Patterson-UTI Energy, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial amounts are in U.S. dollars; monetary figures below are rounded to millions unless stated otherwise.
Business context
Patterson-UTI provides land-based contract drilling and pressure pumping services, and holds non-operating interests in oil and gas properties. Results deteriorated amid a severe industry downturn, lower oil prices and reduced customer spending.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $422.3 million | $845.6 million | $1,552.7 million | $2,281.1 million |
| Operating income (loss) | $(329.5) million | $30.3 million | $(330.2) million | $176.3 million |
| Net income (loss) | $(226.0) million | $16.0 million | $(235.8) million | $105.1 million |
| Diluted EPS | $(1.54) | $0.11 | $(1.61) | $0.71 |
| Adjusted EBITDA | $127.2 million | $268.1 million | $483.9 million | $714.9 million |
Q3 revenue fell about 50% year over year. Contract drilling revenue declined 45.7%, while pressure pumping revenue declined 55.7%. Pressure pumping’s Q3 direct-cost margin was 10.2% of revenue, down from 19.4%. Q3 average U.S. rigs operating were 105 versus 209 a year earlier; average Canadian rigs were 4 versus 10. Drilling revenue per operating day increased partly because it included $28.9 million of early-termination revenue.
Q3 results included approximately $280 million of pretax non-cash charges: $124.6 million impairment of all pressure pumping goodwill, $131 million write-down of drilling equipment, $22 million write-down of pressure pumping equipment and closed facilities, and $1.9 million impairment of oil and gas properties. The nine-month period also included a $12.3 million charge for settlement of an EEOC lawsuit, recorded in Q1.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $806.0 million, investing cash outflow was $592.3 million, and financing cash outflow was $174.1 million. Capital expenditures and acquisitions were $608.2 million. Operating cash flow included a $359.3 million cash benefit from lower accounts receivable.
- Cash was $76.5 million at September 30, 2015, versus $43.0 million at year-end 2014. Working capital was approximately $109.7 million.
- Total debt was $865 million, down from $985.5 million at year-end 2014. It comprised $75 million under the existing term loan, $190 million under the 2015 term loan, and $600 million of senior notes. There were no revolving-credit borrowings; $500 million remained available under the revolving facility.
- The company reported compliance with its debt covenants. Key facility limits include a maximum debt-to-capitalization ratio of 45% and minimum interest coverage of 3.00:1. The 2015 term loan also restricts certain dividends and repurchases unless the specified pro forma debt-to-EBITDA test is met.
- Quarterly dividends were $0.10 per share; the board approved another $0.10 dividend for December 2015. The company paid $44.1 million in dividends during the first nine months.
Outlook, risks and contingencies
- Management expected drilling and pressure pumping activity to decline further through year-end and into 2016 absent an oil-price recovery, with additional pressure on pricing. It expected Q4 average operating rigs and pressure pumping jobs to decline.
- Management expected 2016 capital expenditures to be primarily maintenance spending, with no new rigs or fracturing horsepower planned. Approximately 38% of fracturing horsepower was stacked; the fleet totaled about 1.1 million hydraulic horsepower.
- Contract drilling backlog was approximately $801 million at September 30, but contracts may be terminated on short notice and backlog calculations reflect reduced termination rates where notices had been received. Management cited a modeled activity recovery beginning in Q1 2017 for asset-recoverability estimates; a longer low-price environment could cause future material impairment charges.
- Commitments included about $114 million of major equipment purchases and $55.4 million of remaining minimum proppant and chemical purchases, with potential liquidated damages for shortfalls. The company had $41.3 million of outstanding insurance-related letters of credit; none had been drawn.
- Oil and gas prices, customer spending, excess industry equipment, utilization and service pricing are principal risks. The filing also identifies interest-rate exposure on floating-rate borrowings and foreign-exchange exposure in Canada, which management said was not material.
- Management said current liquidity and expected operating cash flow should support equipment maintenance, debt service and dividends, but noted that additional capital may not be available on reasonable terms. Disclosure controls were judged effective as of September 30, 2015.
Most important facts for investors to verify
- Whether activity, utilization and pricing deteriorate further, and whether the $801 million drilling backlog converts to revenue despite termination risk.
- Whether operating cash flow remains adequate as customer activity contracts, particularly given that receivables collections contributed substantially to nine-month cash generation.
- Whether oil-price and demand assumptions underlying asset valuations prove achievable, or lead to further impairment charges.
- Debt-covenant headroom and the effect of the 2015 term-loan restricted-payment test on future dividends or share repurchases.
- Exposure from equipment and vendor commitments, including potential damages if minimum purchase requirements are not met.