Patterson-UTI Energy, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company provides land-based contract drilling and pressure pumping services, and holds non-operating oil and natural gas interests. Results reflect a severe industry downturn following the oil-price decline.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $193.9m | $472.8m | $462.8m | $1,130.5m |
| Operating loss | ($124.3m) | ($24.8m) | ($219.6m) | ($0.7m) |
| Net loss | ($85.9m) | ($19.0m) | ($156.4m) | ($9.9m) |
| Diluted loss per share | ($0.58) | ($0.13) | ($1.06) | ($0.07) |
| Adjusted EBITDA | $46.7m | $157.2m | $128.2m | $356.6m |
| Operating cash flow | Not separately provided for Q2 | $181.9m | $640.7m | |
| Capital expenditures | $30.0m | $218.6m | $51.8m | $463.6m |
Q2 contract drilling revenue fell 60% year over year; its segment margin was $51.4m, or about 44.6% of revenue, versus $134.5m, or about 46.6%. Pressure pumping revenue fell 58%; segment margin declined to $4.4m, or 6.0% of revenue, from $33.9m, or 19.2%. These segment margins exclude depreciation, amortization, impairment and SG&A.
At June 30, cash was $209.6m, working capital was approximately $164m, and total debt was $830m. The company reported $500m available under its revolving facility at that date. It was in compliance with its debt covenants. Subsequent to quarter-end, it repaid $230m of bank term loans using $160m of cash and $70m drawn on the revolver; as of August 2, $70m was drawn and $430m of borrowing capacity remained. The July credit amendment extended $357.9m of revolver commitments to March 2019 and added borrowing-base and restricted-payment provisions.
Changes versus prior period
- Q2 revenue decreased 59% year over year and net loss widened to $85.9m from $19.0m. Six-month revenue declined 59%, while operating results moved from near breakeven to a $219.6m loss.
- U.S. rigs averaged 55 in Q2 versus 122 a year earlier; operating days declined 55%. Pressure-pumping fracturing jobs fell 50%, and average revenue per fracturing job declined 15%.
- Operating cash flow was $181.9m versus $640.7m in the first half of 2015, alongside substantially lower capital spending. Cash nevertheless increased to $209.6m from $113.3m at year-end 2015.
- The quarterly dividend was reduced to $0.02 per share for the June payment, from $0.10 in March and $0.10 per quarter in 2015. The board approved another $0.02-per-share dividend for September 2016.
Outlook, risks and notable items
- Management said activity had stabilized but did not expect a significant recovery until commodity prices improve. Its asset-recoverability assessment assumed activity in drilling and pressure pumping would begin recovering by early 2017; this is an assumption, not a firm forecast.
- At June 30, 55 U.S. rigs were operating, down 74% from the October 2014 peak of 214. Management expected an average of 45 rigs on term contracts in Q3 and 42 during the second half of 2016. Contract-drilling backlog was approximately $500m; more than 60% was expected to remain at year-end. Backlog is subject to customer termination and other adjustments.
- Approximately 53% of the pressure-pumping fleet was stacked. Management expected remaining-2016 capital expenditures to focus mainly on maintenance and drilling-rig upgrades, and planned to continue adjusting costs to activity levels.
- Oil prices averaged $45.41 per barrel in Q2, and management emphasized continued commodity-price uncertainty, excess service capacity, customer spending, pricing pressure and competition as key risks. Lower demand or prices could further impair revenue, margins, cash flows and access to capital.
- First-half results included $2.2m of oil and gas property impairment, all recorded in Q1; none was recorded in Q2. Other operating income included $7.3m of asset-disposal gains for the first half, partly offset by $1.1m of legal-settlement expense; comparable 2015 included $12.3m of legal settlements.
- Commitments included $55.1m of major equipment purchases and $23.5m of remaining minimum proppant and chemical purchases, including $6.5m due in the remainder of 2016. The company reported $38.2m of letters of credit, with none drawn, and said routine legal proceedings were not expected to have a material adverse effect.
Investor verification priorities
- Track rig count, dayrates, term-contract coverage and the conversion and termination risk of the reported $500m drilling backlog.
- Monitor pressure-pumping utilization, pricing, stacked capacity and segment margins for evidence of recovery or further deterioration.
- Verify post-amendment cash, revolver availability, debt maturities, borrowing-base capacity and compliance with the revised credit agreement, including restrictions on dividends and share repurchases.
- Assess whether operating cash flow can sustain maintenance capital spending, debt service and dividends through the downturn; future dividends remain discretionary.
- Review the assumptions underlying the anticipated early-2017 activity recovery and the potential for further asset impairments if prices or activity weaken.