Patterson-UTI Energy, Inc. — Q2 2010 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. The company provides land contract drilling and pressure-pumping services and holds working interests in oil and gas properties. It sold substantially all assets of its drilling and completion fluids business in January 2010, which is presented as discontinued operations.
Financial performance and position
- Q2 revenue: $307.0 million, up 118% from $140.5 million. Contract drilling contributed $240.0 million; pressure pumping $59.4 million; oil and gas $7.7 million.
- Q2 earnings: Operating income was $45.8 million versus an operating loss of $25.9 million; net income was $29.5 million versus a net loss of $17.7 million. Diluted EPS was $0.19 versus a loss of $0.12. Operating and net margins were approximately 14.9% and 9.6%, respectively.
- Six-month results: Revenue was $578.6 million versus $408.7 million; operating income was $53.6 million versus an operating loss of $0.7 million; net income was $33.7 million versus a net loss of $1.5 million. Diluted EPS was $0.22 versus a loss of $0.01.
- Cash flow and investment: Six-month operating cash flow was $293.6 million, compared with $353.0 million in 2009. Purchases of property and equipment were $298.8 million, making operating cash flow less those purchases approximately negative $5.3 million. Cash rose to $96.0 million from $49.9 million at year-end.
- Liquidity and debt: Working capital was $87.2 million, down from $264 million at December 31, 2009. There were no revolving-credit borrowings; $41.2 million of letters of credit left approximately $199 million available under the $240 million facility. Total liabilities were $691.6 million; no funded debt balance is reported.
- Capital returns and obligations: Six-month dividends were $0.10 per share ($15.4 million). The company had approximately $215 million of major-equipment purchase commitments at quarter-end.
Material changes versus prior comparable periods
- Q2 contract-drilling revenue rose 136%, primarily as average operating rigs increased to 156 from 63 and operating days rose 148%. Revenue per operating day declined 4.8% to $16,920, while direct cost per operating day increased 5.6%.
- Pressure-pumping Q2 revenue rose 77% and the segment returned to profit, with operating income of $6.7 million versus a loss of $0.9 million. Larger Appalachian Basin fracturing jobs raised average revenue per fracturing job.
- For the first half, drilling revenue rose 38%, but average revenue per operating day fell 12.3% to $16,690. The 2009 comparison included $7.5 million of early-termination drilling revenue; none was recorded in 2010.
- Q2 earnings included a $20.1 million pretax gain on selling oil-and-gas exploration and development rights (approximately $12.9 million after tax). The gain materially contributed to reported profitability.
- Cash from operations was lower year over year, while equipment purchases were higher. Management attributed the decrease in working capital mainly to capital spending and equipment deposits exceeding operating cash flow.
Outlook, commentary, risks, and unusual items
- Management said cash, operating cash generation, and available revolving-credit capacity should fund current equipment plans, improvements, and dividends. The filing provides no specific earnings or operating guidance and cautions that interim results are not necessarily indicative of full-year results.
- On July 2, 2010, the company agreed to acquire certain Key Energy pressure-pumping and electric-wireline assets for approximately $238 million cash; closing was expected in September 2010. It also arranged a potential single-draw, unsecured term facility of up to $250 million to help finance the transaction. The acquisition and financing were subsequent events, not completed at quarter-end.
- Commodity-price volatility and customer spending influence demand, rig utilization, service pricing, and cash flows. Other stated risks include excess drilling-rig capacity, reactivation or construction of competing rigs, equipment and labor constraints, customer credit risk, acquisition integration, and regulatory or environmental changes.
- The company reported $86.2 million of goodwill in contract drilling and warned that weaker market conditions could lead to a potentially material impairment. It also disclosed scrutiny of hydraulic-fracturing practices and possible additional regulation.
- The company reported compliance with revolving-facility financial covenants at June 30. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. Disclosure controls were assessed as effective.
Key facts for investors to verify
- How much of the return to quarterly profitability reflects recurring operating improvement versus the $20.1 million asset-sale gain.
- Whether drilling utilization and day rates can sustain improvement as rig capacity and commodity prices fluctuate.
- Completion, final purchase-price adjustments, funding, and integration costs for the approximately $238 million Key Energy asset acquisition.
- Cash requirements for the $215 million equipment commitments and other capital spending, alongside dividends and liquidity needs.
- Potential impact of hydraulic-fracturing regulation, environmental obligations, and any future contract-drilling goodwill impairment.