PATTERSON UTI ENERGY INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-22664
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PATTERSON-UTI ENERGY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2504748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

P.O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS 79549
(Address of principal executive offices) (Zip Code)

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Registrant's telephone number, including area code: (915) 574-6300
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Securities Registered Pursuant to 12(b) of the Act: None
Securities Registered Pursuant to 12(g) of the Act:

(TITLE OF CLASS)
Common Stock, $.01 Par Value

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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 18, 2002 was $2,020,682,056,
based upon the average bid and asked prices of $28.29 and $28.56, respectively,
on the Nasdaq National Market.

As of March 18, 2002, the registrant had outstanding 77,613,794 shares of
common stock, $.01 par value, its only class of voting stock.

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FORWARD LOOKING STATEMENTS

Patterson-UTI Energy, Inc. ("Patterson-UTI" or the "Company") from time to
time makes written or oral forward-looking statements, including statements
contained in our filings with the SEC, press releases and reports to
stockholders. These forward-looking statements are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.

The words "believes," "budgeted," "expects," "project," "will," "could,"
"may," "plans," "intends," "strategy," or "anticipates," and similar expressions
are used to identify our forward-looking statements. We do not undertake to
update, revise or correct any of our forward-looking information. Readers are
cautioned that such forward-looking statements should be read in conjunction
with our disclosures under the heading: "Cautionary Statement for Purposes of
the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995" beginning on page 13.

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES.

OVERVIEW

Patterson-UTI is the second largest operator of land-based drilling rigs in
North America. Formed in 1978 and reincorporated in 1993 as a Delaware
corporation, we focus our contract drilling operations in:

- Texas,

- New Mexico,

- Oklahoma,

- Louisiana,

- Mississippi,

- Utah, and

- Western Canada (Alberta, British Columbia and Saskatchewan).

We currently have a drilling fleet of 319 drilling rigs, of which 287
operated in 2001. A drilling rig includes the structure, power source and
machinery necessary to cause a drill bit to penetrate rock to a depth desired by
the customer.

We provide drilling fluids, completion fluids and related services to oil
and natural gas producers in the Permian Basin of West Texas and Southeast New
Mexico, South Texas, East Texas, Oklahoma, the Gulf Coast regions of Texas and
Louisiana, and the Gulf of Mexico. 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 also provide pressure pumping
services in the Appalachian Basin. These services consist primarily of well
stimulation and cementing for completion of new wells and remedial work on
existing wells. To a lesser extent, we are engaged in the development,
exploration, acquisition and production of oil and natural gas. Our oil and
natural gas operations are not financially material and do not warrant
disclosure as a business segment.

PATTERSON/UTI MERGER

Patterson Energy, Inc. ("Patterson") and UTI Energy Corp. ("UTI")
consummated a merger on May 8, 2001, with Patterson as the surviving entity.
That transaction was a merger of equals and was treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and accounted for as a pooling of interests for financial accounting
purposes. Historical financial statements and related financial and statistical
data contained in this Report have been restated to provide for the retroactive
effect of the merger. At the time of the merger, the name of Patterson Energy,
Inc. was changed to "Patterson-UTI Energy, Inc."

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INDUSTRY SEGMENTS

Our revenues, operating profits and identifiable operating assets are
primarily attributable to three industry segments:

- contract drilling,

- drilling and completion fluids services, and

- pressure pumping services.

With respect to these three segments:

- the contract drilling segment had an operating loss in 1999 and operating
profits in 2000 and 2001,

- the drilling and completion fluids segment had operating losses in 1999
and 2000, and an operating profit in 2001, and

- the pressure pumping segment had operating profits in 1999, 2000 and
2001.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 14 of Notes to Consolidated Financial Statements
included as a part of Items 7 and 8, respectively, of this Report for financial
information pertaining to these industry segments.

CONTRACT DRILLING OPERATIONS

GENERAL. We market our contract drilling services to major and independent
oil and natural gas producers and operators. We currently own 319 drilling rigs
which are located in the following regions:

- 257 in Texas and New Mexico(1)

- 41 in Oklahoma,

- five in Utah, and

- 16 in Western Canada.
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(1) 144 in West Texas and New Mexico, 53 in South Texas, 39 in East Texas
and 21 in North Central Texas,

Of our drilling rigs, 33 are SCR electric rigs and 286 are mechanical rigs.
An electric rig differs from a mechanical rig in that the electric rig converts
the diesel power (the sole energy source for a mechanical rig) into electricity
to power the rig. Our drilling rigs have rated maximum depth capabilities
ranging from 4,000 feet to 30,000 feet.

Drilling rigs are typically equipped with:

- engines,

- drawworks or hoists,

- derricks or masts,

- pumps to circulate the drilling fluid,

- blowout preventers,

- drill string (pipe), and

- other related equipment.

Over time, many of the components on a drilling rig are replaced or
rebuilt. We spend significant funds each year on an ongoing program of modifying
and upgrading our drilling rigs to ensure that our drilling equipment is well
maintained and competitive.

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Depth of the well and drill site conditions are the principal factors in
determining the size of drilling rig used for a particular job. Our drilling
rigs are utilized for both exploratory and developmental drilling and can be
used for either vertical or horizontal drilling.

Our contract drilling operations depend on the availability of:

- drill pipe,

- bits,

- replacement parts and other related rig equipment,

- fuel, and

- qualified personnel,

some of which have been in short supply from time to time.

DRILLING CONTRACTS. Most of our drilling contracts are with established
customers and are obtained on a competitive bid or negotiated basis. Generally,
the contracts are entered into for short-term periods and cover the drilling of
a single well or a series of wells with the terms and rates depending upon the
nature and duration of the work, the equipment and services supplied and other
matters.

The drilling contracts obligate us to provide and operate a drilling rig
and to pay certain operating expenses, including wages of drilling personnel and
necessary maintenance expenses. The contracts are subject to termination by the
customer on short notice, usually upon payment of a fee. We generally indemnify
our customers against claims by our employees and claims arising from surface
pollution caused by spills of fuel, lubricants and other solvents within our
control. The customers generally indemnify us against claims arising from other
surface and subsurface pollution, except claims arising from our own gross
negligence.

The contracts provide for payment on a daywork, footage or turnkey basis,
or a combination thereof. In each case we provide the rig and crews. Our bids
for each contract depend upon:

- the location, depth and anticipated complexity of the well,

- the on-site drilling conditions,

- the equipment to be used,

- our estimate of the risks involved,

- the estimated duration of the work to be performed,

- the availability of drilling rigs, and

- other factors particular to each proposed well.

DAYWORK CONTRACTS

Under daywork contracts, we provide the drilling rig and crew to the
customer, also known as the operator. The customer then supervises the drilling
of the contracted well. Our compensation is based on a negotiated rate per day
during the period the drilling rig is utilized. We generally receive a lower
rate when the drilling rig is moving, or when drilling operations are
interrupted or restricted by adverse weather conditions or other conditions
beyond our control. In addition, daywork contracts typically provide for a lump
sum fee for the mobilization and demobilization of the drilling rig.

FOOTAGE CONTRACTS

Under footage contracts, we contract to drill a well to a certain depth
under specified conditions for a fixed price per foot. The customer provides
drilling fluids, casing, cementing and well design expertise. These contracts
require us to bear the cost of services and supplies that we provide until the
well has been drilled to the agreed depth. If we drill the well in less time
than estimated, then we have the opportunity to improve our

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margins over those that would be attainable under a daywork contract. Margins
are reduced and losses may be incurred if the well requires more days to drill
than estimated. Footage contracts generally contain greater risks for a drilling
contractor than daywork contracts. Under these contracts, the drilling
contractor assumes certain risks associated with loss of hole from fire,
blowouts and other risks.

TURNKEY CONTRACTS

Under turnkey contracts, we contract to drill a well to a certain depth
under specified conditions for a fixed fee. In a turnkey arrangement, we are
required to bear the costs of services, supplies and equipment beyond those
typically provided under a footage contract. In addition to the drilling rig and
crew, we are required to provide the drilling and completion fluids, casing,
cementing and the technical well design and engineering services during the
drilling process. We would also assume certain risks associated with drilling
the well such as fires, blowouts, cratering of the well bore and other such
risks. Compensation occurs only when the agreed scope of the work has been
completed which requires us to make significant up-front working capital
commitments prior to receiving payments under a turnkey drilling contract. Under
a turnkey contract we have the opportunity to improve our margins if the
drilling process goes as expected and there are no complications or time delays.
However, given the increased exposure we have under a turnkey contract, margins
can be significantly reduced and losses incurred if complications or delays
occur during the drilling process. Turnkey contracts generally involve the
highest degree of risk among the three different types of drilling contracts:
daywork, footage and turnkey.

The following table sets forth the approximate percentage of our drilling
revenues attributable to daywork, footage and turnkey contracts for each of the
last three years:

CONTRACT DRILLING ACTIVITY. The following table sets forth certain
information regarding our contract drilling activity for each of the last three
years:

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(1) Rig utilization is based on a 365-day year for rigs owned during 1999 and
2001, and a 366-day year for rigs owned in 2000. A rig is utilized when it
is operating or being moved, assembled or dismantled under contract.

DRILLING RIGS AND RELATED EQUIPMENT. The following table provides certain
information concerning our drilling rigs as of December 31, 2001:

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At December 31, 2001, we owned 234 trucks and 271 trailers used to rig
down, transport and rig up our drilling rigs. This reduces Patterson-UTI's
dependency upon third parties for these services and enhances the efficiency of
our contract drilling operations particularly in periods of high drilling rig
utilization.

Most repair work and overhaul of our drilling rig equipment is performed at
our yard facilities located in Texas, New Mexico, Oklahoma and Western Canada.

DRILLING AND COMPLETION FLUIDS OPERATIONS

GENERAL. We provide drilling fluids, completion fluids and related
services to oil and natural gas producers in the Permian Basin of West Texas and
Southeast New Mexico, South Texas, East Texas, Oklahoma, the Gulf Coast regions
of Texas and Louisiana and the Gulf of Mexico. We serve our offshore customers
through seven stockpoints located along the Gulf of Mexico in Texas and
Louisiana, and our land-based customers through seven stockpoints in Louisiana,
Texas, Oklahoma and New Mexico.

DRILLING FLUIDS. Our product sales are supported by a technical service
organization dedicated to product application on the customer's wellsite.
Drilling fluid products and systems are used to cool and lubricate the drill bit
during drilling operations, contain formation pressures (thereby minimizing
blowout risk), suspend and remove rock cuttings from the hole and maintain the
stability of the wellbore. Technical services are provided to ensure that the
products and systems are applied effectively to optimize drilling operations.

COMPLETION FLUIDS. After a well is drilled it undergoes the completion
process wherein the well casing is set and cemented in place. At that point, the
drilling fluid services are complete, and the drilling fluids are circulated out
of the well and replaced with completion fluids. Completion fluids, also known
as clear brine fluids, are solids-free, clear salt solutions that have high
specific gravities. Combined with a range of specialty chemicals, these fluids
are used by operators to control bottom-hole pressures and to meet a well's
specific corrosion, inhibition, viscosity, and fluid loss requirements during
the completion and workover phases.

RAW MATERIALS. Our drilling and completion fluids operations depend on the
availability of the following raw materials:

We obtain these raw materials through purchases made on the spot market and
supply contracts with producers of these raw materials.

BARITE GRINDING FACILITY. We own and operate a barite grinding facility
equipped with two barite grinding mills located in Houma, Louisiana. We believe
the ability to process our own barite is critical to being competitive on the
Gulf Coast and in the Gulf of Mexico since barite accounts for a substantial
portion of the dollar volume for drilling fluids jobs in both of these areas.
Our grinding facility allows us to grind raw barite into the powder additive
used in producing drilling fluids. Owning this facility reduces our dependence
upon third parties in our supply of barite. Without the grinding mills we would
be required to purchase processed barite from third parties, including some of
our competitors, which could result in higher production costs and less
efficient operations.

OTHER EQUIPMENT. We own 28 trucks and 118 trailers and lease another 36
trucks used to transport drilling and completion fluids and related equipment.

PRESSURE PUMPING OPERATIONS

GENERAL. We provide pressure pumping services in the Appalachian Basin.
Pressure pumping services consist primarily of well stimulation and cementing
for the completion of new wells and remedial work on existing wells. Most wells
drilled in the Appalachian Basin require some form of fracturing or other

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stimulation to enhance the flow of oil and natural gas which is accomplished by
pumping fluids under pressure into the well bore. Generally, Appalachian Basin
wells require cementing services before production commences. Cementing is the
process of inserting material between the wall of the well bore and the casing
to center and stabilize the casing.

