6 million (U.S. $14.2 million) in cash and 380,264 exchangeable shares of
Exchangeco, of which 219,493 exchangeable shares were immediately exchanged for
common shares of Nabors in accordance with the instructions of the holders of
those shares. In addition, we assumed Ryan debt totaling Cdn. $14.5 million
(U.S. $9.1 million). The Ryan 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 Cdn. $5.1 million (U.S. $3.2 million). The purchase price
allocation for the Ryan acquisition is subject to adjustment as additional
information becomes available and will be finalized by September 30, 2003.
Ryan manufactures and sells directional drilling and rig instrumentation
systems and provides directional drilling, rig instrumentation and data
collection services to oil and gas exploration and service companies in the
United States, Canada and Venezuela.
V. 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 continued to strive to attain a financial posture
that would allow us to capitalize on market weakness by adding to our business
base, thereby enhancing our upside potential at reasonable costs. The principal
elements of our strategy have been to:
o Maintain flexibility to respond to changing conditions.
o Maintain a conservative and flexible balance sheet.
o Build a base of low-cost, premium assets.
o Build and maintain low operating costs through economies of scale.
o Develop and maintain long-term, mutually attractive relationships
with key customers and vendors.
o Build a diverse business in long-term, sustainable and worthwhile
geographic markets.
o Recognize and seize opportunities as they arise.
o Continually improve safety, quality and efficiency.
o Implement leading edge technology where cost-effective to do so.
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Our business strategy is designed to allow us to grow and remain profitable in
any market environment. Once again, the major developments in our business in
the past year illustrate our implementation of this strategy and its continuing
success. Following is a discussion of recent events describing several of these
strategies.
RESPONDING TO CHANGING CONDITIONS -- During September 2000 we implemented a
capital expenditure program to refurbish, recommission and, in many cases,
upgrade our stacked, domestic drilling fleet. As part of this program, which
was terminated during the fourth quarter of 2001 due to the declining market
conditions in the drilling sector, we recommissioned 113 rigs and partially
completed 32 rigs for an aggregate of approximately $230 million in capital
expenditures.
The decline in demand also caused us to reduce our crew levels during 2002 as
rig usage in the U.S. Lower 48 came down significantly. As with past activity
drops, we have attempted to retain our best and most experienced personnel in
order to be prepared for the next rise in demand.
The decline in the North American market during 2002 was offset in part by
increased activity in our international markets. During 2002 we entered into a
number of long-term contracts in international markets.
MAINTAINING A CONSERVATIVE AND FLEXIBLE BALANCE SHEET -- During 2002 we
purchased $.6 million face value of our 8.625% senior subordinated notes due
April 2008 in the open market at a price of 108%. In addition, we purchased
$4.7 million face value of our 6.8% senior unsecured notes due April 2004 in
the open market at a price of 104%. Upon settlement of these transactions, we
paid $5.7 million and recognized a pretax loss of approximately $.2 million,
resulting from the repurchases of these notes at prices higher than their
carrying value. Additionally, we repaid Cdn. $22.3 million (U.S. $14.3 million)
and Cdn. $12.9 million (U.S. $8.3 million) of the debt assumed in the Enserco
and Ryan acquisitions, respectively. We also made a $2.5 million scheduled
principal payment relating to certain of our medium-term notes.
We had a $200 million unsecured committed revolving credit facility with a
syndicate of banks, with an original term of five years, that was scheduled to
mature on September 5, 2002. As a result of the corporate reorganization
discussed above, we may have failed to comply with a covenant contained in the
credit facility agreement and a related $30 million letter of credit facility
agreement. At the time of the potential default, there were no outstanding
borrowings on the revolving credit facility and $23 million was outstanding on
the related letter of credit facility. The bank provided a waiver on the letter
of credit facility and the letter of credit facility has since expired. Because
we had cash and marketable securities balances totaling approximately $800
million at the time of the potential default, we terminated the revolving
credit facility.
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 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. Cash
provided by our issuance of these senior notes totaled $495.9 million. The
proceeds from the issuance of these senior notes were invested in cash and
marketable securities.
