Patterson-UTI Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Patterson-UTI provides land contract drilling and pressure pumping services and holds non-operating oil and gas interests.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $730.9 million | $643.6 million | $2,057.3 million | $2,070.7 million |
| Operating income | $124.6 million | $88.6 million | $290.1 million | $397.2 million |
| Net income | $74.4 million | $50.8 million | $171.4 million | $240.6 million |
| Diluted EPS | $0.51 | $0.33 | $1.16 | $1.56 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $656.7 million | $782.4 million |
Q3 revenue increased 13.6% and net income increased 46.5% year over year. Management attributed most of the improvement in drilling revenue per operating day and the increase in net income to approximately $62.8 million in early-termination revenue from six rigs. Nine-month revenue fell 0.6%, operating income declined 27.0%, and net income declined 28.8%. Nine-month operating and net margins were approximately 14.1% and 8.3%, respectively, compared with 19.2% and 11.6% in 2012.
- Contract drilling: Q3 revenue was $457.9 million, up 2.5%; segment operating income was $116.3 million, up 49.1%, including the termination payments. Operating days fell 12.4%, while revenue per operating day rose 16.9% to $26,250. For nine months, revenue declined 9.3% and operating income declined 15.8% as average rigs operating fell 15.5% to 191.
- Pressure pumping: Q3 revenue rose 42.5% to $259.2 million, but direct costs rose 58.0%; segment operating income increased 12.7% to $16.9 million. Q3 segment margin was 21.3% of revenue, down from 29.0%. For nine months, revenue rose 18.3%, but operating income declined 23.3% and margin fell to 24.8% from 31.1%. Larger, more service-intensive fracturing jobs increased both revenue and materials and labor costs.
- Oil and gas interests: Q3 revenue was $13.8 million, down 7.4%, and segment operating income was essentially flat at $5.4 million. Nine-month revenue grew 2.2%, while operating income declined 14.8% to $17.2 million.
Cash, debt and capital allocation
- Cash and cash equivalents were $204.6 million at September 30, 2013, up from $110.7 million at year-end 2012. Working capital was approximately $447 million.
- Nine-month operating cash flow was $656.7 million. Capital spending was $483.3 million; net cash used in investing activities was $475.0 million. Operating cash flow less property-and-equipment purchases was approximately $173.4 million, before other investing flows.
- Total debt was $695 million: $300 million of 4.97% notes due 2020, $300 million of 4.27% notes due 2022, and $95 million outstanding under the term loan. No revolver borrowings were outstanding. Approximately $460 million of revolving capacity remained, after letters of credit.
- The company reported compliance with its debt covenants. Credit-facility limits include a maximum debt-to-capitalization ratio of 45% and minimum interest coverage of 3.00-to-1.00.
- Nine-month financing uses included $73.4 million for treasury-stock purchases, $21.9 million in dividends, and $3.8 million in debt repayments. A new $200 million buyback authorization was approved in September; approximately $188 million remained at quarter-end. The board approved a further $0.05-per-share dividend for December 31, 2013.
Outlook, risks and notable items
- Drilling-contract backlog was approximately $967 million at September 30; management expected approximately $240 million to be realized in the remainder of 2013. Backlog estimates are subject to early termination, standby, maintenance and other contract provisions.
- The company had more than 300 marketable land rigs and over 750,000 hydraulic horsepower in its pressure-pumping fleet. It had completed 121 APEX rigs and planned three additional rigs in the remainder of 2013 and 20 in 2014.
- Management said liquidity and expected operating cash flow should fund current equipment plans, debt service and dividends, while noting that additional growth financing may not be available on reasonable terms. No specific earnings or revenue guidance was provided.
- Management cited volatile oil and gas prices, lower rig activity, excess conventional rig and pressure-pumping capacity, competition, labor and equipment availability, weather, and customer spending as risks to utilization, pricing, margins and cash flow. Q3 U.S. average operating rigs were 181 versus 211 a year earlier; Canadian rigs were eight versus five.
- Commitments included approximately $224 million of major equipment purchases and $28.8 million of remaining minimum proppant and chemical purchases. The company had $39.8 million of outstanding letters of credit, none drawn, supporting insurance obligations.
- The EEOC had issued cause findings concerning allegations of workplace discrimination and retaliation. Conciliation was ongoing; the company expected no material adverse effect based on information then available but cautioned that the outcome was uncertain.
- Nine-month gains on asset disposals were $2.3 million versus $32.7 million in 2012, which included a gain of approximately $22.6 million from the sale of flowback operations. This materially affected the year-over-year comparison. The company also reported approximately $2.6 million of oil and gas property impairments during the first nine months of 2013.
Important facts for investors to verify
- How much of Q3 drilling profitability depended on the $62.8 million in early-termination revenue, and what replacement work or contract rates followed?
- Whether pressure-pumping pricing and margins stabilized as capacity and input costs changed.
- Backlog conversion, including customer termination rights and the expected timing of the approximately $240 million for the remainder of 2013.
- Execution and funding of the equipment commitments and planned APEX rig additions, alongside buybacks and dividends.
- Developments in the EEOC matter and any resulting financial, operational or reputational effects.
- Future operating cash flow, commodity-price exposure, and headroom under debt covenants and the revolving credit facility.