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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, 1998
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 ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2504748
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
P.O. BOX 1416, 4510 LAMESA HIGHWAY,
SNYDER, TEXAS
79550
(Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (915) 573-1104
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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 22, 1999 was $142,705,758, based
upon the average bid and asked prices of $4.66 and $4.69, respectively, on the
Nasdaq National Market.
As of March 22, 1999, the registrant had outstanding 32,471,132 shares of
common stock, $.01 Par Value, its only class of voting stock.
DOCUMENT INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III
of this Annual Report on Form 10-K: Definitive Proxy Statement for the
registrant's 1999 Annual Meeting of Stockholders.
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PART I
The "Company" or "Patterson" is used in this report to refer to Patterson
Energy, Inc. and its consolidated subsidiaries. The Company may from time to
time make written or oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and its reports to stockholders. Items 1 and 2 contain forward-looking
statements and 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 the drilling and completion of wells, well
operations, utilization rates of drilling rigs, reserve estimates (including
estimates for future net revenues associated with such reserves and the present
value of such future net reserves), business strategies and other plans and
objectives of the Company's management for future operations and activities and
other such matters. The words "believes," "budgeted," "plans," "intends,"
"strategy," or "anticipates" and similar expressions identify forward-looking
statements. The Company does not undertake to update, revise or correct any of
the forward-looking information. Readers are cautioned that such forward-looking
statements should be read in conjunction with the Company's 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.
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ALL NUMERICAL INFORMATION CONTAINED IN THIS REPORT RELATING TO THE
COMPANY'S COMMON STOCK REFLECTS THE TWO-FOR-ONE SPLITS OF THE COMPANY'S COMMON
STOCK EFFECTED IN JULY 1997 AND IN JANUARY 1998, RESPECTIVELY.
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
OVERVIEW
Patterson is one of the leading providers of domestic land drilling
services to major and independent oil and natural gas companies. Formed in 1978
and reincorporated in 1993 as a Delaware Corporation, the Company focuses its
operations primarily in Texas and southeast New Mexico. The Company currently
has a drilling fleet of 119 drilling rigs, 114 of which are currently operable.
The Company is also engaged in the development, exploration, acquisition and
production of oil and natural gas and, to a lesser extent, provides contract
drilling fluid services to other oil and natural gas operators.
CONTRACT DRILLING OPERATIONS. The Company has established a reputation for
reliable, high quality drilling equipment and well-trained crews. The Company
continually seeks to modify and upgrade its equipment to maximize the
performance and capabilities of its drilling rig fleet, which the Company
believes provides it with a competitive advantage. Additionally, the Company has
the in-house capability to design, manufacture, repair and modify its drilling
rigs. Of the Company's drilling rigs, 82 are capable of drilling to depths
greater than 10,000 feet, including 11 that are capable of drilling to depths
greater than 15,000 feet. During the fiscal year ended December 31, 1998, the
Company drilled 1,028 wells for 251 non-affiliated customers maintaining an
average utilization rate of 54%.
Over the past five years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1993, the Company has
increased its contract drilling fleet by 106 drilling rigs. From 1993 (prior to
giving effect to the 1996 merger with Tucker Drilling Company, Inc. which was
treated as a pooling of interests for financial accounting purposes) to 1998,
the Company's consolidated operating revenues increased from $25.0 million to
$187.0 million, and earnings before interest expense, income taxes,
depreciation, depletion and amortization (EBITDA) increased from $4.3 million to
$36.1 million.
OIL AND NATURAL GAS OPERATIONS. The Company's oil and natural gas
activities are designed to complement its land drilling operations and diversify
the Company's overall business strategy. These activities are primarily focused
in mature producing regions in the Austin Chalk Trend, the Permian Basin and
South Texas. Oil and natural gas operations comprised approximately 4% of the
Company's consolidated operating revenues for the year ended December 31, 1998.
At December 31, 1998, the Company's proved developed reserves were approximately
1.5 million BOE and had a present value (discounted at 10% before income taxes)
of estimated future net revenues of approximately $6.8 million. The industry's
significantly reduced
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commodity prices, primarily the price of crude oil, have had a negative impact
on the valuation of the Company's oil and natural gas reserves. For the year end
December 31, 1998, the Company incurred a $3.8 million impairment charge to its
oil and natural gas properties.
The Company's business strategy for its oil and natural gas operations is
to increase its oil and natural gas reserves primarily through developmental and
exploratory drilling in producing areas. Although Patterson from time to time
will participate through a working interest in exploratory drilling, the focus
of the Company's drilling activities for the foreseeable future will be
exploration and development drilling in the Austin Chalk Trend, the Permian
Basin of West Texas and Southeastern New Mexico and in South Texas.
DRILLING FLUID OPERATIONS. In addition, the Company also provides contract
drilling fluid services to numerous operators in the oil and natural gas
industry. Operating revenues derived from these activities constitute
approximately 7% of the Company's consolidated operating revenues. Patterson
believes that these contract services integrate well with its other core
operating activities. The drilling fluid operations were added by the Company
during the current fiscal year with its acquisition of Lone Star Mud, Inc.
during January 1998 and Tejas Drilling Fluids, Inc. in September 1998.
The Company's headquarters are located at 4510 Lamesa Highway, Snyder,
Texas, and its telephone number at that address is (915) 573-1104. The Company
also has small offices in Austin, Houston, Dallas, Midland, San Angelo, Corpus
Christi, Texas, and twelve yard facilities variously located in its areas of
operations.
