PATTERSON UTI ENERGY INC quarterly report, Q2 FY2016

Patterson-UTI Energy, Inc. — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. The company provides land-based contract drilling and pressure pumping services, and holds non-operating oil and natural gas interests. Results reflect a severe industry downturn following the oil-price decline.

Financial performance

MetricQ2 2016Q2 2015Six months 2016Six months 2015
Revenue$193.9m$472.8m$462.8m$1,130.5m
Operating loss($124.3m)($24.8m)($219.6m)($0.7m)
Net loss($85.9m)($19.0m)($156.4m)($9.9m)
Diluted loss per share($0.58)($0.13)($1.06)($0.07)
Adjusted EBITDA$46.7m$157.2m$128.2m$356.6m
Operating cash flowNot separately provided for Q2$181.9m$640.7m
Capital expenditures$30.0m$218.6m$51.8m$463.6m

Q2 contract drilling revenue fell 60% year over year; its segment margin was $51.4m, or about 44.6% of revenue, versus $134.5m, or about 46.6%. Pressure pumping revenue fell 58%; segment margin declined to $4.4m, or 6.0% of revenue, from $33.9m, or 19.2%. These segment margins exclude depreciation, amortization, impairment and SG&A.

At June 30, cash was $209.6m, working capital was approximately $164m, and total debt was $830m. The company reported $500m available under its revolving facility at that date. It was in compliance with its debt covenants. Subsequent to quarter-end, it repaid $230m of bank term loans using $160m of cash and $70m drawn on the revolver; as of August 2, $70m was drawn and $430m of borrowing capacity remained. The July credit amendment extended $357.9m of revolver commitments to March 2019 and added borrowing-base and restricted-payment provisions.

Changes versus prior period

  • Q2 revenue decreased 59% year over year and net loss widened to $85.9m from $19.0m. Six-month revenue declined 59%, while operating results moved from near breakeven to a $219.6m loss.
  • U.S. rigs averaged 55 in Q2 versus 122 a year earlier; operating days declined 55%. Pressure-pumping fracturing jobs fell 50%, and average revenue per fracturing job declined 15%.
  • Operating cash flow was $181.9m versus $640.7m in the first half of 2015, alongside substantially lower capital spending. Cash nevertheless increased to $209.6m from $113.3m at year-end 2015.
  • The quarterly dividend was reduced to $0.02 per share for the June payment, from $0.10 in March and $0.10 per quarter in 2015. The board approved another $0.02-per-share dividend for September 2016.

Outlook, risks and notable items

  • Management said activity had stabilized but did not expect a significant recovery until commodity prices improve. Its asset-recoverability assessment assumed activity in drilling and pressure pumping would begin recovering by early 2017; this is an assumption, not a firm forecast.
  • At June 30, 55 U.S. rigs were operating, down 74% from the October 2014 peak of 214. Management expected an average of 45 rigs on term contracts in Q3 and 42 during the second half of 2016. Contract-drilling backlog was approximately $500m; more than 60% was expected to remain at year-end. Backlog is subject to customer termination and other adjustments.
  • Approximately 53% of the pressure-pumping fleet was stacked. Management expected remaining-2016 capital expenditures to focus mainly on maintenance and drilling-rig upgrades, and planned to continue adjusting costs to activity levels.
  • Oil prices averaged $45.41 per barrel in Q2, and management emphasized continued commodity-price uncertainty, excess service capacity, customer spending, pricing pressure and competition as key risks. Lower demand or prices could further impair revenue, margins, cash flows and access to capital.
  • First-half results included $2.2m of oil and gas property impairment, all recorded in Q1; none was recorded in Q2. Other operating income included $7.3m of asset-disposal gains for the first half, partly offset by $1.1m of legal-settlement expense; comparable 2015 included $12.3m of legal settlements.
  • Commitments included $55.1m of major equipment purchases and $23.5m of remaining minimum proppant and chemical purchases, including $6.5m due in the remainder of 2016. The company reported $38.2m of letters of credit, with none drawn, and said routine legal proceedings were not expected to have a material adverse effect.

Investor verification priorities

  • Track rig count, dayrates, term-contract coverage and the conversion and termination risk of the reported $500m drilling backlog.
  • Monitor pressure-pumping utilization, pricing, stacked capacity and segment margins for evidence of recovery or further deterioration.
  • Verify post-amendment cash, revolver availability, debt maturities, borrowing-base capacity and compliance with the revised credit agreement, including restrictions on dividends and share repurchases.
  • Assess whether operating cash flow can sustain maintenance capital spending, debt service and dividends through the downturn; future dividends remain discretionary.
  • Review the assumptions underlying the anticipated early-2017 activity recovery and the potential for further asset impairments if prices or activity weaken.