Patterson-UTI Energy, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Patterson-UTI provides land drilling, pressure pumping, directional drilling and related oilfield services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $250.4 | $675.8 | $696.3 | $1,379.9 |
| Operating loss | $(159.1) | $(48.1) | $(653.5) | $(71.5) |
| Net loss | $(150.3) | $(49.4) | $(585.1) | $(78.1) |
| Loss per diluted share | $(0.81) | $(0.24) | $(3.10) | $(0.37) |
| Adjusted EBITDA | $14.1 | $160.7 | $101.6 | $351.8 |
| Operating cash flow | Not separately stated | Not separately stated | $219.3 | $365.3 |
Q2 revenue fell 62.9% year over year, reflecting sharp reductions in customer drilling and completion activity. Q2 operating loss includes $38.3 million of restructuring charges; the first-half operating loss also includes a $395.1 million goodwill impairment recorded in Q1. Adjusted EBITDA is a non-GAAP measure defined by the company.
Q2 segment revenue was $171.1 million in contract drilling, $59.5 million in pressure pumping, $11.7 million in directional drilling and $8.0 million in other operations. Year-over-year declines were 50.8%, 76.3%, 76.6% and 69.8%, respectively. Contract drilling’s direct margin was $84.0 million; pressure pumping’s was $3.3 million, or 5.5% of its revenue; directional drilling and other operations had negative direct margins.
Cash, debt and liquidity
- Cash and cash equivalents were $246.8 million at June 30, 2020, versus $174.2 million at December 31, 2019. Working capital was approximately $245 million.
- Six-month operating cash flow of $219.3 million funded $121.6 million of capital expenditures, $20.9 million of treasury-share purchases and $11.4 million of dividends. Cash increased by $72.6 million to $246.8 million.
- Long-term debt had $975 million principal outstanding: $525 million of 3.95% notes due 2028, $350 million of 5.15% notes due 2029 and a $100 million term loan due 2022. The balance-sheet carrying value was $967.1 million, net of debt discount and issuance costs.
- The $600 million revolving facility had no borrowings and approximately $600 million available. The company reported compliance with debt covenants at quarter-end. It also had $60.8 million of letters of credit outstanding, with none drawn.
- The company paid $0.06 per share in dividends during the first half and approved a further $0.02 per share dividend for September 2020. Future dividends remain at the board’s discretion.
Material changes and management outlook
- Average active drilling rigs declined to 82 in Q2 from 123 in Q1; management expected an average of 59 rigs in Q3. It expected 51 rigs under term contracts in Q3 and 38 on average over the 12 months ending June 30, 2021. Contract drilling backlog was approximately $334 million; about 24% was expected to remain at June 30, 2021. Contracts may be terminated on short notice.
- Pressure pumping averaged four active spreads in Q2 versus ten in Q1. Management said it had scaled the business for lower activity and intended to generate positive Adjusted EBITDA and cash flow in the second half of 2020.
- The company cut planned 2020 capital expenditures by $110 million to $140 million, emphasizing cost reductions and cash preservation. It estimated annual restructuring savings of approximately $94 million beginning in Q3, including $43 million in pressure-pumping operating savings and $22 million in SG&A savings. The plan was expected to be substantially completed in Q3, with no significant additional charges expected.
- Restructuring costs included $20.4 million of pressure-pumping contract terminations, $9.9 million of right-of-use asset abandonments and $6.5 million of severance. The company also recorded an $8.3 million impairment related to closing Canadian drilling operations and a $9.2 million charge to write down a sand-capacity deposit, which was fully written down.
- Management’s asset recoverability tests at March 31 found estimated undiscounted cash flows exceeded carrying values, but the directional-drilling asset group had only a 3% cushion. The tests assumed activity would begin recovering in 2022 as oil prices improved. Management warned that a prolonged low-price environment could lead to material future impairments.
Risks, contingencies and other notable items
Management highlighted COVID-19, oil-price volatility and OPEC+ supply conditions as drivers of reduced customer budgets and service demand. WTI ranged from a Q1 high of $63.27 per barrel to negative $36.98 on April 20, and was $40.83 on July 20. Other risks include oversupply of drilling and pressure-pumping equipment, customer payment delays or defaults, contract cancellations, additional credit downgrades, supply-chain disruption, workforce changes and further impairments. Management said current liquidity and expected operating cash flow should fund plans, debt service and dividends for at least 12 months, but availability of future financing is not assured.
Remaining minimum commitments under pressure-pumping proppant and chemical supply agreements totaled $26.4 million through 2022; equipment-purchase and investment commitments were approximately $11.7 million. The company reported ordinary-course legal proceedings and did not expect them to have a material adverse effect. A stockholder rights agreement adopted in April 2020 generally becomes exercisable if an investor acquires 10% of common stock, or 12% for passive investors; it was amended in July to exclude BlackRock and Vanguard subject to stated conditions.
Important facts for investors to verify
- Whether rig counts, term-contract coverage and the $334 million backlog develop as management expected, considering short-notice termination provisions.
- Whether pressure pumping achieves positive second-half Adjusted EBITDA and cash flow, and whether the estimated $94 million annual savings are realized.
- Whether liquidity and operating cash flow remain adequate under continued weak activity, customer-credit deterioration and potential dividend or capital-spending changes.
- Whether the assumed 2022 recovery in oil prices and activity supports asset carrying values, especially directional drilling, and whether further impairment charges arise.
- Debt covenant headroom, ratings changes and the effect of outstanding letters of credit and contractual purchase commitments on liquidity.