PTEN

Business Context and Reporting Period

Company: Patterson Energy, Inc. (Patterson)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: Patterson is a leading provider of domestic land drilling services, primarily in Texas and southeast New Mexico. The company operates three segments: contract drilling (core business), oil and natural gas exploration/production, and drilling fluids. As of year-end 1998, the company owned 119 drilling rigs (114 operable) and employed approximately 1,202 people.

Key Financial Metrics

Note: EBITDA is estimated based on Operating Income + Depreciation/Depletion/Amortization + Interest Expense. 1998 Operating Income was $2.6M, DDA was $28.1M, and Interest Expense was $4.5M.

Material Changes vs. Prior Period

• Profitability Collapse: The company swung from a net income of $22.2 million in 1997 to a net loss of $325,000 in 1998. Operating income plummeted from $33.3 million to $2.6 million.
• Revenue Decline: Total revenues decreased 2.2% to $186.6 million. Contract drilling revenues fell 7% to $166.0 million, and oil and gas revenues dropped 48% to $7.2 million due to lower commodity prices and production volumes.
• Utilization Drop: Average rig utilization rate collapsed from 89% in 1997 to 54% in 1998, driven by depressed oil prices and reduced industry demand.
• Impairment Charges: The company recorded a $3.8 million impairment charge on oil and natural gas properties in 1998, compared to $355,000 in 1997, reflecting the decline in crude oil prices.
• Debt Increase: Notes payable more than doubled from $23.3 million to $55.7 million, primarily due to borrowing $36.75 million to fund the acquisition of Robertson Onshore Drilling Company.

Outlook, Risks, and Management Commentary

• Debt Covenant Breach: As of December 31, 1998, the company was in violation of a "positive net income" covenant on its $55.7 million term loan with Norwest Bank. The bank granted a waiver and amended the covenant to an EBITDA-to-interest expense ratio of 2.25 to 1.0. Failure to meet future covenants could trigger immediate loan repayment.
• Commodity Price Sensitivity: Management highlights that the sharp decline in crude oil prices (falling to $8.60/barrel in Dec 1998) materially adversely impacted operations. Future results remain highly dependent on oil and gas price recovery.
• Liquidity: Management believes current cash ($9.0 million) and working capital ($31.0 million) are sufficient to meet debt service obligations for at least 12 months without commodity price improvement.
• Acquisition Strategy: Despite the downturn, the company continued its growth strategy, acquiring Lone Star Mud, Robertson Onshore, and Tejas Drilling Fluids in 1998 to diversify and expand its fleet.
• Turnkey Risk: The percentage of revenues from turnkey contracts (higher risk) increased to 12% in 1998 from 3% in 1997, exposing the company to greater economic risk on specific wells.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to maintain the new EBITDA-to-interest expense covenant (2.25:1) given the current low utilization rates.
• Oil Price Exposure: Assess the sensitivity of the company's contract drilling rates and oil/gas segment profitability to sustained low crude oil prices.
• Debt Service: Confirm the sufficiency of cash flow to cover the $1.1 million monthly principal and interest payments on the term loan maturing in 2001.
• Asset Quality: Review the valuation of the 119 drilling rigs and the $3.8 million impairment charge to ensure assets are not further overvalued.
• Related Party Transactions: Note that a company owned by a relative of the CEO purchased substantially all oil produced from company-operated leases ($8.1 million in 1998).