Patterson-UTI Energy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results are compared with Q1 2016; amounts below are in millions unless stated otherwise. The company provides land-based contract drilling and pressure pumping services. Q1 results exclude Seventy Seven Energy (SSE), whose acquisition closed April 20, 2017.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $305.2 | $268.9 | +13.5% |
| Operating loss | $(92.6) | $(95.3) | Loss narrowed $2.6 |
| Net loss | $(63.5) | $(70.5) | Loss narrowed $7.0 |
| Net loss per diluted share | $(0.40) | $(0.48) | Improved $0.08 |
| Adjusted EBITDA | $63.6 | $81.5 | Down 22.0% |
| Operating cash flow | $5.6 | $113.7 | Down $108.2 |
| Capital expenditures | $68.4 | $21.3 | Up $47.1 |
Revenue growth was led by pressure pumping, while contract drilling revenue declined. Operating loss equaled about 30.4% of revenue, versus 35.4% in Q1 2016; net loss equaled about 20.8% of revenue, versus 26.2%. Adjusted EBITDA is a company-defined non-GAAP measure.
- Contract drilling: Revenue was $158.7, down 5.9%. Segment margin (revenue less direct operating costs) fell 42.4% to $50.5; margin per operating day dropped 48.8% to $6,750. Average rigs operating increased to 83 from 73, but average revenue per operating day declined 16.3% to $21,200. Early termination revenue fell to $1.9 from $16.8.
- Pressure pumping: Revenue increased 46.6% to $141.2. Segment margin rose to $22.2 from $8.5, and margin as a percentage of revenue improved to 15.7% from 8.8%. Fracturing jobs rose 14.5% to 95; average revenue per fracturing job increased 28.1% to $1.451.
Cash, liquidity and debt
- Cash and cash equivalents were $466.6 at March 31, up from $35.2 at December 31, 2016. Working capital was approximately $436.
- Operating cash flow was only $5.6, versus $113.7 a year earlier. The filing cites a $62.3 increase in accounts receivable as a significant operating cash use.
- Cash rose principally because of the January equity offering, which generated $471.6. Investing activities used $42.6 net, including $68.4 of equipment purchases and $25.9 of asset-sale proceeds.
- Long-term debt was $598.5 net of issuance costs, representing $600 of senior notes: $300 due 2020 at 4.97% and $300 due 2022 at 4.27%. No revolver borrowings were outstanding at quarter-end; stated available capacity was $500. The company reported compliance with debt covenants.
- Q1 dividend was $0.02 per share, down from $0.10 in Q1 2016. The board approved another $0.02-per-share dividend for payment in June 2017.
Material changes and outlook
- On April 20, 2017, the company completed its approximately $1.5 billion acquisition of SSE, issuing approximately 46.3 million shares and repaying SSE debt of $472 million ($403 million net of SSE cash). The acquired assets include 91 drilling rigs, approximately 500,000 horsepower of fracturing equipment, and an oilfield rentals business. The detailed purchase-price allocation was not complete; SSE results are not included in Q1.
- The company stated that, if commodity prices remained at or above then-current levels, it expected industry and company activity to continue recovering during 2017. Oil averaged $51.76 per barrel in Q1. Management expected an average of 84 rigs operating under term contracts in Q2 2017 and 61 over the 12 months ending March 31, 2018, including rigs acquired from SSE.
- Pressure-pumping activity was expected to increase, particularly in the Permian. Four frac spreads had been reactivated since December 2016; additional reactivations were planned for Q3. About 30% of the company’s post-acquisition fracturing horsepower remained stacked; management estimated reactivation would cost $3–$4 million per spread.
- Contract drilling backlog was approximately $385 million at March 31, excluding SSE contracts; more than 35% was reasonably expected to remain at year-end. The filing cautions that contracts may be terminated on short notice and backlog estimates may not be realized.
- Management said existing liquidity and expected operating cash flow should fund current equipment plans, debt service, dividends and working capital through a recovery. Further growth opportunities might require additional debt or equity financing, which may not be available on reasonable terms.
Risks, contingencies and unusual items
- The business is highly sensitive to oil and natural gas prices, customer spending, service pricing and industry equipment oversupply. Operating hazards, weather, labor and supply constraints, customer concentration, and customer payment or contract risks may also affect results.
- Integration of SSE may be complex and costly, divert management attention, and fail to produce expected synergies. The filing also identifies risks involving SSE customer concentration, tax-sharing and indemnification obligations, and limits on use of the companies’ net operating loss carryforwards.
- At March 31, commitments included $113.7 of major equipment purchases and $51.3 of remaining minimum proppant and chemical purchases, including $6.5 due during the rest of 2017. Shortfalls against minimum purchase quantities could trigger liquidated damages. The company had $38.2 of insurance-related letters of credit outstanding; none had been drawn.
- Q1 included a $13.6 net gain on asset disposals, including an $11.2 real-estate sale gain; $5.2 of acquisition-related expenses; and $0.5 of oil and gas property impairment. The company said no impairment trigger occurred for its contract drilling or pressure pumping segments.
- Revenue and leasing accounting standards were expected to be adopted in 2018, using retrospective application; their financial impact had not been quantified. Management expected share-based-payment accounting to cause volatility in effective tax rates and diluted EPS.
Investor facts to verify
- How SSE’s purchase-price allocation, integration costs, debt repayment and issued shares affect post-close earnings, leverage and per-share value.
- Whether the expected activity recovery, rig-contract averages, frac-spread reactivations and backlog translate into sustainable revenue and margins.
- Whether operating cash flow improves as receivables and capital spending evolve; the Q1 cash increase was primarily equity-financed.
- Current revolver availability and covenant headroom after the acquisition, including the differing commitment amounts and maturities described in the filing.
- Potential exposure from SSE customer concentration, tax and indemnity arrangements, NOL limitations, purchase commitments, and future revenue/leasing accounting adoption.