e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-22664
Patterson-UTI Energy,
Inc.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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75-2504748
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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4510 LAMESA HIGHWAY,
SNYDER, TEXAS
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79549
(Zip Code)
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(Address of principal executive
offices)
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(325) 574-6300
(Registrants telephone
number, including area code)
N/A
(Former name, former address
and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
156,713,714 shares of common stock, $0.01 par value,
as of May 1, 2007
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
TABLE OF
CONTENTS
PART I
FINANCIAL INFORMATION
|
|
ITEM 1.
|
Financial
Statements
|
The following unaudited consolidated financial statements
include all adjustments which, in the opinion of management, are
necessary in order to make such financial statements not
misleading.
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
(unaudited, in thousands, except share data)
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|
|
|
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March 31,
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December 31,
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2007
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2006
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|
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ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,930
|
|
|
$
|
13,385
|
|
Accounts receivable, net of
allowance for doubtful accounts of $8,116 at March 31, 2007
and $7,484 at December 31, 2006
|
|
|
415,230
|
|
|
|
484,106
|
|
Accrued federal and state income
taxes receivable
|
|
|
|
|
|
|
5,448
|
|
Inventory
|
|
|
44,415
|
|
|
|
43,947
|
|
Deferred tax assets, net
|
|
|
48,244
|
|
|
|
48,868
|
|
Deposits on equipment purchase
contracts
|
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|
15,434
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|
|
|
24,746
|
|
Other
|
|
|
34,041
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|
|
|
32,170
|
|
|
|
|
|
|
|
|
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Total current assets
|
|
|
574,294
|
|
|
|
652,670
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Property and equipment, at cost, net
|
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|
1,553,307
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|
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1,435,804
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Goodwill
|
|
|
96,198
|
|
|
|
99,056
|
|
Other
|
|
|
4,870
|
|
|
|
4,973
|
|
|
|
|
|
|
|
|
|
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Total assets
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|
$
|
2,228,669
|
|
|
$
|
2,192,503
|
|
|
|
|
|
|
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|
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LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
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Accounts payable:
|
|
|
|
|
|
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Trade
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$
|
163,523
|
|
|
$
|
138,372
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Accrued revenue distributions
|
|
|
16,680
|
|
|
|
15,359
|
|
Other
|
|
|
12,775
|
|
|
|
18,424
|
|
Accrued federal and state income
taxes payable
|
|
|
41,472
|
|
|
|
|
|
Accrued expenses
|
|
|
121,044
|
|
|
|
145,463
|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
355,494
|
|
|
|
317,618
|
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Borrowings under line of credit
|
|
|
|
|
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120,000
|
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Deferred tax liabilities, net
|
|
|
197,807
|
|
|
|
187,960
|
|
Other
|
|
|
4,704
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
558,005
|
|
|
|
630,037
|
|
|
|
|
|
|
|
|
|
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Commitments and contingencies (see
Note 10)
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Stockholders equity:
|
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Preferred stock, par value $.01;
authorized 1,000,000 shares, no shares issued
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Common stock, par value $.01;
authorized 300,000,000 shares with 176,731,235 and
176,656,401 issued and 156,617,346 and 156,542,512 outstanding
at March 31, 2007 and December 31, 2006, respectively
|
|
|
1,767
|
|
|
|
1,766
|
|
Additional paid-in capital
|
|
|
685,344
|
|
|
|
681,069
|
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Retained earnings
|
|
|
1,449,816
|
|
|
|
1,346,542
|
|
Accumulated other comprehensive
income
|
|
|
9,038
|
|
|
|
8,390
|
|
Treasury stock, at cost,
20,113,889 shares
|
|
|
(475,301
|
)
|
|
|
(475,301
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,670,664
|
|
|
|
1,562,466
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,228,669
|
|
|
$
|
2,192,503
|
|
|
|
|
|
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|
|
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
1
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
(unaudited, in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
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|
Three Months Ended
|
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|
March 31,
|
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|
2007
|
|
|
2006
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
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Contract drilling
|
|
$
|
467,498
|
|
|
$
|
508,704
|
|
Pressure pumping
|
|
|
38,584
|
|
|
|
31,328
|
|
Drilling and completion fluids
|
|
|
30,760
|
|
|
|
49,181
|
|
Oil and natural gas
|
|
|
10,259
|
|
|
|
8,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547,101
|
|
|
|
597,733
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Contract drilling
|
|
|
246,154
|
|
|
|
233,774
|
|
Pressure pumping
|
|
|
21,151
|
|
|
|
17,650
|
|
Drilling and completion fluids
|
|
|
25,391
|
|
|
|
38,186
|
|
Oil and natural gas
|
|
|
3,278
|
|
|
|
2,655
|
|
Depreciation, depletion and
impairment
|
|
|
55,931
|
|
|
|
43,549
|
|
Selling, general and administrative
|
|
|
14,669
|
|
|
|
12,811
|
|
Embezzlement costs, net of
recoveries
|
|
|
|
|
|
|
3,780
|
|
Other operating expenses
|
|
|
802
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
367,376
|
|
|
|
352,134
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
179,725
|
|
|
|
245,599
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
369
|
|
|
|
2,351
|
|
Interest expense
|
|
|
(763
|
)
|
|
|
(58
|
)
|
Other
|
|
|
94
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
|
|
2,377
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
cumulative effect of change in accounting principle
|
|
|
179,425
|
|
|
|
247,976
|
|
|
|
|
|
|
|
|
|
|
Income tax expense:
|
|
|
|
|
|
|
|
|
Current
|
|
|
53,433
|
|
|
|
83,931
|
|
Deferred
|
|
|
10,191
|
|
|
|
5,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,624
|
|
|
|
89,407
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
|
115,801
|
|
|
|
158,569
|
|
Cumulative effect of change in
accounting principle, net of related income tax expense of $398
|
|
|
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115,801
|
|
|
$
|
159,256
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.75
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.75
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155,387
|
|
|
|
171,818
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
157,742
|
|
|
|
174,313
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
2
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Stock
|
|
|
Total
|
|
|
Balance, December 31, 2006
|
|
|
176,656
|
|
|
$
|
1,766
|
|
|
$
|
681,069
|
|
|
$
|
1,346,542
|
|
|
$
|
8,390
|
|
|
$
|
(475,301
|
