Patterson-UTI Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Figures are unaudited; dollar amounts are in millions unless otherwise noted.
Business context and reporting period
Patterson-UTI provides land-based contract drilling, pressure pumping and directional drilling services, with additional oilfield rental, technology and working-interest operations. Results include Seventy Seven Energy (SSE) from its April 2017 acquisition and MS Directional from October 2017; therefore, comparisons with 2017 are affected by acquisition timing. Directional drilling had no comparable 2017 segment revenue.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $854.4 | $579.2 | $1,663.6 | $884.4 |
| Operating loss | $(9.0) | $(140.2) | $(31.1) | $(232.9) |
| Net loss | $(10.7) | $(92.2) | $(45.1) | $(155.7) |
| Net loss per share | $(0.05) | $(0.46) | $(0.21) | $(0.86) |
| Adjusted EBITDA (non-GAAP) | $203.6 | $79.2 | $391.6 | $142.8 |
Q2 revenue increased 47.5% year over year. The operating loss was about 1.1% of revenue. Management-reported pressure-pumping margin, defined as revenue less direct operating costs, was 19.4% of segment revenue in Q2, unchanged from 2017; first-half margin increased to 20.2% from 18.2%. These segment margins exclude depreciation, amortization and SG&A.
For the first six months, operating cash flow was $300.2, compared with $15.4 in 2017. Capital expenditures were $317.8, versus $186.8; operating cash flow less capital expenditures was approximately negative $17.5. Cash at June 30 was $241.9, and management reported working capital of approximately $407.
June 30 debt was $1,125.0 in principal ($1,118.9 net of discount and issuance costs), versus $868.0 principal at year-end 2017. The company had no revolver borrowings and reported approximately $600 of available borrowing capacity; $81 of letters of credit were outstanding under the revolver. The $525 3.95% senior notes due 2028 were issued in January, with proceeds used partly to repay revolver borrowings. The company reported compliance with its senior-note financial covenants.
Material changes versus the prior comparable period
- Contract drilling revenue rose 29.5% in Q2; average operating rigs increased to 176 from 146, and average revenue per operating day increased 7.9% to $21,870.
- Pressure-pumping revenue rose 46.6% in Q2, supported by more and larger fracturing jobs and the acquired SSE business. Segment operating income was $20.6, versus $4.6.
- Q2 directional-drilling revenue was $52.7 and segment operating loss was $7.7; the business was acquired in October 2017.
- Merger and integration expenses fell to $0.7 in Q2 from $51.2 a year earlier, contributing to the narrower consolidated loss. Interest expense increased to $12.7 from $9.1, partly reflecting the 2028 notes.
- First-half share repurchases under the buyback program cost $50.5; dividends paid were $13.3. Shares outstanding were 219.8 million at June 30, compared with 222.5 million at December 31, 2017.
Outlook, management commentary, risks and contingencies
- Management said current liquidity and expected 2018 operating cash flow should fund planned equipment maintenance and improvements, debt service and dividends for at least 12 months. This is management’s expectation, not a guarantee.
- Based on contracts in place, management expected an average of 119 rigs operating under term contracts in Q3 2018 and 81 for the 12 months ending June 30, 2019. Contract-drilling backlog was approximately $680 at June 30; approximately 19% was expected to remain at June 30, 2019. The company subsequently signed contracts providing over $200 of additional future dayrate drilling revenue through July 25.
- The company activated two frac spreads in Q2 but said completions-market oversupply emerged late in the quarter, increasing idle time; it did not plan further reactivations based on then-current market conditions.
- Oil prices averaged $68.03 per barrel in Q2. Management emphasized that demand, utilization and pricing remain sensitive to commodity prices and customer spending, and that excess non-super-spec rigs and pressure-pumping and directional-drilling equipment may constrain margins.
- Commitments included approximately $162 for major equipment purchases and investments, plus approximately $122 of remaining minimum proppant and chemical purchase obligations; about $17 was due for the remainder of 2018. Failure to meet certain purchase minimums could trigger liquidated damages.
- A January 2018 Oklahoma drilling-site accident resulted in five deaths, including three employees, and one employee injury. Civil lawsuits seek unspecified damages, including punitive damages. The company said it believed insurance was adequate apart from deductibles and investigation costs, but warned that uncovered losses could materially affect results. OSHA proposed approximately $74,000 in penalties; the company contested the citations. EPA and CSB investigations remained ongoing.
- The board approved a $0.04-per-share dividend for September 2018 and increased the share-repurchase authorization to $250. Future dividends and repurchases remain discretionary.
Most important facts for investors to verify
- Whether operating cash flow can sustain elevated capital spending, dividends and buybacks, given first-half capital expenditures exceeded operating cash flow.
- Whether drilling backlog converts to revenue and how customer termination rights, rig utilization and dayrates affect that conversion.
- Pressure-pumping utilization, pricing and idle time after management’s comments about late-quarter market oversupply.
- Debt levels, interest costs, covenant headroom and the actual availability of revolver capacity after letters of credit.
- Insurance coverage, indemnities, investigation outcomes and potential liabilities related to the Oklahoma accident.
- The acquisition-driven comparability of reported growth and the company’s ability to improve directional-drilling profitability.