Patterson-UTI Energy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Comparisons are with the three months ended March 31, 2012 unless otherwise noted. Amounts below are in millions except per-share data and operating statistics.
Business context and results
The company provides land contract drilling and pressure pumping services, and holds non-operating interests in oil and natural gas properties. It reported more than 300 marketable land rigs and over 750,000 hydraulic horsepower in its pressure-pumping fleet. Results weakened as drilling activity and job counts fell, while excess pressure-pumping capacity and low natural gas prices continued to challenge the market.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $667.0 | $745.9 | -10.6% |
| Operating income | $94.9 | $157.7 | -39.8% |
| Net income | $56.2 | $97.3 | -42.2% |
| Diluted EPS | $0.38 | $0.62 | -38.7% |
| Operating margin | 14.2% | 21.1% | Down 6.9 percentage points |
| Net margin | 8.4% | 13.0% | Down 4.6 percentage points |
| Cash from operations | $209.7 | $263.7 | -20.5% |
| Capital expenditures | $174.2 | $263.4 | -33.9% |
Operating cash flow less property and equipment purchases was approximately $35.6 million, versus $0.3 million in Q1 2012; this simple measure does not reflect other investing or financing cash flows.
Segments and material changes
- Contract drilling: Revenue was $419.1 million (-14.4%) and segment income before tax was $72.5 million (-35.1%). Average rigs operating fell to 199 from 237, and operating days declined 17.2%. Revenue per operating day rose 3.4% to $23,410, partly reflecting a $2.9 million early termination payment; direct costs per operating day rose 5.5%.
- Pressure pumping: Revenue was $231.2 million (-4.4%) and segment income before tax was $28.5 million (-39.1%). Total jobs fell 29.2% to 1,408, although larger multi-stage fracturing jobs raised average revenue per fracturing job. Direct costs per total job increased 42.4%, and depreciation and amortization increased 27.0%.
- Oil and natural gas: Revenue increased 14.1% to $16.8 million, but segment income before tax declined 17.0% to $6.2 million. The segment recorded approximately $1.9 million of property impairments, compared with $0.3 million in Q1 2012.
- Higher depreciation, depletion and amortization, up to $136.4 million from $123.0 million, also weighed on earnings. Interest expense increased 47.7% to $6.8 million, primarily reflecting the Series B notes issued in 2012.
Liquidity, debt and capital allocation
- At March 31, 2013, cash was $144.0 million, working capital was approximately $351 million, and total debt carrying value was $697.5 million, including $97.5 million under the term loan and $600 million of senior notes. Cash less debt was approximately negative $553.5 million.
- The $500 million revolving facility had no borrowings; after $39.8 million of letters of credit, approximately $460 million of borrowing capacity remained. The company reported compliance with its credit-facility and note covenants.
- Q1 financing included $15.2 million of treasury-stock purchases and $7.3 million of dividends. The treasury shares were acquired from employees in connection with stock-option exercises, not under the public buyback program. Approximately $51.1 million remained authorized under that program.
- The board approved a further $0.05-per-share dividend for payment June 28, 2013. Future dividends remain discretionary.
Outlook, risks and contingencies
- Management said available liquidity and expected operating cash flows should fund current equipment plans, equipment improvements, debt service and dividends; additional growth financing may not be available on reasonable terms, or at all.
- Drilling-contract backlog was approximately $1.14 billion at March 31, with about $626 million expected to be realized during the remainder of 2013. Backlog excludes certain fees and possible rate reductions or downtime; customers generally may terminate contracts on short notice, subject to applicable termination provisions.
- The company planned to complete nine additional APEX rigs during the rest of 2013. Management cited volatile commodity prices, customer spending, excess rig and pressure-pumping capacity, competition, labor and equipment availability, weather, and potential operating liabilities as risks to demand, pricing and margins. The filing provides no specific earnings or revenue guidance.
- Commitments included approximately $128 million for major equipment and $35 million of remaining minimum proppant and chemical purchases; failure to meet purchase minimums may trigger liquidated damages. Letters of credit of $39.8 million secured insurance-related obligations; none had been drawn. Legal proceedings in the normal course were not expected by management to have a material adverse effect.
- Canadian unremitted earnings were approximately $33.7 million and treated as permanently reinvested; an estimated $5.1 million deferred tax liability would be recognized if those earnings were distributed.
Important facts for investors to verify
- Whether drilling activity, utilization and day rates stabilize, and whether the backlog converts to revenue given customer termination rights and downtime exclusions.
- Whether pressure-pumping job volumes and cost per job improve amid industry overcapacity and higher operating costs.
- Capital spending needs relative to operating cash generation, available revolver capacity, debt maturities and covenant headroom.
- The nature and potential cash impact of equipment and supply commitments, insurance-related letters of credit, and any changes in legal or other contingencies.
- Whether the $2.9 million drilling termination payment and the oil-and-gas property impairments affect comparability of future results.