Patterson-UTI Energy, Inc. — Q2 2019 Form 10-Q
Business context and period. Patterson-UTI provides land-based contract drilling, pressure pumping and directional drilling services, plus oilfield rentals and related businesses. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless stated otherwise. Amounts below are in millions of dollars, except per-share data and operating statistics.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $675.8 | $854.4 | $1,379.9 | $1,663.6 |
| Operating loss | $(48.1) | $(9.0) | $(71.5) | $(31.1) |
| Net loss | $(49.4) | $(10.7) | $(78.1) | $(45.1) |
| Adjusted EBITDA | $160.7 | $203.6 | $351.8 | $391.6 |
| Net loss per diluted share | $(0.24) | $(0.05) | $(0.37) | $(0.21) |
Q2 revenue declined about 21% year over year, while net loss widened. Adjusted EBITDA is a non-GAAP measure defined by the company; it fell about 21% in Q2 and 10% for the first half. The filing does not present a consolidated operating margin measure.
- Q2 segment performance: Contract drilling revenue was $348.1, with segment operating income of $16.5 versus a $0.3 loss. Pressure pumping revenue fell 41% to $251.0; its segment operating result swung to a $14.4 loss from $20.6 income. Directional drilling revenue was $50.2, down 5%, and its operating loss narrowed to $5.3 from $7.7.
- Cash flow: First-half operating cash flow was $365.3, compared with $300.2 in 2018. Capital expenditures were $215.3, down from $317.8. Cash and cash equivalents increased to $255.5 from $245.0 at year-end 2018.
- Liquidity and debt: Management reported approximately $428 of working capital and about $600 of available revolving-credit capacity at June 30. Long-term debt carrying value was $1,119.6; principal outstanding was $1,125.0. The revolver had no borrowings. Total assets were $5,191.8 and stockholders’ equity was $3,278.3.
- Capital returns: The company paid $16.8 in dividends and spent $154.2 on treasury-stock purchases in first-half cash flows. It reported about $100 of remaining repurchase authorization at June 30; the board later approved an additional $250 authorization. A $0.04-per-share dividend was declared for September 2019.
Material changes and management outlook
- Pressure pumping drove the downturn: first-half revenue decreased 40% to $498.6, and the segment recorded a $33.2 operating loss versus $46.0 income in 2018. Management attributed weakness to reduced customer activity, lower demand, customers sourcing more products themselves and lower product prices.
- Contract drilling first-half revenue rose 6% to $720.5, and the segment shifted to $37.7 operating income from a $17.4 loss. Average revenue per operating day improved, although average rigs operating declined to 167 from 172 for the first half.
- Management cited lower customer spending and a recent activity slowdown despite oil averaging $59.88 per barrel in Q2. Average active rigs fell to 158 in Q2 from 175 in Q1. The company expected an average of 142 rigs in Q3, including 92 rigs under term contracts; it expected an average of 58 rigs under term contracts during the 12 months ending June 30, 2020.
- Pressure pumping ended Q2 with 15 active spreads, down from 16 at Q1-end. Management expected to maintain 15 in Q3 but anticipated lower utilization, revenue and margins. No broader earnings or revenue guidance is provided in the supplied filing text.
- 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. It expected to allocate additional capital to share repurchases and debt repayment in the second half of 2019.
Risks, contingencies and unusual items
- Q2 included a $12.7 charge to write down a pressure-pumping sand capacity-reservation deposit after lower market prices made outside purchases more economical. The company also recorded a $3.6 provision for potentially uncollectible receivables and approximately $1.1 of oil and gas property impairment in other operations.
- Commitments included $72.8 for major equipment purchases and investments, plus $42.2 of remaining minimum proppant and chemical purchase obligations through 2023, including $14.9 due in the remainder of 2019. Failure to meet minimum purchase quantities could trigger liquidated damages.
- The company reported $1,125 of senior-note principal, with $300 due in 2020 and $300 in 2022; the remaining $525 is due in 2028. Its revolving facility maturity was extended to March 2024, with two possible one-year extensions. The company stated it was compliant with note covenants at June 30; key limits include a 50% debt-to-capitalization ceiling and a 2.50-to-1.00 minimum interest-coverage ratio.
- Following a 2018 Oklahoma drilling-site accident that killed five people, including three employees, wrongful-death claims were settled and the company was dismissed from those suits. A surviving employee’s lawsuit remains, seeking unspecified damages, including punitive damages. The company believes insurance is adequate but warns uninsured or unrecoverable losses could materially affect results. It is also contesting OSHA citations; the CSB issued recommendations, including five to the company.
- Key business risks include volatile oil and gas prices, reduced customer spending, excess service-equipment capacity, pricing pressure, customer credit and contract termination, operational and safety hazards, supply and labor issues, and the availability of insurance and financing.
Important facts for investors to verify
- Whether the forecast Q3 rig count and expected term-contract coverage materialized, and how quickly customer activity and day rates recover.
- Pressure-pumping utilization, job economics and contract obligations, particularly the sand deposit write-down and minimum-volume purchase commitments.
- Receivable quality and collectability, given the new bad-debt provision and the increase in the allowance for doubtful accounts.
- Liquidity, cash generation and covenant headroom as the company continues repurchases, dividends and equipment investment while reporting losses.
- Developments in the surviving-employee litigation and OSHA contest, including insurance or indemnity coverage and any potential financial exposure.