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 issued by
Nabors Delaware. The purpose of this transaction was to convert a portion of
future interest due on the senior notes to a lower variable rate in an attempt
to realize savings on our future interest payments. We have designated this
swap agreement as a fair value hedge. The swap agreement has a notional amount
of $200 million and matures in August 2012 to match the maturity of the senior
notes. Under the agreement, we pay on a quarterly basis a floating rate based
on a three-month U.S. dollar LIBOR rate, plus a spread of 62.625 basis points,
and receive semi-annually a fixed rate of interest of 5.375%. During 2002 we
recorded interest savings related to this interest rate swap of $1.2 million
which served to reduce interest expense. The change in cumulative fair value of
this derivative instrument resulted in the recording of a derivative asset,
included in other long-term assets, of $10.1 million as of December 31, 2002.
The carrying value of our 5.375% senior notes was increased by the same amount.
15
On October 21, 2002, we also 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 which we had executed the interest rate swap. These
transactions are intended to mitigate and manage our exposure to changes in the
three-month U.S. dollar LIBOR rate and do not qualify for hedge accounting
treatment. Any change in the cumulative fair value of the range cap and the
floor will be reflected as a gain or loss in our consolidated statement of
income. The range cap and the floor are effective August 15, 2003 and expire on
August 15, 2012. The range cap will be triggered when the three-month U.S.
dollar LIBOR rate is at or above 4.50%, and below 6.50%, such that the
counterparty will pay us any difference between the actual LIBOR rate and the
4.50% strike rate on a notional amount of $200 million. No payment will be due
to us if the three-month U.S. dollar LIBOR rate is below 4.5% or at or above
6.50%. The floor is triggered when the three-month U.S. dollar LIBOR rate is at
or below 2.665% such that we will pay the counterparty any difference between
the actual LIBOR rate and the 2.665% floor rate on a notional amount of $200
million. We recorded a loss of $3.8 million during 2002 related to the change
in cumulative fair value of this derivative instrument. This loss is included
in other income in our consolidated statement of income for the year ended
December 31, 2002 and has been accrued in other long-term liabilities in our
consolidated balance sheet as of December 31, 2002.
On July 17, 2002, the Board of Directors of Nabors authorized the continuation
of the share repurchase program that had begun under Nabors Delaware, and
provided that the amount of Nabors common shares authorized for purchase by
Nabors going forward be increased to $400 million. Under the Nabors Delaware
program, Nabors Delaware had acquired an aggregate of approximately $248.0
million of Nabors Delaware common stock, or 6.2 million shares, during 2001.
During the third quarter of 2002, Nabors also acquired, through a subsidiary,
91,000 of its common shares in the open market for $27.30 per share for an
aggregate price of $2.5 million. Immediately thereafter these shares were
transferred to Nabors. Pursuant to Bermuda law, any shares, when purchased,
will be treated as cancelled. Accordingly, a repurchase of shares will not have
the effect of reducing the amount of Nabors' authorized share capital.
Additionally, the Board approved the repurchase of up to $400 million of
outstanding debt securities of Nabors and its subsidiaries. These amounts may
be increased or decreased at the discretion of the Board, depending upon market
conditions and consideration of the best interest of shareholder value.
Repurchases may be conducted on the open market, through negotiated
transactions, or by other means, from time to time, depending upon market
conditions and other factors.
On December 27, 2002, Nabors filed an S-3 "shelf" registration statement with
the Securities and Exchange Commission, to allow Nabors and certain of its
subsidiaries to sell up to $700 million in securities from time to time during
the effectiveness of the registration.
On February 21, 2003, Nabors issued a notice of redemption to the holders of
its 8-5/8% Senior Subordinated Notes due April 1, 2008, for redemption of the
notes and all associated guarantees on April 1, 2003. The redemption price will
be $1,043.13 per $1,000 principal amount of the notes together with accrued and
unpaid interest to the date of redemption. The remaining outstanding principal
amount of the notes is approximately $42.5 million. We estimate that we will
recognize a pre-tax loss of approximately $0.9 million, resulting from the
redemption of the notes at prices higher than their carrying value on April 1,
2003.
