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April 28, 2020, 4:45 p.m. EDT

10-Q: PATTERSON UTI ENERGY INC

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(EDGAR Online via COMTEX) -- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management Overview - We are a Houston, Texas-based oilfield services company that primarily owns and operates one of the largest fleets of land-based drilling rigs in the United States and a large fleet of pressure pumping equipment.

Our contract drilling business operates in the continental United States and western Canada, and, from time to time, we pursue contract drilling opportunities outside of North America. Our pressure pumping business operates primarily in Texas and the Appalachian region. We also provide a comprehensive suite of directional drilling services in most major producing onshore oil and gas basins in the United States, and we provide services that improve the statistical accuracy of horizontal wellbore placement. We have other operations through which we provide oilfield rental tools in select markets in the United States. We also service equipment for drilling contractors, and we provide electrical controls and automation to the energy, marine and mining industries, in North America and other select markets. In addition, we own and invest, as a non-operating working interest owner, in oil and natural gas assets that are primarily located in Texas and New Mexico.

Reduced demand for crude oil and refined products related to the COVID-19 pandemic, combined with production increases from OPEC+, has led to a significant reduction in crude oil prices and demand for drilling and completion services in North America.

Oil prices remain extremely volatile, as the closing price of oil (WTI-Cushing) reached a first quarter 2020 high of $63.27 per barrel on January 6, 2020, and closed at $8.91 per barrel on April 21, 2020. In response to the rapid decline in commodity prices, E&P companies acted swiftly to reduce drilling and completion activity starting late in the first quarter.

Our average active rig count for the first quarter of 2020 was 123 rigs, which included 123 rigs operating in the United States and less than one rig operating in Canada. This was unchanged from our average active rig count for the fourth quarter of 2019. Our rig count started to decline late in the first quarter and has accelerated since the end of the first quarter. We expect our average rig count for the second quarter will decrease by approximately one-third from the first quarter average. Based on contracts currently in place, we expect an average of 71 rigs operating under term contracts (contracts with a duration of six months or more) during the second quarter of 2020 and an average of 50 rigs operating under term contracts during the twelve months ending March 31, 2021.

Due to the downturn in completions activity in March, we ended the first quarter with five active pressure pumping spreads compared to 11 at the end of the fourth quarter. We expect to average approximately four active spreads in the second quarter. We have scaled our pressure pumping business for the operation of four spreads in 2020, while still preserving growth potential for a future improved market. We intend for our pressure pumping business to generate positive Adjusted EBITDA and cash flow for the last two quarters of 2020.

In response to the significant reduction in crude oil prices and the resulting fall in demand for drilling and completion services in North America, we have taken decisive action to quickly scale down our expenses. In addition to lowering our direct field level costs as activity slows, we have taken steps to structurally reduce our indirect support costs by what we estimate will be approximately $100 million annually, of which approximately two-thirds relates to our pressure pumping segment. We expect to record a total of approximately $50 million of charges during the second quarter associated with these savings. We reduced our planned capital expenditures for 2020 by $110 million to $140 million. Our focus throughout the remainder of 2020 will be on further cost reductions and cash preservation during this period of significant uncertainty and volatility.

Our revenues, profitability and cash flows are highly dependent upon prevailing prices for oil and natural gas and upon our customers' ability to access capital to fund their operating and capital expenditures. During periods of improved oil and natural gas prices, the capital spending budgets of oil and natural gas operators tend to expand, which generally results in increased demand for our services. Conversely, in periods, such as now, when oil and natural gas prices deteriorate or when our customers have a reduced ability to access capital, the demand for our services generally weakens, and we experience downward pressure on pricing for our services. We may also be impacted by delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies.

The North American oil and natural gas services industry is cyclical and at times experiences downturns in demand. During these periods, there has been substantially more oil and natural gas service equipment available than necessary to meet demand. As a result, oil and natural gas service contractors have had difficulty sustaining profit margins and, at times, have incurred losses during the downturn periods. Currently, there is an excess supply of drilling rigs, pressure pumping equipment and directional drilling equipment. We cannot predict either the future level of demand for our oil and natural gas services or future conditions in the oil and natural gas service businesses.

