Patterson-UTI Energy, Inc. — Q3 2012 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Patterson-UTI provides land contract drilling and pressure pumping services and holds non-operating oil and gas working interests. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $643.6 | $673.8 | $2,070.7 | $1,841.3 |
| Operating income | $88.6 | $132.3 | $397.2 | $381.7 |
| Net income | $50.8 | $81.9 | $240.6 | $234.8 |
| Diluted EPS | $0.33 | $0.53 | $1.56 | $1.50 |
| Operating margin | 13.8% | 19.6% | 19.2% | 20.7% |
| Net margin | 7.9% | 12.2% | 11.6% | 12.8% |
For the first nine months, cash provided by operations was $782.4 million; investing activities used $680.7 million, including $744.3 million of property and equipment purchases, partly offset by $63.7 million of asset-sale proceeds. Operating cash flow less equipment purchases was approximately $38.0 million. Financing activities used $42.9 million. Cash increased $59.5 million to $83.5 million.
At September 30, 2012, working capital was approximately $323 million and current assets were $695.2 million versus current liabilities of $372.2 million. Debt totaled $600 million, comprising $300 million of 4.97% senior notes due 2020 and $300 million of 4.27% senior notes due 2022; cash less debt was approximately negative $516.5 million. No revolver or term-loan borrowings were outstanding at quarter-end. The company reported about $460 million of revolver availability after letters of credit and $100 million available under the term loan facility. It was in compliance with debt covenants.
Changes versus the prior comparable periods
- Q3 revenue declined 4.5%, operating income fell 33.0%, and net income fell 38.0%. Management attributed the earnings decline mainly to weaker pressure-pumping revenue and margins and higher depreciation, depletion, amortization and impairment expense.
- Q3 contract-drilling revenue rose 2.3%, but segment operating income declined 9.0%. Average operating rigs decreased to 216 from 221; average revenue per operating day increased 4.7% to $22,450.
- Q3 pressure-pumping revenue declined 19.2% and segment operating income declined 70.2%. Total jobs fell 30.5%; higher revenue per job did not offset the lower job count and higher costs.
- For the first nine months, revenue grew 12.5% and net income increased 2.5%, while operating income rose 4.1%. Contract-drilling revenue increased 16.3%; pressure-pumping operating income declined 30.6% despite revenue growth of 4.1%.
- Year-to-date capital expenditures were $744.3 million, versus $711.4 million in 2011. The company repurchased $110.2 million of stock and paid $23.0 million in dividends during the period.
Outlook, commentary, risks and unusual items
- Contract-drilling backlog at September 30 was approximately $1.3 billion, with about $255 million expected to be realized in Q4 2012. Backlog is based on remaining term-contract day rates and is not guaranteed: contracts may be terminated on short notice, and the calculation excludes certain downtime and other potential reductions.
- The company had more than 300 marketable land rigs and over 700,000 hydraulic horsepower in its pressure-pumping fleet. It had completed 107 new APEX rigs and expected to complete seven more in 2012. It identified 36 drilling rigs and about 37,000 horsepower of pressure-pumping equipment for retirement; related impairment charges were recorded.
- Management said liquidity and expected operating cash flow should support current equipment plans, debt service and dividends. The company expected to draw the $100 million term loan in Q4 2012. The board approved a further $0.05-per-share dividend for December 28, 2012; future dividends remain discretionary.
- In April 2012, the company sold its flowback operations for $42.5 million and recorded a gain of approximately $22.6 million. Total net gains on asset disposals were $32.7 million for the first nine months. Q3 and year-to-date depreciation, depletion, amortization and impairment expense was $142.4 million and $393.8 million, respectively.
- Key risks include volatile oil and gas prices, low natural-gas prices, reduced customer spending, excess drilling and pressure-pumping capacity, pricing and utilization pressure, labor and equipment constraints, weather, customer concentration and potential uninsured or unindemnified liabilities. The company also had $154 million of major equipment purchase commitments and $32 million of remaining minimum proppant purchase obligations; shortfalls could trigger liquidated damages.
- Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the pressure-pumping activity and margin decline continued after Q3, and how excess industry capacity affected pricing and utilization.
- Whether the $1.3 billion drilling backlog converted to revenue as expected, considering termination and downtime provisions.
- Actual Q4 term-loan funding, subsequent borrowing, covenant headroom and the effect of higher debt and interest expense.
- Capital spending needs and returns, including the $154 million equipment commitment and planned rig and fleet upgrades.
- Further impairment or retirement charges, asset-sale gains, and the sustainability of earnings excluding unusual disposal gains.
- Future share repurchases and dividends in light of cash generation, capital requirements and debt obligations.