)
|
|
$
|
1,562,466
|
|
Issuance of restricted stock
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
54
|
|
|
|
1
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
Tax benefit for stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
3,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,589
|
|
Forfeitures of restricted shares
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment, net of tax of $279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
648
|
|
Payment of cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,527
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,527
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,801
|
|
|
|
|
|
|
|
|
|
|
|
115,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007
|
|
|
176,731
|
|
|
$
|
1,767
|
|
|
$
|
685,344
|
|
|
$
|
1,449,816
|
|
|
$
|
9,038
|
|
|
$
|
(475,301
|
)
|
|
$
|
1,670,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
115,801
|
|
|
$
|
159,256
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and
impairment
|
|
|
55,931
|
|
|
|
43,549
|
|
Dry holes and abandonments
|
|
|
699
|
|
|
|
|
|
Provision for bad debts
|
|
|
600
|
|
|
|
600
|
|
Deferred income tax expense
|
|
|
10,191
|
|
|
|
5,874
|
|
Stock based compensation expense
|
|
|
3,589
|
|
|
|
2,842
|
|
(Gain) loss on disposal of assets
|
|
|
202
|
|
|
|
(871
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
68,494
|
|
|
|
(45,134
|
)
|
Inventory and other current assets
|
|
|
7,085
|
|
|
|
(3,266
|
)
|
Accounts payable
|
|
|
26,459
|
|
|
|
3,355
|
|
Income taxes payable/receivable
|
|
|
46,950
|
|
|
|
55,452
|
|
Accrued expenses
|
|
|
(21,568
|
)
|
|
|
6,843
|
|
Other liabilities
|
|
|
(5,404
|
)
|
|
|
6,639
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
309,029
|
|
|
|
235,139
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(175,831
|
)
|
|
|
(114,216
|
)
|
Proceeds from disposal of property
and equipment
|
|
|
2,183
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(173,648
|
)
|
|
|
(111,190
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(12,527
|
)
|
|
|
(6,906
|
)
|
Proceeds from exercise of stock
options
|
|
|
487
|
|
|
|
|
|
Tax benefit related to exercise of
stock options
|
|
|
200
|
|
|
|
|
|
Proceeds from borrowings under
line of credit
|
|
|
16,000
|
|
|
|
|
|
Repayment of borrowings under line
of credit
|
|
|
(136,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(131,840
|
)
|
|
|
(6,906
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate
changes on cash
|
|
|
4
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
3,545
|
|
|
|
117,006
|
|
Cash and cash equivalents at
beginning of period
|
|
|
13,385
|
|
|
|
136,398
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
16,930
|
|
|
$
|
253,404
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
Net cash paid during the period
for:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
659
|
|
|
$
|
58
|
|
Income taxes
|
|
$
|
3,052
|
|
|
$
|
21,281
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
|
|
1.
|
Basis of
Consolidation and Presentation
|
The interim unaudited consolidated financial statements include
the accounts of Patterson-UTI Energy, Inc. (the
Company) and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated. The Company has no controlling financial interests
in any entity that is not a wholly-owned subsidiary which would
require consolidation.
The interim consolidated financial statements have been prepared
by management of the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been omitted pursuant to such rules and regulations,
although the Company believes the disclosures included herein
are adequate to make the information presented not misleading.
In the opinion of management, all adjustments which are of a
normal recurring nature considered necessary for presentation of
the information have been included. The Unaudited Consolidated
Balance Sheet as of December 31, 2006, as presented herein,
was derived from the audited balance sheet of the Company. These
unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and
related notes included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006.
The U.S. dollar is the functional currency for all of the
Companys operations except for its Canadian operations,
which use the Canadian dollar as their functional currency. The
effects of exchange rate changes are reflected in accumulated
other comprehensive income, which is a separate component of
stockholders equity (see Note 3 of these Notes to
Unaudited Consolidated Financial Statements).
The Company provides a dual presentation of its net income per
common share in its Unaudited Condensed Consolidated Statements
of Income: Basic net income per common share (Basic
EPS) and diluted net income per common share
(Diluted EPS). Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number
of unrestricted common shares outstanding during the period.
Diluted EPS is based on the weighted-average number of common
shares outstanding plus the impact of dilutive instruments,
including stock options, warrants and restricted shares using
the treasury stock method. The following table presents
information necessary to calculate net income per share for the
three months ended March 31, 2007 and 2006 as well as cash
dividends per share paid and potentially dilutive securities
excluded from the weighted average number of diluted common
shares outstanding, as their inclusion would have been
anti-dilutive during the three months ended March 31, 2007
and 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
115,801
|
|
|
$
|
159,256
|
|
Weighted average number of
unrestricted common shares outstanding
|
|
|
155,387
|
|
|
|
171,818
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.75
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
unrestricted common shares outstanding
|
|
|
155,387
|
|
|
|
171,818
|
|
Dilutive effect of stock options
and restricted shares
|
|
|
2,355
|
|
|
|
2,495
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted
common shares outstanding
|
|
|
157,742
|
|
|
|
174,313
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.73
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
0.08
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities
excluded as anti-dilutive
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of operations for the three months ended
March 31, 2007 are not necessarily indicative of the
results to be expected for the full year.
|
|
2.
|
Stock-based
Compensation
|
The Company adopted Financial Accounting Standards Board
(FASB) Statement No. 123 (revised 2004),
Share-Based Payment (FAS 123(R)), on
January 1, 2006 and recognizes the cost of share-based
payments under the fair-value-based method. The Company uses
share-based payments to compensate employees and non-employee
directors. All awards have been equity instruments in the form
of stock options or restricted stock awards. The Company issues
shares of common stock when vested stock option awards are
exercised and when restricted stock awards are granted. As a
result of the initial adoption of FAS 123(R) in 2006, the
Company recognized income due to the cumulative effect of this
change in accounting principle of $687,000, net of taxes of
$398,000, related to previously expensed amortization of
unvested restricted stock grants.
Stock Options. The Company estimates grant
date fair values of stock options using the Black-Scholes-Merton
valuation model (Black-Scholes), except for stock
options granted prior to 1996 that are not subject to
FAS 123(R). Volatility assumptions are based on the
historic volatility of the Companys common stock over the
most recent period equal to the expected term of the options as
of the date the options were granted. The expected term
assumptions are based on the Companys experience with
respect to employee stock option activity. Dividend yield
assumptions are based on the expected dividends at the time the
options were granted. The risk-free interest rate assumptions
are determined by reference to United States Treasury yields.