We are highly impacted by operational risks, competition, labor issues, weather, the availability of products used in our pressure pumping business, supplier delays and various other factors that could materially adversely affect our business, financial condition, cash flows and results of operations. Please see "Risk Factors" included in Part II, Item 1A of this Report and Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

For the three months ended March 31, 2020 and 2019, our operating revenues consisted of the following (dollars in thousands):







                                      Three Months Ended March 31,
                                     2020                      2019
        Contract drilling    $ 267,364        60.0 %   $ 372,392        52.9 %
        Pressure pumping       125,107        28.1 %     247,601        35.2 %
        Directional drilling    34,485         7.7 %      52,959         7.5 %
        Other operations        18,971         4.2 %      31,219         4.4 %
                             $ 445,927       100.0 %   $ 704,171       100.0 %
        


Contract Drilling

Contract drilling revenues accounted for 60.0% of our consolidated first quarter 2020 revenues and decreased 28.2% from the comparable 2019 period.

We have addressed our customers' needs for drilling horizontal wells in shale and other unconventional resource plays by improving the capabilities of our drilling fleet during the last several years. The U.S. land rig industry refers to certain high specification rigs as "super-spec" rigs. We consider a super-spec rig to be a 1,500 horsepower, AC powered rig that has at least a 750,000 pound hookload, a 7,500 psi circulating system, and is pad capable. As of March 31, 2020, our rig fleet included 198 APEX(R) rigs, of which 150 were super-spec rigs.

We maintain a backlog of commitments for contract drilling services under term contracts, which we define as contracts with a duration of six months or more. Our contract drilling backlog as of March 31, 2020 was approximately $440 million. Approximately 23% of the total contract drilling backlog at March 31, 2020 is reasonably expected to remain at March 31, 2021. We generally calculate our backlog by multiplying the dayrate under our term drilling contracts by the number of days remaining under the contract. The calculation does not include any revenues related to fees for other services such as for mobilization, other than initial mobilization, demobilization and customer reimbursables, nor does it include potential reductions in rates for unscheduled standby or during periods in which the rig is moving or incurring maintenance and repair time in excess of what is permitted under the drilling contract. For contracts that contain variable dayrate pricing, our backlog calculation uses the dayrate in effect for periods where the dayrate is fixed, and, for periods that remain subject to variable pricing, uses the commodity price in effect at March 31, 2020. In addition, our term drilling contracts are generally subject to termination by the customer on short notice and provide for an early termination payment to us in the event that the contract is terminated by the customer. For contracts on which we have received notice for the rig to be placed on standby, our backlog calculation uses the standby rate. For contracts on which we have received an early termination notice, our backlog calculation includes the early termination rate, instead of the dayrate, for the period over which we expect to receive the lower rate.

Ongoing factors which could continue to adversely affect utilization rates and pricing, even in an environment of high oil and natural gas prices and increased drilling activity, include:

movement of drilling rigs from region to region,

reactivation of drilling rigs,

refurbishment and upgrades of existing drilling rigs,

development of new technologies that enhance drilling efficiency, and

construction of new technology drilling rigs.

Pressure Pumping

Pressure pumping revenues accounted for 28.1% of our consolidated first quarter 2020 revenues and decreased 49.5% from the comparable 2019 period. As of March 31, 2020, we had approximately 1.3 million horsepower in our pressure pumping fleet. The pressure pumping market was oversupplied in 2019 and the first three months of 2020. In response to oversupplied market conditions, we started implementing changes to further streamline our operations, improve our efficiencies, and reduce our overall cost structure, while maintaining our customer service levels.

Directional Drilling

Directional drilling revenues accounted for 7.7% of our consolidated first quarter 2020 revenues and decreased 34.9% from the comparable 2019 period. We provide a comprehensive suite of directional drilling services in most major producing onshore oil and gas basins in the United States. Our directional drilling services include directional drilling, downhole performance motors, measurement-while-drilling, and wireline steering tools, and we provide services that improve the statistical accuracy of horizontal wellbore placement.

