Patterson-UTI Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial figures are in millions of dollars unless otherwise noted. Comparisons are year over year unless specified.
Business context and reporting period
Patterson-UTI provides land-based contract drilling, pressure pumping and directional drilling services, along with oilfield rentals and other operations. Results are sensitive to oil and natural gas prices, customer spending and equipment utilization.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $758.9 | $622.2 | $1,550.7 | $1,131.6 |
| Operating income | $104.6 | $36.8 | $230.5 | $17.9 |
| Net income (loss) | $84.6 | $21.9 | $184.3 | $(6.9) |
| Diluted EPS | $0.40 | $0.10 | $0.87 | $(0.03) |
| Adjusted EBITDA (non-GAAP) | $233.7 | Not clearly provided | $489.3 | $255.5 |
- Q2 revenue increased 22% year over year; operating margin was approximately 13.8%, versus 5.9% a year earlier. Six-month net income improved from a loss to profit.
- Q2 contract drilling revenue was $432.4 million, pressure pumping $250.2 million, directional drilling $55.1 million and other revenue $21.1 million.
- Pressure pumping softened sequentially: revenue fell 14.7% and adjusted gross margin fell 26.5% from Q1, reflecting lower spot-market pricing, fewer fracturing jobs and lower utilization. Contract drilling revenue rose 3.2% sequentially, primarily on improved pricing.
- Six-month operating cash flow was $397.2 million, versus $85.0 million in 2022. Capital expenditures were $250.0 million; operating cash flow less capital expenditures was approximately $147.2 million.
- At June 30, cash was $150.3 million, working capital approximately $347 million, and long-term debt carrying value $822.4 million (principal $827.4 million). No revolver borrowings or Credit Agreement letters of credit were outstanding; $600 million of revolver capacity was available. Separate letters of credit under the Scotiabank reimbursement agreement totaled $61.6 million.
- Cash dividends paid in the first half totaled $33.5 million ($0.16 per share). The company repurchased $93.3 million of shares under its buyback program and retired $9.0 million principal of senior notes.
Material changes versus prior periods
- Six-month contract drilling revenue rose 51.7%, supported by higher operating days and pricing; average U.S. rigs operating increased to 129 from 118.
- Six-month pressure pumping revenue rose 27.0% and segment operating income increased to $69.7 million from $26.5 million, reflecting better pricing, job mix, utilization and efficiency. These gains preceded the Q2 sequential slowdown.
- Six-month directional drilling revenue increased 13.5%, but operating income declined 40.7% to $3.4 million, with cost inflation and higher depreciation among the pressures.
- Other operations recorded a six-month operating loss of $1.2 million, versus income of $4.0 million, including higher oil and gas asset impairments.
- Cash and cash equivalents increased by $12.7 million during the first half. Accrued liabilities declined, including deferred revenue, contributing to operating cash flow movements.
Outlook, transactions, risks and unusual items
- Management expected approximately 119 U.S. rigs operating in Q3 2023, with 71 rigs under term contracts in Q3 and an average of 44 under term contracts over the four quarters ending June 30, 2024. U.S. contract drilling backlog was approximately $760 million; about 29% was expected to remain at June 30, 2024. Backlog may not be realized and contracts can be terminated.
- Management planned to operate 11 pressure pumping spreads in Q3 and reduced its 2023 capital expenditure forecast to $485 million.
- The NexTier merger agreement, signed June 14, provides for each eligible NexTier share to convert into 0.7520 Patterson-UTI shares. Closing was expected in 2023, subject to approvals and other conditions.
- The July 3 Ulterra agreement provides for acquisition on a debt-free basis for 34.9 million Patterson-UTI shares and $370 million cash, subject to adjustments and closing conditions; closing was expected in Q3 2023. Management said current liquidity and expected operating cash flow should fund transaction requirements and planned capital needs for at least 12 months.
- Q2 included $7.9 million of merger and integration expenses. The company recorded a $3.8 million Q2 impairment in its oil and gas business; first-half impairment was $5.8 million. A $7.4 million cash settlement of CEO phantom units occurred in May.
- Key risks include volatile commodity prices and customer spending, inflation and operating costs, demand and utilization, realization of drilling backlog, and execution, financing, dilution and integration risks relating to the NexTier and Ulterra transactions. The filing also notes an Ulterra subsidiary is defending a patent-license claim brought by a NOV subsidiary; an unfavorable outcome not covered by indemnity could be material.
- Other disclosed obligations include approximately $114 million of major equipment purchase commitments and $10.9 million of remaining minimum proppant and chemical purchase obligations. The company reported no material adverse effect expected from ordinary-course legal proceedings.
Important facts for investors to verify
- Whether NexTier and Ulterra close on expected terms and timing, and the ultimate cash, debt, share dilution, integration costs and realized benefits.
- Whether the Q3 rig-count, term-contract and pressure-pumping plans are achieved, and how pricing and utilization affect margins.
- Whether the $760 million drilling backlog converts to revenue, given termination provisions and other realization risks.
- Whether operating cash flow can support the $485 million capital plan, transaction funding, debt service, repurchases and dividends.
- The outcome and potential exposure of the Ulterra-related patent claim, and any resulting impact on the acquisition or combined business.