RECOGNIZING OPPORTUNITY -- Our Enserco and Ryan acquisitions completed during
2002 expanded our presence in Canada and added to our technological
capabilities that can be shared across the Nabors group of companies.
SAFETY -- In the drilling and oilfield service business, safety and loss
control are critical to overall performance. The safety and health of Nabors'
employees are of paramount importance. Nabors intensified its safety and loss
control program in 1997 with its U.S. Lower 48 drilling operations, and
expanded the enhanced program to the other business units during the last half
of 2000. The enhanced programs were largely carried out in 2001 and are
becoming further embedded in Nabors culture. Significant improvements have
already been achieved as evidenced by our total OSHA (Occupational Safety and
Health Administration) recordable incident rate (see chart below).
Additionally, in 2002 Nabors' international drilling subsidiary completed a
three year development of an ISO 9000 compatible Rig Management Systems quality
program, and is now in the implementation and operation phase of that program.
Nabors' offshore operations have adopted the same program. Although it is
impossible to predict what
16
incident rates will be in the future, continuous improvement in our safety
procedures is an important part of Nabors' business strategy.
OSHA Recordable Incident Rates*
------------------------------
1997 7.80
1998 5.50
1999 3.43
2000 3.65
2001 2.99
2002 2.43
* The OSHA recordable incident rate is equal to number of OSHA recordable
incidents multiplied by 200,000 man-hours divided by the actual number of
man-hours worked for the period.
VI. 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.
Fluctuations during the last few years in the demand and supply of oil and gas
have contributed to, and are likely to continue to contribute to, price
volatility. 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 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 writedown 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.
Certain competitors are present in more than one of the regions in which we
operate, although no one competitor operates in all of these areas. In the U.S.
Lower 48 states, there are several hundred competitors with smaller
17
national, regional or local rig operations. In the Alaska market, we have
two principal competitors. In Canada and offshore, we compete with several
firms of varying size, many of which have more significant operations in
those areas than us. Internationally, we compete directly with various
competitors at each location where we operate. We believe that the market
for land drilling and workover contracts will continue to be competitive for
the foreseeable future. Although we believe that we have a strong
competitive position in the domestic land drilling, workover and
well-servicing sector, certain of our competitors internationally and
offshore may be better positioned in certain markets, allowing them to
compete more effectively.
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 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. This is particularly of concern in the wake of
the September 11 terrorist attacks, which adversely affected an already
tightening insurance market. It is likely that, in our upcoming insurance
renewals, our premiums and deductibles will be higher, and certain insurance
coverage either will be unavailable or considerably more expensive than it has
been in the recent past (as is expected to be the case for terrorism coverage,
for example). Moreover, our insurance coverage generally provides that we
assume a portion of the risk in the form of an insurance coverage deductible.
We expect that 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
effect of insurance premium increases.
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, Asia and South and
Central America. These operations are subject to various risks, including the
risk of war (including the war in Iraq), 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.
PROPOSED TAX LEGISLATION COULD ELIMINATE THE BENEFITS OF OUR REORGANIZATION
Various bills have been introduced in Congress that would retroactively
eliminate the tax benefits associated with our reorganization as a Bermuda
company. Although no such legislation passed the U.S. Congress in its session
ending during 2002, we expect that similar legislation will be reintroduced in
the current United States Congressional session. Because we cannot predict
whether legislation ultimately will be adopted, no assurances can be given that
the tax benefits associated with our reorganization ultimately will accrue to
the benefit of the company and its shareholders. If legislation is enacted that
retroactively eliminates the benefit of the reorganization, our net
18
operating loss carryforward for U.S. tax purposes would be reduced
significantly and our effective tax rate in future periods could be
increased significantly.
