Patterson-UTI Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated financial statements; dollar amounts below are U.S. dollars. The company provides contract drilling, pressure pumping, and oil and natural gas services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Revenue | $206.1 million | $422.3 million | $669.0 million | $1,552.7 million |
| Operating loss | $123.4 million | $329.5 million | $343.0 million | $330.2 million |
| Net loss | $84.1 million | $226.0 million | $240.5 million | $235.8 million |
| Net loss per diluted share | $0.58 | $1.54 | $1.65 | $1.61 |
| Adjusted EBITDA | $40.1 million | $127.2 million | $168.3 million | $483.9 million |
| Operating cash flow | Not presented by quarter | $252.7 million | $806.0 million |
Q3 revenue fell approximately 51% year over year; nine-month revenue fell approximately 57%. Contract drilling generated Q3 revenue of $123.7 million, pressure pumping $78.2 million, and oil and natural gas $4.3 million. The Q3 effective pressure-pumping margin, before depreciation and SG&A, was 1.2%, versus 10.2% a year earlier. Contract drilling’s average revenue per operating day declined 15.9% to $21,870; average operating rigs fell to 61 from 109. Pressure-pumping fracturing jobs fell to 84 from 137, and average revenue per fracturing job declined 16.2% to $906,420.
Cash and cash equivalents were $37.0 million at September 30, versus $113.3 million at December 31, 2015. Working capital was $43.9 million. Total debt was $615.0 million, down from $855.0 million at year-end; this included $15.0 million drawn on the revolving facility and $600.0 million of senior notes. The company reported $317 million of revolver availability. Nine-month capital expenditures were $80.5 million, versus $608.2 million in the prior-year period. Dividends paid were $20.6 million, or $0.14 per share, compared with $44.1 million, or $0.30 per share.
Changes versus comparable periods
- Q3 net loss improved substantially from 2015, while nine-month net loss increased modestly. The Q3 2015 comparison included approximately $280 million of pretax non-cash charges, including $125 million of pressure-pumping goodwill impairment and $153 million of drilling and pressure-pumping equipment and facility write-downs. There were no comparable charges in 2016.
- Despite lower revenue, nine-month operating loss was greater than in 2015, reflecting the significant decline in drilling and pressure-pumping activity and margins; the 2015 period also included impairment charges.
- Debt declined after the company repaid $255 million of long-term debt, including repayment and termination of its term-loan facilities in July 2016. Net revolver borrowings were $15 million during the first nine months.
- The quarterly dividend was reduced from $0.10 per share in March 2016 to $0.02 per share in June and September. The board approved another $0.02-per-share dividend for December 2016.
Outlook, risks and notable items
- Management said industry activity had recently improved and expected further increases, particularly in the Permian Basin, assuming oil prices remain at or above recent levels. Its long-lived asset assessment assumed activity in drilling and pressure pumping would begin recovering by early 2017. This is an assumption, not a quantified earnings or revenue forecast.
- The company averaged 60 U.S. rigs and two Canadian rigs in Q3; it reported 62 U.S. rigs operating at September 30 and 64 at October 25. Based on contracts then in place, management expected an average of 43 rigs operating under term contracts in Q4. Contract-drilling backlog was approximately $464 million at September 30, with more than 80% expected to remain at year-end; contracts may be terminated on short notice, subject to stated terms.
- Pressure-pumping activity improved modestly, but pricing remained low. The company had not reactivated fracturing spreads and reported 53% of its approximately 1.1 million hydraulic horsepower fleet stacked.
- Management cited volatile oil and gas prices, customer spending, excess equipment, service pricing, utilization, customer credit and contract performance, supply interruptions, weather, labor, and legal or operational liabilities as material risks. Sustained low commodity prices could materially harm results, liquidity, and cash flows.
- The July credit amendment extended $357.9 million of revolving commitments to March 2019, required repayment of the term loans, and introduced restrictions on dividends and share repurchases, subject to exceptions. The company reported compliance with its credit and note covenants at quarter-end.
- Commitments included $64.2 million of major equipment purchases and $22.0 million of remaining minimum proppant and chemical purchases, including $5.0 million for the rest of 2016. Letters of credit totaling $38.2 million supported insurance obligations; none had been drawn.
- In September, the company acquired a business that designs, manufactures, repairs, and services rig components, issuing 353,804 shares valued at $6.7 million. The filing describes the transaction as not significant to consolidated financial statements.
- Other operating income included $10.3 million of net gains on asset disposals for the first nine months and $477,000 of legal-settlement income net of insurance reimbursements. Management said it did not expect ongoing legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether improving rig counts and activity translate into stronger utilization, pricing, and margins, especially in pressure pumping.
- Whether the projected early-2017 recovery and Q4 term-rig expectations are achieved, and how much of the reported backlog converts to revenue and cash.
- Cash generation and liquidity: operating cash flow fell to $252.7 million year to date, while cash declined to $37.0 million; verify revolver availability and compliance with borrowing-base and payment restrictions.
- Debt-service capacity and covenant headroom, including the effect of continued operating losses, variable-rate borrowing, and the remaining $300 million notes due in 2020 and $300 million due in 2022.
- Whether the lower dividend can be sustained under operating conditions and the credit agreement’s restrictions.
- Potential impairment exposure if commodity prices or the assumed recovery in activity weaken; reported 2016 oil and gas property impairment was approximately $2.4 million for the first nine months.