EQUIPMENT. Patterson-UTI continuously maintains its pressure pumping
equipment. Virtually all of the pressure pumping equipment is in use on a
regular basis. As of December 31, 2001, Patterson-UTI operated the following
pressure pumping equipment:

- 16 cement pumper trucks,

- 22 fracturing pumper trucks,

- 19 nitrogen pumper trucks,

- 11 blender trucks,

- 8 bulk acid trucks,

- 24 bulk cement trucks,

- 6 bulk nitrogen trucks,

- 18 bulk sand trucks, and

- 6 connection trucks.

CUSTOMERS

The customers of each of our three business segments are producers or
operators of oil and natural gas. Our customer base includes both major and
independent oil and natural gas companies within the oil and gas industry.
During 2001, no single customer accounted for 10% or more of our consolidated
operating revenues.

COMPETITION

CONTRACT DRILLING AND PRESSURE PUMPING BUSINESSES. Our land drilling and
pressure pumping businesses are intensely competitive due to the fact that the
supply of available land drilling rigs and pressure pumping equipment exceeds
the demand for those rigs and equipment. This excess capacity has resulted in
substantial competition for drilling and pressure pumping contracts. The fact
that drilling rigs and pressure pumping equipment are mobile and can be moved
from one market to another in response to market conditions heightens the
competition in the industry.

Patterson-UTI believes that price competition for drilling and pressure
pumping contracts will continue for the foreseeable future due to the existence
of available rigs and pressure pumping equipment. In addition, some of our
competitors have greater financial resources than we do which may enable them
to:

- better withstand industry downturns,

- compete more effectively on the basis of price, and

- acquire existing rigs or equipment or build new rigs or equipment.

In recent years, many drilling and pressure pumping companies have
consolidated or merged with other companies. Although this consolidation has
decreased the total number of competitors, we believe the competition for
drilling and pressure pumping services will continue to be intense.

DRILLING AND COMPLETION FLUIDS BUSINESS. The drilling and completion
fluids services industry is highly competitive. Price is generally the most
important competitive factor in the industry. Other competitive factors include
the availability of chemicals and experienced personnel, the reputation of the
fluids services provider in the drilling industry and our relationship with
existing customers. Some of our competitors have substantially greater resources
and longer operating histories than we have. We believe that competition for
drilling and completion fluids service contracts will continue to be intense.
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GOVERNMENT AND ENVIRONMENTAL REGULATION

Patterson-UTI's operations and facilities are subject to numerous state,
federal and foreign (Canadian) laws, rules and regulations, including, but
limited to:

- drilling of oil and gas wells,

- containment and disposal of hazardous materials, oilfield waste, other
waste materials and acids,

- use of underground storage tanks, and

- use of underground injection wells.

To date, we have not been required to expend significant resources in order
to satisfy applicable environmental laws and regulations. We do not anticipate
any material capital expenditures for environmental control facilities or
extraordinary expenditures to comply with compliance with environmental rules
and regulations in the foreseeable future. However, compliance costs under
existing laws or under any new requirements could become material and we could
incur liability for noncompliance.

Our business is generally affected by political developments and by
federal, state, foreign and local laws and regulations, which relate to the oil
and natural gas industry. The adoption of laws and regulations affecting the oil
and natural gas industry for economic, environmental and other policy reasons
could increase costs relating to drilling and production. They could have an
adverse effect on our operations. Several state and federal environmental laws
and regulations currently apply to our operations and may become more stringent
in the future.

We have utilized operating and disposal practices that were or are
currently standard in the industry. However, hydrocarbons and other materials
may have been disposed of or released in or under properties currently or
formerly owned or operated by us or our predecessors in interest. In addition,
some of these properties have been operated by third parties over whom we have
no control either as to such entities' treatment of hydrocarbon and other
materials or the manner in which such materials may have been disposed of or
released.

The federal Comprehensive Environmental Response Compensation and Liability
Act of 1980, commonly known as CERCLA, and comparable state statutes impose
strict liability on:

- owners and operators of sites, and

- persons who disposed of or arranged for the disposal of "hazardous
substances" found at sites.

The federal Resource Conservation and Recovery Act and comparable state
statutes govern the disposal of "hazardous wastes." Although CERCLA currently
excludes petroleum from the definition of "hazardous substances," and the
Resource Conservation and Recovery Act also excludes certain classes of
exploration and production wastes from regulation, such exemptions by Congress
under both CERCLA and the Resource Conservation and Recovery Act may be deleted,
limited or modified in the future. If such changes are made to CERCLA and/or the
Resource Conservation and Recovery Act, we could be required to remove and
remediate previously disposed of materials (including materials disposed of or
released by prior owners or operators) from properties (including ground water
contaminated with hydrocarbons) and to perform removal or remedial actions to
prevent future contamination.

The Federal Water Pollution Control Act and the Oil Pollution Act of 1990
and implementing regulations govern:

- the prevention of discharges, including oil and produced water spills,
and

- liability for drainage into waters.

The Oil Pollution Act is more comprehensive and stringent than previous oil
pollution liability and prevention laws. It imposes strict liability for a
comprehensive and expansive list of damages from an oil spill into waters from
facilities. Liability may be imposed for oil removal costs and a variety of
public and private

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damages. Penalties may also be imposed for violation of federal safety,
construction and operating regulations, and for failure to report a spill or to
cooperate fully in a clean-up.

The Oil Pollution Act also expands the authority and capability of the
federal government to direct and manage oil spill clean-up and operations, and
requires operators to prepare oil spill response plans in cases where it can
reasonably be expected that substantial harm will be done to the environment by
discharges on or into navigable waters. We have spill prevention control and
countermeasure plans in place for our oil and natural gas properties in each of
the areas in which we operate and for each of the stockpoints operated by our
drilling and completion fluids business. Failure to comply with ongoing
requirements or inadequate cooperation during a spill event may subject a
responsible party, such as Patterson-UTI, to civil or criminal actions. Although
the liability for owners and operators is the same under the Federal Water
Pollution Act, the damages recoverable under the Oil Pollution Act are
potentially much greater and can include natural resource damages.

Our operations are also subject to federal, state and local regulations for
the control of air emissions. The federal Clean Air Act and various state and
local laws impose certain air quality requirements on Patterson-UTI. Amendments
to the Clean Air Act revised the definition of "major source" such that
emissions from both wellhead and associated equipment involved in oil and
natural gas production may be added to determine if a source is a "major
source." As a consequence, more facilities may become major sources and thus
would be required to obtain operating permits. This permitting process may
require capital expenditures in order to comply with permit limits.

RISKS AND INSURANCE

Our operations are subject to the many hazards inherent in the drilling
business, including:

- accidents at the work location,

- blow-outs,

- cratering,

- fires, and

- explosions.

These hazards could cause:

- personal injury or death,

- suspension of drilling operations, or

- serious damage or destruction of the equipment involved and, in addition
to environmental damage, could cause substantial damage to producing
formations and surrounding areas.

Damage to the environment, including property contamination in the form of
either soil or ground water contamination, could also result from our
operations, particularly through:

- oil or produced water spillage,

- natural gas leaks, and

- extensive, uncontrolled fires.

In addition, we could become subject to liability for reservoir damages.
The occurrence of a significant event, including pollution or environmental
damages, could materially affect our operations and financial condition.

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As a protection against operating hazards, we maintain insurance coverage
we believe to be adequate, including:

- all-risk physical damages,

- employer's liability,

- commercial general liability, and

- workers compensation insurance.

We believe that we are adequately insured for public liability and property
damage to others with respect to our operations. However, such insurance may not
be sufficient to protect us against liability for all consequences of:

- personal injury,

- well disasters,

- extensive fire damage,

- damage to the environment, or

- other hazards.

We also carry insurance to cover major physical damage to or loss of our
drilling rigs. However, we do not carry insurance against loss of earnings
resulting from such damage or loss. In view of the difficulties that may be
encountered in renewing such insurance at reasonable rates, no assurance can be
given that:

- we will be able to maintain the type and amount of coverage that we
believe to be adequate at reasonable rates, or

- any particular types of coverage will be available.

In addition to insurance coverage, we also attempt to obtain
indemnification from our customers for certain of the risks. These indemnity
agreements typically require our customers to hold us harmless in the event of
loss of production or reservoir damage. These contractual indemnifications may
not be supported by adequate insurance maintained by the customer.

EMPLOYEES

We employed approximately 5,250 full-time persons (230 office personnel and
5,020 field personnel) at December 31, 2001. The number of field employees
fluctuates depending on the current and expected demand for the services we
provide. We consider our employee relations to be satisfactory. None of our
employees is represented by a union.

SEASONALITY

Seasonality does not significantly affect our overall operations. However,
our pressure pumping division in Appalachia and our drilling operations in
Canada are subject to slow periods of activity during the spring thaw. In
addition, our drilling operations in Canada are subject to slow periods of
activity during the fall.

RAW MATERIALS AND SUBCONTRACTORS

Patterson-UTI uses many suppliers of raw materials and services. These
materials and services have been and continue to be available. We also utilize
numerous independent subcontractors from various trades.

INCORPORATION BY REFERENCE

The various factors disclosed under the caption "Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private Litigation Reform Act of
1995," beginning on page 13 of this Report, are

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incorporated by this reference into Items 1 and 2 of this Report. Readers of
this Report should review those factors in conjunction with their review of
these Items 1 and 2.

CORPORATE HEADQUARTERS, FIELD OFFICES AND OTHER FACILITIES

Our corporate headquarters are located in Snyder, Texas. We also have a
number of offices, yard and stockpoint facilities located in our various
operating areas.

Our corporate headquarters are located at 4510 Lamesa Highway, Snyder,
Texas, and our telephone number at that address is (915) 574-6300. There are a
number of improvements at our headquarters, including:

- an office building with approximately 16,000 square feet, with an
additional building currently under construction that will add another
18,000 square feet of office space and storage,

- a shop facility with approximately 7,000 square feet used for drilling
equipment repairs and metal fabrication,

- a truck shop facility with approximately 10,000 square feet used to
maintain, overhaul and repair our truck fleet,

- an engine shop facility with approximately 20,000 square feet used to
overhaul and repair the engines used to power our drilling rigs, and

- an open-ended metal storage facility with approximately 10,200 square
feet.

We have regional administrative offices, yard and stockpoint facilities in
many of the areas in which we operate. The facilities are primarily used to
support the day-to-day operations, including the repair and maintenance of
equipment as well as the storage of equipment, inventory and supplies and to
facilitate administrative responsibilities and sales.

CONTRACT DRILLING OPERATIONS

Our drilling operations are supported by several administrative offices and
yard facilities located throughout our areas of operations including:

- Texas,

- New Mexico,

- Oklahoma,

- Utah, and

- Western Canada.

DRILLING AND COMPLETION FLUIDS

Our drilling and completion fluids are supported by several administrative
offices and stockpoint facilities located throughout our areas of operations
including:

- Texas,

- Louisiana,

- New Mexico, and

- Oklahoma.

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PRESSURE PUMPING

Our pressure pumping operations are supported by several offices and yard
facilities located throughout our areas of operations including:

- Pennsylvania,

- Ohio,

- Kentucky, and

- New York.

We own our headquarters in Snyder and lease the majority of our other
facilities. We do not believe that any of these other facilities are
individually material to our operations. We believe that our existing facilities
are suitable and adequate to meet our needs.

ITEM 3. LEGAL PROCEEDINGS.

Westfort Energy LTD and Westfort Energy (US) LTD f/k/a Canadian Delta, Inc.
("Westfort"), filed a lawsuit against two Patterson-UTI subsidiaries, Patterson
Petroleum LP and Patterson Drilling Company LP, in the Circuit Court, Rankin
County, Mississippi, Case No. 2002-18, on January 28, 2002. The lawsuit relates
to a letter agreement entered into in July 2000 between Patterson Petroleum and
Westfort concerning the drilling of a daywork well in Mississippi. This lawsuit
was filed by Westfort after Patterson Petroleum made demand on Westfort for
payment of the contract drilling services.

In this lawsuit, Westfort alleges breach of contract, fraud and negligence
causes of action. Westfort seeks alleged monetary damages, the return of shares
of Westfort stock, unspecified damages from alleged lost profits, lost use of
income stream and additional operating expenses, along with alleged punitive
damages to be determined by the jury, but not less than 25% of Patterson's net
worth. We intend to vigorously contest the allegations made by Westfort and
assert claims against Westfort, including for the monies owed Patterson under
the letter agreement in the amount of approximately $5,075,000.

In addition to the Westfort lawsuit, we are party to various legal
proceedings arising in the normal course of our business. We do not believe that
the outcome of these proceedings, either individually or in the aggregate, will
have a material adverse effect on our financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

We include the following cautionary statement in accordance with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 for
any forward-looking statement made by us, or on our behalf. The factors
identified in this cautionary statement are important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us, or on our behalf. Where any such forward-looking statement includes a
statement of the assumptions or bases underlying such forward-looking statement,
we caution that, while we believe such assumptions or bases to be reasonable and
make them in good faith, assumed facts or bases almost always vary from actual
results. The differences between assumed facts or bases and actual results can
be material, depending upon the circumstances.

