Patterson-UTI Energy, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
Patterson-UTI provides U.S. land contract drilling, pressure pumping and directional drilling services, along with oilfield rentals and other operations. Its Pioneer acquisition closed in October 2021; the acquired well-servicing and wireline businesses were sold in December 2021.
Financial performance
| Metric | Q2 2022 | Comparable period / change |
|---|---|---|
| Revenue | $622.2 | Up 113% year over year from $291.8; up 22% from Q1 2022 |
| Operating income (loss) | $36.8 | Compared with a $109.4 loss in Q2 2021 and a $3.2 loss in Q1 2022 |
| Net income (loss) | $21.9; $0.10 per diluted share | Compared with a $103.3 loss in Q2 2021 and a $28.8 loss in Q1 2022 |
| Operating margin | 5.9% | Calculated as operating income divided by revenue |
| Adjusted EBITDA | $155.9; 25.1% of revenue | Up from $99.6 in Q1 2022 |
For the six months ended June 30, revenue was $1,131.6 versus $532.7 in 2021. Net loss narrowed to $6.9 from $209.7. Segment revenue growth reflected higher activity and improved pricing; the filing also notes cost inflation. Q2 segment revenue was $304.6 contract drilling, $238.4 pressure pumping, $54.8 directional drilling and $24.5 other operations.
Cash flow, debt and liquidity
- Six-month operating cash flow was $85.0, compared with $44.2 in 2021. Capital expenditures were $191.2, versus $56.6; operating cash flow less capital expenditures was negative $106.2.
- Cash declined to $19.6 at June 30 from $117.5 at year-end 2021. Working capital was approximately $173.
- Debt was $883.8, comprising $25.0 drawn on the revolving facility and senior notes due 2028 and 2029. Cash-adjusted debt was approximately $864.1. The company reported covenant compliance.
- Approximately $575 of revolving-credit capacity was available. The facility permits up to $600 of commitments; $50 matures in 2024 and the balance in 2025.
- Cash dividends paid in the first half totaled $17.3 ($0.08 per share). The board approved a further $0.04 per-share dividend for payment in September 2022.
Changes, outlook and risks
- Management described market demand and pricing as improving, with constrained industry equipment supply. Average U.S. active rigs rose to 121 in Q2 from 115 in Q1; pressure pumping ended Q2 with 12 active spreads.
- Based on contracts in place at June 30, management expected an average of 71 U.S. rigs under term contracts in Q3 2022 and 46 over the following 12 months. It expected to end Q3 with 12 active pressure-pumping spreads.
- The 2022 capital expenditure forecast was increased to approximately $390. Management said liquidity and expected operating cash flow should fund current plans, debt service and dividends for at least 12 months.
- Inflation in labor, supplies and services, supply-chain disruption, and difficulty recruiting and retaining employees raised operating and equipment-reactivation costs.
- Q2 results included an $11.5 pretax gain from releasing a cumulative foreign-currency translation adjustment after substantially completing the exit from Canadian operations. The six-month effective tax rate was negative 64.7%, which management attributed primarily to valuation allowances during a pretax-loss period.
- Risks include oil and gas price and customer-spending volatility, competition and excess equipment availability, inflation and supply constraints, operational hazards, customer nonpayment, and the possibility that drilling backlog is not realized. U.S. contract-drilling backlog was approximately $440 at June 30; about 24% was reasonably expected to remain at June 30, 2023. Contracts may be terminable on short notice.
- Commitments included $97.8 for major equipment purchases and $16.1 in remaining minimum proppant and chemical purchases. The company reported no material adverse expectation from its ordinary-course legal proceedings; $65.1 of letters of credit were outstanding, with none drawn.
Investor verification priorities
- Assess whether rising activity and service pricing can outpace labor, supply and reactivation-cost inflation.
- Track operating cash conversion against the $390 capital-spending outlook, dividends and debt obligations, particularly given the first-half cash decline.
- Evaluate the durability and termination risk of the $440 drilling backlog and the stated rig and spread outlook.
- Separate recurring operating performance from the Canadian translation gain and review the effect of tax valuation allowances on reported earnings.
- Monitor covenant headroom, revolver usage, and the renewal and potential cash exposure associated with letters of credit and purchase commitments.