Patterson-UTI Energy, Inc. — 2014 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited consolidated results. Unless noted otherwise, amounts are in millions of dollars.
Business context
Patterson-UTI provides land-based contract drilling and pressure pumping services, and holds non-operating interests in oil and natural gas properties. At quarter-end it reported more than 275 marketable drilling rigs and more than 790,000 hydraulic horsepower in its pressure pumping fleet. In June, it acquired an East Texas pressure pumping operation with 31,500 horsepower.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $757.3 | $659.3 | $1,435.4 | $1,326.4 |
| Operating income | $87.2 | $70.6 | $146.0 | $165.5 |
| Net income | $54.3 | $40.8 | $89.1 | $97.0 |
| Diluted EPS | $0.37 | $0.28 | $0.61 | $0.66 |
| Operating margin | 11.5% | 10.7% | 10.2% | 12.5% |
| Net margin | 7.2% | 6.2% | 6.2% | 7.3% |
Q2 revenue increased 14.9% year over year, and net income rose 33.1%; for the first half, revenue rose 8.2%, while operating income fell 11.8% and net income fell 8.1%. Q2 contract drilling operating income was $69.6 million, up 47.9%; pressure pumping operating income was $24.9 million, down 17.7%. First-half pressure pumping operating income declined 55.0% to $26.5 million.
For Q2, contract drilling revenue increased 12.5%, supported by more operating rigs and slightly higher revenue per operating day; direct cost per day declined. Pressure pumping revenue rose 20.4%, but direct costs rose 28.5%, reducing segment margin to $64.6 million from $66.3 million. Oil and natural gas revenue declined 17.7% to $12.1 million, primarily due to production declines.
Cash flow, investment and liquidity
- First-half operating cash flow was $360.2 million, versus $383.3 million a year earlier. Investing activities used $473.0 million, including $488.0 million for property, equipment and acquisitions.
- Cash fell to $120.8 million from $249.5 million at December 31, 2013. Working capital was approximately $257 million, down from $454 million, mainly reflecting lower cash and higher accounts payable as the rig-building program accelerated.
- Total debt was $687.5 million: $87.5 million under the term loan and $600 million of senior notes. There were no revolver borrowings; approximately $460 million of borrowing capacity remained after $39.8 million of letters of credit. The company reported compliance with its debt covenants.
- First-half capital spending and acquisitions included $336.8 million for contract drilling and $132.5 million for pressure pumping. The company had approximately $347 million of major equipment purchase commitments at June 30.
- Dividends paid were $0.20 per share in the first half. The board approved another $0.10-per-share dividend for payment September 24, 2014. Approximately $187 million remained under the share repurchase authorization.
Outlook, commentary and risks
- Drilling backlog was approximately $1.52 billion at June 30, with about $548 million expected to be realized during the remainder of 2014. Backlog is based on term drilling contracts and is subject to customer termination and other limitations described in the filing.
- The company planned to complete 25 additional APEX rigs during the four quarters ending June 2015. Management said available liquidity and expected operating cash flow should fund current equipment plans, debt service and dividends; this is not quantified earnings guidance.
- Pressure pumping margins face pressure from industry excess equipment capacity and high costs associated with larger, service-intensive fracturing jobs. First-quarter Appalachian operations were also affected by severe weather, which left crews and equipment unable to generate revenue while costs continued.
- Results remain sensitive to oil and natural gas prices, customer spending, service rates and utilization, equipment supply, labor, weather and the ability to deliver new equipment and realize backlog. Management noted that commodity prices are volatile and demand may weaken if prices or customer budgets decline.
- The EEOC referred allegations concerning employment practices to its legal unit for litigation review; the company believed litigation would ensue and intended to defend itself. Management did not expect a material adverse effect based on information then available, but noted the outcome was uncertain.
Important facts for investors to verify
- Whether drilling utilization and backlog convert into revenue at expected rates, considering termination rights and other backlog qualifications.
- Whether pressure pumping job mix, pricing and cost trends improve, and how the East Texas acquisition performs amid excess industry capacity.
- Whether planned equipment investment and the $347 million of purchase commitments are supported by operating cash flow and available liquidity.
- Progress and potential financial consequences of the EEOC matter, along with compliance with credit and note covenants.
- Future dividend and buyback decisions, which remain subject to board discretion and business and financing conditions.