Patterson-UTI Energy, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company provides land-based contract drilling and pressure pumping services and holds non-operating oil and gas interests.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior year-end |
|---|---|---|
| Revenue | $657.7 | $678.2; down 3.0% year over year |
| Operating income | $24.1; 3.7% margin | $58.8; 8.7% margin |
| Net income | $9.1; $0.06 diluted EPS | $34.8; $0.24 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $199.5 | $206.1 |
| Operating cash flow | $405.0 | $179.5 |
| Capital expenditures | $241.5 | $170.4 |
| Cash and working capital | $86.9 cash; approximately $127 working capital | $43.0 cash at Dec. 31, 2014 |
| Total debt | $880.0 | $985.5 at Dec. 31, 2014 |
- Operating cash flow benefited substantially from working-capital movements, including a $176.7 million accounts-receivable cash source and $112.7 million from income taxes receivable/payable. Operating cash flow less reported capital expenditures was approximately $163.5 million.
- Debt at quarter-end comprised $80 million under the existing term loan, $200 million under a new term loan, and $600 million of senior notes; there were no revolver borrowings. Almost $500 million of revolver capacity was available. Cash less total debt was approximately $793 million.
- The company paid a $0.10-per-share dividend during the quarter and approved another $0.10 dividend for June 2015. It reported $187 million remaining under its $200 million share repurchase authorization; no shares were repurchased in Q1.
Material changes and segment results
- Contract drilling: Revenue declined 5.7% to $401.5 million and operating income fell 16.3% to $56.1 million. Operating days decreased 14.8%; average revenue per operating day rose 10.7% to $25,870, including $15.8 million of early-termination revenue. The segment’s reported operating costs included a $12.3 million EEOC settlement charge.
- Pressure pumping: Revenue increased 3.9% to $249.7 million, but the segment recorded a $15.0 million operating loss versus $1.5 million operating income a year earlier. Jobs fell 25.7%, while direct costs rose 6.5% and depreciation increased 37.8%; margin as a percentage of revenue declined to 14.8% from 16.8%.
- Oil and natural gas: Revenue declined 45.9% to $6.5 million and the segment posted a $4.6 million operating loss, including $3.4 million of property impairments. Lower commodity prices and lower oil production contributed to the revenue decline.
- Depreciation, depletion, amortization and impairment rose to $175.4 million from $147.3 million, reflecting recent investment and impairments. Selling, general and administrative expense rose to $32.8 million from $19.7 million, largely due to the EEOC charge.
- The effective tax rate was 42.4%, versus 32.7%. Management expected a full-year 2015 pretax book loss but taxable income; the expected production-activities deduction contributed to the unusually high quarterly effective rate.
Outlook, risks and contingencies
- Management described a severe, fast-changing industry downturn following the oil-price decline. It expected 2015 to remain challenging, with further declines in drilling activity and spot dayrates and in pressure-pumping activity and pricing.
- U.S. operating rigs fell from a peak of 214 in October 2014 to 126 on April 23, 2015. The Q1 average was 165 U.S. rigs and 8 Canadian rigs, versus 193 and 10, respectively, a year earlier; March averages were 142 U.S. and 4 Canadian rigs. Management expected U.S. rig activity to decline further in Q2.
- Management was reducing costs and capital spending, and planned to build only drilling rigs already committed under term contracts. It cited term-contract coverage and the ability to scale labor and other costs as support, while warning that sustained low or lower oil prices could materially harm results, cash flows and financial condition.
- Contract-drilling backlog was approximately $1.24 billion at March 31, with about $622 million expected to be realized during the remainder of 2015. Backlog is not assured: contracts may be terminated on short notice and amounts can be affected by reduced termination rates, downtime and other contract terms.
- Liquidity included nearly $500 million of revolver availability. The company reported compliance with debt covenants at quarter-end. Credit agreements include 45% maximum debt-to-capitalization and 3.00:1 minimum interest-coverage tests; the 2015 term loan also restricts dividends and repurchases unless a specified pro forma debt-to-EBITDA test is met.
- Commitments included approximately $350 million of major equipment purchases and $69.3 million of remaining minimum proppant and chemical purchases, including $13.0 million due for the rest of 2015. Failure to meet minimum purchase volumes could trigger liquidated damages.
- The EEOC consent decree required a $12.26 million settlement payment and was approved by a federal judge on April 17, 2015, after quarter-end. An EPA order entered in April imposed an approximately $0.5 million penalty and required a compliance assessment. Other proceedings were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether rig counts, dayrates and pressure-pumping utilization and pricing deteriorated as management expected, and how much backlog remained realizable after contract terminations.
- Whether operating cash flow remains strong after the quarter’s significant receivables and tax-related working-capital inflows.
- Whether pressure-pumping margins recover, given the operating loss, lower job count and higher costs and depreciation.
- Capital-spending commitments, the new term-loan repayment schedule, covenant headroom and the effect of restricted-payment provisions on dividends or repurchases.
- Payment and accounting treatment of the EEOC settlement and EPA penalty, and progress on the required environmental compliance assessment.