Patterson-UTI Energy, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. Patterson-UTI provides U.S. land contract drilling, pressure pumping and directional drilling services, plus oilfield rentals and other operations. COVID-19-related demand weakness and oil-market volatility drove a sharp industry activity decline.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $207.1 million | $598.5 million | $903.4 million | $1,978.4 million |
| Operating loss | $114.6 million | $307.3 million | $768.1 million | $378.8 million |
| Net loss | $112.1 million | $261.7 million | $697.2 million | $339.8 million |
| Loss per diluted share | $0.60 | $1.31 | $3.70 | $1.65 |
| Adjusted EBITDA | $43.3 million | $111.4 million | $144.9 million | $463.2 million |
- Q3 revenue fell 65% year over year. Contract drilling revenue declined 64%, pressure pumping 66%, and directional drilling 78%.
- Q3 operating loss was 55% of revenue, versus 51% in Q3 2019. Q3 pressure-pumping margin, before depreciation and SG&A, was 11.5% of revenue, compared with 15.5%.
- Nine-month cash provided by operations was $283.3 million, down from $583.8 million. Capital expenditures were $135.0 million, implying approximate operating-cash-flow-less-capex of $148.2 million. Cash and equivalents increased to $303.7 million from $174.2 million at year-end 2019.
- At September 30, total debt principal was $975 million: $525 million of 2028 notes, $350 million of 2029 notes and a $100 million term loan due in 2022. Cash less debt principal was approximately $671 million. The company reported $967.4 million of debt net of discount and issuance costs.
- The $600 million revolving facility had no borrowings and approximately $600 million available, subject to its terms. The company reported compliance with debt covenants. Current assets were $532.1 million and current liabilities $263.4 million.
Material changes versus prior periods
- The nine-month net loss worsened despite lower revenue, principally reflecting a $395.1 million first-quarter impairment of all contract-drilling goodwill. The impairment was non-cash and substantially affected reported operating results.
- A $38.3 million second-quarter restructuring charge covered severance, contract terminations, facility exits and abandoned right-of-use assets. The plan was completed in Q3; management estimated annual savings of about $94 million beginning in Q3 2020.
- Capital expenditures declined to $135.0 million for the first nine months from $283.3 million. Treasury-stock purchases were $21.1 million, versus $230.3 million in the prior-year period.
- The quarterly dividend was reduced from $0.04 per share in 2019 to $0.02 in Q2 and Q3 2020. A $0.02-per-share dividend payable in December 2020 was declared after quarter-end.
Outlook, management commentary and risks
- Management expected an average of 61 operating rigs in Q4 2020, compared with 60 in Q3; 43 rigs were expected under term contracts in Q4 and 35 on average over the 12 months ending September 30, 2021. Contract-drilling backlog was approximately $307 million; about 29% was reasonably expected to remain at September 30, 2021. Contracts may be terminable on short notice.
- Management expected six active pressure-pumping spreads in Q4, while cautioning that seasonal weakness could reduce utilization. The pressure-pumping market remained oversupplied.
- Management forecast 2020 capital expenditures of approximately $150 million and stated that cash, operating cash generation and revolver availability should fund current plans, debt service and dividends for at least 12 months. This is management’s expectation, not a guarantee.
- The company’s asset-recoverability tests assumed activity would begin recovering in 2022. Management cautioned that prolonged low oil prices or delayed recovery could reduce cash flows and lead to potentially material future impairments. Directional-drilling asset-group headroom was particularly narrow at approximately 3% in the March assessment.
- Key risks include continued oil-price and customer-spending weakness, COVID-19 effects, customer payment defaults or bankruptcies, excess service-equipment capacity, contract cancellations, supply-chain disruption, operational hazards and access to capital. Letters of credit totaled approximately $60.8 million, with none drawn; remaining minimum proppant and chemical purchase obligations were $24.9 million through 2022. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether rig counts, term-contract activity and pressure-pumping utilization meet management’s Q4 expectations, and how much of the $307 million backlog converts to revenue.
- Actual realization and timing of the estimated $94 million annual restructuring savings, including any additional restructuring or asset impairment charges.
- Operating cash flow, capital spending and available liquidity relative to the stated 12-month funding outlook, debt maturities and dividend decisions.
- Customer credit quality, receivable collections and allowance for credit losses, which stood at $11.0 million at quarter-end.
- Debt-covenant compliance and credit ratings, particularly because restricted-payment provisions may apply if both Moody’s and S&P ratings fall below investment grade.