Where, in any forward-looking statement, Patterson-UTI, or our management,
expresses an expectation or belief as to the future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis.
However, there can be no assurance that the statement of expectation or belief
will result, or be achieved or accomplished. Taking this into account, the
following are identified as important risk factors that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, Patterson-UTI:

PATTERSON-UTI IS DEPENDENT ON THE OIL AND NATURAL GAS INDUSTRY AND MARKET PRICES
FOR OIL AND NATURAL GAS. DECLINES IN OIL AND NATURAL GAS PRICES HAVE ADVERSELY
AFFECTED OUR OPERATIONS.

Our revenue, profitability and rate of growth are substantially dependent
upon prevailing prices for oil and natural gas. In recent years, oil and natural
gas prices and, therefore, the level of drilling, exploration, development and
production, have been extremely volatile. Prices are affected by:

- market supply and demand,

- international military, political and economic conditions, and

- the ability of the Organization of Petroleum Exporting Countries,
commonly known as OPEC, to set and maintain production and price targets.

All of these factors are beyond our control. Beginning in the third quarter
of 2001 and continuing through the date of this report, commodity price
uncertainty has adversely affected our operations. We expect oil and natural gas
prices to continue to be volatile and to affect our financial condition and
operations and ability to access sources of capital.

INDUSTRY CONDITIONS FOR CONTRACT DRILLING SERVICES HAVE BEEN POOR FOR MUCH OF
THE TIME SINCE 1982.

The contract drilling business experienced increased demand for drilling
services from 1995 through most of 1997 due to higher oil and natural gas
prices. The increase in demand returned, beginning in mid-1999 and continued
through the second quarter of 2001. However, except for those periods and other
occasional upturns, the market for onshore contract drilling services and the
other services we provide has generally been depressed since 1982, when the
number of operable land drilling rigs was at record levels. Since this time
there have been substantially more drilling rigs available than necessary to
meet demand in most operational and geographic segments of the North American
land drilling industry. As a result, drilling contractors have had difficulty
sustaining profit margins.

In addition to adverse effects that future declines in demand could have on
Patterson-UTI, ongoing factors which could adversely affect utilization rates
and pricing, even in an environment of stronger 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

- new construction of drilling rigs.

13

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.

SHORTAGES OF DRILL PIPE, REPLACEMENT PARTS AND OTHER RELATED RIG EQUIPMENT
ADVERSELY AFFECTS PATTERSON-UTI'S OPERATING RESULTS.

During periods of increased demand for drilling services, the industry has
experienced shortages of drill pipe, replacement parts and other related rig
equipment. These shortages caused the price of these items to increase
significantly and required that orders for the items be placed well in advance
of expected use. These price increases and delays in delivery caused us to
substantially increase capital expenditures in our contract drilling segment.
Severe shortages could impair our ability to operate our drilling rigs.

THE VARIOUS BUSINESS SEGMENTS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE WITH
EXCESS CAPACITY WHICH MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

Our land drilling and pressure pumping businesses are intensely competitive
due to the fact that the supply of available land drilling rigs and pressure
pumping equipment exceeds the demand for those rigs and equipment. This excess
capacity has resulted in substantial competition for drilling and pressure
pumping contracts. The fact that drilling rigs and pressure pumping equipment
are mobile and can be moved from one market to another in response to market
conditions heightens the competition in the industry.

Patterson-UTI believes that price competition for drilling and pressure
pumping contracts will continue for the foreseeable future due to the existence
of available rigs and pressure pumping equipment. In addition, some of our
competitors have greater financial resources than we do which may enable them
to:

- better withstand industry downturns,

- compete more effectively on the basis of price, and

- acquire existing rigs or equipment or build new rigs or equipment.

In recent years, many drilling and pressure pumping companies have
consolidated or merged with other companies. Although this consolidation has
decreased the total number of competitors, we believe the competition for
drilling and pressure pumping services will continue to be intense.

The drilling and completion fluids services industry is highly competitive.
Price is generally the most important competitive factor in the industry. Other
competitive factors include the availability of chemicals and experienced
personnel, the reputation of the fluids services provider in the drilling
industry and our relationship with existing customers. Some of our competitors
have substantially greater resources and longer operating histories than we
have. We believe that competition for drilling and completion fluids service
contracts will continue to be intense.

LABOR SHORTAGES ADVERSELY AFFECT OUR OPERATING RESULTS.

During periods of increased demand for contract drilling services, the
industry experiences shortages of qualified drilling rig personnel. During these
periods, our ability to attract and retain sufficient qualified personnel to
market and operate our drilling rigs is adversely affected. Labor shortages also
cause wage increases, which impact our operating margins.

CONTINUED GROWTH OF PATTERSON-UTI THROUGH RIG ACQUISITION IS NOT ASSURED.

We have increased our drilling rig fleet over the past several years
through mergers and acquisitions. In May 2001, UTI merged with Patterson in a
so-called "merger of equals." The combination of the two companies doubled the
number of our drilling rigs. The land drilling industry has experienced
significant consolidation over the past several years, and there can be no
assurance that acquisition opportunities will continue to be available.
Additionally, we are likely to continue to face intense competition from other
companies for available acquisition opportunities.

14

There can be no assurance that we would:

- have sufficient capital resources to complete additional acquisitions,

- successfully integrate acquired operations and assets,

- be able to manage effectively the growth and increased size,

- be successful in deploying idle or stacked rigs,

- be able to maintain the crews and market share attributable to operating
drilling rigs acquired, or

- be successful in improving our financial condition, results of operation,
business or prospects in any material manner as a result of any completed
acquisition.

We may incur substantial indebtedness to finance future acquisitions and
also may issue equity securities or convertible securities in connection with
any such acquisitions. Debt service requirements could represent a significant
burden on our results of operations and financial condition and the issuance of
additional equity could be dilutive to our existing stockholders. Also,
continued growth could strain our management, operations, employees and
resources.

THE NATURE OF OUR BUSINESS OPERATIONS PRESENTS INHERENT RISKS OF LOSS THAT, IF
NOT INSURED OR INDEMNIFIED AGAINST COULD ADVERSELY AFFECT PATTERSON-UTI'S
OPERATING RESULTS.

Our operations are subject to many hazards inherent in the contract
drilling, pressure pumping and drilling and completion fluids businesses, which
in turn could cause personal injury or death, work stoppage or serious damage to
our equipment. Our operations could also cause environmental and reservoir
damages. We maintain insurance coverage and have indemnification agreements with
many of our customers. However, there is no assurance that such insurance or
indemnification agreements would adequately protect Patterson-UTI against
liability from all consequences of the hazards. Additionally, there can be no
assurance that insurance would be available to cover any or all of these risks,
or, even if available, that insurance premiums or other costs would not rise
significantly in the future, so as to make such insurance prohibitive.

VIOLATIONS OF ENVIRONMENTAL LAWS AND REGULATIONS COULD MATERIALLY ADVERSELY
AFFECT PATTERSON-UTI OPERATING RESULTS.

The drilling of oil and natural gas wells is subject to various state,
federal and foreign laws, rules and regulations. The cost to Patterson-UTI of
compliance with these laws and regulations could be substantial. Failure to
comply with these requirements could subject Patterson-UTI to substantial civil
and criminal penalties. In addition, federal law imposes a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages from such spills. Patterson-UTI, as an owner and operator
of land-based drilling rigs may be deemed to be a responsible party under
federal law. Our operations and facilities are subject to numerous state and
federal environmental laws, rules and regulations, including, without
limitation, laws concerning the containment and disposal of hazardous
substances, oil field waste and other waste materials, the use of underground
storage tanks and the use of underground injection wells. We generally try to
require our customers to contractually assume responsibility for compliance with
environmental regulations, however, we are not always successful in shifting all
of those risks, nor is there any assurance that the applicable customer will be
financially able to bear those risks assumed.

SOME OF OUR CONTRACT DRILLING SERVICES ARE DONE UNDER TURNKEY AND FOOTAGE
CONTRACTS, WHICH ARE FINANCIALLY RISKY.

A portion of our contract drilling is done under turnkey contracts and
footage contracts, which involve significant risks. Under turnkey drilling
contracts, we contract to drill a well to a certain depth under specified
conditions for a fixed price. Under footage contracts, we contract to drill a
well to a certain depth under specified conditions at a fixed price per foot.
The risk to us under these types of drilling contracts are greater than on a
well drilled on a daywork basis. Unlike daywork contracts, we must bear the cost
of performing

15

drilling services until the target depth is reached. We must also make
significant up-front working capital commitments prior to receiving payment. In
addition, we must assume most of the risk associated with the drilling
operations, generally assumed by the operator of the well on a daywork contract,
including blowouts, loss of hole from fire, machinery breakdowns and abnormal
drilling conditions. Accordingly, if severe drilling problems are encountered in
drilling wells under such contracts, we could suffer substantial losses.

ANTI-TAKEOVER MEASURES IN OUR CHARTER DOCUMENTS AND UNDER STATE LAW COULD
DISCOURAGE AN ACQUISITION OF PATTERSON-UTI AND THEREBY AFFECT THE RELATED
PURCHASE PRICE.

Patterson-UTI, as a Delaware corporation, is subject to the Delaware
General Corporation Law, including Section 203, an anti-takeover law enacted in
1988. We have also enacted certain anti-takeover measures, including a
stockholders' rights plan. In addition, our board of directors has the authority
to issue up to one million shares of preferred stock and to determine the price,
rights (including voting rights), conversion ratios, preferences and privileges
of that stock without further vote or action by the holders of the common stock.
As a result of these measures and others, potential acquirers of Patterson-UTI
may find it more difficult or be discouraged from attempting to effect an
acquisition transaction with us. This may deprive holders of our securities of
certain opportunities to sell or otherwise dispose of the securities at
above-market prices pursuant to any such transactions.

WE HAVE PAID NO DIVIDENDS ON OUR COMMON STOCK AND HAVE NO PLANS TO PAY
DIVIDENDS.

We have not declared or paid cash dividends on our common shares in the
past. We do not expect to declare or pay any cash dividends on our common stock
in the foreseeable future. The terms of our existing credit facility limit the
payment of dividends without the prior written consent of the lenders.

16

PART II

ITEM 5. MARKET FOR OUR COMMON SHARES AND RELATED STOCKHOLDER MATTERS.

Our common stock, par value $0.01 per share is publicly traded on the
Nasdaq National Market and is quoted under the symbol "PTEN." In November 2001,
our common stock was added to the S&P MidCap 400 Index. Our common stock is also
included in several other market indexes.

The following table sets forth the high and low closing prices of our
common shares for the periods indicated:

As of March 1, 2002, there were approximately 330 holders of record
(approximately 23,400 beneficial holders) of our common shares.

We have not declared or paid cash dividends on our common shares in the
past and do not expect to declare or pay any cash dividends on our common stock
in the foreseeable future. Instead, we intend to retain our earnings to support
the operations and growth of our business. Any future cash dividends would
depend on future earnings, capital requirements, financial condition and other
factors deemed relevant by the board of directors. In addition, the terms of our
existing credit facility limit the payment of dividends without the prior
written consent of the lenders.

During 2001, we issued a total of 1,260,070 common shares and three-year
warrants to acquire 325,000 common shares that were not registered under the
Securities Act of 1933, as amended. The shares and warrants were issued as
follows:

- We issued a total of 810,070 common shares during January 2001 as partial
consideration for the acquisition of Jones Drilling Corporation and the
assets of three related entities.

- The remaining 450,000 common shares and warrants to acquire 325,000
shares were issued during December 2001, as partial consideration for the
acquisition of certain assets of Cleere Drilling Company.

No underwriter was involved in either of the transactions and no sales
commissions, fees or similar compensation were paid by us to any person in
connection with the issuance of the shares. We believe that the issuance of the
shares in each instance was exempt from the registration requirements of Section
5 of the Securities Act by virtue of Section 4(2) of the Securities Act and/or
under Rule 506 of Regulation D promulgated by the SEC thereunder.

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ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated financial data of Patterson-UTI as of December
31, 2001, 2000, 1999, 1998 and 1997 and for each of the five years then ended
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes thereto, included as Items 7 and 8, respectively,
of this document. Historical financial statements as presented herein, have been
restated to provide for the retroactive effect of the merger with UTI Energy
Corp., on May 8, 2001.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This Item 7 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 capital needs and additional
rig acquisitions (if further opportunities arise),

- future utilization of net operating loss carryforwards,

- impact of inflation on our financial position and on our earnings per
share, and

- other such matters.

The words "believes," "budgeted," "expects," "project," "will," "could,"
"may," "plans," "intends," "strategy," or "anticipates," and similar expressions
are used to identify our forward-looking statements. We do not undertake to
update, revise or correct any of our forward-looking information. Readers are
cautioned that such forward-looking statements should be read in conjunction
with our disclosures under the heading: "Cautionary Statement for Purposes of
the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995" beginning on page 13.

