Patterson-UTI Energy, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Figures are in U.S. dollars; financial amounts below are in millions unless otherwise stated. Results include Ulterra from August 14 and NexTier from September 1, so the quarter includes only partial-period contributions from both acquisitions.
Business context and reporting period
Patterson-UTI provides contract drilling, directional drilling, well completion and related services, and—following its Ulterra acquisition—drill-bit products. It reports three segments: Drilling Services, Completion Services and Drilling Products.
Financial and operating highlights
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Revenue | $1,011.5 | $727.5 in Q3 2022 (+39%) |
| Operating income | $9.7 | $76.3 in Q3 2022 |
| Net income (loss) | $(0.3); $0.05 attributable to common stockholders | $61.5 net income in Q3 2022 |
| Diluted EPS | $0.00 | $0.28 in Q3 2022 |
| Adjusted EBITDA | $276.9 | $241.7 in Q2 2023; $774.2 for nine months versus $454.3 in 2022 |
| Operating cash flow | $553.3 for nine months, versus $263.2 in the prior-year period |
Q3 operating margin was approximately 1.0%, versus 10.5% a year earlier. Q3 adjusted gross margin was $208.8 in Drilling Services, $90.7 in Completion Services and $14.5 in Drilling Products. Completion Services operating income was $0.2, with acquired NexTier results and higher depreciation affecting comparability.
For the first nine months, revenue was $2,562.1 versus $1,859.1, and net income was $184.0 versus $54.6. The reported increases reflect acquisitions as well as improved Drilling Services pricing and activity; they are not like-for-like comparisons.
Cash, debt and liquidity
- Cash and restricted cash were $67.0 at September 30, down from $137.6 at year-end 2022. Working capital was approximately $387.
- Long-term debt was $1,249.1, including $482.5 of 3.95% notes due 2028, $344.9 of 5.15% notes due 2029, $400.0 of 7.15% notes due 2033 and $21.7 of equipment loans.
- The company had no revolver borrowings and $597.5 of available capacity under its $600 million revolving credit facility; $2.5 of letters of credit were outstanding under that facility. Total outstanding letters of credit across arrangements were $92.7.
- Nine-month investing cash use was $813.6, including $410.4 of capital expenditures and acquisition cash outlays of $357.3 for Ulterra and $65.2 for NexTier. Financing cash provided was $188.3.
Material changes, outlook and risks
- The NexTier merger closed September 1, 2023, and the Ulterra acquisition closed August 14, 2023. The company issued shares in both transactions and recorded $1,373.0 of goodwill. Q3 included $70.2 of merger and integration expense; nine-month expense was $78.1, including accelerated stock compensation, severance and transaction costs.
- A change in estimated useful lives and accounting for certain completion components reduced Q3 operating income by $24.2 and net income by $19.1. Management expects about $5 million of incremental quarterly depreciation above the historical run rate, or approximately $20 million over the next 12 months.
- Management expected U.S. active rigs to average approximately 118 in Q4 2023, with 74 rigs under term contracts in Q4 and 52 on average over the four quarters ending September 30, 2024. U.S. drilling backlog was approximately $760 million; about 24% was reasonably expected to remain at September 30, 2024. Backlog may not be realized, and contracts can be terminated.
- Management said completion activity had stabilized after slowing late in Q3, with a possible modest recovery beginning in Q1 2024. Drilling-products demand had begun to increase. Expected Q4 capital expenditures were approximately $190 million.
- Key risks include commodity-price and customer-spending volatility, inflation and operating costs, integration execution and realization of deal synergies, customer or employee losses, and the ability to realize backlog. The NexTier merger triggered a Section 382 ownership change; the company expects limits on use of some historic U.S. net operating losses, potentially increasing cash taxes.
- Other obligations include approximately $197 million of major-equipment purchase commitments and $34.5 million of remaining minimum proppant and chemical purchase commitments. The company reported ordinary-course legal proceedings and did not expect them to materially adversely affect it.
Important facts for investors to verify
- How much of reported revenue and EBITDA growth is attributable to the acquisitions versus organic performance, and whether integration costs and expected synergies develop as anticipated.
- Completion Services’ underlying utilization, pricing and margins, excluding NexTier’s partial-quarter contribution and acquisition-related depreciation.
- The effect of the useful-life estimate change on future depreciation, earnings and cash generation.
- Debt-service capacity, refinancing needs and liquidity after planned capital spending, dividends and any share repurchases.
- Actual rig counts, term-contract coverage and conversion of the stated drilling backlog into revenue.
- The extent to which Section 382 limits reduce the value or timing of tax-loss carryforwards and increase cash taxes.