Weighted-average assumptions used to estimate grant date fair
values for stock options granted in the three month periods
ended March 31, 2007 and 2006 follow:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Volatility
|
|
|
36.64
|
%
|
|
|
26.95
|
%
|
Expected term (in years)
|
|
|
4.00
|
|
|
|
4.00
|
|
Dividend yield
|
|
|
1.45
|
%
|
|
|
0.47
|
%
|
Risk-free interest rate
|
|
|
4.65
|
%
|
|
|
4.30
|
%
|
Stock option activity from January 1, 2007 to
March 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at January 1, 2007
|
|
|
6,575,096
|
|
|
$
|
16.18
|
|
Granted
|
|
|
60,000
|
|
|
$
|
22.01
|
|
Exercised
|
|
|
(54,184
|
)
|
|
$
|
8.98
|
|
Forfeited
|
|
|
(900
|
)
|
|
$
|
14.64
|
|
Expired
|
|
|
|
|
|
$
|
|
|
Cancelled
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
6,580,012
|
|
|
$
|
16.30
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007
|
|
|
5,501,979
|
|
|
$
|
14.29
|
|
|
|
|
|
|
|
|
|
|
6
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted Stock. Under all restricted stock
awards to date, shares were issued when granted, nonvested
shares are subject to forfeiture for failure to fulfill service
conditions and nonforfeitable dividends are paid on nonvested
restricted shares. Additionally, certain restricted stock awards
in 2006 contained performance conditions related to the
Companys net income for the year ending December 31,
2007.
Restricted stock activity from January 1, 2007 to
March 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2007
|
|
|
1,188,200
|
|
|
$
|
25.92
|
|
Granted
|
|
|
38,000
|
|
|
$
|
22.65
|
|
Vested
|
|
|
(15,000
|
)
|
|
$
|
34.24
|
|
Forfeited
|
|
|
(17,350
|
)
|
|
$
|
23.96
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2007
|
|
|
1,193,850
|
|
|
$
|
25.74
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the Companys comprehensive
income including the effects of foreign currency translation
adjustments for the three months ended March 31, 2007 and
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
115,801
|
|
|
$
|
159,256
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment related to Canadian operations, net of tax
|
|
|
648
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
$
|
116,449
|
|
|
$
|
159,091
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
Property and equipment consisted of the following at
March 31, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Equipment
|
|
$
|
2,297,034
|
|
|
$
|
2,135,567
|
|
Oil and natural gas properties
|
|
|
88,247
|
|
|
|
85,143
|
|
Buildings
|
|
|
33,398
|
|
|
|
30,987
|
|
Land
|
|
|
10,117
|
|
|
|
7,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,428,796
|
|
|
|
2,259,204
|
|
Less accumulated depreciation and
depletion
|
|
|
(875,489
|
)
|
|
|
(823,400
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost,
net
|
|
$
|
1,553,307
|
|
|
$
|
1,435,804
|
|
|
|
|
|
|
|
|
|
|
7
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys revenues, operating profits and identifiable
assets are primarily attributable to four business segments:
(i) contract drilling of oil and natural gas wells,
(ii) pressure pumping services, (iii) drilling and
completion fluid services to operators in the oil and natural
gas industry, and (iv) the exploration, development,
acquisition and production of oil and natural gas. Each of these
segments represents a distinct type of business based upon the
type and nature of services and products offered. These segments
have separate management teams which report to the
Companys chief operating decision maker and have distinct
and identifiable revenues and expenses. Separate financial data
for each of our four business segments is provided below (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Contract drilling(a)
|
|
$
|
468,339
|
|
|
$
|
509,764
|
|
Pressure pumping
|
|
|
38,584
|
|
|
|
31,328
|
|
Drilling and completion fluids(b)
|
|
|
30,881
|
|
|
|
49,224
|
|
Oil and natural gas
|
|
|
10,259
|
|
|
|
8,520
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
548,063
|
|
|
|
598,836
|
|
Elimination of intercompany
revenues(a)(b)
|
|
|
(962
|
)
|
|
|
(1,103
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
547,101
|
|
|
$
|
597,733
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
Contract drilling
|
|
$
|
171,705
|
|
|
$
|
234,607
|
|
Pressure pumping
|
|
|
10,241
|
|
|
|
8,506
|
|
Drilling and completion fluids
|
|
|
2,276
|
|
|
|
7,918
|
|
Oil and natural gas
|
|
|
2,613
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,835
|
|
|
|
254,260
|
|
Corporate and other
|
|
|
(6,308
|
)
|
|
|
(5,152
|
)
|
Other operating expenses
|
|
|
(802
|
)
|
|
|
271
|
|
Embezzlement costs, net of
recoveries(c)
|
|
|
|
|
|
|
(3,780
|
)
|
Interest income
|
|
|
369
|
|
|
|
2,351
|
|
Interest expense
|
|
|
(763
|
)
|
|
|
(58
|
)
|
Other
|
|
|
94
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
cumulative effect of change in accounting principle
|
|
$
|
179,425
|
|
|
$
|
247,976
|
|
|
|
|
|
|
|
|
|
|
8
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
Contract drilling
|
|
$
|
1,890,290
|
|
|
$
|
1,849,923
|
|
Pressure pumping
|
|
|
127,572
|
|
|
|
111,787
|
|
Drilling and completion fluids
|
|
|
95,956
|
|
|
|
106,032
|
|
Oil and natural gas
|
|
|
64,688
|
|
|
|
65,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,178,506
|
|
|
|
2,133,185
|
|
Corporate and other(d)
|
|
|
50,163
|
|
|
|
59,318
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,228,669
|
|
|
$
|
2,192,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes contract drilling intercompany revenues of
approximately $841,000 and $1.1 million for the three
months ended March 31, 2007 and 2006, respectively. |
|
(b) |
|
Includes drilling and completion fluids intercompany revenues of
approximately $121,000 and $43,000 for the three months ended
March 31, 2007 and 2006, respectively. |
|
(c) |
|
The Companys former CFO has pleaded guilty to criminal
charges and has been sentenced and is serving a term of
imprisonment arising out of his embezzlement of funds from the
Company over a period of more than five years, ending
November 3, 2005. Embezzlement costs, net of recoveries,
include professional and other costs incurred as a result of the
embezzlement. |
|
(d) |
|
Corporate assets primarily include cash and certain deferred
federal income tax assets. |
Goodwill is evaluated at least annually to determine if the fair
value of recorded goodwill has decreased below its carrying
value. At December 31, 2006 the Company performed its
annual goodwill evaluation and determined no adjustment to
impair goodwill was necessary. Goodwill as of March 31,
2007 and December 31, 2006 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Contract Drilling:
|
|
|
|
|
|
|
|
|
Goodwill at beginning of period
|
|
$
|
89,092
|
|
|
$
|
89,092
|
|
Changes to goodwill
|
|
|
(2,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at end of period
|
|
|
86,234
|
|
|
|
89,092
|
|
|
|
|
|
|
|
|
|
|
Drilling and completion
fluids:
|
|
|
|
|
|
|
|
|
Goodwill at beginning of period
|
|
|
9,964
|
|
|
|
9,964
|
|
Changes to goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at end of period
|
|
|
9,964
|
|
|
|
9,964
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
96,198
|
|
|
$
|
99,056
|
|
|
|
|
|
|
|
|
|
|
In connection with the implementation of FIN 48 as of
January 1, 2007 as discussed in Note 12 of these
Unaudited Consolidated Financial Statements, the Company
determined that a tax reserve which had been established in
connection with a business acquisition should be reduced. This
reserve had originally been established in connection with the
allocation of the purchase price in the transaction and was
reflected as an
9
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
increase in goodwill. The $2.9 million reduction of this
reserve is reflected as a reduction to goodwill during the three
months ended March 31, 2007.
