Patterson-UTI Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise indicated, dollar amounts are in millions. Patterson-UTI provides contract drilling, pressure pumping and directional drilling services, primarily in North America.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $598.5 | $867.5 | $1,978.4 | $2,531.1 |
| Operating loss | $(307.3) | $(80.3) | $(378.8) | $(111.4) |
| Net loss | $(261.7) | $(75.0) | $(339.8) | $(120.2) |
| Net loss per diluted share | $(1.31) | $(0.34) | $(1.65) | $(0.55) |
| Adjusted EBITDA | $111.4 | $201.7 | $463.2 | $593.2 |
| Cash provided by operating activities | Not separately presented for the quarter | $583.8 | $488.7 |
- Q3 revenue fell 31% year over year; nine-month revenue fell 22%. Pressure pumping was the largest source of the decline: Q3 revenue decreased 51% to $208.6 million. Contract drilling revenue decreased 13% to $317.0 million.
- Q3 and nine-month losses widened substantially. Operating results included significant asset retirement, write-down and impairment charges. Q3 interest expense was $20.7 million, including an $8.2 million loss on early extinguishment of debt.
- Cash and cash equivalents were $164.8 million at September 30, down from $245.0 million at December 31, 2018. Working capital was approximately $238.7 million. Operating cash flow included a $144.2 million cash benefit from lower accounts receivable.
- Capital expenditures were $283.3 million for the first nine months, down from $480.6 million a year earlier. The company paid $24.7 million in dividends and spent approximately $230.3 million on treasury-stock purchases.
Financial position and debt
- Total assets were $4.61 billion and stockholders’ equity was $2.94 billion at September 30, 2019.
- Debt principal was $975 million: $525 million of 3.95% notes due 2028, $300 million of 4.27% notes due 2022, and a $150 million term loan due June 2022. The $300 million 4.97% Series A notes due 2020 were prepaid in September for approximately $308 million, including the make-whole premium.
- The company reported no revolving-credit borrowings and approximately $600 million of available borrowing capacity, with $81,000 of letters of credit under that facility. It also reported $63.3 million of letters of credit under a separate reimbursement agreement.
- Debt agreements generally cap debt to capitalization at 50%; the company reported compliance with the Series B note covenants at quarter-end. Below-investment-grade ratings would trigger additional restricted-payment provisions.
Material changes, outlook and risks
- Asset charges: Q3 included a $173 million charge for retiring 36 legacy non-APEX drilling rigs and related equipment; a $20.5 million pressure-pumping equipment write-down; an $8.4 million directional-drilling equipment write-down; and $17.8 million of goodwill impairment. The company also recorded a $17.0 million directional-drilling charge, primarily for inventory, and $14.6 million of charges tied to its decision to transition away from engineering and manufacturing in Calgary.
- The company recorded nonmaterial out-of-period adjustments, primarily for directional-drilling inventory accounting. These increased pretax loss by $14.5 million in Q3 and $6.6 million for the nine-month period.
- Average active rigs were 142 in Q3, compared with 158 in Q2 and 178 in Q3 2018. Management expected an average of 126 rigs in Q4 2019, with some increase in Q1 2020 as customer budgets reset. Term contracts covered an expected average of 73 rigs in Q4 and 55 rigs over the twelve months ending September 30, 2020.
- Pressure pumping ended Q3 with 14 active spreads, down from 15 at Q2-end; another spread was idled early in Q4. Management expected pressure-pumping activity to decline further in Q4 and said it would assess whether to operate or idle spreads individually.
- For asset-recoverability assessments, management assumed activity would generally remain below Q3 levels and begin recovering in late 2020 or 2021 as oil prices improved. It cautioned that a prolonged low-price environment could cause future, potentially material impairment charges.
- Key risks include oil and gas price volatility, lower customer spending, excess service-equipment capacity, utilization and pricing pressure, customer credit and contract termination, operational hazards, supply delays, regulatory and legal matters, and access to capital. The company’s outlook is sensitive to customer budgets and future commodity prices.
- Management said current liquidity and expected operating cash flow should fund planned equipment spending, debt service and dividends for at least 12 months. It indicated that share repurchases and/or debt repayment would likely receive additional capital in the near term, subject to conditions and discretion. The board approved a $0.04-per-share dividend for payment in December 2019; future dividends remain discretionary.
- An OSHA proceeding relates to a 2018 drilling-site accident that caused five fatalities, including three employees. In October 2019, the company and the Department of Labor settled all but one citation item; the remaining item awaited an administrative judge’s determination.
Investor verification priorities
- Verify the scale and classification of Q3 asset-retirement, equipment, inventory and goodwill charges, and assess potential additional impairments.
- Track rig counts, term-contract coverage, pressure-pumping spread utilization and pricing against management’s Q4 and 2020 expectations.
- Reconcile operating cash flow with working-capital movements, capital spending, share repurchases and debt repayment needs.
- Review debt maturities, floating-rate exposure, covenant headroom and the implications of any credit-rating change for dividends or buybacks.
- Follow the remaining OSHA citation item and assess any developments in related legal or safety matters.