Patterson-UTI Energy, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited consolidated results. The company provides land contract drilling and pressure pumping services and holds working interests in oil and natural gas properties. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $600.1 | $307.0 | $1,167.5 | $578.6 |
| Operating income | $131.9 | $45.8 | $249.4 | $53.6 |
| Net income | $81.6 | $29.5 | $152.9 | $33.7 |
| Diluted EPS | $0.52 | $0.19 | $0.98 | $0.22 |
| Operating margin | 22.0% | 14.9% | 21.4% | 9.3% |
| Net margin | 13.6% | 9.6% | 13.1% | 5.8% |
- Revenue mix, Q2: Contract drilling $386.5 million; pressure pumping $200.1 million; oil and natural gas $13.5 million.
- Cash flow, six months: Operating activities provided $435.3 million, compared with $293.6 million. Property and equipment purchases were $427.6 million; reported investing cash outflow was $394.6 million. Cash increased $37.0 million to $64.6 million.
- Liquidity: Working capital was approximately $233 million, down from $241 million at December 31, 2010. Current assets were $630.2 million and current liabilities $397.5 million.
- Debt: Total long-term debt, including current portion, was $396.3 million. This comprised $300 million of 4.97% senior notes due 2020 and $96.3 million outstanding under the term loan. No revolving borrowings were outstanding; approximately $359 million of revolver capacity remained after letters of credit.
- Capital returns: Dividends paid were $0.10 per share in the first half. A further $0.05-per-share dividend was declared for payment September 30, 2011. Approximately $113 million remained authorized under the share repurchase program.
Material changes and operating drivers
- Q2 revenue rose 95.5% year over year and net income rose 176.5%; first-half revenue more than doubled and net income increased to $152.9 million from $33.7 million.
- Contract drilling Q2 revenue increased 61%. Average rigs operating rose to 202 from 156, and average revenue per operating day increased to $21,000 from $16,920. Management attributed the gains to stronger demand and higher contractual dayrates, largely associated with higher oil prices.
- Pressure pumping Q2 revenue increased 237% and segment operating income rose to $50.3 million from $6.7 million. Growth reflected larger multi-stage fracturing work, pricing and the October 2010 acquisition of a pressure-pumping business, which contributed $99.6 million revenue and $22.3 million operating income in Q2.
- Q2 2010 included a $21.9 million net gain on asset disposals, compared with $1.0 million in Q2 2011; the prior-period gain included $20.1 million from sale of certain exploration and development rights. Higher 2011 interest expense reflected the senior notes and term loan issued in 2010.
- The acquired electric wireline business was sold for $25.5 million in January 2011 and presented as discontinued operations. The first half includes a $0.4 million after-tax discontinued-operations loss.
Outlook, risks and contingencies
- Management said liquidity, operating cash flow and borrowing capacity should fund current equipment-building plans, equipment improvements, debt service and dividends. The filing provides no specific revenue or earnings guidance.
- The company had approximately $366 million of commitments to purchase major equipment. It also maintained $40.6 million of letters of credit, primarily for insurance collateral; none had been drawn.
- Key risks include volatility in oil and natural gas prices and resulting changes in customer activity, dayrates and margins; excess drilling-rig or pressure-pumping capacity from reactivation or new construction; equipment and labor constraints; acquisition integration; and access to capital. Management noted that weaker market conditions could also lead to goodwill impairment.
- The company reported compliance with credit-facility financial covenants at June 30, 2011. Normal-course legal proceedings were not expected by management to have a material adverse effect. Canadian currency exposure was described as not material.
- Management declared the September 2011 dividend after quarter-end; future dividends remain subject to board discretion and business and financial conditions. The company cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of pressure-pumping growth and profitability is attributable to the acquired business, larger fracturing jobs and pricing, and how sustainable those factors are.
- Whether rig utilization, dayrates and pressure-pumping margins hold up as equipment supply expands or commodity prices weaken.
- Progress, timing and funding of the $366 million equipment commitments, alongside capital spending and operating cash flow.
- Debt amortization, floating-rate exposure and covenant headroom; the filing estimates a 1% rate increase would add about $0.96 million of annual cash interest on the term loan.
- The impact of the 2010 asset-disposal gain on prior-period comparisons and the reported contribution of the pressure-pumping acquisition.