Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-22664

Patterson-UTI Energy, Inc.

Registrant’s telephone number, including area code:

Securities Registered Pursuant to 12(b) of the Act: None

(Title of class)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of 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. o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ          No o

      The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter was $2,441,241,719, calculated by reference to the closing price of $32.37 for the common stock on the Nasdaq National Market on that date.

      As of February 2, 2004, the registrant had outstanding 81,055,467 shares of common stock, $.01 par value, its only class of voting stock.

      Documents incorporated by reference:

      Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders (Part III)

Table of Contents

      This Report on Form 10-K (including documents incorporated by reference herein) contains statements with respect to our expectations and beliefs as to future events. These types of statements are “forward-looking” and subject to uncertainties. Readers are cautioned that such forward-looking statements should be read in conjunction with our disclosures under the heading: “Forward Looking Statements and Cautionary Statements for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” beginning on page 15.

      This Report on Form 10-K, along with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available through our Internet website (www.patenergy.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

PART I

Items 1 and 2.     Business and Properties.

Overview

      Based on publicly available information, we believe we are the second largest owner of land-based drilling rigs in North America. The Company was formed in 1978 and reincorporated in 1993 as a Delaware corporation. Our contract drilling business operates primarily in:

	•	Texas,
	•	New Mexico,
	•	Oklahoma,
	•	Louisiana,
	•	Mississippi,
	•	Colorado,
	•	Utah,
	•	Wyoming, and
	•	Western Canada (Alberta, British Columbia and Saskatchewan).

      As of December 31, 2003, we had a drilling fleet of 343 drilling rigs. A drilling rig includes the structure, power source, and machinery necessary to cause a drill bit to penetrate earth to a depth desired by the customer.

      We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. These services consist primarily of well stimulation and cementing for completion of new wells and remedial work on existing wells. We provide drilling fluids, completion fluids, and related services to oil and natural gas operators in West Texas, 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 are also engaged in the development, exploration, acquisition and production of oil and natural gas. Our oil and natural gas operations are focused primarily in producing regions in West Texas, Southeast New Mexico, South Texas and Mississippi.

Patterson/UTI Merger

      Patterson Energy, Inc. and UTI Energy Corp. consummated a merger on May 8, 2001. The transaction 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

1

Table of Contents

Industry Segments

      Our revenues, operating profits/(losses) and identifiable operating assets are attributable to four industry segments:

	•	contract drilling,
	•	pressure pumping services,
	•	drilling and completion fluids services, and
	•	oil and natural gas development, exploration, acquisition and production.

      With respect to these four segments:

	•	the contract drilling segment had operating profits in 2003, 2002 and 2001,
	•	the pressure pumping segment had operating profits in 2003, 2002 and 2001,
	•	the drilling and completion fluids segment had operating losses in 2003 and 2002 and an operating profit in 2001, and
	•	the oil and natural gas segment had operating profits in 2003, 2002 and 2001.

      See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 16 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 operators. As of December 31, 2003, we owned 343 drilling rigs which are based in the following regions:

	•	143 in West Texas and New Mexico,
	•	56 in South Texas,
	•	42 in the Ark-La-Tex region and Mississippi,
	•	70 in the Mid-Continent region (Oklahoma and North Central Texas),
	•	16 in the Rocky Mountain region (Colorado, Utah and Wyoming), and
	•	16 in Western Canada (Alberta, British Columbia and Saskatchewan).

      Of our drilling rigs, 39 are SCR electric rigs and 304 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,

2

Table of Contents

	•	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. During fiscal years 2003, 2002, and 2001, we spent approximately $95 million, $69 million, and $151 million, respectively, on capital improvements to modify and upgrade our drilling rigs.

      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 developmental and exploratory 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. Typically, the contracts are entered into for short-term periods and cover the drilling of a single well or a series of wells.

      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. 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 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. The customer supervises the drilling of the well. Our compensation is based on a contracted 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 conditions beyond our control. In addition, daywork contracts typically provide separately for mobilization of the drilling rig.

3

Table of Contents

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, we have the opportunity to improve our 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 to the contracted depth than estimated. Footage contracts generally contain greater risks for a drilling contractor than daywork contracts. Under footage contracts, the drilling contractor assumes certain risks associated with loss of the well 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 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 larger 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:

(1)	A rig is operating when it is drilling, being moved, assembled, or dismantled under contract.

