Patterson-UTI Energy, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and results
The company provides land-based contract drilling and pressure pumping services and invests in oil and natural gas properties. It reported continuing operations in these three segments. The electric wireline business acquired in October 2010 was sold on January 27, 2011; its results are presented as discontinued operations.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $567.4 | $271.6 |
| Operating income | $117.5 | $7.8 |
| Income before taxes | $113.8 | $6.7 |
| Income tax expense | $42.2 | $2.5 |
| Net income | $71.3 | $4.2 |
| Diluted earnings per share | $0.46 | $0.03 |
| Operating margin | 20.7% | 2.9% |
| Net margin | 12.6% | 1.5% |
Cash flow, liquidity and debt
- Operating cash flow was $173.1 million, versus $87.7 million a year earlier. Property and equipment purchases were $182.6 million, making operating cash flow less those purchases approximately negative $9.4 million.
- Cash increased $10.1 million during the quarter to $37.7 million. Cash sources included $25.5 million from the wireline business sale; investing cash flow was negative $155.1 million and financing cash flow was negative $8.2 million.
- Working capital was approximately $271 million, compared with $241 million at year-end 2010; current assets were $613.2 million and current liabilities $342.0 million.
- Total debt was $397.5 million: $97.5 million under the term loan and $300 million of senior notes. There were no revolving-credit borrowings; approximately $359 million was available after outstanding letters of credit. Cash less total debt was approximately negative $359.8 million.
- The term loan carried a 3.125% rate at quarter-end; the senior notes carry a 4.97% coupon and mature in 2020. The company reported compliance with its credit-agreement covenants.
- The quarterly dividend was $0.05 per share. A further $0.05 dividend was approved for payment June 30, 2011.
Material changes and management commentary
- Revenue more than doubled year over year. Contract drilling revenue rose 79% to $377.4 million; pressure pumping revenue rose 234% to $179.7 million. Oil and natural gas revenue increased 46% to $10.4 million.
- Drilling activity strengthened: average operating rigs increased to 207 from 142, and average revenue per operating day rose 23% to $20,240. Management attributed gains to higher activity and dayrates, largely reflecting increased demand associated with higher oil prices.
- Pressure pumping growth reflected the October 2010 acquisition and increased larger, multi-stage fracturing work. The acquired business contributed $96.8 million of revenue and $27.6 million of operating income in Q1 2011.
- The company sold the electric wireline business for $25.5 million in cash and recorded a $0.4 million after-tax discontinued-operations loss in Q1. No significant additional sale gain or loss was reported.
- Capital spending was approximately $182.6 million, and the company had commitments to purchase approximately $264 million of major equipment. Management said available liquidity and expected operating cash flow should fund current equipment plans, improvements and dividends; additional growth financing may depend on availability and terms.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management noted that results depend heavily on oil and natural gas prices, customer spending, drilling activity, service pricing and utilization. It cautioned that volatility in commodity prices, excess or newly constructed drilling and pressure-pumping capacity, equipment and labor constraints, acquisition integration, and customer payment difficulties could adversely affect results and cash flows. Management stated that first-quarter results are not necessarily indicative of full-year results.
Income tax expense included $38.6 million of deferred tax expense. The company also disclosed $41.2 million of letters of credit supporting insurance-related obligations; none had been drawn. It did not believe pending legal proceedings would have a material adverse effect. A one-percentage-point increase in the variable rate on the term loan outstanding at quarter-end would increase annual cash interest expense by approximately $975,000.
Important facts for investors to verify
- How much of the sharp revenue and profit improvement is sustainable, particularly the acquired pressure-pumping contribution versus underlying growth, pricing and job mix.
- Whether operating cash generation can support the substantial equipment investment and $264 million of outstanding purchase commitments without increased borrowing.
- The effects of commodity-price changes, industry capacity additions and service-demand shifts on drilling utilization, dayrates and pressure-pumping margins.
- The company’s future capital allocation, dividend decisions and covenant headroom as equipment spending and business conditions evolve.
- The continuing effects of the wireline sale and the composition and cash consequences of the reported tax expense.