Other Operations

Other operations revenues accounted for 4.2% of our consolidated first quarter 2020 revenues and decreased 39.2% from the comparable 2019 period. Our oilfield rentals business, with a fleet of premium oilfield rental tools, provides the largest revenue contribution to our other operations and provides specialized services for land-based oil and natural gas drilling, completion and workover activities. Other operations also includes the results of our electrical controls and automation business, the results of our drilling equipment service business, and the results of our ownership, as a non-operating working interest owner, in oil and natural gas assets that are primarily located in Texas and New Mexico.

For the three months ended March 31, 2020 and 2019, our operating loss consisted of the following (in thousands):







                                 Three Months Ended March 31,
                                  2020                  2019
        Contract drilling    $      (404,018 )     $       21,217
        Pressure pumping             (35,486 )            (18,768 )
        Directional drilling         (10,595 )             (5,667 )
        Other operations             (18,771 )             (5,204 )
        Corporate                    (25,540 )            (14,961 )
                             $      (494,410 )     $      (23,383 )
        


Additional discussion of our operating revenues and operating loss follows in the "Results of Operations" section.

Our consolidated net loss for the first quarter of 2020 was $435 million compared to a net loss of $28.6 million for the first quarter of 2019.







        Results of Operations
        The following tables summarize results of operations by business segment for the
        three months ended March 31, 2020 and 2019:
        Contract Drilling                                      2020             2019         % Change
                                                              (dollars in thousands)
        Revenues                                           $     267,364     $  372,392           (28.2 )%
        Direct operating costs                                   163,420        219,202           (25.4 )%
        Margin (1)                                               103,944        153,190           (32.1 )%
        Selling, general and administrative                        1,464          1,656           (11.6 )%
        Depreciation, amortization and impairment                111,438        130,317           (14.5 )%
        Impairment of goodwill                                   395,060              -              NA
        Operating income (loss)                            $    (404,018 )   $   21,217              NA
        Operating days (2)                                        11,235         15,787           (28.8 )%
        Average revenue per operating day                  $       23.80     $    23.59             0.9 %
        Average direct operating costs per operating day   $       14.55     $    13.88             4.8 %
        Average margin per operating day (1)               $        9.25     $     9.70            (4.7 )%
        Average rigs operating                                       123            175           (29.6 )%
        Capital expenditures                               $      49,445     $   75,725           (34.7 )%
        


(1) Margin is defined as revenues less direct operating costs and excludes depreciation, amortization and impairment and selling, general and administrative expenses. Average margin per operating day is defined as margin divided by operating days.

(2) A rig is considered to be operating if it is earning revenue pursuant to a contract on a given day.

Generally, the revenues in our contract drilling segment are most impacted by two primary factors: our average number of rigs operating and our average revenue per operating day. During the first quarter of 2020, our average number of rigs operating was 123, compared to 175 in the first quarter of 2019. Our average revenue per operating day is largely dependent on the pricing terms of our rig contracts.

Revenues and direct operating costs decreased primarily due to a decrease in operating days. Average direct operating costs per operating day increased slightly due primarily to lower fixed cost absorption with the decrease in operating days.

Depreciation, amortization and impairment expense decreased primarily due to the retirement of 36 legacy non-APEX(R) drilling rigs and related equipment in the third quarter of 2019, which resulted in no depreciation expense being recorded for this equipment in 2020.

All of the goodwill associated with our contract drilling reporting unit was impaired during the three months ended March 31, 2020. See Note 6 of Notes to unaudited condensed consolidated financial statements for additional information.

The decrease in capital expenditures was primarily due to higher maintenance capital expenditures in the first quarter of 2019 when activity levels were higher.