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 specific
design and operational standards on rigs and platforms. Failure to comply with
these requirements could subject us to substantial civil and criminal penalties
as well as potential court injunctions. In addition, federal law imposes a
variety of regulations on "responsible parties" related to the prevention of
oil spills and liability for damages from such spills. As an owner and operator
of onshore and offshore rigs and transportation equipment, we may be deemed to
be a responsible party under federal law. In addition, our well-servicing,
workover and production services operations routinely involve the handling of
significant amounts of waste materials, some of which are classified as
hazardous substances. 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
our customers contractually to assume responsibility for compliance with
environmental regulations. However, we are not always successful in allocating
to our 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. Costs we incur to investigate and remediate contaminated sites are
expensed unless the remediation extends the useful lives of the assets employed
at the site. Remediation costs that extend the useful lives of the assets are
capitalized and amortized over the remaining useful lives of such assets.
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 operations; 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, and it is not uncommon for the neighboring land
owners and other third parties to file claims for personal injury, property
damage and recovery of response costs allegedly caused by the hazardous
substances released into the environment. We have been notified of our possible
responsibility with respect to the cleanup of a federal national priority list
site and a state abandoned site, which were formerly operated by parties
unrelated to us as oilfield waste disposal facilities. In addition, we have
been named as a potentially responsible party with respect to the cleanup of
three other sites, which were formerly operated by various parties unrelated to
us. We believe that our cost to clean up each of these sites will be less than
$100,000. Although at this time information regarding our possible
responsibility with respect to cleanup of the federal national priority list
site and the state abandoned site has not been fully developed and it is not
feasible to predict such outcome with certainty, we are of the opinion that
their ultimate resolution should not have a material adverse effect on our
financial statements or results of operations.
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
19
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.
With respect to our offshore support vessels we are affected by certain U.S.
governmental regulations. Although incorporated in Bermuda, we qualify to own
our offshore U.S. flag vessels through one of our wholly owned subsidiaries. The
subsidiary bareboat chartered the vessels for an original term of five years,
subject to renewals, to an entity qualified as a U.S. citizen under applicable
law. The law which permits this structure and the proposed regulations are
controversial. If the Coast Guard were to change its interpretation of its
proposed regulations or if the U.S. Congress were to change existing law, we
might not be permitted to own our offshore support vessels. Additionally, even
under the existing law and proposed regulations, our continued ownership of the
vessels is dependent upon the continuation of the bareboat charter, which could
terminate for reason of default by either party during the original term or
which might not be renewed.
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. Among other
requirements, this law requires owners and operators of vessels over 300 gross
tons to provide the U.S. Coast Guard with evidence of financial responsibility
to cover the costs of cleaning up oil spills from such vessels. We believe we
have provided satisfactory evidence of financial responsibility to the U.S.
Coast Guard for all vessels over 300 tons. 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.
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 its intercompany loans.
In addition, from time to time, our operating subsidiaries 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 PAY DIVIDENDS
We have not paid any cash dividends on our common shares since 1982. We do not
anticipate that we will pay any cash dividends on common shares in the
foreseeable future. Recent legislation introduced in the United States Congress
may provide certain shareholders with more favorable tax consequences than
exists under present United States law with respect to the receipt of
dividends. In the event that such proposals are enacted into law, management
expects that it will reexamine its policy of not paying dividends, but no
assurances can be given that any dividends will be paid to shareholders.
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 March 14, 2003, there were 400,000,000 authorized shares of our common
shares, of which 145,234,077 shares were outstanding. In addition, 31,264,999
shares of our common shares were reserved for issuance pursuant to option and
employee benefit plans, 318,850 shares of our common shares were reserved for
issuance upon the exercise of outstanding warrants and 16,598,005 shares were
reserved for issuance upon conversion or repurchase of outstanding zero coupon
convertible debentures. In addition, in connection with our Enserco and Ryan
acquisitions, up to 569,470 shares of our common shares could be issuable on
exchange of the shares and warrants of Nabors
20
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 Securities and Exchange Commission. 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 to the conversion into, or repurchase of debentures 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 (of which one preferred share is issued) 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
additional preferred shares, the classified board and our board's ability to
issue additional preferred shares may discourage, delay or prevent changes in
control of Nabors that is not supported by our board, thereby possibly
preventing certain of our shareholders from realizing a possible premium on
their shares.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT OUTSTANDING
We had approximately $2.1 billion in debt outstanding at December 31, 2002,
resulting in a funded debt-to-capitalization ratio of 0.49:1.00. This ratio is
calculated by dividing funded debt by funded debt plus capital. Funded debt is
defined as the sum of (1) short-term borrowings, (2) the current portion of
long-term obligations and (3) long-term obligations. Capital is defined as
stockholders' equity. This ratio is one method for calculating the amount of
leverage a company has in relation to its capital.
