Patterson-UTI Energy, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Financial statement amounts below are in millions of dollars unless noted. Interim statements are unaudited.
Business context and operating results
The company provides land-based contract drilling and pressure pumping services and invests in oil and natural gas properties. It sold substantially all assets of its drilling and completion fluids business in January 2010; that business is reported as discontinued operations. On October 1, after quarter-end, the company acquired certain pressure pumping and wireline assets from Key Energy for approximately $238 million.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $378.7 | $159.7 | $957.3 | $568.4 |
| Operating income (loss) | $52.5 | ($24.6) | $106.1 | ($25.3) |
| Net income (loss) | $29.4 | ($18.6) | $63.1 | ($20.1) |
| Diluted earnings (loss) per share | $0.19 | ($0.12) | $0.41 | ($0.13) |
| Operating margin | 13.9% | (15.4%) | 11.1% | (4.5%) |
| Net margin | 7.8% | (11.6%) | 6.6% | (3.5%) |
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $402.5 million, compared with $413.5 million in 2009. Purchases of property and equipment were $513.7 million, versus $350.4 million. Cash flow from operations less those purchases was negative $111.2 million, versus positive $63.1 million in 2009.
- Cash was $73.9 million at September 30, up from $49.9 million at December 31, 2009. Working capital was approximately $139 million, down from $264 million. Current assets were $451.5 million and current liabilities $312.0 million.
- Debt at September 30 was $100 million under the term loan; there were no revolver borrowings. The company reported $41.2 million in letters of credit and approximately $359 million of available revolver capacity. The term loan carried a 3.125% interest rate.
- Total assets were $2.997 billion and stockholders’ equity was $2.134 billion. The company paid $23.1 million in dividends during the first nine months and reported a $0.05-per-share dividend approved for payment in December.
- Capital spending included substantial rig construction and upgrades. The company also reported approximately $250 million of commitments to purchase major equipment.
Changes versus the prior comparable periods
- Q3 revenue rose 137% year over year, and the company returned to profitability. Average operating rigs increased to 178 from 73; average revenue per operating day rose to $17,730 from $16,800.
- Nine-month contract drilling revenue increased 69%, mainly from more operating days, although average revenue per operating day declined 7.3% to $17,080. The 2009 comparison included $8.0 million from early termination of drilling contracts; none was recognized in 2010.
- Pressure pumping revenue rose 95% in Q3 and 71% for the nine-month period. Larger fracturing jobs associated with unconventional reservoirs increased average revenue per fracturing job; total fracturing jobs declined for the nine-month period.
- Nine-month interest expense increased to $9.0 million from $2.7 million, including $3.3 million of deferred financing cost recognition related to a replaced revolver and $1.3 million related to an expired short-term credit agreement.
- Nine-month earnings included a $21.9 million net gain on asset disposals, including a $20.1 million gain from selling certain oil and gas exploration rights. The company also recorded a $1.5 million negative bad-debt provision, reflecting reserve reductions and collections.
Outlook, risks and notable matters
- Management said cash, operating cash flow and available revolver capacity should fund current plans for equipment investment and dividends. It gave no specific numerical earnings, revenue or activity guidance in the provided filing text.
- The October 1 Key Energy asset acquisition was funded with cash and a $200 million revolver draw. On October 5, the company issued $300 million of 4.97% senior notes due 2020 and used part of the proceeds to repay that revolver borrowing. The acquired businesses’ results were expected to be included beginning in Q4 2010.
- The credit agreement limits debt to capitalization to 45% and requires an interest coverage ratio of at least 3.00-to-1.00; the company reported compliance at September 30. The subsequent senior notes have separate limits of 50% and 2.50-to-1.00, respectively.
- Key risks include volatile oil and gas prices and related customer spending, excess drilling-rig capacity, pressure on utilization and pricing, customer credit risk, equipment and labor constraints, and challenges integrating acquisitions. Management cautioned that actual results may differ from forward-looking statements.
- The company disclosed ordinary-course legal proceedings and did not expect them to have a material adverse effect. Insurance-related letters of credit totaled $41.2 million, with none drawn. Goodwill was $86.2 million, all in contract drilling; management warned a future impairment could be material if market conditions weaken.
Important facts for investors to verify
- Whether the post-quarter Key Energy acquisition integrates successfully and delivers expected operating results, including the effect of its financing.
- Whether drilling activity, rig utilization and day rates can be sustained, and how sensitive performance remains to commodity prices and industry capacity.
- How the large equipment commitments and ongoing capital spending affect liquidity and cash generation relative to operating cash flow.
- Compliance with debt covenants and the cost and availability of credit as borrowings and interest obligations change.
- The durability of pressure pumping margins and the significance of the asset-sale gain and tax-related items when assessing recurring earnings.