Patterson-UTI Energy, Inc. — Q2 2009 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended June 30, 2009. Patterson-UTI provides land contract drilling, pressure pumping, drilling and completion fluids, and oil and natural gas production services. Financial amounts below are in U.S. dollars; millions are used unless otherwise stated.
Financial performance and liquidity
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $160.8 million | $526.3 million | $456.8 million | $1,030.8 million |
| Operating income (loss) | $(27.1) million | $126.4 million | $(1.4) million | $246.3 million |
| Net income (loss) | $(17.7) million | $81.4 million | $(1.5) million | $158.8 million |
| Diluted EPS | $(0.12) | $0.52 | $(0.01) | $1.01 |
| Operating cash flow | Not separately stated | Not separately stated | $354.8 million | $273.3 million |
- Q2 revenue fell about 69% year over year; the operating margin was approximately negative 16.9%, compared with positive 24.0% in Q2 2008. Net margin was approximately negative 11.0%, versus positive 15.5%.
- Six-month revenue declined about 56%. Contract drilling remained profitable for the six-month period ($26.1 million segment income), but recorded a Q2 loss of $14.9 million. Pressure pumping and fluids also reported Q2 segment losses.
- Six-month investing cash outflow was $245.8 million, including $246.5 million of property and equipment purchases. Operating cash flow less those purchases was approximately $108.9 million. Cash rose by $86.4 million to $167.7 million; the cash-flow statement shows a $290.5 million source from accounts receivable changes.
- At June 30, cash was $167.7 million, working capital was approximately $230 million, and current liabilities were $219.7 million. The company had no line-of-credit borrowings; of its $240 million facility, about $194 million was available after $46.3 million of letters of credit. Total liabilities were $530.7 million.
- Capital spending was substantial: $246.5 million of cash purchases in the first half, and approximately $154 million of additional major-equipment purchase commitments remained at June 30.
Material changes and management commentary
- Average operating rigs fell to 63 in Q2 from 244 a year earlier; monthly average rigs declined from a high of 283 in October 2008 to 60 in June 2009. Q2 contract-drilling operating days fell 74%, and average revenue per operating day fell 5% to $17,780.
- Management attributed the steep activity decline to lower oil and gas prices, customer reductions or curtailments in drilling programs, and the broader economic and financing downturn. It cited excess rig capacity, including rigs reactivated or newly built, as a further pressure on utilization and pricing.
- Q2 contract drilling included $7.5 million of standby revenue from about seven rigs and $0.9 million from early contract terminations. For the first half, standby revenue was $18.1 million and early termination revenue was $7.5 million.
- Pressure-pumping revenue fell 41% in Q2 as jobs declined 51%; larger Appalachian unconventional-reservoir jobs lifted revenue per job, but delays in development and lower commodity prices weakened demand and profitability. Fluids revenue fell 48% on lower sales volume.
- Six-month bad-debt expense was $6.0 million, versus $0.6 million in the prior-year period. Oil and gas properties incurred $3.1 million of first-half impairment charges, compared with $0.3 million a year earlier. Goodwill of $86.2 million was unchanged; management warned prolonged weak market conditions could require a potentially material contract-drilling goodwill impairment.
- Management said cash, available credit, and expected operating cash flow should be sufficient for current plans, including equipment investment and dividends. This is a qualified outlook, not quantified earnings or activity guidance. Management also cautioned that continued low gas prices could keep rig demand low and harm results, liquidity, and cash flows.
- The quarterly dividend was $0.05 per share in Q2 2009, down from $0.16 in Q2 2008. A further $0.05 dividend was approved for payment in September 2009; future dividends remain at the board’s discretion.
Risks, contingencies, and other items
- The $240 million unsecured revolving facility matures January 31, 2012 and includes financial covenants. No borrowings were outstanding at quarter-end; the filing states management did not expect covenant restrictions to impair operations.
- $46.3 million of letters of credit supported insurance obligations; none had been drawn. The company was party to ordinary-course legal proceedings and did not expect them to have a material adverse effect.
- Commodity-price volatility, customer credit and access to capital, excess rig supply, service pricing, equipment availability, and retaining personnel were identified as risks. The company reported no material Canadian currency risk and no outstanding LOC borrowings exposed to floating rates at quarter-end.
- Disclosure controls were assessed as effective at June 30, 2009, with no material change in internal control over financial reporting during the quarter. The General Counsel and Secretary resigned effective August 10, 2009.
Investor verification priorities
- Verify whether rig utilization, dayrates, and customer drilling budgets stabilized or continued to decline after June 30.
- Track receivable collections and customer credit quality, given the large cash-flow contribution from receivables and increased bad-debt expense.
- Assess the return, timing, and funding needs for equipment spending and the $154 million purchase commitment amid weak activity.
- Monitor pressure-pumping demand, Appalachian development delays, and possible goodwill or oil-and-gas asset impairments.
- Confirm the company’s ability to maintain dividends and comply with LOC covenants if operating cash flow weakens; future dividends are discretionary.