PTEN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1996, for Patterson Energy, Inc. (and subsidiaries). The Company operates in two primary segments: contract drilling and oil and gas exploration/production. A significant corporate event during this period was the merger with Tucker Drilling Company, Inc., consummated on July 30, 1996, which was accounted for as a pooling of interests. Consequently, historical financial information has been restated to reflect the combined entity retroactively.

Key Financial Metrics

Note: Total Debt includes current maturities ($4,039,952) and long-term notes ($11,614,622) as of September 30, 1996.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 15.8% for the nine months ended September 30, 1996, compared to the prior year. Drilling revenues rose 12% to $47.7 million, while oil and gas sales increased 55% to $5.9 million, driven by higher production volumes and improved commodity prices.
• Profitability Impact: Despite revenue growth, net income for the nine-month period decreased by 15% to $2.13 million. The third quarter specifically reported a net loss of $611,850, compared to a net income of $892,466 in the same quarter of 1995.
• Acquisition Costs: The Company incurred $2,268,331 in non-recurring acquisition costs related to the Tucker Drilling merger during the nine-month period, significantly impacting operating income.
• Asset Impairment: A writedown of $159,403 due to the impairment of long-lived assets was recorded in the nine-month period.
• Debt Levels: Total notes payable increased by approximately 13% year-over-year, reflecting new borrowings to fund capital expenditures and acquisitions.

Guidance, Outlook, and Risks

Management Commentary: Management expects to fund operations and service debt for the next 12 months using cash flow from operations and available borrowings. The Company is aggressively upgrading its drilling fleet, having expended approximately $5.98 million in capital expenditures for the drilling segment in fiscal year 1996. This includes significant purchases of new drill pipe, which will increase depreciation expenses but is deemed necessary for growth.

Recent Acquisitions: In October 1996 (post-period), the Company acquired a non-affiliated contract drilling company for $13 million, increasing its rig count to 46. This was funded by a new $22 million credit facility with The CIT Group and existing cash.

Risks and Contingencies:

• Commodity Price Volatility: The Company's financial condition is substantially dependent on oil and gas prices. A significant decline could materially adversely affect results.
• Legal Proceedings: A wrongful death suit filed in 1993 was settled in October 1996 within the limits of liability coverage, releasing the Company from further liability.
• Debt Covenants: The new CIT loan agreement requires maintaining a cash flow coverage ratio of at least 2:1.0 and tangible net worth of at least $36 million.

Investor Verification Checklist

• Merger Accounting: Verify the "pooling of interests" treatment for the Tucker Drilling merger and the retroactive restatement of 1995 figures.
• Acquisition Costs: Confirm the impact of the $2.27 million in non-recurring acquisition costs on the Q3 net loss.
• Debt Structure: Review the terms of the new $22 million CIT credit facility, specifically the conversion to a 60-month term loan and the associated covenants.
• Capital Expenditures: Assess the sustainability of the $5.98 million drilling capital expenditure program and its effect on future depreciation.
• Post-Period Activity: Note the October 1996 acquisition of Gene Sledge Drilling Corporation and the subsequent drawdown of the CIT credit facility.