PTEN

Patterson Energy, Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Patterson Energy, Inc., covering the period ended June 30, 1998. The Company is engaged primarily in contract drilling operations, with additional segments in drilling fluids and oil and natural gas sales. The financial statements are unaudited but include all normal recurring adjustments. As of August 14, 1998, the Company had 31,671,132 shares of common stock outstanding.

Key Financial Metrics

Note: Debt figures reflect the increase in the line of credit utilized for acquisitions. Working capital decreased from the prior year-end due to acquisition expenditures.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 57% year-over-year, driven by a 54% increase in contract drilling revenues ($100.2 million vs. $65.2 million) and the addition of drilling fluids revenues ($7.8 million) from the Lone Star Mud acquisition.
• Profitability: Despite higher revenues, Net Income increased only marginally ($6.3 million vs. $5.9 million). Operating income for the contract drilling segment rose to $10.9 million from $7.8 million, but this was offset by increased interest expense ($2.2 million vs. $0.5 million) and higher depreciation/amortization ($12.6 million vs. $7.2 million) due to new assets.
• Acquisitions: The Company completed two major acquisitions in the first half of 1998: Lone Star Mud, Inc. ($13.0 million) and Robertson Onshore Drilling Company ($42.2 million). These transactions added 15 operable rigs and expanded the fleet to 114 rigs.
• Utilization: Average rig utilization declined to 67% for the six months ended June 30, 1998, compared to 88% in the prior year period, reflecting industry-wide softness.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes current cash levels ($17.6 million) and a remaining $10 million availability on a $70 million credit facility are sufficient for immediate needs. The credit facility was amended in February 1998 to increase capacity and adjust covenants.
• Oil Price Volatility: The Company faces significant risk from declining oil and natural gas prices. Crude oil prices dropped from an average of $19.75 per barrel in Q2 1997 to $13.12 in Q2 1998, negatively impacting the oil and gas sales segment and overall industry demand.
• Operational Risks: Key risks include intense competition, labor shortages (qualified rig personnel), drill-pipe shortages, and the potential loss of key executives (Chairman Cloyce A. Talbott and President A. Glenn Patterson).
• Year 2000 Compliance: The Company has initiated a review of computer systems for Year 2000 compliance and does not anticipate material costs or operational interruptions.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the amended debt-to-tangible net worth ratio (1.35:1.00) and current ratio (1.40:1.00) following the credit facility increase.
• Acquisition Integration: Monitor the integration of Lone Star Mud and Robertson Onshore, specifically the elimination of the Dallas administrative office planned for July 1998 to reduce G&A expenses.
• Rig Utilization Trends: Track rig utilization rates closely; a continued decline below 67% could materially impact profitability given the high fixed costs of the expanded fleet.
• Oil Price Sensitivity: Assess the impact of sustained low crude oil prices on the Company's non-drilling revenue streams and overall customer demand for drilling services.
• Goodwill Amortization: Review the impact of $44.6 million in goodwill on future earnings, as it is amortized over 15 years.