Patterson-UTI Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. 2017 comparisons are not fully like-for-like: Seventy Seven Energy (SSE) results are included from April 20, 2017, and MS Directional results from October 11, 2017.
Business context and reporting period
Patterson-UTI provides U.S. and Canadian land contract drilling, pressure pumping, directional drilling, oilfield rentals, and related products and services. At year-end it had 295 marketed land rigs and approximately 1.6 million fracturing horsepower. The 2017 SSE merger added 91 rigs and approximately 500,000 fracturing horsepower; the MS Directional acquisition added a directional drilling business.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $2,356.7 million | $915.9 million |
| Operating loss | $292.5 million | $456.2 million |
| Net income (loss) | $5.9 million | ($318.6 million) |
| Operating cash flow | $300.7 million | $305.0 million |
| Capital expenditures | $567.1 million | $119.8 million |
| Adjusted EBITDA, non-GAAP | $491.1 million | $212.3 million |
| Working capital at year-end | $200.6 million | ($17.9 million) |
Fourth-quarter 2017 revenue was $787.3 million, operating loss was $21.6 million, and net income was $195.4 million, compared with fourth-quarter 2016 revenue of $246.9 million and net loss of $78.1 million. The filing attributes the 2017 annual return to profitability partly to a provisional $219 million tax benefit from U.S. tax reform; the company still had a $327.8 million pretax loss and a $292.5 million operating loss for the year.
Revenue increased 157% year over year, reflecting improved industry activity and the acquired businesses; this is not a same-business comparison. U.S. average operating rigs rose to 136 from 63, while average revenue per drilling operating day fell to $20,620 from $23,040. Pressure-pumping revenue increased to $1,200.3 million from $354.1 million, and that segment returned to operating income of $21.0 million from a $176.6 million loss. Its segment margin, before depreciation, amortization and SG&A, was $233.5 million, or 19.5% of revenue. Contract drilling remained loss-making, with a $171.9 million operating loss.
Operating cash flow was $300.7 million. Investing cash outflow was $1,010.6 million, including $502.0 million for acquisitions and $567.1 million for property and equipment purchases. Cash and cash equivalents were $42.8 million at year-end. Debt was $868.0 million at December 31, 2017: $268.0 million under the revolving credit facility and $600.0 million of senior notes. The company reported $227 million of available revolver capacity and compliance with its debt covenants.
On January 19, 2018, after year-end, the company issued $525 million of 3.95% senior notes due 2028, receiving approximately $521 million before offering expenses and using $239 million to repay revolver borrowings. As of February 16, 2018, it reported no revolver borrowings and approximately $499.9 million of borrowing capacity.
Outlook, risks and unusual items
- Management expected U.S. rig counts to continue increasing through 2018 if oil and natural gas prices remained at or above then-current levels. Contracts in place supported an expected average of 96 rigs in the first quarter of 2018 and 67 rigs under term contracts during 2018. These are term-contract counts, not total expected operating rigs.
- Pressure-pumping activity improved, particularly in the Permian Basin. Three frac spreads were reactivated during 2017; the company exited the year with 23 active spreads and approximately 1.25 million active horsepower.
- Contract drilling backlog was $544 million at year-end, up from $417 million in 2016; approximately 19% was expected to remain after 2018. Customers may terminate or renegotiate contracts, so backlog is not assured revenue.
- Merger and integration expenses were $74.5 million. The company recorded a $29.0 million drilling-equipment impairment associated with rig upgrades. Asset-sale gains included in other operating income were $31.96 million net, including gains on real estate and oil and gas property sales.
- The tax benefit is provisional, and the company had not completed its accounting for several tax-reform provisions, including aspects of foreign earnings and GILTI. The filing reports approximately $1.1 billion of gross federal NOLs; their future use may be limited, including by ownership-change rules.
- Key risks include volatile commodity prices and customer spending, excess industry equipment and pricing pressure, acquisition integration, equipment and labor availability, environmental and hydraulic-fracturing regulation, and incomplete insurance or indemnification for operating hazards. The company self-insures certain risks.
- A January 22, 2018 Oklahoma drilling-site accident killed five people, including three company employees. Government investigations were ongoing at the filing date; the company could not estimate their findings or potential penalties. It believed insurance would cover losses other than deductibles and investigation-related costs, based on information then available.
- At year-end, commitments included approximately $172 million of major equipment purchases and $140 million of minimum proppant and chemical purchases; failure to meet vendor minimums could trigger liquidated damages. The company said it expected liquidity and 2018 operating cash flow to fund current plans, debt service and dividends for at least 12 months, while noting financing availability was not assured.
Most important facts for investors to verify
- How much of the $5.9 million annual net income and $195.4 million fourth-quarter profit depended on the provisional tax benefit, and what tax adjustments followed.
- Whether acquired-company activity and merger synergies translate into sustainable operating income and cash generation, given continued consolidated and contract-drilling operating losses.
- Utilization, day rates and margins as equipment returns to service, particularly the pressure-pumping fleet and upgraded drilling rigs.
- Realization and timing of the $544 million drilling backlog, term-contract counts and potential cancellations or rate reductions.
- Post-note-offering debt, interest expense, covenant headroom, capital-spending commitments and capacity to maintain dividends.
- Developments and potential financial, regulatory or reputational consequences from the Oklahoma accident investigations and any related claims.