Patterson-UTI Energy, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Patterson-UTI provides land-based contract drilling and pressure pumping services in North America and holds non-operating interests in oil and gas properties. This unaudited filing covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $678.2 million | $667.0 million; up 1.7% |
| Operating income | $58.8 million | $94.9 million; down 38.1% |
| Net income | $34.8 million; $0.24 per diluted share | $56.2 million; $0.38 per diluted share |
| Operating margin | 8.7% | 14.2% (calculated as operating income divided by revenue) |
| Operating cash flow | $179.5 million | $209.7 million |
| Capital expenditures | $170.4 million | $174.2 million; operating cash flow exceeded expenditures by approximately $9.1 million |
| Cash and working capital | $257.7 million cash; approximately $394 million working capital | Cash was $249.5 million and working capital $454 million at December 31, 2013 |
| Debt | $690 million principal outstanding | $90 million term loan and $600 million senior notes; no revolver borrowings |
At March 31, the company reported approximately $460 million of available revolving-credit capacity, including the effect of $39.8 million in outstanding letters of credit. Cash less principal debt was approximately negative $432 million. The company was in compliance with its debt covenants. Total assets were $4.81 billion and stockholders’ equity was $2.79 billion.
Material changes and segment performance
- Contract drilling: Revenue increased 1.6% to $425.9 million and operating income declined 7.5% to $67.1 million. Operating days rose 1.7%; average revenue per operating day was nearly flat at $23,380. Depreciation increased 8.7%, reflecting prior investment in rig capacity.
- Pressure pumping: Revenue grew 3.9% to $240.3 million, but operating income fell 94.6% to $1.5 million. Direct costs rose 18.8%, while total jobs fell 20.2%. Segment margin as a share of revenue dropped to 16.8% from 27.3%.
- Oil and gas interests: Revenue decreased 28.5% to $12.0 million and operating income decreased 56.7% to $2.7 million, primarily reflecting lower oil production.
- Consolidated results also reflected a $1.7 million net gain on asset disposals, versus a $0.1 million loss in Q1 2013. The effective tax rate was 32.7%, down from 36.4%.
Outlook, commentary, and risks
- Management attributed the sharp pressure-pumping earnings decline primarily to unusually severe weather in Appalachia: crews and equipment remained on location, incurring labor, demurrage, fuel, and other costs without generating revenue.
- Contract-drilling backlog was approximately $1.04 billion at March 31, of which approximately $644 million was expected to be realized during the remainder of 2014. Contracts may be terminable on short notice; backlog estimates exclude certain fees and may be reduced by standby, rig moves, maintenance, or early-termination rates.
- The company had more than 275 marketable land rigs and over 750,000 hydraulic horsepower in its pressure-pumping fleet. It had completed 127 APEX rigs and planned 23 additional completions during the four quarters ending March 2015.
- Management said available working capital, operating cash flow, and revolver capacity should fund current equipment plans, debt service, and dividends. A $0.10-per-share dividend was approved for payment in June 2014. Approximately $187 million remained under the $200 million share repurchase authorization; no purchases were made under that program in Q1.
- Key risks include volatile oil and gas prices and customer spending, excess drilling and pressure-pumping capacity, competition and pricing pressure, weather, labor and equipment availability, supply interruptions, customer concentration or loss, and the ability to realize backlog and finance planned investment. No formal full-year earnings or revenue guidance is provided in the filing.
- Equipment purchase commitments were approximately $317 million. Minimum proppant and chemical purchase obligations were approximately $24.7 million, with potential liquidated damages for shortfalls.
- The EEOC referred allegations concerning employment practices to its legal unit for litigation review in March 2014; the company expected litigation, intended to defend itself, and said it did not expect a material adverse effect, while noting the outcome was uncertain.
Important facts for investors to verify
- Whether pressure-pumping utilization, pricing, and margins recover after the weather-related disruption, and how excess industry capacity affects results.
- Progress on the 23 planned APEX rigs, the $317 million equipment commitment, and the timing and funding of related capital spending.
- Backlog conversion, contract termination exposure, and whether expected 2014 backlog revenue is realized.
- Cash generation, working-capital trends, debt and covenant headroom, and the company’s ability to sustain dividends and any future repurchases.
- Developments in the EEOC matter and any resulting financial or operational exposure.