Patterson-UTI Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are in U.S. dollars; financial figures below are rounded to millions unless otherwise stated.
Business context and reporting period
Patterson-UTI provides land-based contract drilling, pressure pumping, directional drilling and related oilfield services. Results reflect a recovering oilfield-services market, as well as acquisitions: Seventy Seven Energy (SSE) was acquired in April 2017 and MS Directional in October 2017. Accordingly, year-over-year comparisons include acquired operations in 2018 that were not in the corresponding 2017 period. Superior QC, acquired in February 2018, was not material.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $809.2 million | $305.2 million |
| Operating loss | $22.1 million | $92.6 million |
| Net loss | $34.4 million; $0.16 per share | $63.5 million; $0.40 per share |
| Operating cash flow | $150.0 million | $5.6 million |
| Capital expenditures | $122.9 million | $68.4 million |
| Adjusted EBITDA (non-GAAP) | $188.0 million | $63.6 million |
Operating margin was approximately negative 2.7% of revenue, compared with negative 30.4% a year earlier; net margin was approximately negative 4.3%, compared with negative 20.8%. Pressure pumping generated $25.4 million of segment operating income, versus a $22.9 million loss in Q1 2017; its direct-cost margin rose to 21.1% of revenue from 15.7%. Contract drilling remained loss-making at $17.1 million, though improved from a $61.7 million loss. Directional drilling posted a $4.9 million operating loss.
Cash and equivalents were $304.3 million at quarter-end, up from $42.8 million at year-end 2017. Working capital was approximately $437 million. The company reported about $600 million of available revolving-credit capacity and no revolver borrowings at March 31. Gross debt was $1.125 billion, compared with $868 million at December 31, 2017; long-term debt’s carrying value was $1.119 billion. Cash flow from operations less capital expenditures was approximately $27 million.
Material changes versus the prior comparable period
- Revenue grew approximately 165%, driven by higher activity and acquired businesses. Contract drilling revenue increased 106.5%; pressure pumping increased 188.1%; directional drilling contributed $48.6 million, with no comparable 2017 segment revenue.
- Average contract-drilling operating rigs rose to 169 from 83, while average revenue per operating day increased 1.6% to $21,540. Pressure pumping completed 204 fracturing jobs versus 95, and average revenue per fracturing job increased 35.5% to approximately $1.97 million.
- Operating and net losses narrowed. The comparison is affected by acquisition timing, higher depreciation and amortization, and a much smaller income-tax benefit: Q1 2017 included a $36.9 million tax benefit, while Q1 2018 recorded $0.3 million of tax expense.
- Cash generation and cash balances increased, substantially supported by the January issuance of $525 million of 3.95% senior notes due 2028. The company used $239 million of proceeds to repay revolver borrowings; gross debt nevertheless rose year over year and versus year-end.
Outlook, risks, contingencies and unusual items
- Management expected activity to improve with relatively stable or rising oil prices. Oil averaged $62.88 per barrel in Q1 2018. The company expected demand for high-specification drilling rigs to exceed available supply through 2018 and into 2019, while emphasizing uncertainty and the industry’s exposure to commodity-price volatility.
- Management expected an average of 110 rigs operating under term contracts in Q2 2018 and 75 over the 12 months ending March 31, 2019. Contract-drilling backlog was approximately $600 million at March 31; about 15% was expected to remain at March 31, 2019. Contracts may be terminated on short notice, and backlog excludes certain fees and may be affected by standby, movement and maintenance provisions.
- The company reported creating its 24th frac spread early in Q2 using already active horsepower and expected to activate its 25th late in Q2, with substantial horsepower also coming from existing active equipment.
- Liquidity was considered sufficient for planned equipment maintenance and upgrades, debt service and dividends for at least 12 months. Capital commitments included approximately $183 million for equipment purchases and investments, plus approximately $130 million of remaining minimum proppant and chemical purchase obligations; $24.8 million of the latter related to the remainder of 2018.
- A January 22 drilling-site accident in Oklahoma killed five people, including three employees. Lawsuits seek unspecified damages, and federal agencies were investigating. The company disputed the allegations and believed insurance was adequate, excluding deductibles and investigation costs, but warned that inadequate insurance or indemnification could materially affect results and financial condition.
- Other notable items: Q1 included $2.0 million of merger and integration expense, $5.9 million of legal-related expenses and settlements, and $10.4 million of net asset-disposal gains. The board approved a $0.04-per-share dividend for payment in June, up from the $0.02-per-share Q1 dividend. The company repurchased 924,800 shares for $16.9 million during the quarter.
- Debt agreements generally cap debt to capitalization at 50%; the Series A/B notes also require an interest-coverage ratio of at least 2.50 to 1.00. The company reported compliance with the note covenants at March 31. Its results remain sensitive to oil and gas prices, customer spending, service pricing, equipment oversupply, operating hazards, labor and supply constraints, and its ability to realize backlog and acquisition benefits.
Most important facts for investors to verify
- How much of revenue and margin growth reflects sustainable activity and pricing versus acquisitions and changes in job size or mix.
- Whether operating cash flow can support elevated capital expenditures, debt service, dividends and buybacks if commodity prices or customer spending weaken.
- Actual rig and frac-spread utilization, realized dayrates and pressure-pumping margins, and conversion of the stated backlog into revenue.
- The final cost, insurance coverage and legal or regulatory outcomes related to the Oklahoma accident.
- Debt covenant headroom, future equipment and minimum-purchase commitments, and the company’s accounting estimates for taxes and acquired assets.