Patterson-UTI Energy, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Patterson-UTI provides land-based contract drilling and pressure pumping services and holds non-operating oil and gas working interests. At quarter-end it had more than 330 marketable drilling rigs and approximately 660,000 hydraulic horsepower in its pressure pumping fleet. Average rigs operating in Q2 were 224, compared with 202 a year earlier.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $681.1 | $600.1 | $1,427.0 | $1,167.5 |
| Operating income | $150.9 | $131.9 | $308.6 | $249.4 |
| Net income | $92.5 | $81.6 | $189.8 | $152.9 |
| Diluted EPS | $0.60 | $0.52 | $1.22 | $0.98 |
| Operating margin | 22.2% | 22.0% | 21.6% | 21.4% |
Q2 revenue rose 13.5% and net income rose 13.4% year over year. Q2 contract drilling revenue increased 19.1%; pressure pumping revenue increased 3.0%, while segment operating income fell 26.8% to $36.8 million as costs increased faster than revenue. Six-month operating cash flow was $495.5 million, versus $435.3 million. Capital expenditures were $512.1 million, leaving cash flow after capital expenditures of approximately negative $16.6 million before asset-sale proceeds and financing.
Cash at June 30 was $75.3 million; working capital was approximately $382 million. Debt totaled $600 million, all senior notes, with no revolver borrowings. The company reported approximately $360 million of available revolver capacity after $39.8 million of letters of credit. Debt increased from $502.5 million at December 31, 2011, reflecting a $300 million Series B notes issuance; the term loan was repaid in full. The company was in compliance with its debt covenants.
Material changes and unusual items
- Contract drilling benefited from higher rig activity and day rates: Q2 average revenue per operating day rose 7.5% to $22,570. Direct costs per operating day rose 12.5%, tempering segment income growth.
- Pressure pumping activity included fewer total jobs in Q2, but higher average revenue per job. Higher material, labor and related costs, along with increased depreciation, reduced segment operating income.
- The April sale of flowback operations for $42.5 million generated a reported gain of approximately $22.6 million. Total net gains on asset disposals were $28.3 million in Q2 and $30.7 million for the first half.
- The company repurchased approximately 4.7 million shares for about $70.1 million in the first half and paid $0.10 per share in dividends.
Outlook, risks and contingencies
Management reported a contract-drilling backlog of approximately $1.5 billion at June 30, including about $526 million expected to be realized during the rest of 2012. Backlog is based on remaining term-contract day rates; contracts may generally be terminated on short notice, subject to early-termination payments. The company expected to complete 24 new APEX rigs in 2012; 100 had been completed by quarter-end. No specific earnings or revenue guidance was provided.
Management said liquidity and expected operating cash flows should fund current equipment plans, debt service and dividends, while noting that additional financing for growth may not be available on reasonable terms. Key risks include oil and gas price volatility, customer spending and service demand, excess drilling and pressure-pumping capacity, cost inflation, labor and equipment availability, weather, and customer losses. Management noted oversupply in pressure pumping equipment, associated with low natural-gas prices and new equipment entering the market.
- Committed major equipment purchases were approximately $220 million. Remaining minimum proppant purchase obligations were approximately $33.7 million; shortfalls may trigger liquidated damages.
- Legal proceedings arose in the ordinary course; management did not expect them to have a material adverse effect.
- On July 25, the board approved a $0.05-per-share dividend payable September 28 and a new share-repurchase authorization of up to $150 million, replacing the prior program’s remaining authority.
- The Chief Accounting Officer said he would resign effective August 10, 2012; the CFO was to assume principal accounting officer responsibilities.
Important facts for investors to verify
- Whether drilling activity and day rates remain strong enough to offset higher operating costs and commodity-driven demand changes.
- Pressure-pumping utilization, pricing and margins amid the disclosed excess equipment capacity.
- Realization and termination exposure of the $1.5 billion drilling backlog, particularly the $526 million expected in the second half of 2012.
- Capital spending, equipment commitments, cash generation and the company’s capacity to fund buybacks and dividends while maintaining liquidity.
- The impact of the flowback-sale gain on comparisons and the sustainability of earnings excluding asset-disposal gains.