        Pressure Pumping                                    2020            2019         % Change
                                                          (dollars in thousands)
        Revenues                                        $    125,107     $  247,601           (49.5 )%
        Direct operating costs                               114,855        202,748           (43.4 )%
        Margin (1)                                            10,252         44,853           (77.1 )%
        Selling, general and administrative                    3,067          3,486           (12.0 )%
        Depreciation, amortization and impairment             42,671         60,135           (29.0 )%
        Operating loss                                  $    (35,486 )   $  (18,768 )          89.1 %
        Fracturing jobs                                           89            164           (45.7 )%
        Other jobs                                               209            263           (20.5 )%
        Total jobs                                               298            427           (30.2 )%
        Average revenue per fracturing job              $   1,359.39     $ 1,476.55            (7.9 )%
        Average revenue per other job                   $      19.72     $    20.71            (4.8 )%
        Average revenue per total job                   $     419.82     $   579.86           (27.6 )%
        Average direct operating costs per total job    $     385.42     $   474.82           (18.8 )%
        Average margin per total job (1)                $      34.40     $   105.04           (67.2 )%
        Margin as a percentage of revenues (1)                   8.2 %         18.1 %         (54.7 )%
        Capital expenditures                            $     14,280     $   31,400           (54.5 )%
        


(1) Margin is defined as revenues less direct operating costs and excludes depreciation, amortization and impairment and selling, general and administrative expenses. Average margin per total job is defined as margin divided by total jobs. Margin as a percentage of revenues is defined as margin divided by revenues.

Generally, the revenues in our pressure pumping segment are most impacted by our number of fracturing jobs and the size (including whether or not we provide proppant and other materials) of those jobs, which is reflected in our average revenue per fracturing job. Direct operating costs are also most impacted by these same factors. Our average revenue per fracturing job is largely dependent on the pricing terms of our pressure pumping contracts. We completed 89 fracturing jobs during the first quarter of 2020, compared to 164 fracturing jobs in the first quarter of 2019. Our average revenue per fracturing job was $1.359 million in the first quarter of 2020, compared to $1.477 million in the first quarter of 2019.

Revenues and direct operating costs decreased primarily due to a decline in the number of fracturing jobs. Average revenue and direct operating costs per job were impacted by lower demand, more customers self-sourcing products and decreases in product prices.

Selling, general and administrative expenses decreased primarily as a result of cost reduction efforts.

Depreciation, amortization and impairment expense decreased primarily due to the write-down of pressure pumping equipment in the third quarter of 2019, which resulted in no depreciation expense being recorded for this equipment in the first quarter of 2020.

The decrease in capital expenditures was primarily due to higher maintenance capital expenditures in the first quarter of 2019 when activity levels were higher.







        Directional Drilling                             2020             2019        % Change
                                                       (dollars in thousands)
        Revenues                                     $      34,485      $ 52,959          (34.9 )%
        Direct operating costs                              32,329        45,602          (29.1 )%
        Margin (1)                                           2,156         7,357          (70.7 )%
        Selling, general and administrative                  2,330         2,657          (12.3 )%
        Depreciation, amortization, and impairment          10,421        10,367            0.5 %
        Operating loss                               $     (10,595 )    $ (5,667 )         87.0 %
        Capital expenditures                         $       2,008      $  2,112           (4.9 )%
        


(1) Margin is defined as revenues less direct operating costs and excludes depreciation, amortization and impairment and selling, general and administrative expenses.

Directional drilling revenue decreased by $18.5 million from the first quarter of 2019 primarily due to decreased job activity.

Directional drilling direct operating costs decreased by $13.3 million primarily due to lower direct costs from decreased activity and cost reduction efforts.

Selling, general and administrative expenses decreased primarily as a result of cost reduction efforts.







        Other Operations                                    2020              2019         % Change
                                                           (dollars in thousands)
        Revenues                                        $      18,971      $   31,219           (39.2 )%
        Direct operating costs                                 16,024          21,773           (26.4 )%
        Margin (1)                                              2,947           9,446           (68.8 )%
        Selling, general and administrative                     1,459           2,862           (49.0 )%
        Depreciation, depletion, amortization and
        impairment                                             20,259          11,788            71.9 %
        Operating loss                                  $     (18,771 )    $   (5,204 )         260.7 %
        Capital expenditures                            $       5,264      $    7,773           (32.3 )%
        


(1) Margin is defined as revenues less direct operating costs and excludes depreciation, depletion, amortization and impairment and selling, general and administrative expenses.

Other operations revenue decreased by $12.2 million from the first quarter of 2019 primarily due to a decrease in the volume of services provided by our oilfield rentals business and a decline in the average price per barrel of crude received by our oil and natural gas assets.

