Patterson-UTI Energy, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial amounts are in U.S. dollars; figures below are rounded to millions unless noted. The filing is unaudited.
Business context and reporting period
Patterson-UTI provides land-based contract drilling, pressure pumping and directional drilling services, alongside smaller oilfield rentals, equipment services and oil and gas working-interest operations. Its results depend heavily on oil and gas prices, customer spending and service pricing.
On October 1, 2021, after quarter-end, the company completed its acquisition of Pioneer Energy Services. Consideration was approximately $278 million, including about 26.3 million Patterson-UTI shares and $30 million cash, and included retirement of Pioneer debt. Acquired assets included U.S. and Colombian drilling rigs, well-servicing rigs and wireline units. Pioneer results were to be consolidated beginning in Q4 2021; purchase accounting was still in process when the filing was made.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $357.9m | $207.1m | $890.6m | $903.4m |
| Operating loss | $(90.0)m | $(114.6)m | $(316.9)m | $(768.1)m |
| Net loss | $(83.0)m | $(112.1)m | $(292.7)m | $(697.2)m |
| Net loss per share, diluted | $(0.44) | $(0.60) | $(1.55) | $(3.70) |
| Adjusted EBITDA (non-GAAP) | $51.1m | $43.3m | $121.9m | $144.9m |
Q3 revenue increased 72.8% year over year, and the operating loss margin narrowed to about 25.1% of revenue from 55.3%. Higher activity supported revenue, while cost increases—especially contract drilling costs—limited improvement. Nine-month revenue declined 1.4%; the much smaller year-to-date net loss primarily reflects the absence of the $395.1 million goodwill impairment recorded in 2020. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Q3 segment trends: Contract drilling revenue rose 37% to $157.9m, but segment operating loss widened to $51.8m as direct costs per operating day rose 41%. Pressure pumping revenue rose 112% to $152.6m and its operating loss narrowed to $13.8m; segment margin was 11.7% of revenue versus 11.5%. Directional drilling revenue rose 209% to $31.7m, with operating loss narrowing to $4.6m.
- Cash flow and spending: For the first nine months, operating cash flow was $51.6m versus $283.3m a year earlier. Capital expenditures were $90.8m; operating cash flow less capital expenditures was therefore negative $39.2m. Dividends paid were $11.3m. Cash decreased $33.6m to $191.3m.
- Balance sheet and liquidity: At September 30, cash was $191.3m, current assets $543.5m and current liabilities $338.8m, implying working capital of about $204.7m. Debt principal was $908.8m (reported net carrying amount $902.1m); cash-adjusted principal debt was approximately $717.5m. The company reported about $600m of available revolver capacity and compliance with debt covenants.
- Debt and obligations: Debt comprised $50m under a term loan maturing June 2022, $509.5m of 3.95% notes due 2028 and $349.3m of 5.15% notes due 2029. Letters of credit totaled $63.7m, with none drawn. Operating lease liabilities were $21.7m.
- Capital returns: The quarterly dividend was $0.02 per share, unchanged from Q3 2020. The board approved another $0.02-per-share dividend for payment in December 2021, subject to the stated record date and board discretion.
Material changes versus prior comparable periods
- Q3 activity recovery lifted revenue across major service lines. Average active drilling rigs increased to 80 from 60; pressure pumping averaged nine active spreads versus four. Management attributed higher drilling costs per day partly to fewer rigs on standby, reactivation costs and inflation.
- Year-to-date contract drilling revenue fell 21.7%, reflecting fewer operating days and lower early-termination revenue. Pressure pumping and directional drilling revenue rose 32.7% and 35.0%, respectively, as activity recovered.
- Year-to-date operating cash flow fell substantially, in part amid a $103.2m use of cash from accounts receivable changes, compared with a $202.7m source in the prior-year period.
- In 2020, the company recorded a $395.1m goodwill impairment and $38.3m of restructuring charges; neither recurred in the 2021 year-to-date period. The 2021 period included $2.1m of merger and integration expenses related to Pioneer.
Outlook, management commentary and risks
- Management expected Q4 2021 to average approximately 106 operating rigs in the United States, including 13 Pioneer rigs, and approximately ten active pressure pumping spreads. It expected 53 rigs under term contracts in Q4 2021 and 35 under term contracts on average for the twelve months ending September 30, 2022.
- Contract drilling backlog was approximately $286m at September 30, 2021; about 31% was reasonably expected to remain at September 30, 2022. The company cautioned that customer termination rights and other contract factors mean backlog may not be realized.
- The 2021 capital expenditure forecast was increased to approximately $170m based on customer discussions about higher activity into 2022. Management said current liquidity and expected operating cash flow should fund planned equipment spending, debt service and dividends for at least the next 12 months, while noting that additional capital may not be available on reasonable terms.
- Management saw oilfield labor, service and supply-cost inflation and difficulty attracting workers, but believed tighter markets for premium equipment could support higher pricing. Pressure pumping remained oversupplied, and a significant portion of its horsepower remained stacked.
- Key risks include volatile oil and gas prices, weaker customer spending or access to capital, excess service-equipment capacity, inflation and labor availability, customer nonpayment, operational and weather risks, and the ability to realize drilling backlog. The filing also highlights Pioneer integration, retention of business relationships, realization of synergies and the possibility that a sale of some or all of Pioneer’s production-services business may not occur on acceptable terms.
- The company reported routine legal proceedings and did not expect them, individually or in aggregate, to materially adversely affect financial condition, cash flows or results. It also noted exposure to self-insured losses and variable interest rates; a one-percentage-point increase on the term loan outstanding would raise annual cash interest expense by about $0.5m.
Important facts for investors to verify
- Post-acquisition share count, purchase-price allocation, acquired liabilities and debt repayment, and the actual integration and operating contribution from Pioneer.
- Whether Q4 rig and pressure-pumping activity, term-contract expectations and pricing improvement materialize, given cost inflation and market oversupply.
- Cash conversion and working-capital trends, especially receivable collections, against the increased $170m capital expenditure forecast.
- Debt maturities, covenant compliance, available revolver capacity and the insurance-related letters of credit.
- Realizability of the $286m drilling backlog and any plans or outcomes regarding a sale of Pioneer production-services assets.