Off balance sheet arrangements. We have no off balance sheet arrangements
other than letters of credit of $20.0 million at December 31, 2001, maintained
for the benefit of various insurance companies as collateral for retrospective
premiums and retained losses which would become payable under the terms of the
underlying insurance contracts. These letters of credit expire variously during
each calendar year, but provide for an indefinite number of annual extensions of
the expiration date. No amounts have been drawn under the letters of credit.

Trading and investing. We do not engage in trading activities that include
high-risk securities, such as derivatives and non-exchange traded contracts. We
invest cash on hand only in highly liquid, short-term investments such as
overnight deposits, money markets and highly rated municipal and commercial
bonds.

Description of business. We are a leading provider of land-based contract
drilling services to major and independent oil and natural gas producers and
operators in Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Utah and
Western Canada. We own the second largest land-based drilling fleet in North
America with 319 drilling rigs. We provide drilling fluids, completion fluids
and related services to oil and natural gas producers in the Permian Basin of
West Texas and Southeast New Mexico, South Texas, East Texas, Oklahoma, the Gulf
Coast regions of Texas and Louisiana, and the Gulf of Mexico. 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 also
provide pressure pumping services in the Appalachian Basin. These services
consist primarily of well stimulation and cementing for completion of new wells
and remedial work on existing wells. To a lesser extent, we are engaged in the
development, exploration, acquisition and production of oil and natural gas. Our
oil and natural gas operations are not financially material and do not warrant
disclosure as a business segment.

The contract drilling business experienced increased demand for drilling
services from 1995 through most of 1997 due to higher oil and natural gas
prices. The increase in demand returned, beginning in mid-1999 and continued
through the second quarter of 2001. However, except for those periods and other
occasional upturns, the market for onshore contract drilling services and the
other services we provide has generally been depressed since 1982, when the
number of operable land drilling rigs was at record levels. Since this time
there have been substantially more drilling rigs available than necessary to
meet demand in most operational and

19

geographic segments of the North American land drilling industry. As a result,
drilling contractors have had difficulty sustaining profit margins.

In addition to adverse effects that future declines in demand could have on
Patterson-UTI, ongoing factors which could adversely affect utilization rates
and pricing, even in an environment of stronger 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

- new construction of 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.

Management estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Revenue recognition. Generally, revenues are recognized when services are
performed. We follow the percentage-of-completion method of accounting for
footage contract drilling arrangements. Under this method, all drilling
revenues, direct costs and appropriate portions of indirect costs, related to
the contracts in progress, are recognized as contract drilling services are
performed. Due to the nature of turnkey contract drilling arrangements and risks
therein, we follow the completed contract method of accounting for such
arrangements. Under this method, all drilling advances, direct costs and
appropriate portions of indirect costs (including maintenance and repairs)
related to the contracts in progress are deferred and recognized as revenues and
expenses in the period the contracts are completed. Provisions for losses on
incomplete or in-process contracts are made when estimated total costs are
expected to exceed total estimated revenues.

Related party transactions. In 2001, 2000 and 1999, we leased a 1981 Beech
King-Air 90 airplane owned by an affiliate of our Chief Executive Officer and
our President/Chief Operating Officer. Under the terms of the lease, we paid a
monthly rental of $9,200 and our proportionate share of the costs of fuel,
insurance, taxes and maintenance of the aircraft. We paid approximately
$212,283, $193,769 and $222,583 for the lease of the airplane during 2001, 2000
and 1999, respectively.

An affiliate acted as the first purchaser of oil produced from certain
leases we operated during 1999. Sales of oil to that entity, both royalty and
working interest were approximately $8.4 million. There were no sales of oil to
that entity in 2001 or 2000.

The Company operates certain oil and natural gas properties in which our
Chief Executive Officer, our President/Chief Operating Officer, our Chief
Financial Officer and other affiliated persons or entities, purchased a joint
interest ownership with us and other industry partners. We made oil and natural
gas production payments (net of royalty) of $8.3 million, $13.4 million and $6.1
million from these properties in 2001, 2000 and 1999, respectively, to the
aforementioned persons or entities. These persons or entities reimbursed us for
joint operating costs of $5.9 million, $8.0 million and $5.9 million in 2001,
2000 and 1999, respectively.

In 2001, we paid approximately $387,000 to an entity owned by a relative of
our President/Chief Operating Officer for certain equipment and metal
fabrication services. One of our directors is a director and an officer of a
company from which we purchased drill pipe, materials and supplies totalling
approximately $22.0 million in 2001. This same director was an officer of a
customer through February 2001 from which we received approximately $500,000 in
revenues in 2001.

20

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2001, we had working capital of approximately $110.2
million including cash and cash equivalents of approximately $33.6 million. For
2001, our significant sources of cash flow were:

- $254.0 million derived from operations,

- $6.1 million from the exercise of stock options and warrants,

- $9.8 million of proceeds provided by a credit facility, and

- $742,000 from the sale of certain property and equipment.

Correspondingly, we used a portion of the funds discussed above as follows:

- $89.2 million to repay notes payable,

- $40.5 million as partial consideration in the acquisitions of Jones
Drilling Corporation and the assets of three related entities, the
drilling rigs and certain other assets of Cleere Drilling Company and six
additional drilling rigs from three separate transactions,

- $172.8 million to make capital expenditures for the betterment and
refurbishment of our drilling rigs, as well as the acquisition and
procurement of drilling equipment, including drill pipe, to fund
leasehold acquisition, exploration and development of oil and natural gas
properties and to fund capital expenditures for our drilling and
completion fluids and pressure pumping segments and

- $1.1 million for the purchase of other long-term assets.

During 2001, we entered into five separate transactions, all accounted for
as purchases, whereby we increased our land-based drilling rig fleet to 319, an
increase of 44 rigs from a year ago. A brief description of each of the
transactions follows:

- On December 21, 2001, we acquired 17 drilling rigs and related equipment
from Cleere Drilling Company for an aggregate purchase price of $25.8
million. The purchase price consisted of $13.5 million cash plus 450,000
shares of our common stock and warrants to acquire an additional 325,000
shares of common stock at an exercise price of $26.75 per share. The
common stock was recorded at $21.55 per share and the warrants were
valued at $8.00 per underlying share of our common stock using the
Black-Scholes option valuation model.

- On January 5, 2001, we acquired Jones Drilling Corporation and certain
assets of three entities related to Jones Drilling Corporation. The
acquired assets consisted of 21 drilling rigs (of which 14 were then
marketable) and related equipment and approximately $2.3 million of net
working capital. The purchase price of $33.0 million consisted of 810,070
shares of the Company's common stock valued at $26.8125 per share and
$11.3 million cash plus approximately $240,000 in transaction costs.

- In January 2001, we acquired six drilling rigs, through three separate
transactions, for approximately $15.7 million cash.

On February 4, 2001, Patterson entered into an Agreement and Plan of Merger
with UTI providing for the merger of the two entities. On May 8, 2001, the
stockholders of each company approved the merger, and the merger was
consummated. Each outstanding share of UTI common stock was converted into one
share of Patterson common stock and each option or warrant then outstanding
representing the right to receive UTI common stock was converted into the right
to purchase Patterson-UTI common stock on an equivalent basis. A total of
37,782,135 shares of Patterson common stock was issued pursuant to the merger
and an additional 3,621,079 shares were reserved for issuance under the UTI
stock option plans. Additionally, our stockholders approved an increase in the
authorized shares of our common stock from 50 million to 200 million and a name
change to "Patterson-UTI Energy, Inc."

During 2001, we repaid $89.2 million under our existing credit facilities
and other term obligations. We incurred expenses of $448,000 as a result of
prepayment penalties and $942,000 related to deferred financing

21

costs which were unamortized at the time the debt was extinguished. The
penalties and deferred financing costs were included in restructuring and
related charges during 2001.

In June 2001, we increased our existing revolving line of credit to $100.0
million and extended the term of the facility to June 2005. The revolving line
of credit carries a floating interest rate of LIBOR plus 1.75% to 2.75% based on
twelve-month trailing EBITDA. The facility has no financial covenants unless
availability under the facility is less than $20.0 million. The terms of our
credit facility limit the payment of dividends without the prior written consent
of the lenders.

We believe that the current level of cash and short-term investments,
together with cash generated from operations should be sufficient to meet our
immediate capital needs. From time to time, acquisition opportunities are
reviewed relating to our business. The timing, size or success of any
acquisition and the associated capital commitments are unpredictable. Should
further 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, and either debt or equity financing. However, there
can be no assurance that such capital would be available.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000

The following tables summarize our operations for the twelve months ended
December 31, 2001 and 2000:

The significant increases shown were reflective of increased activity in
the contract drilling industry and specifically:

- increases in average rig utilization and in the number of operating days,

- increases in dayrates as evidenced by average revenue per operating day,
and

- the addition of an average 39 drilling rigs from 2000 to 2001.

22

Largely due to favorable commodity prices during the first half of 2001,
the demand for our contract drilling services was strong as we reached our peak
rig utilization of 81% in July. However, beginning in the third quarter of 2001
the industry conditions began to deteriorate as the commodity prices of oil and
natural gas significantly weakened. Market prices for oil fell from
approximately $27 per barrel at the end of 2000 to approximately $17 per barrel
in late 2001 and natural gas prices declined from approximately $10 per Mcf to
under $3 per Mcf for the same time period. Accordingly, the demand for our
contract drilling services has been negatively impacted. Should commodity prices
improve, we would expect to begin to see increases in demand.

The increases above were primarily attributable to the purchase of the
fluids division of Ambar, Inc., during October 2000 providing for twelve months
of activity in 2001 versus three months in 2000. Deteriorating industry
conditions as noted above also had an adverse impact on our drilling and
completion fluids division beginning in the third quarter of 2001. Should
industry conditions improve, we would expect to begin to see improvements in
such operations.

The improvement in the pressure pumping segment's operating results were
primarily attributable to improved market conditions throughout 2001 as
evidenced by the increase in number of jobs and revenue per job.

The merger costs and restructuring charges incurred in 2001 are associated
with our merger with UTI that occurred in 2001. Weakened commodity prices
resulted in depletion expense increasing from $3.4 million

23

in 2000 to $7.2 million in 2001. Included in depletion expense in 2001 is
approximately $1.1 million of impairment expense to our oil and natural gas
properties and other valuation allowances associated with impairment to our
undeveloped properties. This impairment is attributable to declining commodity
prices and unfavorable results from certain oil and natural gas prospects.
Selling, general and administrative expenses increased primarily as a result of
the increased activity as evidenced by the operating segments' individual
results of operations and the growth of our Company in 2001 through
acquisitions. Included in this increase are management and operational bonuses
resulting from improved operations.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999

The following tables summarize our operations for the twelve months ended
December 31, 2000 and 1999:

24

The increases above were primarily attributable to the purchase of the
fluids division of Ambar, Inc., during October 2000 providing for three months
of activity in 2000 and favorable industry conditions during most of 2000.

The increase in revenues in Other and Corporate is reflective of increased
activity in our oil and natural gas operations resulting from a rise in the
average price received for crude oil from $17.88 per BBL to $30.09 per BBL and a
rise in the average price received for natural gas from $2.31 per Mcf to $4.32
per Mcf from 1999 to 2000, respectively.

INCOME TAXES

We recognized income tax benefit of $4.8 million for 1999, resulting from
losses from operations. We recognized income tax expense of $22.9 million for
2000, even though a minimal current expense existed due to loss carryforwards
from prior years.

Our remaining unutilized investment tax credit carryforward expired in
2000. Net operating losses were fully utilized in 2001 and the remaining
alternative minimum tax credit may be carried forward indefinitely. Deferred tax
assets at December 31, 2001, consist primarily of various allowance accounts and
tax deferred expenses expected to generate a future tax benefit of approximately
$8.1 million.

We record non-cash federal deferred income taxes based primarily on the
relationship between the amount of our unused federal NOL carryforwards and the
temporary differences between the book basis and tax basis in our assets.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. As a result of fully
recognizing the benefit of our deferred income taxes, we will incur deferred
income tax expense as these benefits are utilized. We incurred deferred income
tax expense of approximately $14.6 million and $15.9 million for 2001 and 2000,
respectively, and a deferred income tax benefit of approximately $4.9 million
for 1999.

25

VOLATILITY OF OIL AND NATURAL GAS PRICES

Our revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for oil and natural gas, with respect to all of
our operating segments. Historically, oil and natural gas prices and markets
have been volatile. Prices are affected by market supply and demand factors as
well as actions of state and local agencies, the United States and foreign
governments and international cartels. All of these are beyond our control. Any
significant or extended decline in oil and/or natural gas prices would have a
material adverse effect on our financial condition and results of operations.

Due to a decline in oil and natural gas prices beginning in the second
quarter of 2001, demand for drilling rigs declined beginning in the third
quarter of 2001 and is continuing. This decline in demand has resulted in a
steep decline in drilling rig utilization and day rates, which in turn has
adversely impacted our operations.

