Patterson-UTI Energy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated results; comparisons are with Q1 2015 unless stated otherwise. Amounts are in U.S. dollars.
Business context and operating conditions
The company provides land contract drilling and pressure pumping services, primarily in North America, and holds non-operating oil and gas interests. The filing describes a severe industry downturn following the oil-price decline: U.S. industry rig counts had fallen more than 75% from the 2014 peak, and oil prices reached $26.19 per barrel in February 2016 before recovering into the mid-$40s. Management said those prices were not sufficient to support a meaningful increase in U.S. drilling activity.
- The company averaged 71 U.S. rigs and 3 Canadian rigs in Q1 2016, versus 165 and 8, respectively, a year earlier; 61 U.S. rigs were operating at quarter-end.
- It had approximately 1.1 million hydraulic horsepower of pressure-pumping capacity, with about 54% of the fleet stacked.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $268.9 million | $657.7 million |
| Operating income (loss) | $(95.3) million | $24.1 million |
| Net income (loss) | $(70.5) million | $9.1 million |
| Diluted EPS | $(0.48) | $0.06 |
| Adjusted EBITDA (non-GAAP) | $81.5 million | $199.5 million |
| Cash from operating activities | $113.7 million | $405.0 million |
| Capital expenditures | $21.3 million | $241.5 million |
- Revenue fell 59%. Contract drilling revenue declined 58% to $168.7 million; pressure-pumping revenue declined 61% to $96.3 million; oil and gas revenue declined 39% to $4.0 million.
- Contract drilling segment margin (revenue less direct costs, before depreciation and SG&A) was $87.8 million, down from $188.7 million. Average margin per operating day rose 8% to $13,180, while operating days fell 57%.
- Pressure-pumping segment margin fell to $8.5 million from $37.0 million; margin was 8.8% of revenue versus 14.8%. Fracturing jobs declined 62% to 83.
- Interest expense increased 26% to $10.8 million. Q1 2016 included a $2.2 million impairment of oil and gas properties. The company recorded a $1.3 million net gain in “other operating income (expense),” including $1.1 million of legal-settlement expense and asset-disposal gains; the comparable 2015 period included a $12.3 million legal-settlement charge.
Liquidity, debt, and capital allocation
- At March 31, cash and cash equivalents were $186.6 million; working capital was approximately $181 million. The company reported $500 million available under its revolving credit facility, with no revolver borrowings.
- Principal debt was $845 million, comprising $65 million under the 2012 term loan, $180 million under the 2015 term loan, and $600 million of senior notes. The balance sheet reported debt net of issuance costs. Scheduled principal repayments were $53.8 million in 2016 and $191.3 million in 2017; the term loans mature in September 2017.
- The company was in compliance with its debt covenants at quarter-end. It reported $41.1 million of outstanding letters of credit, with none drawn.
- Operating cash flow decreased substantially year over year, while capital expenditures fell to $21.3 million. The company paid $14.7 million in dividends and repaid $10.0 million of debt during the quarter.
- The board approved a further $0.02-per-share dividend for payment in June 2016. Management cautioned that a covenant in the 2015 term loan could restrict dividend payments later in 2016; future dividends remain at the board’s discretion.
Outlook, risks, and contingencies
- Management expected 43 rigs to operate under term contracts on average in Q2 and 40 on average during 2016. Contract drilling backlog was $580 million at quarter-end; approximately 54% was reasonably expected to remain at year-end. Contracts may be terminable on short notice, and backlog is not guaranteed revenue.
- Management expected 2016 capital spending to be primarily maintenance-related, with no new rigs or fracturing horsepower planned. It said visibility on industry recovery was limited and that activity levels would not improve until commodity prices improved. Its asset-recoverability assessment assumed drilling and pressure-pumping activity would begin recovering by early 2017; this is an assumption, not firm guidance.
- Key risks include sustained low or volatile commodity prices, reduced customer spending, excess drilling and pressure-pumping capacity, pricing pressure, customer nonpayment or contract termination, and operational, labor, weather, regulatory, and litigation risks. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Commitments included approximately $61.9 million for major equipment purchases and $24.7 million of remaining minimum proppant and chemical purchase obligations, including $7.7 million for the rest of 2016. Shortfalls in required purchases could trigger liquidated damages.
- The filing reclassified asset-disposal gains and certain legal-settlement expenses into “other operating (income) expense” and reclassified prior-period amounts for comparison. Management reported effective disclosure controls and procedures as of March 31, 2016.
Important facts for investors to verify
- Whether rig activity, customer spending, utilization, and service pricing improve enough to support the recovery assumption used in asset assessments.
- Whether the $580 million drilling backlog converts to revenue as expected, considering termination rights and early-termination rates.
- Debt repayment capacity and covenant headroom, particularly around the 2017 maturities and the restriction that may affect future dividends.
- Whether operating cash flow remains adequate to cover maintenance spending, debt service, and shareholder distributions during the downturn.
- Whether continued weak commodity prices require further asset impairments or additional cost reductions.