Patterson-UTI Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Dollar amounts are in millions unless stated otherwise. Results include Seventy Seven Energy (SSE) only from its April 20, 2017 acquisition date, which limits comparison with 2016.
Business context and material developments
Patterson-UTI provides land contract drilling, pressure pumping and related oilfield services. The April 20 SSE merger added 91 drilling rigs, approximately 500,000 horsepower of fracturing equipment and an oilfield rental-tools business. Consideration was valued at approximately $1.51 billion, including 46.3 million shares valued at $1.04 billion and $472 million of SSE debt repaid. The preliminary purchase allocation included $438.5 million of goodwill.
The company also completed an 18.2 million-share offering in January, raising $472 million net to repay SSE debt. SSE contributed $190 million of revenue and a $16.9 million pretax loss from the merger date through June 30.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $579.2 | $193.9 | $884.4 | $462.8 |
| Operating loss | $(140.2) | $(124.3) | $(232.9) | $(219.6) |
| Net loss | $(92.2) | $(85.9) | $(155.7) | $(156.4) |
| Net loss per share | $(0.46) | $(0.58) | $(0.86) | $(1.06) |
| Adjusted EBITDA | $79.2 | $46.7 | $142.8 | $128.2 |
| Operating cash flow | Not separately stated | Not separately stated | $15.4 | $181.9 |
Q2 revenue rose sharply, reflecting industry recovery and SSE, but the operating loss widened and net loss increased. The per-share loss narrowed as weighted-average shares increased substantially. Adjusted EBITDA is a non-GAAP measure defined by the company; it excludes interest, taxes and depreciation, depletion, amortization and impairment.
Q2 contract drilling revenue was $270.1 million; segment margin, defined as revenue less direct costs, was $89.5 million. Average revenue per operating day fell 12% year over year to $20,270, while operating days rose 167%. Pressure-pumping revenue was $290.0 million, and segment margin improved to $56.1 million, or 19.4% of revenue, from $4.4 million, or 6.0%, as job count and pricing improved. Companywide depreciation, depletion, amortization and impairment was $219.3 million in Q2.
Cash, debt and liquidity
At June 30, cash was $40.1 million and working capital was approximately $98.9 million. The company reported $115 million drawn on its revolving facility, $502 million of available borrowing capacity and $15.6 million of letters of credit under that facility. It also had $600 million of senior notes outstanding; total principal debt was $715 million. Revolver borrowings carried a 4.24% weighted-average rate. The company reported compliance with its credit-agreement and senior-note financial covenants.
Six-month investing cash outflow was $586.0 million, including $434.2 million for the acquisition and $186.8 million of capital expenditures, partly offset by asset-sale proceeds. Financing provided $575.2 million, principally from the equity offering and net revolver borrowing. The company paid $7.6 million in dividends during the half.
Outlook, risks and contingencies
Management expected activity to continue improving in 2017, assuming relatively stable oil prices. It expected an average of 94 rigs operating under term contracts in Q3 2017 and 60 on average over the 12 months ending June 30, 2018. Management planned to reactivate two frac spreads late in Q3 and one in Q4, with 23 active spreads expected at year-end and more than 80% of its over 1.5 million hydraulic-fracturing horsepower active. These are expectations, not guarantees.
Drilling backlog was approximately $535 million at June 30; about 15% was expected to remain at June 30, 2018. Backlog excludes certain fees and is subject to customer termination and rate-reduction provisions. Management said current liquidity and expected operating cash generation should fund planned equipment maintenance and improvements, debt service, dividends and working capital; additional financing could be needed for growth opportunities and may not be available on reasonable terms.
Key risks include volatile oil and gas prices, excess industry equipment and pressure on service pricing, integration and realization of SSE merger benefits, customer concentration, equipment and labor availability, weather, operating hazards, and access to capital. Chesapeake Energy and its working-interest partners represented approximately 16% of pro forma combined Q2 revenue and 18% for the six-month period.
Commitments included approximately $160 million of major equipment purchases and $90.3 million of remaining minimum proppant and chemical purchases; failure to meet certain minimums could trigger liquidated damages. The company recorded a $29.0 million drilling-equipment impairment related to rig upgrades and $51.2 million of Q2 merger and integration expenses. It reported no legal proceedings expected to have a material adverse effect. A $0.02-per-share dividend was approved for payment in September 2017; future dividends remain discretionary.
Investor verification priorities
- Review whether post-merger integration delivers expected operating benefits and how final SSE purchase accounting changes the preliminary allocation.
- Track drilling utilization and dayrates, pressure-pumping pricing and margins, and progress toward planned frac-spread reactivations.
- Assess cash conversion and capital spending against the weak six-month operating cash flow and stated liquidity needs.
- Monitor revolver availability, upcoming facility terms and maturities, covenant headroom, and the variable-rate exposure of borrowings.
- Test backlog quality and customer concentration, including termination provisions and exposure to Chesapeake Energy and its partners.
- Verify the scale and timing of equipment and proppant commitments, merger costs, and any further impairment charges.