Accrued expenses consisted of the following at March 31,
2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Salaries, wages, payroll taxes and
benefits
|
|
$
|
25,487
|
|
|
$
|
42,751
|
|
Workers compensation
liability
|
|
|
67,681
|
|
|
|
67,615
|
|
Sales, use and other taxes
|
|
|
7,984
|
|
|
|
11,043
|
|
Insurance, other than
workers compensation
|
|
|
14,294
|
|
|
|
13,328
|
|
Other
|
|
|
5,598
|
|
|
|
10,726
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
121,044
|
|
|
$
|
145,463
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Asset
Retirement Obligation
|
Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations,
(SFAS No. 143), requires that the Company
record a liability for the estimated costs to be incurred in
connection with the abandonment of oil and natural gas
properties in the future. The following table describes the
changes to the Companys asset retirement obligations
during the three months ended March 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
$
|
1,829
|
|
|
$
|
1,725
|
|
Liabilities incurred
|
|
|
78
|
|
|
|
32
|
|
Liabilities settled
|
|
|
(142
|
)
|
|
|
(28
|
)
|
Accretion expense
|
|
|
15
|
|
|
|
14
|
|
Revision in estimated cash flows
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation at end
of period
|
|
$
|
2,069
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Borrowings
Under Line of Credit
|
The Company entered into a five-year unsecured revolving line of
credit (LOC) in December 2004. On August 2,
2006, the Company amended the LOC and increased the borrowing
capacity to $375 million. Interest is paid on outstanding
LOC balances at a floating rate ranging from LIBOR plus 0.625%
to 1.0% or the prime rate. Any outstanding borrowings must be
repaid at maturity on December 16, 2009. This arrangement
includes various fees, including a commitment fee on the average
daily unused amount (0.15% at March 31, 2007). There are
customary restrictions and covenants associated with the LOC.
Financial covenants provide for a maximum debt to capitalization
ratio and a minimum interest coverage ratio. The Company does
not expect that the restrictions and covenants will restrict its
ability to operate or react to opportunities that might arise.
As of December 31, 2006, the Company had borrowed
$120 million under the LOC and $60 million in letters
of credit were outstanding. As of March 31, 2007, no
borrowings were outstanding under the LOC and $60 million
in letters of credit were outstanding. As a result, the Company
had available borrowing capacity of $315 million at
March 31, 2007.
10
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Commitments,
Contingencies and Other Matters
|
Commitments The Company maintains letters of
credit in the aggregate amount of approximately $60 million
for the benefit of various insurance companies as collateral for
retrospective premiums and retained losses which could become
payable under the terms of the underlying insurance contracts.
These letters of credit are typically renewed annually. No
amounts have been drawn under the letters of credit.
As of March 31, 2007, the Company has signed non-cancelable
commitments to purchase $257 million of equipment to be
received throughout 2007. This amount excludes
$15.4 million and $24.7 million at March 31, 2007
and December 31, 2006, respectively, related to deposits
that have been paid pursuant to agreements that were entered
into to purchase rig components to be used in the construction
of 15 new land drilling rigs. These payments are presented as
Deposits on equipment purchase contracts in the consolidated
balance sheet.
Contingencies A receiver has been appointed
to take control of and liquidate the assets of the
Companys former CFO in connection with his embezzlement of
Company funds. The receiver is in the process of seeking court
approval for a plan of distribution of the assets recovered by
the receiver and the proceeds thereof, which total approximately
$40 million. While the Company believes it has a claim for
at least the full amount of funds embezzled from the Company,
other creditors have asserted or may assert claims with respect
to the assets held by the receiver.
In December 2005, two purported derivative actions were filed in
Texas state court in Scurry County, Texas, and in May 2006, a
derivative action was filed in federal court in Lubbock, Texas,
in each case, against the Companys directors, alleging
that the directors breached their fiduciary duties to the
Company as a result of alleged failure to timely discover the
embezzlement of approximately $77.5 million by its former
CFO. The Board of Directors formed a special litigation
committee to review and inquire about these allegations and
recommend the Companys response, if any. Further legal
proceedings in these suits were stayed pending completion of the
work of the special litigation committee. The lawsuits sought
recovery on behalf of and for the Company and did not seek
recovery from the Company. In November 2006, the parties to all
three of the derivative actions reached an agreement to settle
the actions. After a preliminary hearing and notice to the
Companys stockholders, the state court held a hearing,
approved the settlement, which required the implementation of
certain corporate governance measures, and signed a final
judgment on December 29, 2006. As contemplated by the
settlement agreement, the federal court entered a final judgment
on January 10, 2007. Pursuant to the terms of the
settlement, the Company paid a net amount of $230,000 to the
attorneys for the plaintiffs in the suits.
The Company is party to various other legal proceedings arising
in the normal course of its business. The Company does not
believe that the outcome of these proceedings, either
individually or in the aggregate, will have a material adverse
effect on its financial condition, results of operations or cash
flows.
On February 22, 2007, the Companys Board of Directors
approved a cash dividend on its common stock in the amount of
$0.08 per share. The cash dividend of approximately
$12.5 million was paid on March 30, 2007 to holders of
record on March 15, 2007. On May 2, 2007, the
Companys Board of Directors approved a cash dividend on
its common stock in the amount of $0.12 per share to be paid on
June 29, 2007 to holders of record as of June 14,
2007. The amount and timing of all future dividend payments is
subject to the discretion of the Board of Directors and will
depend upon business conditions, results of operations,
financial condition, terms of the Companys credit
facilities and other factors.
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48) on January 1, 2007.
FIN 48 clarifies the accounting for
11
PATTERSON-UTI
ENERGY, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
uncertainty in income taxes recognized in an enterprises
financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. As a result of the adoption of FIN 48 the
Company reduced a reserve for an uncertain tax position with
respect to a business combination that had originally been
recorded as goodwill (see Note 6). The impact of
adjustments to reserves with respect to other uncertain tax
positions was not material. In connection with the adoption of
FIN 48, the Company established a policy to account for
interest and penalties with respect to income taxes as operating
expenses. As of March 31, 2007, the years ended
December 31, 2005 and 2006 have not been examined by
U.S. taxing authorities. As of March 31, 2007, the
years ended December 31, 2000 through 2006 have not been
examined by Canadian taxing authorities.
|
|
13.
|
Recently
Issued Accounting Standards
|
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (FAS 157).
FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurement. FAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. FAS 157 will
be effective for the Company beginning in the quarter ending
March 31, 2008. The application of FAS 157 is not
expected to have a material impact to the Company.
12
|
|
ITEM 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Management Overview We are a leading provider
of contract services to the North American oil and natural gas
industry. Our services primarily involve the drilling, on a
contract basis, of land-based oil and natural gas wells and, to
a lesser extent, we provide pressure pumping services and
drilling and completion fluid services. In addition to the
aforementioned contract services, we also engage in the
development, exploration, acquisition and production of oil and
natural gas. For the three months ended March 31, 2007 and
2006, our operating revenues consisted of the following (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Contract drilling
|
|
$
|
467,498
|
|
|
|
85
|
%
|
|
$
|
508,704
|
|
|
|
85
|
%
|
Pressure pumping
|
|
|
38,584
|
|
|
|
7
|
|
|
|
31,328
|
|
|
|
5
|
|
Drilling and completion fluids
|
|
|
30,760
|
|
|
|
6
|
|
|
|
49,181
|
|
|
|
8
|
|
Oil and natural gas
|
|
|
10,259
|
|
|
|
2
|
|
|
|
8,520
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
547,101
|
|
|
|
100
|
%
|
|
$
|
597,733
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide our contract services to oil and natural gas
operators in many of the oil and natural gas producing regions
of North America. Our contract drilling operations are focused
in various regions of Texas, New Mexico, Oklahoma, Arkansas,
Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North
Dakota, South Dakota and Western Canada, while our pressure
pumping services are focused primarily in the Appalachian Basin.
Our drilling and completion fluids services are provided to
operators offshore in the Gulf of Mexico and on land in Texas,
Southeastern New Mexico, Oklahoma and the Gulf Coast region of
Louisiana. Our oil and natural gas operations are primarily
focused in West and South Texas, Southeastern New Mexico, Utah
and Mississippi.
The profitability of our business is most readily assessed by
two primary indicators in our contract drilling segment: our
average number of rigs operating and our average revenue per
operating day. During the first quarter of 2007, our average
number of rigs operating was 255 per day compared to 290 in
the fourth quarter of 2006 and 300 in the first quarter of 2006.
Our average revenue per operating day decreased to $20,350 in
the first quarter of 2007 from $20,760 in the fourth quarter of
2006 and increased from $18,840 in the first quarter of 2006.
Our consolidated net income for the first quarter of 2007
decreased by approximately $43 million or 27% as compared
to the first quarter of 2006 primarily due to a decrease in
operating income in our contract drilling segment of
approximately $63 million caused by a decrease in the
number of average operating days in the first quarter of 2007 as
compared to the first quarter of 2006.
Our revenues, profitability and cash flows are highly dependent
upon the market prices of oil and natural gas. During periods of
improved commodity prices, the capital spending budgets of oil
and natural gas operators tend to expand, which results in
increased demand for our contract services. Conversely, in
periods of time when these commodity prices deteriorate, the
demand for our contract services generally weakens and we
experience a decrease in the number of rigs operating and
downward pressure on pricing for our services. In addition, our
operations are highly impacted by competition, the availability
of excess equipment, labor issues and various other factors
which are more fully described as Risk Factors
included as Item 1A in our Annual Report on
Form 10-K
for the year ended December 31, 2006.
We believe that the liquidity presented in our balance sheet as
of March 31, 2007, which includes approximately
$219 million in working capital (including
$16.9 million in cash) and $315 million available
under a $375 million line of credit (availability of
$60 million is reserved for outstanding letters of credit),
provides us with the ability to pursue acquisition
opportunities, expand into new regions, make improvements to our
assets, pay cash dividends and survive downturns in our industry.
Commitments and Contingencies The Company
maintains letters of credit in the aggregate amount of
approximately $60 million for the benefit of various
insurance companies as collateral for retrospective premiums and
retained losses which could become payable under the terms of
the underlying insurance contracts. These letters of credit
expire at various times during each calendar year. No amounts
have been drawn under the letters of credit.
As of March 31, 2007, we have remaining non-cancelable
commitments to purchase approximately $257 million of
equipment throughout 2007.
13
A receiver has been appointed to take control of and liquidate
the assets of our former CFO in connection with his embezzlement
of Company funds. The receiver is in the process of seeking
court approval for a plan of distribution of the assets
recovered by the receiver and the proceeds thereof, which total
approximately $40 million. While we believe we have a claim
for at least the full amount of funds embezzled from us, other
creditors have asserted or may assert claims with respect to the
assets held by the receiver.
In December 2005, two purported derivative actions were filed in
Texas state court in Scurry County, Texas, and in May 2006, a
derivative action was filed in federal court in Lubbock, Texas,
in each case against our directors, alleging that the directors
breached their fiduciary duties to us as a result of alleged
failure to timely discover the embezzlement of approximately
$77.5 million by our former CFO. The Board of Directors
formed a special litigation committee to review and inquire
about these allegations and recommend our response, if any.
Further legal proceedings in these suits were stayed pending
completion of the work of the special litigation committee. The
lawsuits sought recovery on behalf of and for us and did not
seek recovery from us. In November 2006, the parties to all
three of the derivative actions reached an agreement to settle
the actions. After a preliminary hearing and notice to our
stockholders, the state court held a hearing, approved the
settlement, which required the implementation of certain
corporate governance measures, and signed a final judgment on
December 29, 2006. As contemplated by the settlement
agreement, the federal court entered a final judgment on
January 10, 2007. Pursuant to the terms of the settlement,
we paid a net amount of $230,000 to the attorneys for the
plaintiffs in the suits.
Trading and Investing We have not engaged in
trading activities that include high-risk securities, such as
derivatives and non-exchange traded contracts. We invest cash
primarily in highly liquid, short-term investments such as
overnight deposits, money markets, and highly rated municipal
and commercial bonds.
