Patterson-UTI Energy, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated results. The company provides land-based contract drilling and pressure pumping services and holds working interests in oil and natural gas properties.
Financial results
Amounts below are in millions of dollars, except per-share data, percentages and operating statistics.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $673.8 | $378.7 | $1,841.3 | $957.3 |
| Operating income | $132.3 | $52.5 | $381.7 | $106.1 |
| Net income | $81.9 | $29.4 | $234.8 | $63.1 |
| Diluted EPS | $0.53 | $0.19 | $1.50 | $0.41 |
| Operating margin | 19.6% | 13.9% | 20.7% | 11.1% |
- Q3 revenue rose 78% year over year; operating income increased 152% and net income 179%. For the nine months, revenue rose 92%, operating income 260% and net income 272%.
- Q3 revenue by segment: contract drilling $436.8 million, pressure pumping $225.2 million and oil and natural gas $11.8 million. Pressure pumping revenue includes $127 million from the October 2010 acquisition; acquired operations contributed $28 million of Q3 operating income. For the nine months, the acquired business contributed $324 million of revenue and $77.9 million of operating income.
- Cash from operations was $655.9 million for the first nine months, versus $402.5 million in 2010. Property and equipment purchases were $711.4 million, leaving cash flow after those purchases of negative $55.5 million. Ending cash was $10.6 million, down from $27.6 million at year-end 2010.
- Working capital was approximately $260 million. Total debt was $410.8 million, comprising $300 million of senior notes, $95 million under the term loan and $15.8 million on the revolver. Revolver availability was approximately $344 million after letters of credit.
- Total assets were $4.0 billion and stockholders’ equity was $2.43 billion at September 30. Quarterly and year-to-date dividends were $0.05 and $0.15 per share, respectively.
Material changes and management commentary
- Contract drilling benefited from higher activity and dayrates: Q3 average rigs operating increased to 221 from 178, and average revenue per operating day rose to $21,440 from $17,730. Management attributed activity growth largely to stronger oil prices. Higher repairs, maintenance and labor costs also raised costs per operating day.
- Pressure pumping growth reflected both the acquired business and more, larger multi-stage fracturing work, along with improved pricing and expanded equipment capacity. Costs per job also rose, particularly with larger fracturing jobs.
- The company spent $711 million on property and equipment during the nine-month period, principally for new drilling rigs and pressure pumping equipment, refurbishment and related equipment. It reported approximately $370 million in commitments to purchase major equipment.
- Management said working capital, revolver capacity and expected operating cash flow should fund current equipment plans, debt service and dividends. It cautioned that additional financing for growth opportunities may not be available on reasonable terms, or at all. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies and unusual items
- Results are sensitive to oil and natural gas prices, customer capital spending, service demand and pricing. Management also cited excess or newly constructed drilling and pressure pumping capacity, cost inflation, equipment and labor availability, and acquisition integration risks.
- Letters of credit totaled $40.6 million, primarily supporting insurance obligations; none had been drawn. The company reported ordinary-course legal proceedings and did not expect them to materially adversely affect results or financial condition.
- The company removed 22 rigs from its marketable fleet in the first nine months and recorded $4.3 million of drilling-equipment impairment. Oil and gas property impairments were approximately $2.8 million. Further goodwill impairment could be material if market conditions weaken.
- Deferred tax expense was elevated, partly reflecting accelerated tax depreciation on capital spending. The company had $18.7 million of unremitted Canadian earnings designated as permanently reinvested.
- The board approved a further $0.05-per-share dividend for payment December 30, 2011; future dividends remain discretionary. The company reported compliance with its credit-facility covenants at September 30.
Most important facts for investors to verify
- How much of pressure pumping’s reported growth and profit reflects the acquisition versus organic activity, pricing and job mix.
- Whether operating cash generation can sustain the planned equipment spending, given capital purchases exceeded operating cash flow in the first nine months.
- The pace and returns of equipment additions, and whether industry capacity growth pressures utilization, pricing and margins.
- Debt balances, revolver availability, covenant headroom and the funding of approximately $370 million in equipment commitments.
- The sensitivity of results to commodity prices, operating-cost inflation, and impairment risk for rigs, oil and gas properties and goodwill.