Other operations direct operating costs decreased by $5.7 million from the first quarter of 2019 primarily due to a decrease in the volume of services provided by our oilfield rentals business.

Selling, general and administrative expense decreased primarily as a result of cost reduction efforts.

Depreciation, depletion, amortization and impairment increased over the comparable prior year period primarily due to a $10.6 million impairment related to certain of our oil and natural gas assets recorded in the first quarter of 2020.

The decrease in capital expenditures was primarily due to higher maintenance capital expenditures in the first quarter of 2019 when activity levels were higher.







        Corporate                                           2020              2019         % Change
                                                           (dollars in thousands)
        Selling, general and administrative             $     22,026       $   21,894             0.6 %
        Depreciation                                    $      2,008       $    1,803            11.4 %
        Other operating expenses (income), net
        Net gain on asset disposals                     $     (1,239 )     $   (6,545 )         (81.1 )%
        Legal-related expenses and settlements, net
        of insurance reimbursements                              800           (3,471 )            NA
        Research and development                                 895            1,355           (33.9 )%
        Other                                                     (5 )            (75 )         (93.3 )%
        Other operating expenses (income), net          $        451       $   (8,736 )            NA
        Credit loss expense                             $      1,055       $        -              NA
        Interest income                                 $        657       $    1,032           (36.3 )%
        Interest expense                                $     11,224       $   12,984           (13.6 )%
        Other income                                    $         85       $      117           (27.4 )%
        Capital expenditures                            $        931       $    1,331           (30.1 )%
        


Other operating expenses (income), net includes net gains associated with the disposal of assets. Accordingly, the related gains or losses have been excluded from the results of specific segments. The majority of the net gain on asset disposals during 2019 reflect gains on disposal of drilling equipment. Legal-related expenses and settlements in 2019 includes proceeds from insurance claims.

A provision for credit losses was recognized in the first quarter of 2020 with respect to accounts receivable balances that are estimated to be uncollectible.

Interest expense was lower in the first quarter of 2020 due to the repayment of long-term debt in the third quarter of 2019.

Income Taxes

Our effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, the impact of U.S. state and local taxes, and other differences related to the recognition of income and expense between U.S. GAAP and tax accounting.

Our effective income tax rate for the three months ended March 31, 2020 was 13.9%, compared with 18.8% for the three months ended March 31, 2019. The lower effective income tax rate for the three months ended March 31, 2020 was primarily attributable to the non-deductible portion of the goodwill impairment recorded in the first quarter of 2020.

We continue to monitor income tax developments in the United States and other countries where we operate. During the first quarter of 2020, the United States enacted legislation related to COVID-19, which includes tax provisions. We have considered these tax provisions and do not currently expect any material impact to our financial statements. We will incorporate into our future financial statements the impacts, if any, of future regulations and additional authoritative guidance when finalized.

Liquidity and Capital Resources

In response to the significant reduction in crude oil prices and the resulting fall in demand for drilling and completion services in North America, we have taken decisive action to quickly scale down our expenses. In addition to lowering our direct field level costs as activity slows, we have taken steps to structurally reduce our indirect support costs by what we estimate will be approximately $100 million annually, of which approximately two-thirds relates to our pressure pumping segment. We expect to record a total of approximately $50 million of charges during the second quarter associated with these savings. We reduced our planned capital expenditures for 2020 by $110 million to $140 million. Our focus throughout the remainder of 2020 will be on further cost reductions and cash preservation during this period of significant uncertainty and volatility.

Our liquidity as of March 31, 2020 included approximately $230 million in working capital, including $152 million of cash and cash equivalents, and approximately $600 million available under our revolving credit facility.

On January 19, 2018, we completed an offering of $525 million in aggregate principal amount of our 3.95% Senior Notes due 2028 (the "2028 Notes"). We used $239 million of the net proceeds from the offering to repay amounts outstanding under our revolving credit facility. As described below, on March 27, 2018, we entered into an amended and restated credit agreement, which is a committed senior unsecured revolving credit facility that permits aggregate borrowings of up to $600 million, including a letter of credit facility that, at any time . . .

Apr 28, 2020

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