Patterson-UTI Energy, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. Patterson-UTI provides contract drilling, pressure pumping, directional drilling and other oilfield services. Management attributed the sharp deterioration in industry conditions to COVID-19-related demand declines and increased oil supply, which drove crude prices down and customers to reduce activity.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $445.9 million | $704.2 million |
| Operating loss | $494.4 million | $23.4 million loss |
| Net loss | $434.7 million; $2.28 per diluted share | $28.6 million; $0.14 per diluted share |
| Adjusted EBITDA (non-GAAP) | $87.5 million | $191.1 million |
| Operating cash flow | $73.3 million | $183.8 million |
| Capital expenditures | $71.9 million | $118.3 million |
| Cash and cash equivalents | $152.2 million | $174.2 million at Dec. 31, 2019 |
| Long-term debt, carrying value | $966.8 million; $975.0 million principal | $966.5 million carrying value at Dec. 31, 2019 |
Management reported approximately $230 million of working capital and approximately $600 million of available revolving-credit capacity. The company had no revolver borrowings and $100 million outstanding under its term loan. It reported compliance with debt covenants at quarter-end. The debt-to-capitalization covenant limit is 50%.
Material changes versus the prior comparable period
- Revenue declined 36.7% year over year. Contract drilling revenue fell 28.2%, pressure pumping 49.5%, directional drilling 34.9%, and other operations 39.2%.
- Average operating rigs fell to 123 from 175. Contract drilling operating days declined 28.8%; average revenue per operating day was nearly flat, while average margin per day declined 4.7%.
- Pressure pumping margin as a percentage of revenue fell to 8.2% from 18.1%. The segment completed 89 fracturing jobs versus 164 a year earlier and ended Q1 with five active spreads, compared with 11 at year-end 2019.
- The company recorded a $395.1 million impairment of all goodwill in its contract drilling reporting unit. It also recorded a $10.6 million impairment related to certain oil and gas assets. No impairment was indicated for the tested long-lived operating asset groups.
- Q1 operating cash flow decreased to $73.3 million from $183.8 million. Capital expenditures were lower, at $71.9 million versus $118.3 million.
Outlook, management commentary and risks
- Management expected Q2 average rig count to decline approximately one-third from Q1. Based on contracts then in place, it expected an average of 71 rigs under term contracts in Q2 and 50 over the 12 months ending March 31, 2021.
- Management expected approximately four active pressure pumping spreads on average in Q2 and said it intended for the segment to generate positive Adjusted EBITDA and cash flow in the last two quarters of 2020.
- The company estimated annual indirect-cost reductions of approximately $100 million, about two-thirds relating to pressure pumping, and expected approximately $50 million of associated charges in Q2. It reduced its 2020 capital-expenditure plan by $110 million, to $140 million, and emphasized cost reduction and cash preservation.
- Management said current liquidity and expected operating cash flows should fund current plans, debt service and dividends for at least 12 months. However, it warned that the duration of low oil prices and pandemic-related disruption was uncertain and that 2020 would be challenging, with lower activity, pricing pressure, revenue and operating margins expected.
- Asset recoverability assessments assumed activity would be lower than recent levels and begin recovering in 2022. Management cautioned that a prolonged low-price environment into late 2022 or beyond could lead to future, potentially material, impairment charges.
- Other risks include customer payment delays or defaults, contract renegotiations, credit-rating downgrades, supply-chain disruption, excess service equipment, and further reductions to dividends or capital spending. The company had $25.7 million of equipment and investment commitments and $36.1 million of minimum proppant and chemical purchase obligations.
- Subsequent events: the board approved a $0.02-per-share dividend for June 2020, down from the $0.04-per-share Q1 dividend. It also adopted a shareholder rights agreement, generally triggered by an acquisition of 10% ownership (12% for passive investors), expiring April 21, 2021.
Important facts for investors to verify
- Whether the steep activity and revenue declines, including the forecast reduction in rig count and pressure-pumping spreads, proceeded as management expected.
- Whether planned cost savings, Q2 restructuring-related charges and the revised $140 million capital-spending plan were achieved.
- Whether liquidity, customer collections and covenant compliance remained adequate as oilfield demand weakened; verify debt maturities, revolver availability and credit ratings.
- Whether the assumptions supporting the 2022 recovery in activity remained reasonable, and whether further asset impairments or credit-loss provisions were recorded.
- Whether pressure pumping achieved management’s stated second-half positive Adjusted EBITDA and cash-flow objective, and whether dividends or repurchases changed.