IMPACT OF INFLATION

We believe that inflation will not have a significant near-term impact on
our financial position.

RECENTLY-ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 141, "Business Combinations," ("SFAS No.
141") in June 2001. SFAS No. 141 addresses financial accounting and reporting
for business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001 and mandates that such
combinations are to be accounted for using the purchase method. The Company
adopted SFAS No. 141 as of June 30, 2001.

The FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS No. 142") in June 2001. SFAS No.
142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS
No. 142 applies to all fiscal years beginning after December 15, 2001. The
provisions of SFAS No. 142, which the Company adopted on January 1, 2002, are
not expected to have a material impact on the Company's consolidated financial
statements. Approximately $4.6 million in amortization expenses recognized
during 2001 would not have been recognized under SFAS No. 142.

The FASB issued Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," ("SFAS No. 143") in July 2001.
SFAS No. 143 addresses financial accounting requirements for retirement
obligations associated with tangible long-lived assets. SFAS No. 143 is
effective beginning June 15, 2002. The provisions of SFAS No. 143 are not
expected to have a material impact on the Company's consolidated financial
statements.

The FASB issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No.
144") in August 2001. SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and supersedes SFAS No. 121
and APB Opinion No. 30. SFAS No. 144 is effective beginning January 1, 2002, and
is not expected to have a material impact on the Company's consolidated
financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We currently have no exposure to interest rate market risk as we have no
outstanding balance under our credit facility. Should we incur a balance in the
future, we would have some exposure associated with the floating rate of the
interest charged on that balance. The credit facility, which expires on June 29,
2005, bears interest at LIBOR plus 1.75% to 2.75% based on the Company's
twelve-month trailing EBITDA. Our exposure to interest rate risk due to changes
in LIBOR is not expected to be 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 over the last ten years. If the value of

26

the Canadian dollar against the U.S. dollar weakens, revenues and earnings of
our Canadian operations will be reduced when they are translated to U.S.
dollars. Also, the value of our Canadian net assets in U.S. dollars may decline.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial Statements are filed as a part of this report at the end of Part
IV hereof beginning at page F-1, Index to Consolidated Financial Statements, and
are incorporated herein by this reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

27

PART III

The information required by Part III is omitted from this report because
Patterson-UTI will file a definitive proxy statement pursuant to Regulation 14A
of the Securities Exchange Act of 1934 no later than 120 days after the end of
the fiscal year covered by this document and certain information included
therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this Item is incorporated herein by reference
to the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated herein by reference
to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is incorporated herein by reference
to the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated herein by reference
to the Proxy Statement.

28

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements.

See Index to Consolidated Financial Statements on page F-1 of this report.

(a)(2) Financial Statement Schedule.

Schedule II -- Valuation and qualifying accounts is filed herewith on page
S-1.

All other financial statement schedules have been omitted because they are
not applicable or the information required therein is included elsewhere in the
financial statements or notes thereto.

(a)(3) Exhibits.

The following exhibits are filed herewith or incorporated by reference
herein.

2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger.(1)

2.2 Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(2)

2.2.1 Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(3)

2.3 Agreement and Plan of Merger dated as of January 5, 2001
among Patterson Energy, Inc., Patterson Drilling Company LP,
LLLP and Jones Drilling Corporation.(4)

2.4 Agreement and Plan of Merger, dated February 4, 2001, by and
between UTI Energy Corp. and Patterson Energy, Inc.(5)

2.5 Asset Purchase Agreement, dated as of December 21, 2001
among Patterson-UTI Energy, Inc., Patterson-UTI Drilling
Company LP, LLLP and Cleere Drilling Company.

3.1 Restated Certificate of Incorporation.(6)

3.1.1 Certificate of Correction of Restated Certificate of
Incorporation.

3.2 Amended and Restated Bylaws.

3.3 Rights Agreement dated January 2, 1997, between Patterson
Energy, Inc. and Continental Stock Transfer & Trust
Company.(7)

3.3.1 Amendment to Rights Agreement dated as of October 23,
2001.(15)

4.1 Excerpt from Restated Certificate of Incorporation of
Patterson-UTI Energy, Inc. regarding authorized Common Stock
and Preferred Stock.(14)

4.2 Certificate of Designation.(16)

4.2.1 Amendment to Certificate of Designation.

4.3 Registration Rights Agreement with Bear, Stearns and Co.
Inc., dated March 25, 1994, as assigned to REMY Capital
Partners III, L.P.

10.1 Loan and Security Agreement, dated November 22, 1999.(14)

10.1.1 First Amendment to Loan and Security Agreement, dated May 2,
2000.(14)

29

10.1.2 Second Amendment to Loan and Security Agreement, dated May
18, 2000.(14)

10.1.3 Third Amendment to Loan and Security Agreement, dated
October 18, 2000.(14)

10.1.4 Fourth Amendment to Loan and Security Agreement, dated May
8, 2001.(14)

10.1.5 Fifth Amendment to Loan and Security Agreement, dated June
29, 2001.(14)

10.1.6 Revolving Loan Promissory Note, dated June 29, 2001.(14)

10.1.7 Guaranty Agreement, dated June 29, 2001.(14)

10.1.8 Pledge Agreement, dated June 29, 2001.(14)

10.2 Aircraft Lease, dated December 20, 2000, (effective January
1, 2001) between Talbott Aviation, Inc. and Patterson
Energy, Inc.(8)

10.3 Patterson-UTI Energy, Inc. 1993 Stock Incentive Plan, as
amended.(9)

10.4 Patterson-UTI Energy, Inc. Non-Employee Directors' Stock
Option Plan, as amended.(10)

10.5 Patterson-UTI Energy, Inc. Amended and Restated 1997
Long-Term Incentive Plan.(11)

10.6 Amended and Restated Non-Employee Director Stock Option Plan
of Patterson-UTI Energy, Inc.(12)

10.7 Amended and Restated Patterson-UTI Energy, Inc. 1996
Employee Stock Option Plan.(12)

10.8 1997 Stock Option Plan of DSI Industries, Inc.(11)

10.9 Stock Option Agreement dated July 20, 2001 between
Patterson-UTI Energy, Inc. and Kenneth R. Peak (a
non-employee director of Patterson-UTI Energy, Inc.).

10.10 Stock Option Agreement dated July 20, 2001 between
Patterson-UTI Energy, Inc. and Stephen J. DeGroat (a
non-employee director of Patterson-UTI Energy, Inc.).

10.11 Model Form Operating Agreement.(13)

10.12 Form of Drilling Bid Proposal and Footage Drilling
Contract.(13)

10.13 Form of Turnkey Drilling Agreement.(13)

21.1 Subsidiaries of the Registrant.

23.1 Consent of Independent Accountants -- PricewaterhouseCoopers
LLP.

23.2 Consent of Independent Auditors -- Ernst & Young LLP.

- ---------------

(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment No. 2
to Registration Statement on Form SB-2 (File No. 33-68058-FW) filed on
October 28, 1993.

(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.

(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.

(4) Incorporated by reference to Item 16, "Exhibits" to Registration Statement
on Form S-3 filed on January 8, 2001.

(5) Incorporated herein by reference to Joint Proxy Statement/Prospectus filed
on March 14, 2001.

(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated and filed on May 8, 2001.

30

(7) Incorporated by reference to Item 2, "Exhibits" to Registration Statement
on For 8-A filed on January 14, 1997.

(8) Incorporated herein by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 2000.

(9) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917) filed on March 13, 1998.

(10) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471) filed on November 4, 1997.

(11) Incorporated herein by reference to Item 8, "Exhibits" to Post-Effective
Amendment No. 1 to Registration Statement on Form S-8 (file No. 333-60470)
filed on July 25, 2001.

(12) Incorporated herein by reference to Item 8, "Exhibits" to Post-Effective
Amendment No. 1 to Registration Statement on Form S-8 (file No. 333-60466)
filed on July 25, 2001.

(13) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
on Form SB-2 (File No. 33-68058-FW) filed on August 30, 1993.

(14) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended June 30, 2001, filed on
August 1, 2001.

(15) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended September 30, 2001, filed
on October 31, 2001.

(16) Incorporated herein by reference to Item 2, "Exhibits" to Registration
Statement on Form 8-A (File No. 000-22664) filed on January 14, 1997.

(b) Reports on Form 8-K.

There were no reports on Form 8-K filed during the three months ended
December 31, 2001.

31

INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders of
Patterson-UTI Energy, Inc.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Patterson-UTI
Energy, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
based on our audits and the report of other auditors, the financial schedule
listed in Item 14(a)(2) presents fairly, in all material respects, the
information set forth therein, when read in conjunction with the related
consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of UTI Energy Corp.
("UTI") on May 8, 2001 in a transaction accounted for as a pooling of interests,
as described in Note 2 to the consolidated financial statements. We did not
audit the financial statements of UTI, which statements reflect total assets of
$330 million as of December 31, 2000 and total revenues of $275 million and $155
million for the years ended December 31, 2000 and 1999, respectively. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for UTI, is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Houston, Texas
January 28, 2002

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Patterson-UTI Energy, Inc.

We have audited the consolidated balance sheet of UTI Energy Corp. as of
December 31, 2000 and the related consolidated statements of operations, changes
in shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2000 (not presented separately herein). Our audits also
included the financial statement schedule listed in the Index at Item 14(a) of
UTI Energy Corp.'s Annual Report (Form 10-K) for the year ended December 31,
2000 (also not presented separately herein). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UTI Energy Corp. at December 31, 2000, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

Ernst & Young LLP

Houston, Texas
February 16, 2001

F-3

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands)

The accompanying notes are an integral part of these consolidated financial
statements.
F-4

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

The accompanying notes are an integral part of these consolidated financial
statements.

F-7

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

Non-cash investing and financing activities:

During 2001 the Company acquired Jones Drilling Corporation and certain
assets of three other entities affiliated with Jones Drilling Corporation for
$33.0 million, drilling rigs and related equipment from Cleere Drilling Company
for an aggregate purchase price of $25.8 million and six drilling rigs through
three separate transactions for $15.7 million. Of the $74.6 million,
approximately $40.5 million was paid in cash as follows:

During May, 2000, the Company, in a non monetary exchange of similar
productive assets, acquired a drilling rig in exchange for certain drilling rig
components and drill pipe with a net book value of approximately $970,000. No
gain or loss was recognized on this transaction.

During 2000, the Company acquired WEK Drilling Co., Inc., High Valley
Drilling, Inc., the land drilling operations of Phelps Drilling International,
Ltd. and the drilling and completion fluids operations of Ambar, Inc., for an
aggregate purchase price of approximately $70.6 million, of which approximately
$47.4 million was paid in cash as follows:

During 1999, the Company acquired Norton Drilling Services, Inc., Schneider
Drilling Corporation and the drilling assets of Padre Industries, Inc. for an
aggregate purchase price of $32.7 million, of which approximately $7.5 million
was paid in cash.

The accompanying notes are an integral part of these consolidated financial
statements.

F-8

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A description and basis of presentation follows:

Description of business -- Patterson-UTI Energy, Inc. and its wholly-owned
subsidiaries, (collectively referred to herein as "Patterson-UTI" or the
"Company") is a leading provider of onshore contract drilling services to major
and independent oil and natural gas producers and operators in Texas, New
Mexico, Oklahoma, Louisiana, Mississippi, Utah and Western Canada. The Company
owns the second largest land-based drilling fleet in North America with 319
drilling rigs. The Company provides drilling fluids, completion fluids and
related services to oil and natural gas producers in the Permian Basin of West
Texas and Southeast New Mexico, South Texas, East Texas, Oklahoma, the Gulf
Coast regions of Texas and Louisiana and the Gulf of Mexico. The Company also
provides pressure pumping services in the Appalachian Basin. To a lesser extent,
the Company is engaged in the development, exploration, acquisition and
production of oil and natural gas. The Company's oil and natural gas operations
are not financially material and do not warrant disclosure as a business
segment.

Patterson Energy, Inc. ("Patterson") and UTI Energy Corp. ("UTI")
consummated a merger, with Patterson as the surviving entity, which was treated
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and accounted for as a pooling of interests for
financial accounting purposes. Accordingly, historical financial statements as
presented herein, have been restated to provide for the retroactive effect of
the merger. At the time of the merger, the name of Patterson Energy, Inc. was
changed to "Patterson-UTI Energy, Inc." (See Note 2).

Basis of presentation -- The consolidated financial statements of
Patterson-UTI Energy, Inc. and its wholly-owned subsidiaries have been prepared
to give retroactive effect to the merger between Patterson and UTI on May 8,
2001. These financial statements also give retroactive effect to the two for one
stock split in October 2001 by UTI.

