Patterson-UTI Energy, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited consolidated results. Unless stated otherwise, financial amounts below are in millions of dollars. Comparisons are with Q1 2009.
Business context
The company provides land-based contract drilling and pressure pumping services and holds working interests in oil and natural gas properties. In January 2010, it sold substantially all assets of its drilling and completion fluids business and classified that business as discontinued operations.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue from continuing operations | $271.6 | $268.2 |
| Operating income | $7.8 | $25.2 |
| Operating margin | 2.9% | 9.4% |
| Net income | $4.2 | $16.2 |
| Diluted earnings per share | $0.03 | $0.11 |
| Cash provided by operating activities | $87.7 | $214.3 |
| Capital expenditures | $108.9 | $89.8 |
| Cash dividends paid | $7.7 | $7.7 |
Operating cash flow less property and equipment purchases was negative approximately $21.2 million, versus positive approximately $124.5 million in Q1 2009. The filing attributes the much lower year-over-year operating cash flow in part to working-capital movements, including accounts receivable. Cash ended the quarter at $63.9 million.
At March 31, 2010, working capital was approximately $173 million and the current ratio was approximately 1.64. The company had no revolving-credit borrowings; $45.9 million of letters of credit left approximately $194 million of available capacity under its $240 million facility, which matures January 31, 2012. It reported compliance with facility covenants. Total liabilities were $656.3 million, including $381.0 million of net deferred tax liabilities; the filing reports no outstanding facility debt.
Q1 segment results: contract drilling revenue was $210.7 million and pretax segment income was $8.7 million; pressure pumping revenue was $53.8 million and pretax segment income was $4.5 million; oil and gas revenue was $7.1 million and pretax segment income was $2.8 million.
Material changes and notable items
- Total continuing-operations revenue rose 1.3%, but operating income fell 68.9% and net income fell 74.2% year over year.
- Contract drilling revenue declined 6.6% and segment income fell 78.8%. Average rigs operating increased to 142 from 127, while average revenue per operating day fell 16.4% to $16,440. Q1 2009 included $6.6 million from early contract terminations; Q1 2010 did not.
- Pressure pumping revenue increased 41.1% and moved from an operating loss to income. Jobs declined 16.5%, while average revenue per job increased 68.9%, reflecting a greater mix of larger unconventional-reservoir jobs.
- Oil and gas revenue increased 61.4%, mainly from higher realized prices, partly offset by lower production. The segment moved from a loss to income; Q1 2010 included $0.3 million of property impairment compared with $2.5 million in Q1 2009.
- The fluids-business sale generated approximately $42.6 million in proceeds. The business contributed $3.7 million of discontinued-operation revenue in Q1 2010 and $27.8 million in Q1 2009. A $1.9 million impairment was recorded when the assets were classified as held for sale in 2009; no additional gain or loss was recognized on the 2010 sale.
- Cash and cash equivalents increased by $14.0 million during the quarter. Investing cash flows included $42.6 million of proceeds associated with discontinued operations; property and equipment purchases were $108.9 million.
Outlook, risks, and contingencies
Management said cash, working capital, available credit and expected operating cash flow—including an expected 2010 federal tax refund of approximately $114 million from carrying back net operating losses—should fund current plans for equipment construction and upgrades, regional expansion and dividends. The company also had commitments to purchase approximately $168 million of major equipment. This is management’s assessment, not a guarantee of funding or results.
Management highlighted the sensitivity of demand, pricing, results and cash flow to natural gas and oil prices, customer capital spending, rig availability and competition. Risks also include excess land-rig capacity, rig reactivations or new construction, customer credit problems, equipment and labor availability, and adverse economic or financing conditions. The company cautioned that Q1 results are not necessarily indicative of full-year results.
The board approved a $0.05-per-share dividend for payment June 30, 2010. Future dividends remain at the board’s discretion. The company had approximately $113 million remaining under its share-repurchase authorization, but made no purchases under that program in Q1; it did acquire 21,973 shares from employees for tax withholding purposes.
Other items include a $5.1 million reduction in deferred tax liabilities related to the restructuring of Canadian operations, to be amortized as a reduction in deferred tax expense; approximately $2.8 million of Canadian earnings designated as permanently reinvested; and $45.9 million of insurance-related letters of credit, none drawn. Management did not expect pending ordinary-course legal proceedings to have a material adverse effect. It warned that weaker market conditions could require a material goodwill impairment; $86.2 million of goodwill was recorded in contract drilling.
The CEO and CFO concluded disclosure controls were effective at quarter-end. The company began implementing a new enterprise resource planning system and noted implementation risks while stating that manual procedures were available.
Important facts for investors to verify
- Whether the expected $114 million tax refund was received, and its timing and cash-flow impact.
- Contract drilling utilization, dayrates and operating costs, and whether pressure-pumping margins on larger jobs were sustained.
- Actual capital spending and payment timing for the $168 million equipment commitments, alongside operating cash generation and liquidity.
- Credit-facility availability, covenant compliance and any changes in letters of credit or borrowing needs.
- Progress and financial effects of the ERP implementation, Canadian tax treatment, and any goodwill impairment indicators.
- Subsequent dividends and any use of the remaining share-repurchase authorization.