Patterson-UTI Energy, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2015. Patterson-UTI provides land contract drilling and pressure pumping services, and has non-operating oil and natural gas interests. The filing describes a severe industry downturn following falling oil prices and reduced customer capital spending.
Financial performance and position
Amounts below are in millions of dollars except per-share data and where noted.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $472.8 | $757.3 | $1,130.5 | $1,435.4 |
| Operating income (loss) | $(24.8) | $87.2 | $(0.7) | $146.0 |
| Net income (loss) | $(19.0) | $54.3 | $(9.9) | $89.1 |
| Diluted EPS | $(0.13) | $0.37 | $(0.07) | $0.61 |
| Adjusted EBITDA | $157.2 | $240.7 | $356.6 | $446.8 |
- Q2 revenue declined 37.6% year over year; first-half revenue declined 21.2%. Lower activity drove the deterioration. Q2 operating loss was $24.8 million, versus operating income of $87.2 million a year earlier.
- Contract drilling Q2 revenue fell 34.3% to $288.3 million; segment operating income fell to $9.4 million from $69.6 million. Average operating rigs were 123 in the segment table versus 204 a year earlier. Average revenue per operating day rose 8.8% to $25,720, helped by $15.6 million in early-termination revenue.
- Pressure pumping Q2 revenue fell 42.4% to $176.6 million and the segment recorded an $18.7 million operating loss, versus $24.9 million income. Jobs declined 48.6%; margin as a percentage of revenue fell to 19.2% from 21.1%.
- Operating cash flow was $640.7 million in the first half, versus $360.2 million. Investing activities used $452.9 million, including $463.6 million for property, equipment and acquisitions, partly offset by asset-sale proceeds. Cash at June 30 was $76.5 million, up from $43.0 million at year-end.
- At June 30, working capital was approximately $68 million and the company reported $500 million available under its revolving facility. Total debt was $872.5 million, down from $985.5 million at year-end; it included $600 million of senior notes, $77.5 million under the existing term loan and $195 million under the 2015 term loan. The company reported covenant compliance. Revolver and term-loan maturities are in 2017; the senior notes mature in 2020 and 2022.
- Dividends were $0.10 per share in each of Q1 and Q2. The board approved another $0.10 dividend for September 2015. The 2013 buyback program had approximately $186.8 million remaining at June 30.
Material changes, outlook and risks
- Management cited lower oil prices and customer spending cuts: U.S. industry rig counts had fallen more than 50% from the October 2014 peak. Patterson-UTI had 110 U.S. rigs operating at June 30, compared with a peak of 214 in October 2014. The filing gives differing Q2 average U.S. rig counts—122 in the narrative and 123 in the segment table.
- Management expected the remainder of 2015 to remain challenging, with further declines in drilling and pressure-pumping activity and pricing. It expected the average rig count to decline more slowly in Q3 than in Q2. Cost reductions, lower supplier prices and reduced 2015 capital spending were underway; management said term-contract coverage and scalable costs should help the company weather the downturn.
- Contract drilling backlog was approximately $1.0 billion at June 30, with about $388 million expected to be realized in the remainder of 2015. Contracts may be terminated on short notice, and backlog calculations reflect reduced early-termination rates where notices were received.
- Management said current liquidity and expected operating cash flow should support planned equipment investment, debt service and dividends, but noted that future financing for growth may not be available on reasonable terms. Depressed or further-declining commodity prices could materially harm demand, rates, utilization, margins and cash flows.
- Notable items included a $12.3 million first-quarter charge for settlement of an EEOC lawsuit on a no-fault basis. Oil and gas property impairments were $4.1 million in Q2 and $7.4 million in the first half. First-half results also included a deferred tax benefit; management attributed the reported effective tax rate partly to tax-law benefits and the expected difference between book and taxable income.
- Commitments included approximately $189 million of major equipment purchases and $57.9 million of remaining minimum proppant and chemical purchase obligations, with potential liquidated damages for shortfalls. The company had $41.3 million of letters of credit outstanding; none had been drawn.
Most important facts for investors to verify
- Whether rig counts, dayrates and pressure-pumping job volumes and pricing stabilize or continue to decline; reconcile the filing’s Q2 average U.S. rig-count figures of 122 and 123.
- How much of the $1.0 billion drilling backlog converts to revenue, given early-termination rights and reduced rates on certain contracts.
- Cash-flow sustainability: first-half operating cash flow benefited from substantial working-capital movements, including collections of receivables and income-tax balances.
- Debt covenant headroom and the effect of floating-rate borrowing; the filing reports compliance but does not provide a clear numerical measure of covenant cushion.
- Ability to meet equipment and vendor commitments while maintaining dividends if the downturn persists, and any further impairments or legal liabilities.