4

Table of Contents

      Drilling Rigs and Related Equipment — The following table provides certain information about our drilling rigs as of December 31, 2003:

      At December 31, 2003, we owned 261 trucks and 316 trailers used to rig down, transport, and rig up our drilling rigs. This reduces our 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 and overhaul work to our drilling rig equipment is performed at our yard facilities located in Texas, New Mexico, Oklahoma, and Western Canada.

Pressure Pumping Operations

      General — We provide pressure pumping services to oil and natural gas operators primarily 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 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 — As of December 31, 2003, we operated the following pressure pumping equipment:

	•	21 cement pumper trucks,
	•	24 fracturing pumper trucks,
	•	20 nitrogen pumper trucks,
	•	11 blender trucks,
	•	11 bulk acid trucks,
	•	25 bulk cement trucks,
	•	6 bulk nitrogen trucks,
	•	31 bulk sand trucks, and
	•	11 connection trucks.

Drilling and Completion Fluids Operations

      General — We provide drilling fluids, completion fluids, and related services to oil and natural gas operators in West Texas, 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 Texas, Louisiana, Oklahoma, and New Mexico.

      Drilling Fluids — Drilling fluid products and systems are used to cool and lubricate the 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.

5

Table of Contents

      Completion Fluids — After a well is drilled it undergoes the completion process wherein the well casing is set and cemented into 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. This facility allows us to grind raw barite into the powder additive used in drilling fluids. We believe the ability to process our own barite is critical to being competitive on the Gulf Coast and in the Gulf of Mexico.

      Other Equipment — We own 20 trucks and 75 trailers and lease another 22 trucks which are used to transport drilling and completion fluids and related equipment.

Oil and Natural Gas Operations

      General — We are engaged in the development, exploration, acquisition, and production of oil and natural gas. Our oil and natural gas business operates primarily in producing regions of West Texas, Southeast New Mexico, South Texas, and Mississippi. Our strategy for our oil and natural gas operations is to increase our reserve base primarily through developmental drilling, as well as selected acquisitions of leasehold acreage and producing properties.

      Oil and Natural Gas Reserves — The following table sets forth estimates, derived from reserve reports provided by M. Brian Wallace, an independent petroleum engineer, of our proved developed reserves and estimated future net revenues from our proved developed reserves as of December 31, 2003, 2002, and 2001. The estimates were based upon production histories, current market prices for oil and natural gas, and other geologic, ownership, and engineering data provided by us. The present values (discounted at 10% before income taxes) of estimated future net revenues shown in the table are not intended to represent the current market value of the estimated oil and natural gas reserves. For further information concerning the present value of estimated future net revenues from these proved developed reserves, see also Note 20 of Notes to Consolidated Financial Statements included as a part of Item 8 of this Report.

      Proved oil and natural gas reserves are the estimated quantities of oil and natural gas which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reserves are considered proved if economical productibility is supported by either actual production or conclusive formation tests. Proved developed oil and

6

Table of Contents

(1)	For the calculation of standardized measure of discounted future net cash flows, see Note 20 of Notes to Consolidated Financial Statements included as a part of Item 8 of this Report.

      A barrel (Bbl) of oil is 42 U.S. gallons and represents the basic unit for measuring production of crude oil and condensate.

      An Mcf of natural gas refers to a volume of 1,000 cubic feet under prescribed conditions of pressure and temperature and represents the basic unit for measuring volumes of produced natural gas. A barrel of equivalent (BOE) in reference to natural gas equivalents is determined using the rate of six Mcf of natural gas to one Bbl of crude oil or condensate.

      Production — At December 31, 2003, we held a working interest in 315 productive wells, of which 150 were considered oil and 165 were considered natural gas. A productive well is a well producing oil or natural gas in commercial quantities. A working interest is the operating interest under an oil or natural gas lease which gives the owner the right to explore for and produce oil or natural gas from the lease. We were the operator of 172 of these wells at December 31, 2003. The following table sets forth our net oil and natural gas production, average sales price, and average production costs. Production costs are costs incurred to operate and maintain our wells and related equipment and include costs of labor, well service and repair, utilities, field supervision, property taxes, production, and severance taxes and related charges.

