Patterson-UTI Energy, Inc. — 2014 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. Patterson-UTI provides land drilling and pressure pumping services, primarily in the United States, and holds non-operated oil and gas interests. At year-end, it had 239 marketable drilling rigs and approximately 1.03 million hydraulic horsepower of pressure pumping equipment. Amounts below are in U.S. dollars.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $3.182 billion | $2.716 billion | +17.2% |
| Operating income | $283.1 million | $322.2 million | -12.1% |
| Net income | $162.7 million | $188.0 million | -13.5% |
| Diluted EPS | $1.11 | $1.28 | -13.3% |
| Operating margin | 8.9% | 11.9% | Down 3.0 percentage points |
| Operating cash flow | $728.7 million | $888.9 million | -18.0% |
| Adjusted EBITDA (non-GAAP) | $1.002 billion | $921.4 million | +8.7% |
Fourth-quarter 2014 revenue was $901.2 million and net income was $57.6 million, compared with $658.8 million and $16.6 million, respectively, in fourth-quarter 2013. The filing attributes the full-year earnings decline principally to a $77.9 million charge for retiring 55 mechanical rigs and writing off excess components; 2013 also included approximately $65.2 million of drilling contract early-termination revenue.
Segments and material changes
- Contract drilling: Revenue rose 9.5% to $1.839 billion, while segment operating income fell 9.2% to $241.9 million. Average rigs operating increased to 211 from 192, but average revenue per operating day edged down to $23,880 from $24,020. The rig retirement charge and higher depreciation weighed on results.
- Pressure pumping: Revenue increased 32.1% to $1.293 billion, but operating income rose only 2.1% to $89.1 million. Segment margin (revenue less direct operating costs) contracted to 19.9% from 24.0%, reflecting substantially higher direct costs. Two 2014 acquisitions added pressure pumping assets and contributed $80.8 million of revenue after acquisition.
- Oil and gas interests: Revenue declined 12.3% to $50.2 million; the segment recorded a $5.5 million operating loss versus $19.9 million operating income in 2013. Property impairment was $20.9 million, primarily due to lower oil prices.
- Capital expenditures were $1.052 billion, versus $662.5 million in 2013. Operating cash flow less property and equipment purchases was approximately negative $323.6 million, before acquisitions and other investing activity. The company also paid $176.3 million for acquisitions.
Liquidity, debt and capital allocation
At December 31, 2014, cash was $43.0 million, working capital was $340.7 million, and total debt was $985.5 million: $303.0 million drawn on the revolver, $82.5 million under the term loan, and $600 million of senior notes. Revolver availability was approximately $157 million after letters of credit. Subsequent to year-end, the company received an $82 million federal tax refund and used that and other cash to repay $103 million of revolver borrowings; availability was $260 million as of February 10, 2015. Management stated that liquidity and expected operating cash flow should support current equipment plans, debt service and dividends, but additional financing might be needed for growth opportunities.
The company paid $0.40 per share in 2014 dividends, twice the 2013 rate, and declared a further $0.10 per-share dividend payable in March 2015. Future dividends remain at the board’s discretion. Credit agreements require debt-to-capitalization and interest-coverage covenant compliance; the company reported compliance at year-end. A 1 percentage-point increase in rates on year-end variable-rate borrowings would increase annual cash interest expense by about $3.8 million.
Outlook, risks and contingencies
- Management described 2015 as challenging following the sharp second-half 2014 oil-price decline and significant customer capital-spending cuts. U.S. operating rigs fell from a peak of 214 in October 2014 to 173 on February 10, 2015; management expected a further decline of at least 20% over the next 90 days. Customers were seeking early termination of term contracts and price reductions; pressure pumping jobs were also cancelled or deferred.
- The company began reducing costs in fourth-quarter 2014, continued workforce and cost reductions in 2015, reduced its capital expenditure plans, and said it would build only new rigs committed under term contracts. It had previously described plans to complete 16 additional APEX rigs in 2015; execution is subject to the stated spending reductions and market conditions.
- Drilling backlog was approximately $1.5 billion at year-end, of which about $953 million was expected to be realized in 2015. Backlog is not assured: customer termination rights, renegotiations, defaults and other conditions may reduce amounts realized.
- Contractual obligations included approximately $511.8 million of major equipment purchases, largely scheduled for delivery in 2015, and $71.8 million of minimum proppant and chemical purchases, including $15.4 million due in 2015. Shortfalls on supply commitments may trigger liquidated damages.
- Key risks include commodity-price volatility, excess industry equipment and pricing pressure, customer concentration (top ten customers generated about 41% of 2014 revenue), labor and supply availability, operational and environmental liabilities, and potential regulation of hydraulic fracturing and greenhouse-gas emissions. Management found no impairment indicated for drilling or pressure-pumping long-lived assets at year-end, but warned prolonged weak markets could require a material goodwill impairment.
- The EEOC matter concerning alleged employment practices remained in mediation/litigation review; management did not expect a material financial effect but could not assure the outcome. The EPA was seeking approximately $1.1 million in penalties for alleged RCRA violations; settlement discussions were ongoing, and management did not expect a material effect.
Important facts for investors to verify
- Subsequent rig-count, utilization and dayrate trends, and whether customer terminations or price concessions reduce backlog and 2015 revenue.
- Actual 2015 capital spending, completion of planned or contract-committed rigs, and payment obligations for equipment and pressure-pumping materials.
- Cash generation and revolver availability under a prolonged downturn, including covenant headroom and the effect of floating-rate debt.
- Pressure-pumping margins after the rapid revenue growth and acquisitions, and the carrying value of goodwill and oil-and-gas properties under lower commodity-price assumptions.
- Outcome and financial exposure from the EEOC and EPA matters, plus any material uninsured operational or environmental claims.