Patterson-UTI Energy, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
The company provides land contract drilling, pressure pumping, drilling and completion fluids, and oil and natural gas production services. Results deteriorated sharply amid lower commodity prices and reduced customer drilling activity.
Key financial results
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $176.2 | $608.5 | $633.0 | $1,639.4 |
| Operating income (loss) | $(27.3) | $165.3 | $(28.7) | $411.6 |
| Net income (loss) | $(18.6) | $108.7 | $(20.1) | $267.6 |
| Diluted EPS | $(0.12) | $0.69 | $(0.13) | $1.71 |
| Operating cash flow | Not provided | Not provided | $416.2 | $459.6 |
- Q3 revenue fell 71% year over year; the operating margin was approximately negative 15.5%, versus positive 27.2% a year earlier. Net margin was approximately negative 10.5%.
- Contract drilling revenue was $112.3 million in Q3, down 77.5%. Average rigs operating fell to 73 from 276, and average revenue per operating day declined to $16,800 from $19,620.
- Q3 pressure pumping revenue declined 31.2% to $41.7 million, with operating income down to $1.2 million from $12.9 million. Fluids revenue fell 53.9%; the segment reported a $2.3 million operating loss. Oil and gas revenue fell 58.4% to $5.7 million.
- For the first nine months, capital expenditures were $350.6 million and investing cash outflow was $347.3 million. Operating cash flow less investing cash outflow was approximately $68.9 million. Operating cash flow included a $288.2 million cash benefit from the change in accounts receivable.
- At September 30, cash was $119.2 million and working capital was approximately $237 million. Current assets were $435.7 million and current liabilities $198.6 million. Total assets were $2.645 billion and stockholders’ equity $2.101 billion.
- No borrowings were outstanding under the $240 million unsecured credit line; $46.3 million of letters of credit left approximately $194 million available. The facility matures January 31, 2012. The filing reports no other outstanding debt balance.
Material changes and management commentary
- Compared with the first nine months of 2008, revenue declined 61.4% and the company moved from net income of $267.6 million to a net loss of $20.1 million. Contract drilling operating income fell 98.4%; pressure pumping and fluids moved to operating losses.
- Management attributed lower activity primarily to declining oil and gas prices, weaker customer budgets, and excess land-rig capacity. Average operating rigs fell from a peak of 283 in October 2008 to 60 in June 2009, then recovered to 81 in September 2009.
- Management said available cash, credit-line capacity, expected operating cash generation and anticipated tax refunds from net operating loss carrybacks should support current plans, including equipment investment, dividends and operations through the downturn. This is not a formal earnings or operating forecast.
- The company recorded $3.3 million of oil and gas property impairments in the first nine months. Goodwill of $86.2 million remained unchanged; management warned continued weak market conditions could require a potentially material impairment.
Outlook, risks and unusual items
- Management expected continued volatility in oil and gas prices; sustained low natural gas prices could keep drilling demand low and harm results, liquidity and cash flows. Other stated risks include customer credit stress, competition, excess rig supply, financing-market conditions, equipment availability and labor retention.
- The company had approximately $128 million of major-equipment purchase commitments at quarter-end, in addition to ongoing capital needs. It maintained $46.3 million in insurance-related letters of credit; none had been drawn. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
- The quarterly dividend was reduced to $0.05 per share from $0.16 in Q3 2008. A further $0.05 dividend, payable December 30, 2009, was approved after quarter-end; future dividends remain at the board’s discretion.
- Nine-month drilling revenue included $7.5 million from early contract terminations; average standby rigs generated $21.5 million of revenue. The company also reported a $6.2 million credit-line issuance cost and higher bad-debt expense, which increased $4.9 million year over year for the first nine months.
Investor verification priorities
- Check subsequent rig counts, utilization, day rates and customer activity against the September recovery to 81 rigs.
- Verify cash conversion and receivables quality, including the large receivables-driven operating cash flow benefit and the increase in the doubtful-account allowance to $15.2 million from $9.3 million at year-end 2008.
- Track planned capital spending and the $128 million equipment commitment against cash generation and available credit capacity.
- Assess whether weak market conditions could trigger impairment of the $86.2 million drilling-segment goodwill balance or further oil and gas property impairments.
- Confirm the sustainability of dividends and compliance with credit-line financial covenants as operating results evolve.