Patterson-UTI Energy, Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023. This is an annual filing; the supplied text does not provide a complete standalone fourth-quarter income statement. Comparisons with 2022 are significantly affected by the NexTier merger and Ulterra acquisition, which closed in September and August 2023, respectively.
Business context
Patterson-UTI provides contract drilling, directional drilling, hydraulic fracturing and other completion services, and drill-bit products. It reports three segments: drilling services, completion services and drilling products. The 2023 results include NexTier from September 1 and Ulterra from August 14.
Financial and operating performance
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Revenue | $4.146 billion | $2.648 billion |
| Operating income | $352.0 million | $211.0 million |
| Net income | $246.0 million | $154.7 million |
| Diluted EPS | $0.88 | $0.70 |
| Adjusted EBITDA (non-GAAP) | $1.183 billion | $693.8 million |
| Cash provided by operating activities | $1.006 billion | $566.2 million |
| Cash capital expenditures | $615.7 million | $436.8 million |
Revenue rose 56.6% year over year; operating income increased 66.8% and net income 59.0%. Approximate operating and net margins were 8.5% and 5.9%, respectively, compared with 8.0% and 5.8% in 2022. Adjusted EBITDA margin was approximately 28.5%, versus 26.2%. These comparisons reflect acquisitions as well as operating changes.
- Segments: Drilling services revenue was $1.920 billion, up 24.3%, with operating income of $422.0 million, up 181.7%. U.S. average revenue per operating day rose 31.5%, while direct operating costs per day rose 12.1%.
- Completion services revenue was $2.017 billion and operating income $140.2 million. The year-over-year reported increase largely reflects NexTier; excluding NexTier, legacy completion revenue and direct costs declined 7.9% and 6.3%, respectively, amid calendar inefficiencies and lower pricing.
- Drilling products, added through Ulterra, contributed $134.7 million revenue and a $6.5 million operating loss for the post-acquisition period. Purchase-accounting fair-value step-ups increased its 2023 direct costs and depreciation.
- Cash flow: Operating cash flow less cash capital expenditures was approximately $390.2 million, versus $129.4 million in 2022. Cash flow and working capital can be affected by receivables, inventory and payables movements.
- Liquidity and debt: Year-end cash and cash equivalents were $192.7 million; working capital was approximately $435 million. The company reported no revolver borrowings and approximately $597 million available under its $600 million revolving facility. Long-term debt was $1.246 billion in principal ($1.225 billion carrying value), versus $836.4 million principal in 2022. Total year-end letters of credit were $92.4 million.
Material changes and unusual items
- Completed the NexTier merger, valued at approximately $2.8 billion including assumed debt, and the Ulterra acquisition, valued at approximately $897 million. The transactions expanded completion services and added global drill-bit operations.
- Issued $400 million of 7.15% senior notes due 2033; proceeds were used to repay revolver borrowings. Year-end debt also included $483 million of 3.95% notes due 2028, $345 million of 5.15% notes due 2029 and $18.7 million of equipment loans due 2025.
- Merger and integration expense was $98.1 million, including $84.8 million of accelerated stock compensation and other transaction-related costs. A $5.2 million favorable legal settlement and a $6.5 million reversal of cumulative compensation costs contributed to other operating income.
- A change in estimated useful lives and accounting treatment for certain completion equipment reduced 2023 operating income by $30.7 million and net income by $24.3 million, or $0.09 per diluted share.
- No goodwill impairment was recorded after testing prompted by a sustained share-price decline. Estimated fair value exceeded carrying value by only 4% for drilling products, compared with 11% for completion services and 80% for cementing services.
Outlook, risks and contingencies
- Management expected an average of 120 U.S. rigs in Q1 2024; 79 were expected to operate under term contracts in that quarter. The company expected an average of 52 rigs under term contracts during 2024.
- Management anticipated a modest Q1 2024 decline in completion activity, while drilling-products demand was expected to remain steady. The 2024 capital expenditure forecast was approximately $740 million.
- U.S. drilling backlog was approximately $700 million at year-end, down from $830 million in 2022; about 16% was reasonably expected to remain after 2024. Backlog may not be realized, including because contracts can be terminated in some circumstances.
- Key exposures include volatile oil and gas prices, customer capital-spending decisions, competitive pricing and equipment oversupply, inflation and labor costs, supply commitments, customer concentration, operational and environmental hazards, cybersecurity, regulation and climate-related risks. The top ten customers supplied approximately 49% of 2023 revenue; one customer accounted for 14%.
- Ulterra subsidiaries are defending a patent/license claim brought by an NOV subsidiary. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect; an unfavorable outcome in the patent matter could be material.
- The NexTier merger triggered a Section 382 ownership change that is expected to limit use of historical U.S. net operating losses and could increase cash taxes. Gross U.S. federal NOLs were approximately $1.9 billion before valuation allowances.
- Management said current liquidity and expected operating cash flows should be sufficient for planned needs for at least 12 months. It also reported compliance with debt covenants and effective internal control over financial reporting; the auditor issued an unqualified opinion. The auditor’s internal-control assessment excluded NexTier and Ulterra, acquired during 2023.
Important facts for investors to verify
- Review acquisition pro forma results and subsequent filings to distinguish underlying performance from partial-year consolidation, purchase accounting and integration costs.
- Track cash conversion, working-capital movements, the $740 million 2024 capex forecast and capital returns against free cash flow.
- Monitor debt maturities, including $50 million of revolver commitments scheduled to mature in March 2024, and the company’s refinancing and liquidity plans.
- Assess whether drilling and completion activity, pricing, contract coverage and the $700 million backlog develop as management expected.
- Follow goodwill valuation headroom, particularly the 4% cushion in drilling products, and the NOV-related patent dispute.
- Verify customer concentration, NOL utilization after the Section 382 ownership change, and any significant changes in insurance coverage, contingencies or merger synergies.