Patterson-UTI Energy, Inc. — Q3 2022 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2022. Patterson-UTI provides land contract drilling, pressure pumping and directional drilling services, primarily in North America. Management compares quarterly operating results with the immediately preceding quarter. The October 2021 Pioneer acquisition and subsequent sale of its well-servicing and wireline businesses affect comparability with 2021.
Financial performance
- Q3 revenue: $727.5 million, up 16.9% from $622.2 million in Q2 2022 and approximately double Q3 2021 revenue of $357.9 million. Q3 revenue comprised contract drilling $356.0 million, pressure pumping $287.7 million, directional drilling $58.9 million and other $24.9 million.
- Profit: Operating income was $76.3 million versus $25.9 million in Q2 (calculated from reported segment and corporate results); net income was $61.5 million, or $0.28 per diluted share, versus $21.9 million, or $0.10 per diluted share, in Q2. Q3 2021 recorded a net loss of $83.0 million.
- Margins and EBITDA: Operating margin was approximately 10.5% in Q3 versus 4.2% in Q2. Adjusted EBITDA, a non-GAAP measure, was $196.7 million versus $155.9 million. Pressure-pumping adjusted gross margin was 26.4% of revenue, up from 19.7% in Q2.
- Nine-month comparison: Revenue was $1.86 billion versus $890.6 million in 2021; net income was $54.6 million versus a $292.7 million loss. Adjusted EBITDA was $452.2 million versus $121.9 million.
- Cash flow and capital spending: For nine months, operating cash flow was $263.2 million, compared with $51.6 million in 2021; capital expenditures were $317.6 million, compared with $90.8 million. Operating cash flow less capital expenditures was negative $36.4 million. Cash declined to $42.7 million from $117.5 million at year-end 2021.
- Debt and liquidity: Long-term debt carrying value was $852.9 million (principal $858.8 million), primarily senior notes due 2028 and 2029. The company reported $253 million of working capital, no revolver borrowings and $600 million of available revolver capacity. It also had $65 million of letters of credit under a separate reimbursement agreement. Debt covenants were in compliance.
- Returns to shareholders: Dividends paid in the first nine months totaled $0.12 per share. On October 26, the board declared a $0.08-per-share dividend and authorized an aggregate $300 million of future share repurchases.
Changes, outlook and management commentary
- Quarter-over-quarter improvement reflected more U.S. drilling operating days and better pricing, plus pressure-pumping pricing, utilization and efficiency gains. Average U.S. active rigs rose to 128 from 121; average active pressure-pumping spreads were 12, versus 11 in Q2.
- Management cited strong demand and constrained industry supply, while warning that oilfield labor, services and supply costs were rising. WTI averaged $93.18 per barrel in Q3, down from $108.72 in Q2.
- Management forecast approximately $425 million of 2022 capital expenditures. Based on contracts as of October 25, it expected an average of 81 U.S. rigs operating under term contracts in Q4 2022 and 56 over the four quarters ending September 30, 2023; it expected to end Q4 with 12 active pressure-pumping spreads.
- U.S. contract-drilling backlog was approximately $710 million at September 30; about 32% was reasonably expected to remain at September 30, 2023. Backlog may not be realized: contracts can be terminated, sometimes without an early-termination payment.
- Unusual items included an $11.5 million pre-tax gain recorded in Q2 from releasing the Canadian cumulative translation adjustment as the company substantially exited Canada. Q3 included a $2.6 million impairment in the oil and gas business. Nine-month asset-disposal gains were $10.6 million.
- The company said existing liquidity and expected operating cash flow should fund current plans, debt service and dividends for at least 12 months. Results remain exposed to commodity prices and customer spending, inflation, supply-chain and labor constraints, equipment reactivation costs, operational hazards, customer defaults, and geopolitical and economic conditions. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
Important facts for investors to verify
- Whether improving service prices and utilization can offset ongoing labor, supply and reactivation-cost inflation.
- Whether the $710 million drilling backlog converts to revenue, given termination rights and the disclosed decline in expected term-rig activity.
- Whether operating cash flow can support the elevated capital-spending plan, dividends and repurchases while preserving liquidity.
- The sustainability of earnings after considering the Canadian translation gain, Q3 oil-and-gas impairment, acquisition-related comparability and non-GAAP adjusted EBITDA.
- Debt terms, covenant headroom and the status of $65 million in insurance-related letters of credit and equipment and vendor purchase commitments.