Description of Business We conduct our
contract drilling operations in Texas, New Mexico, Oklahoma,
Arkansas, Louisiana, Mississippi, Colorado, Utah, Wyoming,
Montana, North Dakota, South Dakota and Western Canada. As of
March 31, 2007, we had 341 currently marketable land-based
drilling rigs. We provide pressure pumping services to oil and
natural gas operators primarily in the Appalachian Basin. These
services consist primarily of well stimulation and cementing for
completion of new wells and remedial work on existing wells. We
provide drilling fluids, completion fluids and related services
to oil and natural gas operators offshore in the Gulf of Mexico
and on land in Texas, Southeastern New Mexico, Oklahoma and the
Gulf Coast region of Louisiana. Drilling and completion fluids
are used by oil and natural gas operators during the drilling
process to control pressure when drilling oil and natural gas
wells. We are also engaged in the development, exploration,
acquisition and production of oil and natural gas. Our oil and
natural gas operations are focused primarily in producing
regions in West and South Texas, Southeastern New Mexico, Utah
and Mississippi.
The North American land drilling industry has experienced
periods of downturn in demand over the last decade. During these
periods, there have been substantially more drilling rigs
available than necessary to meet demand. As a result, drilling
contractors have had difficulty sustaining profit margins during
the downturn periods.
In addition to adverse effects that future declines in demand
could have on us, ongoing factors which could 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 land-based drilling rigs, or
|
|
|
|
construction of new drilling rigs.
|
We cannot predict either the future level of demand for our
contract drilling services or future conditions in the oil and
natural gas contract drilling business.
Critical
Accounting Policies
In addition to established accounting policies, our consolidated
financial statements are impacted by certain estimates and
assumptions made by management. No changes in our critical
accounting policies have occurred since the filing of the
Companys Annual Report on
Form 10-K
for the period ended December 31, 2006.
14
Liquidity
and Capital Resources
As of March 31, 2007, we had working capital of
approximately $219 million including cash and cash
equivalents of $16.9 million. For the three months ended
March 31, 2007, our significant sources of cash flow
included:
|
|
|
|
|
$309 million provided by operations,
|
|
|
|
$2.2 million in proceeds from disposal of property and
equipment, and
|
|
|
|
$687,000 from the exercise of stock options and related tax
benefits.
|
We used $12.5 million to pay dividends on the
Companys common stock, $120 million to repay
borrowings under our line of credit and $176 million:
|
|
|
|
|
to make capital expenditures for the betterment and
refurbishment of our drilling rigs,
|
|
|
|
to acquire and procure drilling equipment and facilities to
support our drilling operations,
|
|
|
|
to fund capital expenditures for our pressure pumping and
drilling and completion fluids divisions, and
|
|
|
|
to fund leasehold acquisition and exploration and development of
oil and natural gas properties.
|
On August 2, 2006, the Company entered into an agreement to
amend our unsecured revolving line of credit (LOC).
In connection with this amendment, the borrowing capacity under
this LOC was increased to $375 million. No significant
changes were made to the terms of the LOC, including the
interest to be paid on outstanding balances and financial
covenants. As of March 31, 2007, we had no outstanding
borrowings under the LOC and $60 million in letters of
credit were outstanding such that we had available borrowings of
$315 million at March 31, 2007.
On February 22, 2007, our Board of Directors approved a
cash dividend on our common stock in the amount of
$0.08 per share. The cash dividend of approximately
$12.5 million was paid on March 30, 2007 to holders of
record on March 15, 2007. On May 2, 2007, our Board of
Directors approved a cash dividend on our common stock in the
amount of $0.12 per share to be paid on June 29, 2007
to holders of record on June 14, 2007. The amount and
timing of all future dividend payments is subject to the
discretion of the Board of Directors and will depend upon
business conditions, results of operations, financial condition,
terms of our credit facilities and other factors.
We believe that the current level of cash and short-term
investments, together with cash generated from operations,
should be sufficient to meet our capital needs. From time to
time, acquisition opportunities are evaluated. The timing, size
or success of any acquisition and the associated capital
commitments are unpredictable. Should opportunities for growth
requiring capital arise, we believe we would be able to satisfy
these needs through a combination of working capital, cash
generated from operations, our existing credit facility and
additional debt or equity financing. However, there can be no
assurance that such capital would be available.
15
Results
of Operations
The following tables summarize operations by business segment
for the three months ended March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
467,498
|
|
|
$
|
508,704
|
|
|
|
(8.1
|
)%
|
Direct operating costs
|
|
$
|
246,154
|
|
|
$
|
233,774
|
|
|
|
5.3
|
%
|
Selling, general and administrative
|
|
$
|
1,451
|
|
|
$
|
1,788
|
|
|
|
(18.8
|
)%
|
Depreciation
|
|
$
|
48,188
|
|
|
$
|
38,535
|
|
|
|
25.0
|
%
|
Operating income
|
|
$
|
171,705
|
|
|
$
|
234,607
|
|
|
|
(26.8
|
)%
|
Operating days
|
|
|
22,972
|
|
|
|
27,000
|
|
|
|
(14.9
|
)%
|
Average revenue per operating day
|
|
$
|
20.35
|
|
|
$
|
18.84
|
|
|
|
8.0
|
%
|
Average direct operating costs per
operating day
|
|
$
|
10.72
|
|
|
$
|
8.66
|
|
|
|
23.8
|
%
|
Average rigs operating
|
|
|
255
|
|
|
|
300
|
|
|
|
(15.0
|
)%
|
Capital expenditures
|
|
$
|
153,276
|
|
|
$
|
99,377
|
|
|
|
54.2
|
%
|
Demand for our contract drilling services is dependent upon the
prevailing prices for natural gas. The average market price of
natural gas fell from $8.98 per Mcf in 2005 to
$6.94 per Mcf in 2006. This decrease resulted in our
customers reducing their drilling activities beginning in the
fourth quarter of 2006 and continuing through the first quarter
of 2007. As a result of this decrease in drilling activities by
our customers, our average rigs operating have declined to 255
in the first quarter of 2007 compared to 290 in the fourth
quarter of 2006.
Revenues in the first quarter of 2007 decreased as compared to
the first quarter of 2006 as a result of the decreased number of
operating days in 2007 partially offset by an increase of
approximately $1,500 in the average revenue per operating day.
Although the number of operating days decreased in 2007, direct
operating costs increased due to an increase in average direct
operating costs per operating day of approximately $2,000. The
increase in average direct operating costs per day primarily
resulted from increased compensation costs and an increase in
the cost of maintenance for our drilling rigs, partially caused
by costs relating to the deactivating of drilling rigs.