A summary of the significant accounting policies follows:

Principles of consolidation -- The consolidated financial statements
include the accounts of Patterson-UTI and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

Management estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Revenue recognition -- Generally, revenues are recognized when services are
performed. The Company follows the percentage-of-completion method of accounting
for footage contract drilling arrangements. Under this method, all drilling
revenues, direct costs and appropriate portions of indirect costs, related to
the contracts in progress, are recognized as contract drilling services are
performed. Due to the nature of turnkey contract drilling arrangements and risks
therein, the Company follows the completed contract method of accounting for
such arrangements. Under this method, all drilling advances, direct costs and
appropriate portions of indirect costs (including maintenance and repairs)
related to the contracts in progress are deferred and recognized as revenues and
expenses in the period the contracts are completed. Provisions for losses on
incomplete or in-process contracts are made when estimated total costs are
expected to exceed total estimated revenues.

Inventories -- Inventories consist primarily of chemical products to be
used in conjunction with the Company's drilling and completion fluids
activities. The inventories are stated at the lower of cost or market,
determined by the first-in, first-out method.
F-9

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)

Property and equipment -- Property and equipment (other than oil and
natural gas) -- is carried at cost less accumulated depreciation. Depreciation
is provided on the straight-line method over the estimated useful lives as
defined below. The Company incurred depreciation expense of approximately $72.6
million, $52.0 million and $43.9 million for 2001, 2000 and 1999, respectively.

Oil and natural gas properties -- The Company follows the successful
efforts method of accounting, using the field as its accumulation center for
capitalized costs. Under the successful efforts method of accounting, costs
which result directly in the discovery of oil and natural gas reserves and all
development costs are capitalized. Exploration costs which do not result
directly in discovering oil and natural gas reserves are charged to expense when
such determinations are made. The capitalized costs, consisting of lease and
well equipment, lease acquisition costs and intangible development costs are
depreciated, depleted and amortized on the units-of-production method, based on
petroleum engineer estimates of recoverable proved developed oil and natural gas
reserves of each respective field. The Company incurred depletion expense of
approximately $7.2 million, $3.4 million and $2.6 million for 2001, 2000 and
1999, respectively.

Impairment of long-lived assets -- Net capitalized costs of long-lived
assets, certain identifiable intangibles and goodwill are reduced to reflect an
amount which is expected to be recovered through the future cash flows generated
by the use of the related assets. Impairment of proved oil and natural gas
properties is periodically assessed based on estimated future net cash flows at
a field level as determined by an independent reserve engineer. The Company
incurred approximately $1.2 million and $275,000 of impairment to such
properties for 2001 and 1999, respectively. Impairment of the oil and natural
gas properties was primarily attributable to declines in the market prices of
crude oil and natural gas and related revisions to existing reserve estimates.
Impairment expense is included in depreciation, depletion and amortization in
the accompanying financial statements.

Maintenance and repairs -- Maintenance and repairs are charged against
operations. Renewals and betterments which extend the life or improve existing
properties are capitalized.

Retirements -- Upon disposition or retirement of property and equipment
(other than oil and natural gas properties), the cost and related accumulated
depreciation are removed and the gain or loss thereon, if any, is credited or
charged to operations. The Company recognizes the gain or loss on the sale of
either a part of a proved oil and natural gas property or an entire proved oil
and natural gas property constituting a part of a field upon the sale or
disposition of such. The unamortized cost of the property or group of
properties, a part of which was sold or otherwise disposed of, is apportioned to
the interest sold and the interest retained on the basis of the fair value of
those interests.

Intangible assets -- Intangible assets consist primarily of goodwill and
covenants not to compete arising from business combinations (see Notes 2 and 5).
The values assigned to intangible assets, based in part upon independent
appraisals, are amortized on a straight line basis. Goodwill, representing the
excess of the purchase price over the estimated fair value of the net assets of
the acquired business, is amortized over the period of expected benefit of 15
years. Covenants not to compete are amortized over their underlying

F-10

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)

contractual lives. Amortization expense charged to operations for the years
ended December 31, 2001, 2000 and 1999 was approximately $5.2 million, $6.0
million and $5.8 million, respectively.

Earnings per share -- The Company provides a dual presentation of its
earnings per share; Basic Earnings per Share ("Basic EPS") and Diluted Earnings
per Share ("Diluted EPS") in its Consolidated Statements of Operations. Basic
EPS is computed using the weighted average number of shares outstanding during
the year. Diluted EPS includes common stock equivalents, which are dilutive to
earnings per share. Dilutive securities, consisting of certain stock options and
warrants as described in Note 10, of approximately 4.1 million were excluded
from the December 31, 1999 calculation of Diluted EPS as a result of the
Company's net loss for that year. For the years ended December 31, 2001 and
2000, dilutive securities included in the calculation of Diluted EPS were 2.8
million shares and 3.6 million shares, respectively. There are 490,000 of
potentially dilutive shares and warrants outstanding at December 31, 2001 due to
their exercise prices being greater than the average exercise price for the year
2001.

Income taxes -- The asset and liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for operating loss and tax credit carryforwards and for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets unless it is
more likely than not that such assets will be realized.

Stock based compensation -- The Company grants stock options to employees
and non-employee directors under stock-based incentive compensation plans, (the
"Plans"). The Company uses the intrinsic value based method of accounting for
the Plans. Under this method, the Company records no compensation expense for
stock options granted when the exercise price for options granted is equal to or
greater than the fair market value of the Company's stock on the date of the
grant.

Statement of cash flows -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, cash on deposit and unrestricted
certificates of deposit with original maturities of 90 days or less.

Recently Issued Accounting Standards -- The Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 141,
"Business Combinations," ("SFAS No. 141") in June 2001. SFAS No. 141 addresses
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting
for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and
mandates that such combinations are to be accounted for using the purchase
method. The Company adopted SFAS No. 141 as of June 30, 2001.

The FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS No. 142") in June 2001. SFAS No.
142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS
No. 142 applies to all fiscal years beginning after December 15, 2001. The
provisions of SFAS No. 142, which the Company adopted on January 1, 2002, are
not expected to have a material impact on the Company's consolidated financial
statements. Approximately $4.6 million in amortization expenses recognized
during 2001 would not have been recognized under SFAS No. 142.

F-11

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)

The FASB issued Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," ("SFAS No. 143") in July 2001.
SFAS No. 143 addresses financial accounting requirements for retirement
obligations associated with tangible long-lived assets. SFAS No. 143 is
effective beginning June 15, 2002. The provisions of SFAS No. 143 are not
expected to have a material impact on the Company's consolidated financial
statements.

The FASB issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No.
144") in August 2001. SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and supersedes SFAS No. 121
and APB Opinion No. 30. SFAS No. 144 is effective beginning January 1, 2002, and
is not expected to have a material impact on the Company's consolidated
financial statements.

Reclassifications -- Certain reclassifications have been made to the 1999
and 2000 consolidated financial statements in order for them to conform with the
2001 presentation.

2. MERGERS AND ACQUISITIONS

2001 MERGER AND ACQUISITIONS

Cleere Drilling Company -- On December 21, 2001, the Company acquired 17
drilling rigs and related equipment from Cleere Drilling Company for an
aggregate purchase price of $25.8 million. The purchase price consisted of $13.5
million cash plus 450,000 shares of its common stock and warrants to acquire an
additional 325,000 shares of common stock at an exercise price of $26.75 per
share. The common stock was recorded at $21.55 per share and the warrants were
valued at $8.00 per underlying share of the Company's Common Stock using the
Black-Scholes option valuation model. All of the purchase price was allocated to
the rigs acquired.

UTI Energy Corp. -- On February 4, 2001, Patterson entered into an
Agreement and Plan of Merger with UTI providing for the merger of the two
entities. On May 8, 2001, the stockholders of each company approved the merger
and the merger was consummated. Each outstanding share of UTI common stock was
converted into one share of Patterson common stock and each option or warrant
then outstanding representing the right to receive UTI common stock was
converted into the right to purchase Patterson-UTI common stock on an equivalent
basis. A total of 37,782,135 shares of common stock was issued pursuant to the
merger and an additional 3,621,079 shares were reserved for issuance under the
then outstanding UTI stock option plans. Additionally, the stockholders of
Patterson approved an increase in the authorized shares of common stock from 50
million to 200 million and a name change to "Patterson-UTI Energy, Inc."

The Company incurred $13.1 million in expenses related to the merger, of
which approximately $2.2 million are unpaid as of December 31, 2001. Such
expenses consisted of $5.9 million in merger costs which were primarily related
to professional fees paid to investment banking firms, attorneys, accountants
and commercial printers for their professional services rendered and $7.2
million in restructuring costs and related charges incurred as a result of the
following:

- severance costs and related expenses of $2.8 million,

- closing of duplicate operational facilities of $1.6 million,

- costs of $1.4 million incurred in connection with changes to the
Company's credit facilities (see Note 7), and

- fees and expenses related to the transfer of licenses and leaseholds, and
in some instances the impairment of such leaseholds, the combination or
cancellation of various service contracts and the renegotiation of
certain insurance policies of approximately $1.4 million.

F-12

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MERGERS AND ACQUISITIONS -- (CONTINUED)

The merger was treated as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended, and was accounted for
as a pooling of interests for financial accounting purposes. The consolidated
financial statements give retroactive effect to the merger, which includes
combining the companies' historical consolidated financial statements for the
years ended December 31, 2000 and 1999. Certain adjustments were made in those
periods to conform the previous accounting policies of UTI with those of
Patterson.

Selected unaudited pro forma information related to the operations of
Patterson and UTI for the three months ended March 31, 2001 follows (in
thousands):

Jones Drilling Corporation -- On January 5, 2001, the Company consummated
the transactions contemplated by certain agreements among the Company and Jones
Drilling Corporation and three of its affiliated entities. The acquired assets
consisted of 21 drilling rigs and related equipment and approximately $2.3
million of net working capital. The purchase price of $33.2 million consisted of
810,070 shares of the Company's common stock valued at $26.8125 per share and
$11.3 million cash plus approximately $240,000 in transaction costs. The
purchase price, net of working capital was allocated among the assets acquired
based on their estimated fair market values as of the date of the transaction.

Other. In January 2001, the Company acquired six drilling rigs, through
three separate transactions, for approximately $15.7 million cash in aggregate.
All of the purchase price was allocated to the rigs acquired.

2000 MERGER AND ACQUISITIONS

Ambar, Inc. -- In October 2000, the Company completed, through a wholly
owned subsidiary, the acquisition of the drilling and completion fluid
operations of Ambar, Inc., a non-affiliated entity with its principal operations
in Louisiana, the Gulf Coast region of South Texas and the Gulf of Mexico. The
purchase price of $12.4 million consisted of cash of $11.7 million and $680,000
of direct costs incurred related to the acquisition. The assets acquired
included net working capital of approximately $7.8 million (current assets of
$18.2 million and current liabilities assumed of $10.4 million). The purchase
price, net of working capital acquired, was allocated to the fixed assets based
on their estimated fair market values as of the date of the transaction.

The Company's operating results include the operations of the acquired
entity since the acquisition date. The following summary, prepared on a pro
forma basis, combines the consolidated results of operations as if the
transactions had occurred on January 1, 1999, after including the impact of
certain adjustments, such as

F-13

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MERGERS AND ACQUISITIONS -- (CONTINUED)

restatement of depreciation using fair values instead of book values of the
assets acquired, the increased interest expense on the acquisition debt and the
related income tax effects.

The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisition
been made as of the date indicated. In addition, they are not intended to be a
projection of future results and do not reflect any synergies that might be
achieved from combined operations.

In September 2000, the Company acquired four drilling rigs in two separate
transactions for a total of $7.7 million in cash. The purchase price was
allocated to the rigs acquired.

High Valley Drilling, Inc. -- On June 2, 2000, the Company completed the
merger of High Valley Drilling, Inc., a privately held, non-affiliated company,
with and into Patterson-UTI Drilling Company LP, LLLP, a wholly owned subsidiary
of Patterson-UTI. The purchase price of $21.8 million was funded using 1,150,000
shares of common stock valued at $18 per share, three-year warrants to acquire
127,000 shares at $22 per share and approximately $208,000 of direct costs
incurred related to the transaction. Using a Black-Scholes model, the warrants
were valued at $900,000. The assets acquired consisted of eight drilling rigs
and other related equipment. The purchase price was allocated among such assets
based upon the estimated fair market value of the drilling rigs and related
equipment.

Asset Swap. -- On May 15, 2000, the Company, in a non-monetary exchange,
acquired a drilling rig in exchange for certain drilling rig components and
drill pipe with a net book value of approximately $970,000. No gain or loss was
recognized on this transaction.

Phelps Drilling International Ltd. -- On May 5, 2000, the Company acquired
the land drilling operations of Phelps Drilling International Ltd. for $29.6
million in cash. Phelps' assets and operations are located in the Canadian
provinces of Alberta, Saskatchewan and British Columbia. The acquisition was
accounted for under the purchase method of accounting. The acquired assets
consisted of fourteen land drilling rigs and related equipment. The purchase
price was allocated among such assets based upon the fair market value of the
drilling rigs and related equipment.

