Patterson-UTI Energy, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company provides land-based contract drilling and pressure pumping services, and holds non-operating oil and natural gas interests. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $845.6m | $730.9m | $2,281.1m | $2,057.3m |
| Operating income | $30.3m | $124.6m | $176.3m | $290.1m |
| Net income | $16.0m | $74.4m | $105.1m | $171.4m |
| Diluted EPS | $0.11 | $0.51 | $0.71 | $1.16 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $566.3m | $656.7m |
| Adjusted EBITDA (non-GAAP) | $268.1m | $265.7m | $714.9m | $705.2m |
Q3 revenue increased 15.7%, while operating income fell 75.7% and net income fell 78.5%. The quarter’s operating margin was about 3.6%, versus 17.0% a year earlier. Nine-month revenue rose 10.9%, but operating income declined 39.2% and net income declined 38.7%. Adjusted EBITDA increased about 0.9% for Q3 and 1.4% for the nine-month period; it is a non-GAAP measure and should not be treated as a substitute for operating cash flow or net income.
Segments and drivers
- Contract drilling: Q3 revenue was $482.2m, up 5.3%, while segment income before tax was $12.1m versus $116.3m. The main unusual item was a $77.9m charge for retiring 55 mechanical rigs and writing off excess spare components. Q3 2013 also included about $62.8m of early-termination revenue for six rigs. Average operating rigs increased to 218 from 190; reported average revenue per operating day was $24,010 versus $26,250, affected by the prior-year termination revenue.
- Pressure pumping: Q3 revenue rose 34.5% to $348.7m and segment income before tax rose to $25.2m from $16.9m. Revenue and direct costs increased with larger, more intensive multi-stage fracturing jobs and fleet expansion. Segment margin as a share of revenue was 19.4%, down from 21.3%; average direct costs per total job increased faster than average margin per job.
- Oil and natural gas: Q3 revenue increased 6.5% to $14.7m, but segment income before tax declined to $3.0m from $5.4m. The quarter included about $2.2m of property impairment, versus $0.2m in Q3 2013.
Cash, liquidity and debt
- At September 30, cash was $38.6m, compared with $249.5m at December 31, 2013. Working capital was about $161m, down from $454m. Current assets were $748.1m and current liabilities $587.4m.
- Nine-month operating cash flow was $566.3m. Investing activities used $751.3m, including $773.8m of property, equipment and acquisition spending; financing activities used $25.3m. Cash declined by $210.9m over the period.
- Total debt was $685.0m, including $85.0m under the term loan and $600.0m of senior notes. There were no revolver borrowings at September 30; approximately $460m of borrowing capacity remained after $39.8m of letters of credit. The company reported compliance with its debt covenants.
- From September 30 through October 23, the company borrowed $170m under its revolver, leaving approximately $290m available at October 23. Interest expense was $21.4m for the first nine months.
Changes, outlook and notable items
- Growth investment was substantial: nine-month capital expenditures and acquisitions totaled $773.8m. The company reported plans to complete 30 additional APEX drilling rigs during the four quarters ending September 2015; 139 APEX rigs had been completed by September 30.
- Contract drilling backlog was approximately $1.74bn at September 30, of which about $342m was expected to be realized during the remainder of 2014. Backlog is based on term contracts and can be affected by customer termination rights, downtime, and other contract provisions.
- In June, the company acquired an East Texas pressure-pumping operation with 31,500 horsepower. On October 20, after quarter-end, it completed another Texas pressure-pumping acquisition with 148,250 horsepower. The filing says the two 2014 acquisitions added about 180,000 horsepower and cost $176m in total, plus assumed leases and other contractual obligations; purchase accounting for the October deal was incomplete.
- The company declared a $0.10-per-share dividend payable December 24, 2014. Future dividends remain subject to board discretion. Approximately $187m remained under the share repurchase authorization at September 30; no shares were purchased under the public program during Q3.
- Management cited volatile oil and gas prices, cyclical demand, excess drilling and pressure-pumping capacity, competition, equipment delivery and labor constraints, weather, customer losses, and acquisition integration as risks. It stated that available liquidity, expected operating cash flow and borrowing capacity should support current equipment plans, debt service and dividends, while noting that additional capital may not be available on reasonable terms.
- The EEOC had referred allegations concerning workplace practices to its legal unit for litigation review; the company expected litigation, intended to defend itself, and did not expect a material adverse effect, while noting the outcome was uncertain. The company also had $574m of major equipment purchase commitments and $72m of remaining minimum proppant and chemical purchase obligations.
- The nine-month effective tax rate was 32.4%, versus 36.6% in 2013. Q3 tax expense included a $41.1m deferred tax benefit against $48.6m of current tax expense.
Important facts for investors to verify
- Whether the $77.9m mechanical-rig retirement charge is nonrecurring and how the reduced fleet affects future utilization, depreciation, and profitability.
- Whether pressure-pumping revenue growth can translate into improved margins amid rising direct costs and industry-wide excess capacity.
- How the $773.8m of nine-month investment, $574m of equipment commitments, and post-quarter revolver borrowing affect liquidity, leverage, and returns on capital.
- Realization and durability of the $1.74bn drilling backlog, including customer termination provisions and expected timing.
- Final purchase accounting, integration costs, and operating contribution from the October acquisition, as well as the outcome of the EEOC matter.