Significant capital expenditures have been incurred to activate
additional drilling rigs, to modify and upgrade our drilling
rigs and to acquire additional related equipment such as drill
pipe, drill collars, engines, fluid circulating systems, rig
hoisting systems and safety enhancement equipment. The increase
in depreciation expense was a result of the capital expenditures
discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
Pressure Pumping
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
38,584
|
|
|
$
|
31,328
|
|
|
|
23.2%
|
|
Direct operating costs
|
|
$
|
21,151
|
|
|
$
|
17,650
|
|
|
|
19.8%
|
|
Selling, general and administrative
|
|
$
|
4,068
|
|
|
$
|
2,986
|
|
|
|
36.2%
|
|
Depreciation
|
|
$
|
3,124
|
|
|
$
|
2,186
|
|
|
|
42.9%
|
|
Operating income
|
|
$
|
10,241
|
|
|
$
|
8,506
|
|
|
|
20.4%
|
|
Total jobs
|
|
|
2,839
|
|
|
|
2,711
|
|
|
|
4.7%
|
|
Average revenue per job
|
|
$
|
13.59
|
|
|
$
|
11.56
|
|
|
|
17.6%
|
|
Average direct operating costs per
job
|
|
$
|
7.45
|
|
|
$
|
6.51
|
|
|
|
14.4%
|
|
Capital expenditures
|
|
$
|
16,425
|
|
|
$
|
9,027
|
|
|
|
82.0%
|
|
Revenues and direct operating costs increased as a result of the
increased number of jobs, as well as an increase in the average
revenue and average direct operating costs per job. The increase
in jobs was attributable to increased demand for our services
and increased operating capacity. Increased average revenue per
job was due to increased pricing for our services and an
increase in the number of larger jobs. Average direct operating
costs per job increased as a result of increases in compensation
and the cost of materials used in our operations, as well as an
increase in the number of larger jobs. Selling, general and
administrative expense increased as a result of additional
expenses to support the expanding operations of the pressure
pumping segment. Significant capital expenditures have been
16
incurred to add capacity, expand our areas of operation and
modify and upgrade existing equipment. The increase in
depreciation expense was a result of the capital expenditures
discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling and Completion Fluids
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
30,760
|
|
|
$
|
49,181
|
|
|
|
(37.5
|
)%
|
Direct operating costs
|
|
$
|
25,391
|
|
|
$
|
38,186
|
|
|
|
(33.5
|
)%
|
Selling, general and administrative
|
|
$
|
2,397
|
|
|
$
|
2,440
|
|
|
|
(1.8
|
)%
|
Depreciation
|
|
$
|
696
|
|
|
$
|
637
|
|
|
|
9.3
|
%
|
Operating income
|
|
$
|
2,276
|
|
|
$
|
7,918
|
|
|
|
(71.3
|
)%
|
Total jobs
|
|
|
435
|
|
|
|
487
|
|
|
|
(10.7
|
)%
|
Average revenue per job
|
|
$
|
70.71
|
|
|
$
|
100.99
|
|
|
|
(30.0
|
)%
|
Average direct operating costs per
job
|
|
$
|
58.37
|
|
|
$
|
78.41
|
|
|
|
(25.6
|
)%
|
Capital expenditures
|
|
$
|
1,098
|
|
|
$
|
951
|
|
|
|
15.5
|
%
|
Revenues and direct operating costs decreased primarily as a
result of decreases in the average revenue and direct operating
costs per job and in the number of total jobs. Average revenue
and direct operating costs per job decreased primarily as a
result of a decrease in large jobs offshore in the Gulf of
Mexico.
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Natural Gas Production and Exploration
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except sales prices)
|
|
|
Revenues
|
|
$
|
10,259
|
|
|
$
|
8,520
|
|
|
|
20.4
|
%
|
Direct operating costs
|
|
$
|
3,278
|
|
|
$
|
2,655
|
|
|
|
23.5
|
%
|
Selling, general and administrative
|
|
$
|
648
|
|
|
$
|
638
|
|
|
|
1.6
|
%
|
Depreciation, depletion and
impairment
|
|
$
|
3,720
|
|
|
$
|
1,998
|
|
|
|
86.2
|
%
|
Operating income
|
|
$
|
2,613
|
|
|
$
|
3,229
|
|
|
|
(19.1
|
)%
|
Capital expenditures
|
|
$
|
5,032
|
|
|
$
|
4,861
|
|
|
|
3.5
|
%
|
Average net daily oil production
(Bbls)
|
|
|
1,064
|
|
|
|
792
|
|
|
|
34.3
|
%
|
Average net daily gas production
(Mcf)
|
|
|
5,438
|
|
|
|
5,030
|
|
|
|
8.1
|
%
|
Average oil sales price (per Bbl)
|
|
$
|
56.23
|
|
|
$
|
61.84
|
|
|
|
(9.1
|
)%
|
Average natural gas sales price
(per Mcf)
|
|
$
|
7.15
|
|
|
$
|
7.31
|
|
|
|
(2.2
|
)%
|
Revenues increased due to increases in the net daily production
of oil and natural gas which was partially offset by reductions
in the average sales price of oil and natural gas. Average net
daily oil and natural gas production increased primarily due to
the completion of wells subsequent to the first quarter of 2006.
Direct operating costs increased due primarily to approximately
$699,000 in costs associated with the abandonment of an
exploratory well. Depreciation, depletion and impairment expense
in the three months ended March 31, 2007 includes
approximately $530,000 incurred to impair certain oil and
natural gas properties. No impairments were recorded in the
three months ended March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
Selling, general and administrative
|
|
$
|
6,105
|
|
|
$
|
4,959
|
|
|
|
23.1
|
%
|
Depreciation
|
|
$
|
203
|
|
|
$
|
193
|
|
|
|
5.2
|
%
|
Other operating expenses
|
|
$
|
802
|
|
|
$
|
(271
|
)
|
|
|
N/A
|
%
|
Embezzlement costs, net of
recoveries
|
|
$
|
|
|
|
$
|
3,780
|
|
|
|
(100.0
|
)%
|
Interest income
|
|
$
|
369
|
|
|
$
|
2,351
|
|
|
|
(84.3
|
)%
|
Interest expense
|
|
$
|
763
|
|
|
$
|
58
|
|
|
|
1,215.5
|
%
|
Other income
|
|
$
|
94
|
|
|
$
|
84
|
|
|
|
11.9
|
%
|
Selling, general and administrative expense increased primarily
as a result of compensation expense related to transfers of
administrative staff to our corporate segment as well as
increases in legal and other professional fees.
17
Embezzlement costs, net of recoveries, include professional and
other costs incurred as a result of the embezzlement. Interest
income decreased due to the decrease in excess cash from the
first quarter of 2006 to the first quarter of 2007. During the
last three quarters of 2006, we utilized excess cash balances to
repurchase $450 million of our common stock. Interest
expense in 2007 increased due to borrowings that were
outstanding under our line of credit during the first quarter of
2007.
Recently
Issued Accounting Standards
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (FAS 157).
FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurement. FAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. FAS 157 will
be effective for us beginning in the quarter ending
March 31, 2008. The application of FAS 157 is not
expected to have a material impact to us.
