Patterson-UTI Energy, Inc. — FY 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; quarterly figures are also provided. Patterson-UTI provides U.S. and Canadian land contract drilling, pressure pumping and directional drilling services, alongside rentals, technology, controls and other operations. The 2018 results include acquisitions of Superior QC and Current Power; 2017 comparisons include the partial-year contributions of SSE and MS Directional.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3.327 billion | $2.357 billion |
| Operating loss | $322.2 million | $292.5 million |
| Net income (loss) | $(321.4) million | $5.9 million |
| Diluted EPS | $(1.47) | $0.03 |
| Cash from operating activities | $730.7 million | $300.7 million |
| Capital expenditures | $641.5 million | $567.1 million |
| Adjusted EBITDA (non-GAAP) | $806.0 million | $491.1 million |
- Revenue grew 41.2%. Contract drilling revenue rose 37.5% to $1.430 billion; pressure pumping revenue rose 31.1% to $1.573 billion. Directional drilling revenue was $209.3 million, up from $45.6 million, partly reflecting acquisition timing.
- All three reportable segments recorded operating losses in 2018: contract drilling $(33.1) million, pressure pumping $(77.3) million and directional drilling $(117.5) million. Other operations lost $18.2 million.
- Consolidated operating margin was approximately negative 9.7%. Pressure pumping’s direct margin was 19.7% of segment revenue, versus 19.5% in 2017; this measure excludes depreciation, impairment and SG&A.
- Operating cash flow less capital expenditures was approximately $89.2 million. Cash and cash equivalents were $245.0 million; working capital was $423.9 million.
- Year-end debt principal was $1.125 billion, with no revolver borrowings. The balance sheet reported $1.119 billion of long-term debt net of discounts and issuance costs. The $600 million revolving facility had $81 million of letters of credit outstanding; the filing describes approximately $600 million of available borrowing capacity.
Changes versus the prior period
- Higher operating activity lifted both major service lines: average U.S. rigs operating increased to 175 from 136, while pressure-pumping fracturing jobs rose to 812 from 622.
- Despite revenue and operating-cash-flow growth, the company reported a larger net loss. It recorded $211.1 million of goodwill impairment, eliminating all goodwill in pressure pumping and directional drilling, plus charges including $48.4 million for retirement of 42 legacy rigs and $17.4 million for obsolete sand-handling equipment.
- 2017 net income was affected by a substantial tax benefit associated primarily with U.S. tax reform; it is not directly comparable to 2018 earnings.
- Debt increased after the company issued $525 million of 3.95% senior notes due 2028. Proceeds partly repaid revolver borrowings. The company spent $161.7 million on treasury-stock purchases in 2018 and paid $30.6 million in dividends, up from $16.3 million in 2017.
Outlook, risks and unusual items
- Management expected 2019 capital expenditures of approximately $465 million, based on near-term activity. Contract drilling backlog was $770 million at year-end, up from $544 million; about 23% was expected to remain after 2019. Backlog is not assured and can be affected by termination, renegotiation, pricing and customer performance.
- Based on contracts in place, management expected an average of 122 rigs operating under term contracts in Q1 2019 and 78 on average during 2019. Late-2018 oil-price weakness delayed customer completion projects and pressure-pumping pricing remained highly competitive. The company ended 2018 with 20 active frac spreads and idled three more early in 2019 rather than accept unreasonably low prices.
- WTI averaged $59.08 per barrel in Q4 2018, after falling 42% from an early-October high to a late-December low. Management’s long-lived asset assumptions contemplated lower activity than Q4 2018, with recovery beginning in late 2019 and continuing into 2020; prolonged lower prices could cause future material impairment.
- A January 2018 Oklahoma drilling-site accident killed five people, including three employees. Related lawsuits seek unspecified damages, including punitive damages; EPA and CSB investigations remained ongoing. OSHA proposed approximately $74,000 in penalties, which the company contested. Management believed insurance was adequate, while noting uninsured or unrecoverable exposure could be material.
- Other key risks include commodity-price volatility, excess industry equipment and pricing pressure, customer concentration (top ten customers represented 41% of 2018 revenue), operational and environmental hazards, supply constraints, regulation of hydraulic fracturing, cybersecurity, and possible limits on use of tax-loss carryforwards.
- The company reported compliance with its note covenants at year-end. Its $1.3 billion of gross federal tax NOLs may be subject to utilization limits, including ownership-change restrictions. The filing also reported $107 million of equipment and investment commitments and $114 million of minimum proppant and chemical purchase obligations.
Most important facts for investors to verify
- Whether the 2019 rig and frac-spread outlook, backlog conversion and projected capital spending held up as commodity prices and customer budgets changed.
- Whether operating cash flow can sustain planned capital expenditures, debt service, dividends and any further repurchases; assess liquidity and covenant headroom against the $1.125 billion debt principal.
- Whether the 2018 impairment assumptions remain supportable and whether additional asset or goodwill impairments become necessary.
- Developments, insurance coverage and potential financial exposure related to the Oklahoma accident litigation and investigations.
- Segment-level utilization, pricing and margins, particularly pressure pumping and directional drilling, and the effect of acquisitions and equipment retirement on reported comparisons.
The filing reports an unqualified audit opinion on the consolidated financial statements and effective internal control over financial reporting as of December 31, 2018.