Patterson-UTI Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted. The company provides contract drilling, pressure pumping and oil and natural gas production services.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $659.3 | $681.1 | $1,326.4 | $1,427.0 |
| Operating income | $70.6 | $150.9 | $165.5 | $308.6 |
| Net income | $40.8 | $92.5 | $97.0 | $189.8 |
| Diluted EPS | $0.28 | $0.60 | $0.66 | $1.22 |
| Operating margin | 10.7% | 22.2% | 12.5% | 21.6% |
| Net margin | 6.2% | 13.6% | 7.3% | 13.3% |
- Q2 revenue declined 3.2% year over year, while operating income fell 53.2% and net income fell 55.9%. For the first half, revenue declined 7.1% and net income fell 48.9%.
- Q2 contract drilling revenue was $390.0, down 15.3%; segment operating income was $47.1, down 48.0%. Average rigs operating fell 17.4% to 185, while revenue per operating day increased 2.4% to $23,120.
- Q2 pressure pumping revenue rose 23.5% to $254.6, but segment operating income decreased 17.9% to $30.3. Larger multi-stage fracturing jobs lifted average revenue per fracturing job, while higher materials and labor costs raised costs per job.
- Q2 oil and natural gas revenue was essentially flat at $14.7; segment operating income declined 23.5% to $5.5. First-half property impairment expense was approximately $2.4, versus $0.4 in the comparable period.
- Q2 results included only a $1.0 gain on asset disposals, compared with $28.3 in Q2 2012, including a $22.6 gain from selling flowback operations. Higher depreciation and interest expense also weighed on results; interest expense rose 37.4% in Q2 to $6.9.
Cash flow, liquidity and debt
- First-half cash from operations was $383.3, down from $495.5. Capital spending was $332.6, versus $512.1. Operating cash flow less property and equipment purchases was approximately $50.7, compared with negative $16.6 in the prior-year period.
- Cash and equivalents were $148.9 at June 30, 2013, up from $110.7 at year-end 2012. Working capital was approximately $420 million. Current assets were $773.3 and current liabilities $353.0.
- Total debt principal was $696.3: $96.3 under the term loan and $600.0 in senior notes. There were no revolver borrowings; $39.8 of letters of credit left approximately $460 million of available revolver capacity. The company reported compliance with its debt covenants.
- First-half dividends were $0.10 per share ($14.7 total). The board approved another $0.05-per-share dividend for payment September 30, 2013. The company spent $10.0 on treasury-stock purchases and reported $50.9 of remaining authorization under its buyback program.
Outlook, commentary and risks
- Management said available liquidity and expected operating cash flow should support planned equipment investment, debt service and dividends, while noting that additional financing for growth may not be available on reasonable terms.
- Contract drilling backlog was approximately $1.05 billion at June 30, with about $497 million expected to be realized in the second half of 2013. Backlog included approximately $63 million of early-termination revenues expected in that period; contracts may be terminable on short notice, and backlog is not guaranteed revenue.
- The company had completed 120 new APEX rigs and planned to add up to six rigs during the rest of 2013. Its pressure pumping fleet had more than 750,000 hydraulic horsepower. Management cited excess pressure pumping capacity, low natural gas prices and competition as industry challenges.
- Key stated risks include volatile oil and gas prices, customer spending changes, excess or newly built equipment, labor and supply constraints, weather, customer losses, operating liabilities and access to capital. Management said results for the interim periods are not necessarily indicative of full-year results.
- Commitments included approximately $101 million of major equipment purchases and $31.9 million remaining under proppant and chemical minimum-purchase agreements, with potential liquidated damages for shortfalls. Letters of credit totaling $39.8 million supported insurance obligations; none had been drawn.
- The EEOC notified the company in May 2013 of cause findings involving alleged discrimination, hostile work environment and retaliation. Conciliation was planned for later in 2013; the company intended to defend itself and did not expect a material adverse effect based on information then available, but noted the outcome was uncertain.
Most important facts for investors to verify
- Whether the decline in drilling activity and segment operating income continues, and whether higher pressure pumping revenue translates into improved profitability.
- Backlog conversion, including the timing and collectability of early-termination revenue and the effect of customer termination rights.
- Actual capital spending, rig additions, cash generation and remaining revolver availability relative to management’s liquidity assessment.
- Compliance with debt covenants and the impact of floating-rate borrowing, debt maturities and planned dividends or repurchases.
- Developments in the EEOC matter and any change in the company’s assessment of its potential financial or operational impact.