WEK Drilling Co., Inc. -- On March 31, 2000, the Company acquired the
outstanding stock of WEK Drilling Co., Inc., a privately held, non-affiliated
drilling company with its principal operations in Southeast New Mexico. The
purchase price of $6.8 million, which is net of cash acquired, was funded using
$5.66 million of proceeds from the Company's existing credit facility and 53,000
shares of the Company's common stock valued at $29.0625 per share and
approximately $77,000 of direct costs incurred related to the transaction. The
assets acquired consisted of four operable drilling rigs, other related
equipment, and working capital of $1.2 million. Immediately following the
transaction, certain assets unrelated to the oil and natural gas industry were
sold back to one of the previous owners for a cash payment of $1.0 million. The
purchase price of $6.8 million, less the $1.0 million of unrelated assets that
were subsequently sold and the net working capital acquired, was allocated among
the acquired assets based upon the estimated fair market value of the drilling
rigs and related equipment.

F-14

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MERGERS AND ACQUISITIONS -- (CONTINUED)

1999 ACQUISITIONS

Schneider Drilling Corporation -- On December 14, 1999, the Company
acquired the land drilling assets of Schneider Drilling Corporation for $7.5
million in cash. The acquisition was accounted for under the purchase method of
accounting. Schneider's assets included three land drilling rigs, major
components for two additional drilling rigs and drilling equipment. The purchase
price was allocated among such assets based upon the fair market value of the
drilling rigs and related equipment.

Norton Drilling Services, Inc. -- On July 27, 1999, the Company acquired
Norton Drilling Services, Inc., for approximately 2.6 million shares of the
Company's common stock valued at $5.12 per common share, for a purchase price of
$13.3 million. The Company also repaid approximately $8.0 million of Norton's
existing debt upon the acquisition. The acquisition was accounted for under the
purchase method of accounting. Norton's assets included sixteen drilling rigs
and related equipment. The purchase price was allocated among the assets and
liabilities acquired based upon their fair market value.

Padre Industries, Inc. -- On January 27, 1999, the Company completed the
acquisition of five drilling rigs and other related equipment from a privately
held, non-affiliated entity based in Corpus Christi, Texas. The purchase price
consisted of 800,000 shares of the Company's stock at a guaranteed value of
$5.00 per share. As part of the acquisition agreement, the Company had the
option exercisable on February 1, 2000 to buy back 300,000 of the 800,000 shares
at $5.50 per share. The Company exercised its option on February 1, 2000. The
purchase price of $4.0 million was allocated among such assets based upon the
estimated fair market value of the drilling rigs and related equipment.

The aforementioned acquisitions, excluding the merger with UTI, completed
during fiscal years 2001, 2000 and 1999 have been accounted for as purchases and
the related results of operations and cash flows of the acquired entities have
been included in the consolidated financial statements since their respective
dates of acquisition.

3. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table illustrates the Company's comprehensive income
including the effects of foreign currency translation adjustments for the years
ended December 31, 2001 and 2000 (in thousands):

Accumulated other comprehensive income at December 31, 2001 and 2000
consists entirely of foreign currency translation adjustments.

F-15

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2001 and
2000 (in thousands):

5. INTANGIBLE ASSETS

Intangible assets consisted of the following at December 31, 2001 and 2000
(in thousands):

6. ACCRUED EXPENSES

Accrued expenses consisted of the following at December 31, 2001 and 2000
(in thousands):

F-16

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. NOTES PAYABLE

The Company had no outstanding notes payable at December 31, 2001. Notes
payable consisted of the following at December 31, 2000 (in thousands):

On November 22, 1999, the Company entered into a $65.0 million revolving
credit facility. The maximum borrowings under this revolving credit facility
were increased to $75.0 million in May of 2000, to $90.0 million in October of
2000 and later increased to $100.0 million in June 2001 when the term of the
facility was also extended to June 2005. A fee of .375% per annum is assessed on
the unused facility amount. The amount used for letters of credit decreases the
borrowing base of the facility on a dollar-for-dollar basis. The revolving
credit facility calls for periodic interest payments at a floating rate ranging
from LIBOR plus 1.75% to 2.75%. Assets of the Company secure the facility. The
facility has restrictions customary in financial instruments of this type
including restrictions on certain investments, acquisitions and loans. The
facility has no financial covenants unless availability under the facility is
less than $20.0 million. There were no amounts drawn under the facility at
December 31, 2001. The terms of our facility limit the payment of dividends
without the prior written consent of the lenders.

During 2001, the Company repaid $89.2 million under its existing credit
facilities and other term obligations. The Company incurred expenses of $448,000
as a result of prepayment penalties and $942,000 related to deferred financing
costs which were unamortized at the time the debt was extinguished. The
penalties and deferred financing costs are included in restructuring and related
charges for 2001.

The Company maintains letters of credit in the aggregate amount of $20.0
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
variously during each calendar year, but provide for an indefinite number of
annual extensions of the expiration date. No amounts have been drawn under the
letters of credit.

8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

Contingencies -- The Company's contract services and oil and natural gas
exploration and production operations are subject to inherent risks, including
blowouts, cratering, fire and explosions which could result in personal injury
or death, suspended drilling operations, damage to, or destruction of equipment,
damage to producing formations and pollution or other environmental hazards.

As a protection against these hazards, the Company maintains general
liability insurance coverage of $2.0 million per occurrence with $4.0 million of
aggregate coverage and excess liability and umbrella coverages up to $50.0
million per occurrence with a $50.0 million aggregate.

The Company believes it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect the Company against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment. The Company also carries insurance to cover physical damage to, or
loss of, its rigs; however, it does not carry

F-17

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS -- (CONTINUED)

insurance against loss of earnings resulting from such damage or loss. The
Company's lender who has a security interest in the drilling rigs is named as
loss payee on the physical damage insurance on such rigs.

Westfort Energy LTD and Westfort Energy (US) LTD f/k/a Canadian Delta, Inc.
("Westfort"), filed a lawsuit against two Patterson-UTI subsidiaries, Patterson
Petroleum LP and Patterson Drilling Company LP, in the Circuit Court, Rankin
County, Mississippi, Case No. 2002-18. The lawsuit relates to a letter agreement
entered into in July 2000 between Patterson Petroleum and Westfort concerning
the drilling of a daywork well in Mississippi. This lawsuit was filed by
Westfort after Patterson Petroleum made demand on Westfort for payment of the
contract drilling services.

In this lawsuit, Westfort alleges breach of contract, fraud and negligence
causes of action. Westfort seeks alleged monetary damages, the return of shares
of Westfort stock, unspecified damages from alleged lost profits, lost use of
income stream and additional operating expenses, along with alleged punitive
damages to be determined by the jury, but not less than 25% of Patterson's net
worth. The Company intends to vigorously contest the allegations made by
Westfort and assert claims against Westfort, including for the monies owed
Patterson under the letter agreement in the amount of approximately $5,075,000.

In addition to the Westfort lawsuit, the Company is party to various 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.

9. STOCKHOLDERS' EQUITY

During December 2001, the Company issued 450,000 shares of its common stock
and warrants to acquire an additional 325,000 shares at an exercise price of
$26.75 per share, as partial consideration for the acquisition of 17 drilling
rigs and related equipment from Cleere Drilling Company. The common stock was
recorded at $21.55 per share and the warrants were valued at $8.00 per
underlying share of common stock using the Black-Scholes option valuation model
(see Note 2).

On May 8, 2001, pursuant to the merger between Patterson and UTI, the
Company's stockholders approved an amendment to the Company's charter increasing
the number of authorized shares of the Company's common stock to 200 million.

On May 7, 2001, warrants to purchase 121,250 shares of UTI's common stock
were exercised. The exercise price ranged from $13.25 to $17.50. The $1.8
million in proceeds resulting from the exercise was used as partial payment of
notes payable owed to the same parties.

During January 2001, the Company issued 810,070 shares of its common stock
as partial consideration for the acquisition of Jones Drilling Corporation and
certain assets owned by its related entities (see Note 2). The common stock was
valued at $26.8125 per share, its fair market value on the date of the
transaction.

During September 2000, the Company issued 3,000,000 shares of its common
stock at a public price of $34.50 per share. An underwriting discount of $1.50
was paid for a net price of $33.00 per share. Net proceeds from the offering
totaled approximately $98.8 million.

During June 2000, the Company issued 1,150,000 shares of its common stock
and three-year warrants to acquire an additional 127,000 shares at an exercise
price of $22.00 per share, as consideration for certain drilling equipment
acquired from High Valley Drilling, Inc. (see Note 2). The common stock was
recorded at $18 per share, its fair market value on the date of purchase and the
warrants were valued at $900,000 using the Black-Scholes option valuation model.

F-18

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. STOCKHOLDERS' EQUITY -- (CONTINUED)

During March 2000, the Company issued 53,000 shares of its common stock as
consideration for certain drilling equipment acquired from WEK Drilling Company,
Inc. The common stock was recorded at $29.0625 per share, its fair market value
on the date of purchase (see Note 2).

During June 1999, the Company issued 25,776 shares of its common stock as
consideration for certain drilling equipment acquired from an unrelated entity.
The common stock was recorded at $8.0625 per share, its fair market value on the
date of purchase.

On January 27, 1999, the Company issued 800,000 shares of its common stock
as consideration for the Company's acquisition of the drilling assets of Padre
Industries, Inc. The common stock was recorded at its guaranteed value of $5.00
per share, or an aggregate purchase price of $4.0 million. On February 1, 2000,
the Company exercised its option to buy back 300,000 shares of its common stock
previously issued in conjunction with this acquisition for $5.50 per share.

10. STOCK OPTIONS AND WARRANTS

Employee and Non-Employee Director Stock Option Plans. The Company has
seven stock option plans of which three are active. The remaining four plans are
dormant and the Company does not intend to grant any further options under such
plans. At December 31, 2001, the Company's stock option plans were as follows:

- ---------------

(1) Plan was assumed by the Company as a part of the merger between Patterson
and UTI.

(2) Plan is for the benefit of employees of the Company, other than officers and
directors of the Company.

(3) Plan is for the benefit of employees of the Company, including officers and
directors of the Company.

The Company's active plans are the 1997 Plan, the 2001 Plan and the
Non-Employee Director Plan. A summary of each of these plans is set forth below.

F-19

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)

1997 PLAN

- Administered by the Compensation Committee of the Board of Directors.

- All employees including officers and employee directors are eligible for
awards.

- Vesting schedule is set by the Compensation Committee, however, typically
20% of the options vest after one year and the remaining 80% vest monthly
over the next four years.

- The Compensation committee sets the term of the option except that no
Incentive Stock Option ("ISO") can have a term of longer than 10 years.
Typically options granted under the plan have a term of 10 years.

- The options granted under the plan, unless otherwise stated in the grant
thereof, vest upon a change of control as defined in the plan. Options
granted to non-executive employees typically do not vest upon a change of
control.

- All options granted under the plan are granted with an exercise price
equal to or greater than the fair market value of the Company's common
stock at the time the option is granted.

- Although the plan allows for awards of tandem and independent stock
appreciation rights, restricted stock and performance awards, no such
awards have been granted.

2001 PLAN

The terms and conditions of the 2001 Plan are identical to the 1997 Plan
except as follows:

- Officers and directors of the Company are not eligible for grants of
options under the 2001 Plan.

- No ISO's may be awarded under the 2001 Plan.

- Unless the grant states otherwise, options granted under the 2001 Plan do
not vest upon a change of control of the Company.

NON-EMPLOYEE DIRECTOR PLAN

- Administered by the Compensation Committee of the Board of Directors.

- All options vest upon the first anniversary of the option grant.

- Each director receives options to purchase 15,000 shares upon becoming a
director of the Company and options to purchase 7,500 shares on December
31 of each subsequent year in which the director serves as a director of
the Company.

- The exercise price of the options is the fair market value of the
Company's common stock on the date of the grant.

Of the four dormant plans administered by the Company, two of the plans
(the 1993 Plan and the 1995 Non-Employee Director Plan) were plans of the
Company prior to the merger of Patterson and UTI and two of the plans (the DSI
Plan and the 1996 Plan) were plans of UTI.

1993 Plan. Options granted under the 1993 Plan, typically had terms of 10
years and vested over five years in 20% increments beginning at the end of the
first year. These options vest in the event of a change of control as defined in
the plan. All options were granted with an exercise price equal to the fair
market value of the Company's common stock at the time of grant.

F-20

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)

1995 Non-Employee Director Plan. All options granted under the 1995
Non-Employee Director Plan were vested as of November 6, 2001. 1995 Non-Employee
Director Plan options have five year terms. All options were granted with an
exercise price equal to the fair market value of the Company's common stock at
the time of grant.

DSI Plan. The options granted under the DSI plan typically vested at a
rate of 33% per year with ten year terms. All options were granted with an
exercise price equal to the fair market value of the Company's common stock at
the time of grant.

