Patterson-UTI Energy, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. Patterson-UTI provides contract drilling and pressure pumping services and holds non-operating oil and gas working interests. The company reported approximately 330 marketable land rigs and 660,000 hydraulic horsepower of pressure-pumping capacity at quarter-end.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $745.9 million | $567.4 million | +31.5% |
| Operating income | $157.7 million | $117.5 million | +34.1% |
| Net income | $97.3 million | $71.3 million | +36.5% |
| Diluted EPS | $0.62 | $0.46 | +$0.16 |
| Cash from operating activities | $263.7 million | $173.1 million | +$90.6 million |
| Capital expenditures | $263.4 million | $182.6 million | +$80.9 million |
Operating margin was approximately 21.1%, versus 20.7%; net margin was approximately 13.0%, versus 12.6%. Operating cash flow nearly matched capital expenditures, leaving approximately $0.3 million of cash flow before asset-sale proceeds and financing activity. Cash declined to $17.8 million from $23.9 million at year-end 2011.
Segment results: Contract drilling revenue rose 29.7% to $489.5 million and operating income rose 38.8% to $111.8 million. Average rigs operating increased to 237 from 207, while average revenue per operating day increased to $22,650 from $20,240. Pressure-pumping revenue increased 34.5% to $241.7 million, but operating income rose only 13.1% to $46.8 million as direct costs and depreciation grew faster than revenue. Oil and gas segment revenue increased 41.7% to $14.7 million and operating income increased 56.0% to $7.5 million.
Financial position and liquidity
At March 31, 2012, working capital was approximately $322 million, compared with $346 million at December 31, 2011. Total debt was $498.5 million: $108.5 million under the revolver, $90.0 million under the term loan and $300 million of senior notes. The revolver had $251 million of available borrowing capacity after $40.6 million of letters of credit. Management reported compliance with debt covenants. The company paid $7.8 million in dividends during the quarter and declared a further $0.05-per-share dividend for payment in June 2012.
Material changes, outlook and risks
- Management attributed earnings growth primarily to more operating rigs and higher drilling day rates, plus greater pressure-pumping activity, pricing and job size.
- Drilling backlog was approximately $1.7 billion at March 31; management expected about $753 million to be realized during the remainder of 2012. Backlog is based on term contracts and may be affected by termination, downtime and other contract provisions.
- The company expected to complete 24 new APEX drilling rigs in 2012. Management said available liquidity and expected operating cash flow should fund current equipment plans, debt service and dividends, while noting that additional growth financing might not be available on reasonable terms.
- Natural gas prices averaged $2.45 per Mcf in Q1 and were below $2.00 per Mcf at quarter-end and through April, according to the filing. Management cited oil and gas price volatility, customer spending, excess drilling and pressure-pumping capacity, labor and supply constraints, and weather as risks to demand, pricing and margins. It specifically noted excess pressure-pumping equipment amid low gas prices and new capacity.
- Commitments included approximately $338 million of major equipment purchases and $37.4 million of remaining minimum proppant purchases; shortfalls on proppant commitments could trigger liquidated damages. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- As a subsequent event, the company sold its flowback operations on April 23 for $42.5 million, retaining approximately $5 million of associated working capital. It expected to recognize a pretax gain of approximately $20 million in Q2 2012.
- Q1 included a $1.6 million provision for bad debts. A $1.7 million cash payment on 2009 performance units was accrued at quarter-end and paid in April; the related compensation benefit recognized in Q1 was approximately $1.9 million.
Most important facts for investors to verify
- Whether drilling utilization and day rates remain resilient, particularly given low natural gas prices and the company’s rigs operating below its available fleet.
- Whether pressure-pumping pricing and margins can hold up as new equipment adds capacity; Q1 direct operating costs rose faster than segment revenue.
- Timing and execution of the $338 million equipment commitments, and the effect of capital spending on cash, borrowing and liquidity.
- Realization and termination exposure of the $1.7 billion drilling backlog, including the expected $753 million for the balance of 2012.
- Completion accounting for the flowback sale and the expected Q2 gain, along with continuing covenant compliance and revolver availability.