VII. ACQUISITIONS AND DIVESTITURES.
We have grown from a land drilling business centered in the U.S. Lower 48,
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 almost 600 land drilling rigs, approximately 745 domestic and 40
international land workover and well-servicing rigs, 43 offshore platform rigs,
16 jack-ups, three barge rigs, 30 marine transportation and support vessels,
and a large component of trucks and fluid hauling vehicles. This growth was
fueled in part by strategic acquisitions, as summarized in the following chart:
- --------------- ---------------------------------- --------------------------------- --------------------------------
DATE ACQUIRED OR SELLING ENTITY ASSETS ACQUIRED(1) LOCATIONS
- --------------- ---------------------------------- --------------------------------- --------------------------------
3/1990 Loffland Brothers Company 63 land drilling rigs; yards; North Sea, Middle East,
miscellaneous equipment and Canada, U.S. Lower 48, Gulf of
inventory; financial assets Mexico, Venezuela
- --------------- ---------------------------------- --------------------------------- --------------------------------
11/1990 Henley Drilling Co. 11 land drilling rigs U.S. Lower 48, Yemen
- --------------- ---------------------------------- --------------------------------- --------------------------------
6/1993 Grace Drilling Co. 110 land drilling rigs; yards; U.S. Lower 48
miscellaneous equipment
and inventory
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1994 MND Drilling 16 land drilling rigs U.S. Lower 48
- --------------- ---------------------------------- --------------------------------- --------------------------------
10/1994 Sundowner Offshore Services, Inc. 15 platform rigs, 1 platform Gulf of Mexico, International
rig under construction, 5
jack-up workover rigs, 3
workover and plug and
abandonment barges
- --------------- ---------------------------------- --------------------------------- --------------------------------
1994 Various 8 mobile, medium-depth land U.S. Lower 48
drilling rigs
- --------------- ---------------------------------- --------------------------------- --------------------------------
21
- --------------- ---------------------------------- --------------------------------- --------------------------------
DATE ACQUIRED OR SELLING ENTITY ASSETS ACQUIRED(1) LOCATIONS
- --------------- ---------------------------------- --------------------------------- --------------------------------
1/1995 Delta Drilling Company 30 land drilling rigs (15 SCR, Texas, Louisiana
15,000+ capable depth), yards
and office facilities
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1996 Exeter Drilling Company 49 shallow and medium-depth United States (47),
land drilling rigs International (2)
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1996 J.W. Gibson Well Servicing 78 workover and well-servicing Rocky Mountains, Mid-continent
Company(2) rigs (10 leased from third Region
parties)
- --------------- ---------------------------------- --------------------------------- --------------------------------
11/1996 EPOCH Well Logging, Inc. Mudlogging units Not applicable
- --------------- ---------------------------------- --------------------------------- --------------------------------
12/1996 Noble Drilling 47 land drilling rigs (19 United States (38),
Company operating and 28 stacked); Canada (9)
yards; equipment and inventory
- --------------- ---------------------------------- --------------------------------- --------------------------------
1/1997 Adcor-Nicklos Drilling 36 land drilling rigs (30 U.S. Lower 48
Company active, 6 stacked, including 14
SCR), equipment, drill pipe,
yards, vehicles and support
equipment
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1997 Chesley Pruet Drilling Company 12 land drilling rigs (10 Alabama, Louisiana, Mississippi
active, 2 stacked, including 9
SCR)
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1997 Samson Rig Company 25 stacked SCR land rigs and Oklahoma
large component of equipment
- --------------- ---------------------------------- --------------------------------- --------------------------------
8/1997 Cleveland Drilling Company, Inc. 7 land drilling rigs (6 active, California, Nevada
1 stacked, including 6 SCR rigs)
- --------------- ---------------------------------- --------------------------------- --------------------------------
11/1997 VECO Drilling, Inc.; 6 land drilling rigs (5 active, California, Texas
Diamond L 1 stacked, including 3 SCR) and
two offshore labor contracts; 3
active mechanical rigs
- --------------- ---------------------------------- --------------------------------- --------------------------------
12/1997 C.A.P.E. International, Inc. Rig reporting software Not applicable
- --------------- ---------------------------------- --------------------------------- --------------------------------
5/1998 New Prospect Drilling Company 6 land drilling rigs Arkansas, Oklahoma
- --------------- ---------------------------------- --------------------------------- --------------------------------
5/1998 Can-Tex Drilling & Exploration, 7 land drilling rigs Alberta, Canada
Ltd.