7

Table of Contents

      Productive Wells — The following table sets forth information regarding the number of productive wells in which we held a working interest as of December 31, 2003. One or more completions in the same well bore are reflected as one well.

      Developed and Undeveloped Acreage — The following table sets forth the developed and undeveloped acreage in which we owned a working interest at December 31, 2003:

      Undeveloped acreage is leased acres on which wells have not been drilled to a point that would permit production of commercial quantities of oil and natural gas. Developed acreage is leased acres that have been assigned to productive wells. Our gross acreage is the total number of acres, developed or undeveloped, in which we own a working interest, regardless of the size of our working interest in the acreage. Our net acreage is the gross acreage proportionally reduced to our working interest in the acreage.

      Many of our leases summarized in the table above as undeveloped acreage will expire at the end of their respective primary terms unless production has been obtained from the acreage prior to that date. If production is obtained, the lease will remain in effect until the cessation of production. The following table sets forth the gross and net acreage subject to leases summarized in the table of undeveloped acreage that will expire:

8

Table of Contents

      Drilling Activities — The following table sets forth the results of our participation in the drilling of developmental and exploratory wells during 2003, 2002 and 2001:

      In addition, we were participating in six wells, 1.33 net, that were being drilled at December 31, 2003.

      Generally, a developmental well is a well that is drilled into an oil and natural gas reservoir that is known to be productive. An exploratory well is a well that is drilled to find oil and natural gas in an unproved area.

Customers

      The customers of each of our four business segments are oil and natural gas operators or purchasers of these commodities. Our customer base includes both major and independent oil and natural gas operators. During 2003, 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.

      We believe 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 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 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.

      Oil and Natural Gas Business — There is substantial competition for the acquisition of oil and natural gas leases suitable for development and exploration and for the hiring of experienced personnel. Our competitors in this business include:

	•	major integrated oil and natural gas operators,
	•	independent oil and natural gas operators, and
	•	drilling and production purchase programs.

      Our ability to increase our oil and natural gas reserves in the future is directly dependent upon our ability to select, acquire, and develop suitable prospects. Many of our competitors have financial resources, staffs, and facilities greater than ours.

9

Table of Contents

Government and Environmental Regulation

      All of our operations and facilities are subject to numerous federal, state, foreign, and local laws, rules, and regulations related to various aspects of our business, including:

	•	drilling of oil and natural 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 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 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, as amended, 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, as amended, 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, as amended, 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

10

Table of Contents

      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, as amended, 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
	•	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.

11

Table of Contents

      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 coverage for major physical damage to our drilling rigs. However, we do not carry insurance against loss of earnings resulting from such damage. 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 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 5,800 full-time persons (300 office personnel and 5,500 field personnel) at December 31, 2003. The number of field employees fluctuates depending on the current and expected demand for our services. We consider our employee relations to be satisfactory. None of our employees are 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 “Forward Looking Statements and Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,”

12

Table of Contents

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 (325) 574-6300. There are a number of improvements at our headquarters, including:

	•	an office building with approximately 34,000 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 services are supported by several administrative offices and yard facilities located throughout our areas of operations including:

	•	Texas,
	•	New Mexico,
	•	Oklahoma,
	•	Colorado,
	•	Utah, and
	•	Western Canada.

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

	•	Pennsylvania,
	•	Ohio,
	•	West Virginia,
	•	Kentucky,
	•	Wyoming, and
	•	Eastern Canada.

13

Table of Contents

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

	•	Texas,
	•	Louisiana,
	•	New Mexico, and
	•	Oklahoma.

      Oil and Natural Gas — Our oil and natural gas services are supported by administrative and field offices in Texas.

      We own our headquarters in Snyder, Texas, 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.

      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-UTI 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 LP and Westfort concerning the drilling of a daywork well in Mississippi. This lawsuit was filed by Westfort after Patterson Petroleum LP made demand on Westfort for payment of the contract drilling services.

      The Westfort lawsuit has been dismissed without prejudice. Westfort filed for bankruptcy in May of 2003. We continue to assert claims against Westfort including the monies owed Patterson Petroleum LP under the letter agreement in the amount of approximately $5,075,000. Amounts deemed uncollectible have been reserved. We believe that it is remote that the outcome of this matter will have a material adverse effect on Patterson-UTI’s financial condition and results of operations.