Volatility
of Oil and Natural Gas Prices and its Impact on
Operations
Our revenue, profitability, and rate of growth are substantially
dependent upon prevailing prices for oil and natural gas, with
respect to all of our operating segments. For many years, oil
and natural gas prices and markets have been volatile. Prices
are affected by market supply and demand factors as well as
international military, political and economic conditions, and
the ability of OPEC to set and maintain production and price
targets. All of these factors are beyond our control. During
2006, the average market price of natural gas retreated from
record highs that were set in 2005. The price dropped to an
average of $6.94 per Mcf for the full year of 2006 compared
to $8.98 per Mcf for the full year of 2005. This decrease
resulted in our customers reducing their drilling activities
beginning in the fourth quarter of 2006 and continuing through
the first quarter of 2007. As a result of this decrease in
drilling activities by our customers, our average rigs operating
have declined to 255 in the first quarter of 2007 compared to
290 in the fourth quarter of 2006. We expect oil and natural gas
prices to continue to be volatile and to affect our financial
condition, operations and ability to access sources of capital.
A significant decrease in market prices for natural gas could
result in a material decrease in demand for drilling rigs and
reduction in our operation results.
Impact of
Inflation
We believe that inflation will not have a significant near-term
impact on our financial position.
|
|
ITEM 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We currently have exposure to interest rate market risk
associated with borrowings under our credit facility. The
revolving credit facility calls for periodic interest payments
at a floating rate ranging from LIBOR plus 0.625% to 1.0% or at
the prime rate. The applicable rate above LIBOR is based upon
our debt to capitalization ratio. Our exposure to interest rate
risk due to changes in the prime rate or LIBOR is not material.
We conduct some business in Canadian dollars through our
Canadian land-based drilling operations. The exchange rate
between Canadian dollars and U.S. dollars has fluctuated
during the last several years. If the value of the Canadian
dollar against the U.S. dollar weakens, revenues and
earnings of our Canadian operations will be reduced and the
value of our Canadian net assets will decline when they are
translated to U.S. dollars. This currency rate risk is not
material to our results of operations or financial condition.
|
|
ITEM 4.
|
Controls
and Procedures
|
Disclosure Controls and Procedures We
maintain disclosure controls and procedures (as such terms are
defined in
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) designed to ensure that
the information required to be disclosed in the reports that we
file with the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to our management,
18
including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), as appropriate, to
allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an
evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly
Report on
Form 10-Q.
Based on that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures were effective as of
March 31, 2007.
Changes in Internal Control Over Financial
Reporting There were no changes in our internal
control over financial reporting during our most recently
completed fiscal quarter that have materially affected or are
reasonably likely to materially affect our internal control over
financial reporting, as defined in
Rule 13a-15(f)
under the Exchange Act.
FORWARD
LOOKING STATEMENTS AND CAUTIONARY STATEMENTS FOR PURPOSES OF
THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES
LITIGATION REFORM ACT OF 1995
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Item 2 of this Report contains forward-looking statements
which are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. These statements include, without limitation, statements
relating to: liquidity; financing of operations; continued
volatility of oil and natural gas prices; source and sufficiency
of funds required for immediate capital needs and additional rig
acquisitions (if further opportunities arise); and other
matters. The words believes, plans,
intends, expected, estimates
or budgeted and similar expressions identify
forward-looking statements. The forward-looking statements are
based on certain assumptions and analyses we make in light of
our experience and our perception of historical trends, current
conditions, expected future developments and other factors we
believe are appropriate in the circumstances. We do not
undertake to update, revise or correct any of the
forward-looking information. Factors that could cause actual
results to differ materially from our expectations expressed in
the forward-looking statements include, but are not limited to,
the following:
|
|
|
|
|
Changes in prices and demand for oil and natural gas;
|
|
|
|
Changes in demand for contract drilling, pressure pumping and
drilling and completion fluids services;
|
|
|
|
Shortages of drill pipe and other drilling equipment;
|
|
|
|
Labor shortages, primarily qualified drilling personnel;
|
|
|
|
Effects of competition from other drilling contractors and
providers of pressure pumping and drilling and completion fluids
services;
|
|
|
|
Occurrence of operating hazards and uninsured losses inherent in
our business operations; and
|
|
|
|
Environmental and other governmental regulation.
|
For a more complete explanation of these factors and others, see
Risk Factors included as Item 1A in our Annual
Report on
Form 10-K
for the year ended December 31, 2006, beginning on
page 10.
You are cautioned not to place undue reliance on any of our
forward-looking statements, which speak only as of the date of
this Report or, in the case of documents incorporated by
reference, the date of those documents.
19
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
Legal
Proceedings
|
In December 2005, two purported derivative actions were filed in
Texas state court in Scurry County, Texas, and in May 2006, a
derivative action was filed in federal court in Lubbock, Texas,
in each case against our directors, alleging that the directors
breached their fiduciary duties to us as a result of alleged
failure to timely discover the embezzlement of approximately
$77.5 million by our former CFO. The Board of Directors
formed a special litigation committee to review and inquire
about these allegations and recommend our response, if any.
Further legal proceedings in these suits were stayed pending
completion of the work of the special litigation committee. The
lawsuits sought recovery on behalf of and for us and did not
seek recovery from us. In November 2006, the parties to all
three of the derivative actions reached an agreement to settle
the actions. After a preliminary hearing and notice to our
stockholders, the state court held a hearing, approved the
settlement, which required the implementation of certain
corporate governance measures, and signed a final judgment on
December 29, 2006. As contemplated by the settlement
agreement, the federal court entered a final judgment on
January 10, 2007. Pursuant to the terms of the settlement,
we paid a net amount of $230,000 to the attorneys for the
plaintiffs in the suits.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by
reference, as indicated:
|
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation, as amended (filed August 9, 2004 as
Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2004 and
incorporated herein by reference).
|
|
3
|
.2
|
|
Amendment to Restated Certificate
of Incorporation, as amended (filed August 9, 2004 as
Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2004 and
incorporated herein by reference).
|
|
3
|
.3
|
|
Amended and Restated Bylaws (filed
March 19, 2002 as Exhibit 3.2 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001 and
incorporated herein by reference).
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PATTERSON-UTI ENERGY, INC.
|
|
|
|
By:
|
/s/ Cloyce
A. Talbott
|
Cloyce A. Talbott
(Principal Executive Officer)
President & Chief Executive Officer
|
|
|
|
By:
|
/s/ John
E. Vollmer III
|
John E. Vollmer III
(Principal Financial and Accounting Officer)
Senior Vice President-Corporate Development,
Chief Financial Officer and Treasurer
DATED: May 7, 2007
21