Business context and reporting period
Patterson-UTI Energy, Inc. is an oilfield-services provider, principally in U.S. land contract drilling and pressure pumping, with directional drilling and other businesses. This unaudited Form 10-Q covers the three months ended March 31, 2019; comparisons are with the first quarter of 2018 unless noted. Amounts below are in U.S. dollars.
Financial results and condition
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Revenue | $704.2 million | $809.2 million; down 13.0% |
| Operating loss | $23.4 million | $22.1 million loss |
| Net loss | $28.6 million; $0.14 per diluted share | $34.4 million; $0.16 per diluted share |
| Adjusted EBITDA (non-GAAP) | $191.1 million | $188.0 million |
| Cash from operations | $183.8 million | $150.0 million |
| Capital expenditures | $118.3 million | $122.9 million |
Operating loss was approximately 3.3% of revenue, compared with 2.7% in Q1 2018. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Contract drilling revenue rose 13.6% to $372.4 million; segment operating income was $21.2 million versus a $17.1 million loss. Pressure-pumping revenue fell 39.1% to $247.6 million, and the segment swung from $25.4 million operating income to an $18.8 million loss. Directional-drilling revenue increased 8.9% to $53.0 million, but the segment’s operating loss widened to $5.7 million. Other-operations revenue rose 20.3% to $31.2 million, with an operating loss of $5.2 million.
Operating cash flow less capital expenditures was approximately $65.5 million (calculated). Investing activities used $96.3 million, including $118.3 million of property and equipment purchases and $22.1 million of asset-disposal and insurance proceeds. Financing activities used $83.6 million, including $75.1 million for share repurchases and $8.5 million for dividends. Cash increased $3.9 million to $248.9 million.
At March 31, 2019, working capital was approximately $416.6 million. Gross long-term debt principal was $1.125 billion ($1.119 billion carrying value, net of discount and issuance costs); cash less gross debt was approximately negative $876.1 million (calculated). The company reported no revolving-credit borrowings and approximately $600 million of available borrowing capacity. It reported $81,000 of letters of credit under that facility and $51.4 million under a separate reimbursement agreement. Debt-to-capitalization and interest-coverage covenants were reported as satisfied. Operating lease adoption added a $33.1 million lease liability and a $28.4 million right-of-use asset at quarter-end.
Material changes versus the prior comparable period
- Revenue fell mainly because pressure-pumping activity and revenue per fracturing job weakened; pressure-pumping margin as a share of revenue declined to 18.1% from 21.1%.
- Contract drilling improved on more operating days and higher average revenue per operating day; average active rigs were 175 versus 169.
- Net loss narrowed despite lower revenue, helped in part by a $6.6 million income-tax benefit. The 2018 comparison included $2.0 million of merger and integration expense; none was recorded in Q1 2019.
- Share repurchases rose to $75.1 million from $16.9 million. The company repurchased 5.4 million shares and had approximately $175 million of authorization remaining at quarter-end.
- The company adopted lease accounting guidance on January 1, 2019; comparative periods were not restated.
Outlook, management commentary, risks and contingencies
Management said activity had softened despite oil prices strengthening, largely because customers reduced spending and remained fiscally conservative. Oil averaged $54.83 per barrel in Q1 and closed at $65.66 on April 22, 2019. The company ended Q1 with 16 active pressure-pumping spreads, down from 20 at year-end, and said it removed spreads until redeployment offered attractive economics.
Based on term contracts in place, management expected an average of 104 rigs operating under term contracts in Q2 2019 and 59 over the twelve months ending March 31, 2020. Contract-drilling backlog was approximately $650 million at March 31; about 27% was reasonably expected to remain at March 31, 2020. Backlog may be affected by customer termination rights and other contract terms. The filing does not provide a clear full-year earnings or revenue guidance figure.
Management said existing liquidity and expected operating cash flow should fund planned equipment maintenance and improvements, debt service and dividends for at least 12 months. The revolving-credit maturity was extended from March 2023 to March 2024, with two conditional one-year extension options. The company also had approximately $89.9 million of equipment-purchase and investment commitments, plus approximately $50 million of remaining minimum proppant and chemical purchase obligations, including $22.3 million for the remainder of 2019; shortfalls could trigger liquidated damages.
Litigation remains a material contingency related to the January 2018 Oklahoma drilling-site accident that killed five people, including three company employees, and injured another employee. Four wrongful-death plaintiffs had settled; other lawsuits remained, with unspecified damages sought. The company said it believed insurance was adequate, but warned that uncovered losses or unrecoverable indemnity could materially adversely affect results, cash flows or financial condition. EPA and CSB investigations were ongoing; the company contested OSHA citations carrying approximately $74,000 in proposed penalties.
Key risks include volatile oil and gas prices, subdued customer spending, excess service-equipment capacity, pricing and utilization pressure, operational hazards, customer payment or contract risks, supply constraints, and the ability to realize backlog. Other operating income of $8.7 million included net asset-disposal gains and legal-related expenses and settlements net of insurance proceeds.
Important facts for investors to verify
- Whether the projected reduction in rigs under term contracts and the $650 million backlog convert into realized revenue, given customer termination rights.
- Pressure-pumping utilization, pricing, job mix and margins, and the economics of redeploying the 16 active spreads.
- The sustainability of operating cash flow relative to capital expenditures, dividends and share repurchases.
- Debt covenant headroom, actual revolver availability after letters of credit, and upcoming $300 million note maturities in 2020 and 2022.
- Exposure and insurance or indemnity coverage for the Oklahoma accident litigation and related investigations.
- Execution and cash requirements for equipment commitments and minimum proppant and chemical purchase contracts.