- --------------- ---------------------------------- --------------------------------- --------------------------------
6/1998 Transocean-Nabors Drilling Joint interest in a coiled Alaska
Technology LLC tubing drilling rig; certain
technology rights
- --------------- ---------------------------------- --------------------------------- --------------------------------
4/1999 Bayard Drilling Technologies, 87 land drilling rigs (73 Oklahoma, Texas, Louisiana,
Inc. actively marketed); significant Arkansas
inventories of new component
equipment (e.g., drill pipe,
engines and mud pumps);
oilfield hauling equipment fleet
- --------------- ---------------------------------- --------------------------------- --------------------------------
11/1999 Pool Energy Services Co. 790 land well U.S. Lower 48, Gulf of Mexico,
servicing/workover rigs (470 Alaska, International
actively marketed); 34 land
drilling rigs; 25 offshore
rigs; 300+ fluid handling
trucks; 1,060 storage tanks
and 15 salt-water disposal
wells; 27 offshore supply
vessels
- --------------- ---------------------------------- --------------------------------- --------------------------------
12/1999 - Various 7 offshore supply vessels Gulf of Mexico
10/2000 (including 5 new-builds)
- --------------- ---------------------------------- --------------------------------- --------------------------------
12/2000 Parker Drilling Company 1 arctic land rig; 1 ball mill Alaska
unit
- --------------- ---------------------------------- --------------------------------- --------------------------------
22
- --------------- ---------------------------------- --------------------------------- --------------------------------
DATE ACQUIRED OR SELLING ENTITY ASSETS ACQUIRED(1) LOCATIONS
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11/2001 Command Drilling Corporation 15 land drilling rigs (plus one Canada
under construction)
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4/2001, Arabian Jack-up Partnership Four jack-up rigs International
6/2001, 1996, Ltd.; Santa Fe
2/2002 and International Corporation;
6/2002 Transocean, Inc.
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3/18/02 Enserco Energy Service Inc. 30 drilling rigs, 209 workover Canada
rigs
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10/09/02 Ryan Energy Technologies Inc. Directional Drilling and Canada, U.S. Lower 48,
MWD/LWD Assets Venezuela
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(1) With the exception of the MND Drilling, Samson Rig Company and
jack-up rig transactions, all acquisitions of rigs also included substantial
quantities of drill collars and drill pipe.
(2) Sold in January 1998.
Although Nabors continues to examine opportunities, there can be no assurance
that attractive rigs or other acquisition opportunities will continue to be
available, that the pricing will be economical or that we will be successful in
making such acquisitions in the future.
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.
VIII. 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 2003. Nabors has been
a party to administrative and legal proceedings with governmental agencies that
have arisen under statutory provisions regulating the discharge or potential
discharge of material into the environment. 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 above under Risk Factors --
Noncompliance with governmental regulation or exposure to environmental
liabilities could adversely affect Nabors' results of operations.
IX. AVAILABLE INFORMATION.
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 Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES
Information regarding Nabors' rig fleet can be found on pages 28 through 31 of
our 2002 Annual Report and is incorporated into this document by reference.
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