Patterson-UTI Energy, Inc. — 2013 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2013; it also reports fourth-quarter results. Patterson-UTI provides land-based contract drilling and pressure pumping services in North America and holds non-operating oil and natural gas interests. At year-end, it had 279 marketable drilling rigs and approximately 763,000 hydraulic horsepower of pressure-pumping equipment. Unless stated otherwise, amounts are U.S. dollars.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $2.716 billion | $2.723 billion |
| Operating income | $322.2 million | $497.4 million |
| Net income | $188.0 million | $299.5 million |
| Diluted EPS | $1.28 | $1.96 |
| Cash from operating activities | $888.9 million | $1.005 billion |
| Capital expenditures | $662.5 million | $974.0 million |
| Cash and cash equivalents at year-end | $249.5 million | $110.7 million |
| Working capital at year-end | $454.4 million | $340.1 million |
| Total debt at year-end | $692.5 million | $698.8 million |
- Full-year consolidated operating margin was approximately 11.9%, versus 18.3% in 2012. Contract-drilling margin (revenue less direct operating costs) was $710.9 million, or about 42.3% of segment revenue; pressure-pumping margin was $234.9 million, or 24.0%.
- Fourth-quarter 2013 revenue was $658.8 million, operating income $32.1 million, net income $16.6 million, and diluted EPS $0.11. In fourth-quarter 2012, those figures were $652.8 million, $100.2 million, $58.9 million, and $0.40, respectively.
- Operating cash flow less purchases of property and equipment was approximately $226.4 million in 2013, compared with $31.4 million in 2012; this is a simple cash-flow less capital-spending measure, not a company-reported free-cash-flow metric.
- The company had $92.5 million outstanding under its term loan, no revolving-credit borrowings, and approximately $460 million of available revolver capacity after letters of credit. Its $600 million of senior notes are due in 2020 and 2022. It reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue was nearly flat year over year, but operating income declined about 35% and net income about 37%.
- Contract-drilling revenue fell 7.8%; average rigs operating decreased 13.1% to 192, while average revenue per operating day rose 6.6% to $24,020. The fourth-quarter average was 192 operating rigs versus 206 a year earlier.
- Pressure-pumping revenue increased 16.3%, but direct operating costs rose 28.1%; segment operating income fell 34.3%, and margin as a share of revenue declined from 31.0% to 24.0%. Larger, more intensive fracturing jobs lifted both revenue and costs.
- Depreciation, depletion, amortization and impairment increased to $597.5 million from $526.6 million. 2013 included $29.9 million of additional depreciation related to 55 out-of-contract mechanical rigs with reduced expected utilization, as well as $7.9 million for rigs removed from the marketable fleet.
- 2012 benefited from $33.8 million in net asset-disposal gains, including the sale of flowback operations; 2013 recorded $3.4 million. The company also cited higher depreciation and pressure-pumping costs as drivers of lower earnings.
Outlook, risks, contingencies, and unusual items
- Management planned to complete 20 additional APEX drilling rigs in 2014. Contract-drilling backlog at year-end was approximately $946 million, of which about $660 million was expected to be realized in 2014. Backlog may not be fully realized because customer termination rights and other conditions can reduce or eliminate expected payments.
- Management said available working capital, revolver capacity, and expected operating cash flow should fund current equipment plans, debt service, and dividends. This is not specific earnings or revenue guidance; no clear numerical full-year 2014 earnings outlook is provided.
- The board approved a $0.10-per-share dividend for payment in March 2014. The company repurchased $73.5 million of shares in 2013 and had approximately $187 million remaining under its $200 million buyback authorization at year-end.
- Year-end commitments included approximately $225 million for major equipment purchases and $25.2 million of minimum proppant and chemical purchases, with potential liquidated damages for purchase shortfalls.
- Key business risks include volatile oil and natural-gas prices and customer spending, excess drilling and pressure-pumping capacity, a customer shift away from mechanical rigs, competition and pricing pressure, supply constraints, labor availability, and operational, weather, environmental, and insurance exposures. Hydraulic-fracturing and greenhouse-gas regulation could raise costs or reduce customer activity.
- One customer represented approximately $286 million, or 10.5%, of 2013 consolidated revenue; the top five customers represented about 29%.
- The EEOC made cause findings in 2013 concerning alleged workplace discrimination and retaliation. Conciliation was underway; management said it did not expect a material financial impact but could not assure the outcome.
- The company recorded $4.0 million of oil and gas property impairments. Its 2013 goodwill test indicated no impairment, but management cautioned that weaker market conditions could result in a future material charge. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the expected 2014 realization of $660 million in drilling backlog materialized, and whether cancellations or early-termination payments affected it.
- Subsequent rig utilization, day rates, and deployment of the 20 planned APEX rigs, particularly as customer demand shifts toward electric rigs.
- Whether pressure-pumping pricing and margins improved despite rising job costs and industry-wide excess capacity.
- Actual capital spending against equipment commitments, and the effect on cash generation, net debt, dividends, and share repurchases.
- Developments and any financial exposure from the EEOC matter, environmental or operational claims, and changes in relevant regulation.
The filing states that the independent auditor issued an unqualified opinion on the consolidated financial statements and that internal control over financial reporting was effective as of December 31, 2013.