Patterson-UTI Energy, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2018. Patterson-UTI provides contract drilling, pressure pumping and directional drilling services, alongside oilfield rentals and other operations. Comparisons are affected by the 2017 Seventy Seven Energy merger and the October 2017 MS Directional acquisition; directional drilling had no comparable 2017 segment revenue.
Financial results
Amounts are in millions of dollars except per-share data. Q3 means three months ended September 30; YTD means nine months ended September 30.
| Metric | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Revenue | $867.5 | $685.0 | $2,531.1 | $1,569.4 |
| Operating loss | $(80.3) | $(38.0) | $(111.4) | $(270.9) |
| Net loss | $(75.0) | $(33.8) | $(120.2) | $(189.5) |
| Diluted loss per share | $(0.34) | $(0.16) | $(0.55) | $(0.99) |
| Adjusted EBITDA | $201.7 | $158.7 | $593.2 | $301.5 |
| Cash flow from operations | Not separately stated | Not separately stated | $488.7 | $131.3 |
| Capital expenditures | $162.8 | $143.1 | $480.6 | $329.9 |
- Q3 revenue increased 26.6% year over year, but operating and net losses widened. Q3 results included $48.4 million of charges for retiring 42 legacy drilling rigs and $17.4 million for writing down pressure-pumping equipment.
- YTD revenue rose 61.3%; net loss narrowed by $69.3 million. Operating cash flow less capital expenditures was approximately $8.2 million, versus approximately negative $198.6 million in YTD 2017.
- Q3 pressure-pumping margin was $79.1 million, or 18.8% of revenue, versus $72.1 million, or 19.9%, a year earlier. Contract drilling revenue per operating day rose 9.6% to $22,280; segment operating losses nonetheless increased, chiefly reflecting higher depreciation and the rig retirement charge.
- At September 30, cash was $214.0 million and working capital approximately $399 million. Gross debt principal was $1.125 billion; net debt using reported cash was approximately $911 million. The company reported no revolver borrowings and approximately $600 million of available borrowing capacity; $81 million of letters of credit was outstanding under the facility.
- Total assets were $5.82 billion and stockholders’ equity $3.76 billion. Nine-month dividends were $0.10 per share. Treasury-stock purchases totaled $111.7 million, including $100.5 million under the buyback program.
Material changes and management commentary
- Contract drilling Q3 revenue rose 21.1%, with average operating rigs increasing to 178 from 161 and average revenue per operating day increasing 9.6%. The fleet included 198 APEX rigs, of which 144 were described as super-spec.
- Pressure-pumping Q3 revenue rose 16.3%, but operating results turned to a $1.5 million loss from $16.8 million income. Management cited oversupply in completions and reduced marketed frac spreads to 21 by quarter-end; it did not plan reactivation until market conditions improve.
- Management reported an average U.S. rig count of 177 in Q3, versus 175 in Q2. It expected an average of 127 rigs operating under term contracts in Q4 2018 and 81 for the 12 months ending September 30, 2019. Contract drilling backlog was approximately $825 million, with about 27% expected to remain at September 30, 2019. Backlog is subject to contract terms and possible customer termination.
- The company issued $525 million of 3.95% senior notes due 2028 in January 2018 and amended its unsecured revolver in March to a $600 million facility maturing in 2023. Debt principal also includes $300 million of 4.97% notes due 2020 and $300 million of 4.27% notes due 2022. The company reported compliance with its note covenants.
- Management said liquidity and expected operating cash flow should fund current plans, debt service and dividends for at least 12 months. Its outlook depends on commodity prices, customer spending and activity; it assumed activity would remain relatively stable or improve alongside stable or rising oil prices. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- A January 2018 Oklahoma drilling-site accident killed five people, including three employees, and injured another employee. Civil lawsuits seek unspecified damages, including punitive damages; EPA and Chemical Safety Board investigations were ongoing, and the company contested OSHA citations carrying proposed penalties of approximately $74,000. The company believed insurance was adequate, but warned that inadequate insurance or recoverable indemnity could materially affect results and cash flows.
- At quarter-end, commitments included approximately $143 million for equipment purchases and investments, plus $123 million of remaining minimum proppant and chemical purchase obligations. Shortfalls could trigger liquidated damages.
- Business performance is highly sensitive to oil and natural gas prices, service demand, pricing and equipment utilization. Management cited excess capacity in non-super-spec rigs, pressure-pumping equipment and directional-drilling equipment, as well as operational, labor, weather, supply and customer-payment risks.
- Tax reform reduced the effective tax rate; Q3 included a $2.6 million tax expense adjustment to the provisional estimate of the transition tax. A valuation allowance was recorded against deferred tax assets at a Canadian subsidiary.
- The company adopted the new revenue standard in 2018 without a material financial-statement impact. It expected the lease standard, planned for adoption in 2019, to increase reported assets and liabilities but not significantly affect earnings or cash flows.
- Management concluded disclosure controls were effective as of September 30, 2018. It reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether drilling and pressure-pumping activity and pricing support improved operating profitability, excluding the identified equipment write-downs and retirement charge.
- How much of the $825 million drilling backlog converts to revenue, given customer termination provisions and the stated decline in term-contracted rigs into 2019.
- Whether cash generation can sustain high capital spending, debt service, dividends and repurchases; reconcile reported revolver availability with outstanding letters of credit.
- The ultimate insurance and indemnity coverage, financial exposure and regulatory outcomes related to the Oklahoma accident.
- Whether the $143 million equipment and investment commitments and $123 million minimum supply obligations remain appropriate if market conditions weaken.