      In this lawsuit, Westfort alleged breach of contract, fraud, and negligence causes of action. Westfort sought 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-UTI’s net worth. We intend to vigorously contest these claims if reasserted by Westfort.

      We are also 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.

      None.

14

Table of Contents

FORWARD LOOKING STATEMENTS AND CAUTIONARY

      Patterson-UTI from time to time makes written or oral forward-looking statements, including statements contained in this Annual Report on Form 10-K, our other 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. These statements include, without limitation, statements relating to liquidity, financing of operations, sources and sufficiency of funds, and impact of inflation. 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.

      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 currently applicable to, or which could readily be applicable to, 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. Natural gas prices fell from an average of $6.23 per Mcf in the first quarter of 2001 to an average of $2.51 per Mcf for the same period in 2002. During this same period, the average number of our rigs operating dropped by approximately 50%. The average market price of natural gas improved to $5.45 in 2003 compared to $3.36 in 2002, resulting in an increase in demand for our drilling services. Our average number of rigs operating increased to 188 in 2003 from 126 in 2002. 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.

A General Excess of Operable Land Drilling Rigs Adversely Affects Our Profit Margins Particularly in Times of Weaker Demand.

      The contract drilling business experienced increased demand for drilling services in 1997, 2000 and 2001. However, except for those periods and other occasional upturns, generally, there have been substantially more drilling rigs available than necessary to meet demand in most operational and geographic segments of the

15

Table of Contents

      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.

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 can cause the price of these items to increase significantly and require that orders for the items be placed well in advance of expected use. These price increases and delays in delivery may require 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 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 our 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 which in turn has a negative impact on both our operations and profitability. Operationally, it is more difficult to hire qualified personnel which adversely affects our ability to mobilize inactive rigs in response to the increased demand for our contract drilling services. Additionally, wage rates for drilling personnel are likely to increase, resulting in greater operating costs. During the last upturn in our industry, we experienced an approximate 30% to 40% increase in wage rates to our drilling personnel.

16

Table of Contents

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. 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.

      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 operations, 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 or losses 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.

      We have elected in some cases to accept a greater amount of risk through increased deductibles on certain insurance policies. For example, we maintain a $750,000 per occurrence deductible on our workers’ compensation insurance coverage and a $1.0 million per occurrence deductible on our general liability insurance coverage. These levels of self-insurance expose us to increased operating costs and risks.

Violations of Environmental Laws and Regulations Could Materially Adversely Affect Patterson-UTI’s Operating Results.

      The drilling of oil and natural gas wells is subject to various federal, state, foreign, and local 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.

17

Table of Contents

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 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 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 currently have no plan to declare or pay any cash dividends on our common stock in the foreseeable future. The terms of our existing credit facility limit payment of dividends without the prior written consent of the lenders.

PART II

      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 December 2002, our common stock was added to the Nasdaq-100 Index and 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.

18

Table of Contents

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

      As of December 31, 2003, there were approximately 300 holders of record and approximately 19,000 beneficial holders of our common shares.

      We have not declared or paid cash dividends on our common shares in the past. We currently have no plan to declare or pay any cash dividends on our common stock in the foreseeable future. Instead, we currently 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 payment of dividends without the prior written consent of the lenders.

      The following table summarizes as of December 31, 2003, certain information regarding equity compensation to our employees, officers, directors, and other persons under our equity compensation plans:

(1)

The Patterson-UTI Energy, Inc. 2001 Long-Term Incentive Plan was approved by the Company’s Board of Directors in July 2001. The terms of the Plan provide for grants of stock options to eligible employees other than officers and directors of the Company. The total number of stock options that could be granted under the Plan was 1,000,000. No Incentive Stock Options may be awarded under the Plan. All options are granted with an exercise price equal to or greater than the fair market value of the Company’s common stock at the time of grant. The vesting schedule and term are set by the Compensation Committee of the Board of Directors.

		Also in July 2001, the Company’s Board of Directors approved option grants, not included in any of the Company’s stock option plans, for two non-employee directors, each covering options to purchase 12,000 shares of the Company’s common stock at an exercise price greater than the fair market value of the

19

Table of Contents

		Company’s common stock on the grant date. The options vested in November 2001 and expire in November 2005.

      The selected consolidated financial data of Patterson-UTI as of December 31, 2003, 2002, 2001, 2000, and 1999, 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 Report. 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.

20

Table of Contents