1996 Plan. The options granted under the 1996 plan vested over one, four
and five years as dictated by the Compensation Committee. These options had
terms of five and ten years as dictated by the Compensation Committee. All
options were granted with a strike price equal to the fair market value of the
Company's common stock at the time of grant.

Additional Options. In July 2001, the Compensation Committee granted to
each of two non-employee directors of the Company an option to purchase 12,000
shares of the Company's Common Stock. These options vested on November 6, 2001
and terminate four years later on November 5, 2005. The exercise price of each
of the options was $28.625 which was in excess of the fair market value of the
Company's common stock on the date of grant.

A summary of the status of the Company's stock options issued under its
various incentive plans as of December 31, 2001, 2000 and 1999 and the changes
during each of the years then ended are presented below (in thousands, except
weighted average exercise price):

2001 2000 1999
--------------------------- --------------------------- ---------------------------
NO. OF NO. OF NO. OF
SHARES OF WEIGHTED SHARES OF WEIGHTED SHARES OF WEIGHTED
UNDERLYING AVERAGE UNDERLYING AVERAGE UNDERLYING AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------

Outstanding at beginning of
the year................... 5,488 $ 7.57 6,497 $ 5.72 5,334 $ 5.38
Granted.................... 2,103 16.19 586 18.58 2,644 4.76
------- -------- ------- -------- ------- --------
Total granted...... 7,591 9.96 7,083 6.78 7,978 5.18
Exercised.................. 805 5.26 1,563 3.93 1,249 1.77
Surrendered................ 190 14.39 32 11.42 232 8.35
------- -------- ------- -------- ------- --------
Outstanding at end of year... 6,596 $ 10.40 5,488 $ 7.57 6,497 $ 5.72
======= ======== ======= ======== ======= ========
Exercisable at end of year... 4,110 $ 7.52 2,672 $ 6.89 3,019 $ 5.52
======= ======== ======= ======== ======= ========

The following table summarizes information about stock options outstanding
at December 31, 2001:

F-21

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)

Public Relations Services Stock Options -- In June 1999, the Company issued
options covering a total of 50,000 shares of common stock at an exercise price
of $8.0625 per share to a consultant as partial compensation for public
relations services rendered to the Company. The options granted to the
consultant have an exercise price equal to the fair market value of the stock at
date of grant. The options were fully exercisable upon grant date. The Company
accounted for the option grant in accordance with SFAS No. 123, and as such, a
charge for stock compensation expense of $250,000, which represents the fair
value of the options on the date of grant, is included in general and
administrative expenses for the year ended December 31, 1999. All such options
were exercised in 2000.

Pro Forma Stock-Based Compensation Disclosure -- SFAS 123 requires that pro
forma information regarding net income and earnings per share be presented as if
the Company had accounted for its employee stock options under the fair value
method as defined in that statement. The fair value of each stock option granted
is estimated on the date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions for grants in 1995, 1996, 1997,
1998, 1999, 2000 and 2001 respectively; dividend yield of 0.00%; risk-free
interest rates are different for each grant and range from 4.65% to 7.02%; the
expected term is 5 years; and a volatility of 38.68% for all 1995 and 1996
grants, 35.97% for all 1997 grants, 51.08% for all 1998 grants, 61.97% for all
1999 grants, 67.71% for all 2000 grants and 68.33% for all 2001 grants. The
effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

A summary of Patterson-UTI's stock option activity and related information for
the years ended December 31 follows:

Stock Purchase Warrants -- In December 2001, the Company issued 325,000
warrants exercisable at $26.75 per share as partial consideration for the
purchase of 17 drilling rigs and related equipment from Cleere Drilling Company
(see Note 2). The warrants were fully exercisable upon the date of issuance. If
not exercised, the warrants will expire on December 21, 2004.

In June 2000, the Company issued 127,000 warrants exercisable at $22 per
share as partial consideration for the purchase of eight drilling rigs and
related equipment from High Valley Drilling, Inc. (see Note 2). The warrants
were fully exercisable upon date of issuance. If not exercised, the warrants
will expire on June 2, 2003.

F-22

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)

Tabular Summary -- The following table summarizes information regarding the
Company's stock options and warrants granted under the provisions of the
aforementioned plans: as well as stock options and warrants issued pursuant to
certain transactions described in Notes 2 and 9:

11. LEASES

The Company incurred rent expense, consisting primarily of daily rental
charges for the use of drilling equipment of $5.9 million, $8.6 million and $5.6
million, for the years 2001, 2000 and 1999, respectively. The Company's
obligations under non-cancelable operating lease agreements are not material to
the Company's operations.

F-23

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. INCOME TAXES

Components of the income tax provision applicable for federal and state
income taxes are as follows (in thousands):

The difference between the statutory federal income tax rate and the
effective income tax rate is summarized as follows:

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. The Company expects the
deferred tax assets at December 31, 2001 to be realized as a result of the
reversal during the carryforward period of existing taxable temporary
differences giving rise to deferred tax liabilities and the generation of
taxable income in the carryforward period; therefore, no valuation allowance is
necessary.

F-24

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. INCOME TAXES -- (CONTINUED)

The tax effect of significant temporary differences representing deferred
tax assets and liabilities and changes therein were as follows (in thousands):

Patterson-UTI's investment tax credit carryforward expired in 2000, the
expiration of which gave rise to a deduction of 50% of the credit in 2001. Net
operating losses were fully utilized in 2001 and the remaining alternative
minimum tax credit may be carried forward indefinitely. Significant other
deferred tax assets consist primarily of workers' compensation allowance of $4.5
million and bad debt allowance of $1.3 million at December 31, 2001.

13. EMPLOYEE BENEFITS

The Company maintains a 401(k) profit sharing plan for all eligible
employees. Company contributions are discretionary. The Company made no matching
contribution in 1999, but made matching contributions of $789,000 and $2.1
million for 2001 and 2000, respectively.

14. BUSINESS SEGMENTS

The Company conducts its business through three distinct operating
activities: contract drilling of oil and natural gas wells, and provision of
drilling and completion fluids services and pressure pumping services to
operators in the oil and natural gas industry.

Contract Drilling Services. The Company markets its contract drilling
services to major and independent oil and natural gas producers and operators.
The Company owns 319 drilling rigs, of which 287 operated in 2001. Currently,
257 of the drilling rigs are based in Texas and New Mexico (144 in West Texas
and New Mexico, 53 in South Texas, 39 in East Texas and 21 in North-Central
Texas), 41 are based in Oklahoma, five in Utah and 16 in western Canada. Our
contract drilling services operations contributed operating income of $274.5
million in 2001.

Drilling and Completion Fluids Services. The Company provides contract
drilling and completion fluids services to oil and natural gas producers in the
Permian Basin of West Texas and Southeast New Mexico, South Texas, East Texas,
Oklahoma, the Gulf Coast regions of Texas and Louisiana, and the Gulf of Mexico.
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. The drilling fluids operations were added by the Company during 1998 with
its acquisition of two companies with operations in Texas, New Mexico, Oklahoma
and

F-25

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. BUSINESS SEGMENTS -- (CONTINUED)

Colorado. Our services were expanded to include completion fluids in October
2000 with the acquisition of the drilling and completion fluids division of
Ambar, Inc., which had operations in the coastal areas of Texas, Louisiana and
in the Gulf of Mexico. Our drilling and completion fluids services operations
contributed operating income of $3.8 million in 2001.

Pressure Pumping Services. The Company provides pressure pumping services
in the Appalachian Basin. Pressure pumping services consist primarily of well
stimulation and cementing for the completion of new wells and remedial work on
existing wells. Well stimulation involves processes inside a well designed to
enhance the flow of oil, natural gas or other desired substances from the well.
Cementing is the process of inserting material between the hole and the pipe to
center and stabilize the pipe in the hole. Our pressure pumping services
operations contributed operating income of $12.6 million in 2001.

The following table summarizes selected financial information relating to
our business segments:

F-26

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. BUSINESS SEGMENTS -- (CONTINUED)

- ---------------

(a) Corporate assets primarily include cash on hand managed by the parent
corporation and certain deferred Federal income tax assets.

F-27

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Quarterly financial information for the years ended December 31, 2001 and
2000 is as follows:

16. CONCENTRATIONS OF CREDIT RISK

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of demand deposits, temporary
cash investments and trade receivables.

The Company believes that it places its demand deposits and temporary cash
investments with high credit quality financial institutions. At December 31,
2001 and 2000, the Company's demand deposits and temporary cash investments
consisted of the following (in thousands):

Concentrations of credit risk with respect to trade receivables are
primarily focused on companies involved in the exploration and development of
oil and natural gas properties. The concentration is somewhat mitigated by the
diversification of customers for which the Company provides drilling services.
As is general industry practice, the Company generally does not require
customers to provide collateral. No significant losses from individual contracts
were experienced during the years ended December 31, 2001, 2000 and 1999. We
recognized bad debt expense for 2001, 2000 and 1999 of $2.0 million, $570,000
and $282,000, respectively.

The carrying values of cash and cash equivalents, marketable securities and
trade receivables approximate fair value due to the short-term maturity of these
assets.

F-28

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. RELATED PARTY TRANSACTIONS

Use of Assets -- In 2001, 2000 and 1999, the Company leased a 1981 Beech
King-Air 90 airplane owned by an affiliate of the Company's Chief Executive
Officer and our President/Chief Operating Officer. Under the terms of the lease,
the Company paid a monthly rental of $9,200 and its proportionate share of the
costs of fuel, insurance, taxes and maintenance of the aircraft. The Company
paid approximately $212,283, $193,769 and $222,583 for the lease of the airplane
during 2001, 2000 and 1999, respectively.

Sales of Oil -- An affiliate acted as the first purchaser of oil produced
from certain leases operated by the Company during 1999. Sales of oil to that
entity, both royalty and working interest were approximately $8.4 million. There
were no sales of oil to that entity in 2001 or 2000.

Joint Operation of Oil and Natural Gas Properties -- The Company operates
certain oil and natural gas properties in which the Chief Executive Officer, the
President/Chief Operating Officer, the Chief Financial Officer and other persons
or entities related to the Company purchased a joint interest ownership with the
Company and other industry partners. The Company made oil and natural gas
production payments (net of royalty) of $8.3 million, $13.4 million and $6.1
million from these properties in 2001, 2000 and 1999, respectively, to the
aforementioned persons or entities. These persons or entities reimbursed the
Company for joint operating costs of $5.9 million, $8.0 million and $5.9 million
in 2001, 2000 and 1999, respectively.

Other -- In 2001, the Company paid approximately $387,000 to an entity
owned by a relative of the Company President/Chief Operating Officer for certain
equipment and metal fabrication services. One of our directors is a director and
an officer of a company from which we purchased drill pipe, materials and
supplies totalling approximately $22.0 million in 2001. This same director was
an officer of a customer through February 2001 from which we received
approximately $500,000 in revenues in 2001.

F-29

PATTERSON-UTI ENERGY, INC.

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

- ---------------

(1) Net of recoveries.

(2) Uncollectible accounts written off.

S-1

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Patterson-UTI Energy, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 18, 2002 PATTERSON-UTI ENERGY, INC.

By: /s/ CLOYCE A. TALBOTT
------------------------------------
Cloyce A. Talbott
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Patterson-UTI
Energy, Inc. and in the capacities indicated as of March 18, 2002.

EXHIBIT INDEX

- ---------------

(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment No. 2
to Registration Statement on Form SB-2 (File No. 33-68058-FW) filed on
October 28, 1993.

(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.

(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.

(4) Incorporated by reference to Item 16, "Exhibits" to Registration Statement
on Form S-3 filed on January 8, 2001.

(5) Incorporated herein by reference to Joint Proxy Statement/Prospectus filed
on March 14, 2001.

(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated and filed on May 8, 2001.

(7) Incorporated by reference to Item 2, "Exhibits" to Registration Statement
on For 8-A filed on January 14, 1997.

(8) Incorporated herein by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 2000.

(9) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917) filed on March 13, 1998.

(10) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471) filed on November 4, 1997.

(11) Incorporated herein by reference to Item 8, "Exhibits" to Post-Effective
Amendment No. 1 to Registration Statement on Form S-8 (file No. 333-60470)
filed on July 25, 2001.

(12) Incorporated herein by reference to Item 8, "Exhibits" to Post-Effective
Amendment No. 1 to Registration Statement on Form S-8 (file No. 333-60466)
filed on July 25, 2001.

(13) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
on Form SB-2 (File No. 33-68058-FW) filed on August 30, 1993.

(14) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended June 30, 2001, filed on
August 1, 2001.

(15) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended September 30, 2001, filed
on October 31, 2001.

(16) Incorporated herein by reference to Item 2, "Exhibits" to Registration
Statement on Form 8-A (File No. 000-22664) filed on January 14, 1997.