Patterson-UTI Energy, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. Patterson-UTI provides U.S. and Canadian land drilling, pressure pumping, and related equipment and technology services, with smaller oil and natural gas working interests. Its two principal segments—contract drilling and pressure pumping—both recorded operating losses in 2016 and 2015.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $915.9 million | $1,891.3 million |
| Operating loss | $456.2 million | $407.0 million |
| Net loss | $318.6 million; $2.18 per diluted share | $294.5 million; $2.00 per diluted share |
| Adjusted EBITDA, company-defined non-GAAP | $212.3 million | $582.4 million |
| Cash provided by operations | $305.0 million | $999.4 million |
| Capital expenditures | $119.8 million | $743.8 million |
| Cash and working capital at year-end | $35.2 million cash; $18.5 million working capital | $113.3 million cash; $178.9 million working capital |
| Long-term debt at year-end | $598.4 million carrying value; $600 million principal | $787.9 million carrying value |
2016 revenue fell 51.6% year over year. Contract drilling revenue declined 52.9% to $543.7 million; its company-defined segment margin (revenue less direct operating costs) was $237.9 million, and its operating loss was $235.9 million. U.S. average operating rigs fell to 64.5 from 123.7, operating days declined 47.7%, and average revenue per operating day decreased 9.9% to $23,040.
Pressure pumping revenue declined 50.3% to $354.1 million. Segment margin fell 80.6% to $19.5 million, equal to 5.5% of revenue versus 14.1% in 2015; the segment operating loss was $176.6 million. Total jobs declined 57.2% to 1,151. The filing attributes the deterioration mainly to lower activity and pricing. Both segments had negative operating results.
In fourth-quarter 2016, revenue was $246.9 million, operating loss was $113.2 million, net loss was $78.1 million, and diluted loss per share was $0.53. Fourth-quarter 2015 revenue was $338.6 million, operating loss $76.8 million, and net loss $58.7 million.
Interest expense was $40.4 million in 2016. Patterson-UTI had $600 million principal amount of senior notes outstanding and no revolver borrowings at year-end; $500 million of revolving capacity was available. It reported $38.2 million of letters of credit outstanding under a separate reimbursement agreement. The company stated it was in compliance with debt covenants. Dividends paid fell to $0.16 per share in 2016 from $0.40 in 2015.
Material changes and unusual items
- Revenue contracted sharply as customer activity and service pricing weakened. Cash from operations fell substantially, while capital spending was reduced by 83.9% to $119.8 million.
- The 2016 net loss increased despite the absence of the major 2015 impairments: 2015 included a $124.6 million goodwill impairment and a $131 million drilling-equipment write-down, as well as a $22 million pressure-pumping equipment and facilities write-down. No comparable segment equipment or goodwill impairment was recorded in 2016; oil and gas property impairment was $2.8 million.
- Contract drilling backlog was $417 million at year-end, down from $710 million a year earlier; about 29% was expected to remain after 2017. Backlog is subject to contract termination, rate adjustments, and other realization risks.
- The board reduced the quarterly dividend from $0.10 to $0.02 per share during 2016. The merger agreement limits dividends to no more than $0.02 per share per quarter absent SSE consent while the agreement remains in effect.
Outlook, merger, and risks
Management reported improving commodity prices and industry activity late in 2016. It expected U.S. rig counts to continue increasing during 2017 if oil and gas prices remained at or above then-current levels, and anticipated further pressure-pumping activity, particularly in the Permian Basin. Patterson-UTI expected an average of 44 rigs on term contracts in first-quarter 2017 and 37 across 2017. These are conditional expectations, not guaranteed results. Two frac spreads were reactivated at about $2 million each; approximately 45% of fracturing horsepower remained stacked, and reactivating remaining idle spreads was estimated at about $3 million per spread.
On December 12, 2016, Patterson-UTI agreed to acquire Seventy Seven Energy (SSE) for approximately 49.6 million Patterson-UTI shares, subject to downward adjustments and closing conditions. SSE shareholders were expected to own up to approximately 23% of the combined company. The merger was expected to close in late first-quarter or early second-quarter 2017, subject to approvals and other conditions; the HSR waiting period received early termination in January 2017. Patterson-UTI subsequently sold 18.2 million shares in January 2017 for approximately $470 million net, intended primarily to repay SSE net debt if the merger closes. The company also arranged a conditional increase in revolver commitments to about $595.8 million.
Merger risks include failure or delay to close, integration and synergy uncertainty, dilution to existing shareholders, management distraction, and possible termination payments of $40 million or $100 million in specified circumstances, plus up to $7.5 million of expense reimbursement in a specified termination scenario. Other key risks include volatile commodity prices, excess service equipment and pricing pressure, concentrated customer revenue (the largest customer represented 14% of 2016 revenue), backlog cancellation, possible future asset impairments, environmental and hydraulic-fracturing regulation, operational hazards, and incomplete insurance or indemnification. The company reported no off-balance-sheet arrangements and stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Management said current liquidity and expected 2017 operating cash generation should be sufficient for planned equipment maintenance and improvement, debt service, and dividends for at least 12 months. It cautioned that additional financing could be needed for other growth opportunities and might not be available on reasonable terms. The filing also says future impairment charges could be material if weak market conditions persist. Management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the SSE merger closed, its final share issuance and financing, and realized integration benefits and costs.
- Subsequent rig and pressure-pumping utilization, service rates, and customer spending relative to management’s conditional recovery outlook.
- Cash conversion and liquidity trends, including the impact of working-capital movements, equipment commitments, and the planned repayment of SSE debt.
- Backlog conversion, contract terminations, and whether further equipment or goodwill impairments become necessary.
- Dividend sustainability and compliance with debt covenants and merger-related restrictions.
- Customer concentration, insurance exposure, and any material changes in regulatory, environmental, or legal contingencies.