Patterson-UTI Energy, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Patterson-UTI provides contract drilling, pressure pumping and directional drilling services, primarily in North America. Financial amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Revenue | $791.8 | $509.4 in Q1 2022 |
| Operating income (loss) | $126.0 | $(18.9) in Q1 2022 |
| Net income (loss) | $99.7 | $(28.8) in Q1 2022 |
| Diluted EPS | $0.46 | $(0.13) in Q1 2022 |
| Operating cash flow | $234.3 | $33.7 in Q1 2022 |
| Capital expenditures | $117.6 | $94.8 in Q1 2022 |
| Cash and cash equivalents | $157.2 | $137.6 at December 31, 2022 |
| Long-term debt, carrying value | $822.2 | $830.9 at December 31, 2022 |
Revenue increased 55% year over year, and operating margin was approximately 15.9%, compared with a loss in the prior-year quarter. Net margin was approximately 12.6%. Operating cash flow less capital expenditures was approximately $116.7 million; this is a simple calculation, not a company-reported non-GAAP measure.
Q1 2023 Adjusted EBITDA, a company-defined non-GAAP measure, was $255.6 million, compared with $239.5 million in Q4 2022. The filing does not provide Q1 2022 Adjusted EBITDA in the cited reconciliation.
Segments and material changes
- Contract drilling: Revenue was $419.0 million versus $256.6 million in Q1 2022. Versus Q4 2022, revenue rose 4.9% and operating income rose 28.2% to $100.3 million, primarily on improved pricing. U.S. average operating rigs were 131 in both quarters compared with Q4.
- Pressure pumping: Revenue was $293.3 million versus $189.6 million in Q1 2022. Compared with Q4 2022, revenue fell 4.4% and operating income fell 24.2% to $44.4 million, with management citing lower utilization. Adjusted gross margin was 24.9%, down from 28.0% in Q4.
- Directional drilling: Revenue was $56.3 million versus $43.3 million in Q1 2022. Compared with Q4 2022, revenue decreased 5.4% and operating income decreased 60.0% to $2.1 million as job activity declined.
- Shareholder returns and debt: The company repurchased 5.6 million shares for $74.3 million and retired $9.0 million principal of senior notes in Q1. It paid $16.9 million in dividends, or $0.08 per share, versus $0.04 per share in Q1 2022.
Cash, debt and liquidity
At March 31, 2023, working capital was approximately $293 million. The company had $600 million available under its revolving credit facility and no borrowings or letters of credit outstanding under that facility. Separately, $65 million of letters of credit were outstanding under its reimbursement agreement; none had been drawn.
Senior notes had $827.4 million of principal outstanding: $482.5 million of 3.95% notes due 2028 and $344.9 million of 5.15% notes due 2029. The company reported compliance with debt covenants. It retired $6 million of the 2028 notes and $3 million of the 2029 notes during the quarter, recording $1.1 million of gains on extinguishment. The credit facility’s $600 million commitments have staggered maturities in 2024, 2025 and 2026.
Outlook, risks and unusual items
- Management expected the average U.S. rig count to decline by two to three rigs in Q2 as activity shifted more toward oil than natural gas. Based on contracts in place as of April 26, it expected an average of 79 rigs operating under term contracts in Q2 and 53 over the four quarters ending March 31, 2024.
- The company expected to end Q2 with 12 active pressure-pumping spreads. It lowered its 2023 capital expenditure forecast from $550 million to $510 million, including approximately $30 million of customer-funded rig upgrades.
- U.S. contract drilling backlog was approximately $890 million at March 31; management estimated 26% would remain at March 31, 2024. Backlog is not guaranteed: contracts may be terminated, and some may be subject to variable rates or other adjustments.
- Management said existing liquidity and expected operating cash flows should be sufficient for planned equipment spending, debt service and dividends for at least 12 months. Future dividends remain discretionary and may be reduced or suspended.
- Key risks include oil and natural gas price volatility, changes in customer capital spending and service demand, inflation and economic conditions, competition and excess equipment capacity, operational and weather risks, labor and supply constraints, customer payment defaults, and the ability to realize backlog. Management expects commodity prices to remain volatile.
- Q1 income tax expense was $20.2 million, with a 16.8% effective tax rate; management attributed rate changes in part to valuation allowances on deferred tax assets. Other notable items included a $6.5 million reversal of cumulative compensation costs for certain performance-based restricted stock units and a $2.0 million impairment in the oil and natural gas business. The filing says ordinary-course legal proceedings are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether anticipated Q2 activity and the term-contract rig outlook materialize, particularly given the expected reduction in active rigs.
- Pressure-pumping utilization, pricing and margins, which declined sequentially despite higher year-over-year revenue.
- How much of the $890 million drilling backlog is ultimately realized, given contract termination provisions and variable-rate exposure.
- Execution of the reduced $510 million capital expenditure plan and its effects on cash generation, equipment capacity and liquidity.
- The sustainability of share repurchases and the $0.08 quarterly dividend amid industry and commodity-price volatility.
- Debt covenant compliance, scheduled revolving-credit maturities, and the status of the $65 million of letters of credit under the separate reimbursement agreement.