Patterson-UTI Energy, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. Patterson-UTI provides land-based contract drilling and pressure pumping services, and holds oil and natural gas working interests. At year-end it had 356 marketable drilling rigs.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Operating revenue | $1.463 billion | $781.9 million |
| Operating income (loss) | $200.9 million | $(48.2) million |
| Income (loss) from continuing operations | $117.9 million | $(34.0) million |
| Net income (loss) | $116.9 million | $(38.3) million |
| Diluted EPS | $0.76 | $(0.25) |
| Cash from operating activities | $525.7 million | $453.7 million |
| Capital expenditures for property and equipment | $738.1 million | $452.6 million |
Revenue increased 87% year over year, while operating margin was approximately 13.7%, compared with approximately negative 6.2% in 2009. These margins are calculated from reported revenue and operating income. The company’s operating cash flow less property-and-equipment purchases was approximately negative $212.4 million in 2010; this is a simple derived measure, not a company-reported free-cash-flow figure.
Fourth-quarter 2010 revenue was $505.7 million, operating income $94.8 million, and net income $53.9 million, versus revenue of $213.6 million, an operating loss of $22.9 million, and a net loss of $18.2 million in fourth-quarter 2009.
At December 31, 2010, cash was $27.6 million, working capital $241.4 million, and total assets $3.423 billion. Debt was $398.8 million: $98.8 million outstanding under a term loan and $300 million of senior notes. No revolver borrowings were outstanding; after $41.2 million of letters of credit, available revolving capacity was approximately $359 million. Stockholders’ equity was $2.188 billion.
Material changes versus prior periods
- Contract drilling revenue rose 80.5% to $1.082 billion; average rigs operating increased to 168 from 91. Operating days rose 83.4%, while average revenue per operating day edged down 1.6% to $17,670.
- Pressure pumping revenue more than doubled to $350.6 million and segment operating income increased to $62.2 million from $1.0 million. The October acquisition contributed $84.7 million in revenue and $22.8 million in operating income from its acquired pressure pumping business.
- The company acquired pressure pumping and electric wireline assets for aggregate consideration of approximately $241 million in October. It classified wireline as discontinued operations at year-end and sold that business on January 27, 2011 for $25.5 million. It had sold its drilling and completion fluids business in January 2010 for approximately $42.6 million; both businesses’ results are presented as discontinued operations.
- Operating cash flow increased, but equipment purchases and acquisition spending were substantial. Cash and cash equivalents declined from $49.9 million to $27.6 million.
Outlook, commentary, risks, and unusual items
- Management said available liquidity and expected operating cash flow should fund current equipment-building and improvement plans and dividends. The filing provides no numerical earnings or revenue guidance. It reports approximately $267 million of equipment purchase commitments, primarily for delivery in 2011.
- Management attributed the operating recovery to stronger drilling activity, higher oil prices, and increased demand for large multi-stage fracturing work. It also noted that the average operating rig count remained well below the available fleet.
- Key risks include volatile oil and natural gas prices, excess drilling rigs and pressure-pumping capacity, competitive pricing, labor and equipment shortages, and customer credit risk. Proposed or changing regulation of hydraulic fracturing and greenhouse-gas emissions, environmental liabilities, and uninsured operational accidents could also affect results.
- Debt agreements impose financial covenants; the company reported compliance at year-end. The $300 million senior notes carry a 4.97% coupon and mature in 2020. Insurance letters of credit totaled $41.2 million, with none drawn. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Unusual items included a $20.1 million gain on sale of exploration and development rights, $2.5 million of acquisition-related costs, and $2.2 million impairment of wireline assets held for sale. The company recorded $4.2 million of impairment on components from four rigs removed from its marketable fleet.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. However, the acquired pressure-pumping and wireline subsidiaries—representing about 9% of consolidated assets and 6% of 2010 revenue—were excluded from management’s and the auditor’s internal-control assessment because the acquisition closed late in the year.
Important facts for investors to verify
- Whether higher rig utilization and pressure-pumping demand continued after year-end, and how pricing and margins developed.
- Whether the acquired pressure-pumping assets achieved expected integration and operating benefits; confirm the wireline sale proceeds and final disposal accounting.
- How the $738.1 million of 2010 equipment spending and the approximately $267 million purchase commitments affect future cash generation, liquidity, and leverage.
- Current debt covenant headroom, revolver availability, and the effect of floating-rate debt and commodity-price changes on cash flow.
- Whether hydraulic-fracturing or environmental regulation, insurance claims, or other contingencies resulted in material costs after the filing date.