Patterson-UTI Energy, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The unaudited consolidated results include Seventy Seven Energy (SSE) from its April 20, 2017 acquisition date; therefore, year-over-year comparisons are affected by the partial-period inclusion of SSE and are not fully like-for-like.
Business context and operating outlook
The company provides land-based contract drilling and pressure pumping services, along with oilfield rental tools and other operations. Its results depend substantially on oil and natural gas prices, customer spending, equipment utilization and service pricing.
- Q3 average operating rig count was 161, versus 61 a year earlier; average revenue per operating day fell 7.1% to $20,320 as higher-priced legacy contracts expired.
- Management expected an average of 87 rigs operating under term contracts in Q4 2017 and 53 over the 12 months ending September 30, 2018. Drilling backlog was approximately $471 million; about 17% was expected to remain at September 30, 2018. Contracts may be terminable on short notice.
- Management cited expectations of further industry activity increases, particularly in the Permian Basin. After reactivating two frac spreads in Q3, it planned to reactivate one more in Q4 and expected to exit 2017 with 23 active spreads, or approximately 1.25 million hydraulic fracturing horsepower.
- On October 11, 2017, after quarter-end, the company acquired MS Directional for $75 million cash and 8.8 million shares, with stated consideration of approximately $262 million. Its results were to be reported as a separate segment beginning in Q4.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $685.0 million | $206.1 million | $1,569.4 million | $669.0 million |
| Operating loss | $38.0 million | $123.4 million | $270.9 million | $343.0 million |
| Net loss | $33.8 million | $84.1 million | $189.5 million | $240.5 million |
| Basic and diluted loss per share | $0.16 | $0.58 | $0.99 | $1.65 |
| Adjusted EBITDA (non-GAAP) | $158.7 million | $40.1 million | $301.5 million | $168.3 million |
Q3 revenue rose sharply alongside higher activity and SSE’s contribution. Management said drilling and pressure-pumping margins improved by $65.5 million and $71.2 million, respectively, versus Q3 2016; gains were partly offset by higher depreciation and amortization, corporate costs and $9.4 million of merger and integration expense. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
- Contract drilling: Q3 revenue was $301.6 million, up 143.9%. Segment margin (revenue less direct operating costs, before depreciation and SG&A) was $114.7 million; average margin per operating day fell 11.0% to $7,730.
- Pressure pumping: Q3 revenue was $362.4 million, up 363.7%. Segment margin was $72.1 million, or 19.9% of revenue, compared with $0.9 million, or 1.2%, a year earlier. Management attributed improvement to pricing, larger jobs and scale as activity increased.
- Cash flow: Nine-month operating cash flow was $131.3 million, down from $252.7 million. Investing cash outflow was $726.9 million, including $434.2 million for the SSE acquisition and $329.9 million of property and equipment purchases. Financing cash inflow was $596.9 million, including $471.6 million net equity proceeds and $144.0 million net revolver borrowing. Cash ended at $37.8 million.
Financial position, debt and liquidity
- At September 30, 2017, working capital was approximately $129 million; cash was $37.8 million. The company reported $342 million of available revolver capacity, $144 million drawn at a weighted-average 4.83% interest rate, and $4.6 million of letters of credit under the revolver.
- Debt comprised $600 million principal of senior notes and $144 million drawn on the revolving facility, or $744 million total principal. The notes are $300 million of 4.97% Series A notes due 2020 and $300 million of 4.27% Series B notes due 2022.
- The company was in compliance with its credit agreement and senior-note financial covenants at quarter-end. The revolving credit agreement requires a debt-to-capitalization ratio no higher than 40% and interest coverage of at least 3.00 to 1.00; the notes have respective thresholds of 50% and 2.50 to 1.00.
- As of October 30, after quarter-end, revolver borrowings were $240 million and available capacity was $255 million. On October 27, the company increased revolving commitments to $500 million through March 2019.
- Stockholders’ equity increased to $3.59 billion, reflecting the SSE share issuance and January equity offering, partly offset by losses. Shares outstanding were 213.7 million at September 30; 222.4 million were outstanding as of October 30.
Material changes, unusual items and risks
- The April SSE merger was valued at approximately $1.51 billion, including 46.3 million Patterson-UTI shares valued at $1.04 billion and repayment of $472 million of SSE debt. The preliminary purchase-price allocation included $438.5 million of goodwill and remains subject to measurement-period revisions.
- Nine-month merger and integration expenses were $65.8 million. A $29.0 million drilling-equipment impairment was recorded in Q2 following rig upgrades; oil and gas property impairments were $1.3 million in Q3 and $3.5 million for the nine months.
- Capital commitments included approximately $191 million for equipment purchases and investments. Minimum proppant and chemical purchase obligations were approximately $86.9 million; failure to meet certain quantities could trigger liquidated damages. Letters of credit totaled $59.5 million, with none drawn.
- Management said current liquidity and expected operating cash flow should support planned equipment maintenance and improvements, debt service, dividends and working capital, but additional growth capital might not be available on reasonable terms. Commodity-price volatility, customer spending, competition and excess equipment, operating hazards, weather, labor and supply availability, customer concentration, and integration execution are key risks.
- Management did not expect ordinary-course legal proceedings, individually or in aggregate, to materially adversely affect the company. The board declared a $0.02-per-share dividend for payment in December 2017; future dividends remain discretionary and subject to debt terms and other factors.
Important facts for investors to verify
- Whether improved rig and pressure-pumping activity and pricing persist, and how contract expirations affect revenue per operating day and margins.
- Actual integration costs, synergies and operating performance from SSE, and the final SSE purchase-price allocation.
- MS Directional’s final purchase-price allocation, contribution to results, and effect of its cash and share consideration on liquidity and dilution.
- Cash conversion and funding needs, including the impact of receivables growth, capital expenditures, equipment commitments and proppant and chemical purchase obligations.
- Revolver availability, borrowing costs and covenant headroom as borrowings change; also confirm the timing and conditions of debt maturities and any restrictions on dividends or repurchases.
- Customer concentration and potential changes in demand, particularly given the filing’s stated dependence on oil and gas prices and customer capital-spending decisions.