BUSINESS STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
enhancing its position as a leading domestic land drilling contractor. The
principal components of this strategy are as follows:
STRONG INDUSTRY REPUTATION. The Company believes that it has a strong
reputation within its existing markets for providing well maintained equipment,
high quality service and experienced personnel. The Company intends to build on
existing customer relationships in each of its areas of operation by offering
technically sophisticated drilling equipment and providing quality service to
its customers with an emphasis on efficiency, dependability and safety.
HIGH QUALITY ASSET BASE. The Company's drilling rigs are maintained in good
operating condition through an established program of modifications and
upgrades. The Company believes that the quality and operating condition of its
drilling equipment allow it to maximize utilization rates and pricing.
CONTINUED GROWTH THROUGH ACQUISITION. The Company believes that attractive
acquisition opportunities continue to exist to further expand its drilling rig
fleet in its core geographic operating areas as well as into other areas.
Following an acquisition, the Company refurbishes the drilling rigs to the
Company's standards of quality and dependability.
EFFICIENT OPERATIONS. Based on publicly available information, the Company
believes that it had one of the most competitive ratios of EBITDA to revenues in
the U.S. land drilling industry during 1998. The Company has produced these
results from the combination of providing premium contract drilling services and
operating under an efficient cost structure. In addition, the Company has
achieved cost reductions and efficiencies through acquisition related synergies.
The Company uses its fleet of trucks and trailers to rig down, transport and rig
up its drilling rigs, which further increases efficiency by reducing the time
and costs associated with these ancillary operations.
RECENT ACQUISITIONS
On January 5, 1998, the Company acquired 100% of the outstanding stock of
Lone Star Mud, Inc. ("Lone Star"), a privately-owned, non-affiliated company
based in Midland, Texas. The purchase price of approximately $13.0 million
consisted of $1.4 million in cash, 571,328 shares of the Company's common stock
valued at $17.41 per share, the assumption of $1.6 million of debt and
approximately $3,300 of other direct costs incurred relative to the transaction.
Pursuant to certain terms of the Company's existing loan agreement
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with Norwest Bank Texas, N.A. ("Norwest"), the outstanding balance of the above
mentioned assumed debt was paid in full.
On February 6, 1998, the Company completed the merger of Robertson Onshore
Drilling Company ("Robertson") a privately-owned, non-affiliated, contract
drilling company based in Dallas, Texas, with and into Patterson Onshore
Drilling Company, a wholly-owned subsidiary of Patterson Drilling Company. The
purchase price of approximately $42.2 million was funded using cash on hand of
approximately $3.25 million, proceeds of $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. The
assets acquired consisted of 15 operable drilling rigs and a shop and yard
located in Liberty City, Texas.
On September 17, 1998, the Company acquired 100% of the outstanding stock
of Tejas Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated
company based in Corpus Christi, Texas for $3.5 million cash and approximately
$74,000 of other direct costs incurred relative to the transaction.
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from a non-affiliated entity based in South
Texas. The Company's consideration for the acquired assets included 800,000
unregistered shares of the Company's common stock valued at $4.00 per share and
an additional cash payment to be determined one year from the acquisition date.
The contingent cash payment will be based on the sales price of the Company's
common stock in January 2000. The payment may be as high as $880,000 or as low
as zero.
INDUSTRY SEGMENTS
The Company's revenues, operating profits and identifiable operating assets
are primarily attributable to three industry segments: (i) contract drilling,
(ii) oil and natural gas exploration, development, acquisition and production
and (iii) drilling fluids. The contract drilling segment operated at a profit
during each of the years in the three-year period ended December 31, 1998. The
oil and natural gas segment operated at a profit for the years ended December
31, 1996 and 1997 and at a loss for the year ended December 31, 1998. The
drilling fluids segment generated a profit for the year ended December 31, 1998.
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. The Company markets its contract drilling services to major oil
companies and independent oil and natural gas producers. The Company owns 119
drilling rigs, 114 of which are currently operable. Currently, 99 of the
operable drilling rigs are based in Texas (60 in west Texas, 22 in south Texas,
12 in east Texas and five in north Texas), nine are based in southeast New
Mexico, five in Mississippi and one in Utah. The drilling rigs have rated
maximum depth capabilities ranging from 7,000 feet to 25,000 feet.
The drilling rigs are equipped with engines, drawworks or hoists, derricks
or masts, pumps to circulate the drilling fluid (mud), blowout preventers, drill
string (pipe) and related equipment. Depth of the well and drill site conditions
are the principal factors in determining the size and type of drilling rig used
for a particular job. The Company's drilling rigs are utilized for both
exploration and development drilling and can be used for either vertical or
horizontal drilling.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant
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importance to prospective customers. The Company has and will continue to strive
to maintain its drilling fleet in good working condition. In addition to normal
repair and maintenance expenses, the Company spends significant funds each year
on an ongoing program of modifying and upgrading its drilling rigs. The Company
also strives to employ experienced and dedicated drilling supervisors for its
various drilling rigs in the field. The Company intends to continue its ongoing
rig maintenance program and to continue to retain high quality, experienced
drilling supervisors in order to build upon its reputation in the market place.
In addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
DRILLING CONTRACTS. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other matters. The contracts obligate
the Company to pay certain operating expenses, including wages of drilling
personnel and maintenance expenses and to furnish incidental drilling rig
supplies and equipment. The contracts are subject to termination by the customer
on short notice, usually upon payment of a fee. The Company generally
indemnifies its customers against claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. These customers generally indemnify
the Company against claims arising from other surface and subsurface pollution,
except claims arising from the Company's gross negligence.
The contracts provide for compensation to the Company on a daywork, footage
or turnkey basis, or a combination thereof, with rates bid by the Company which
are dependent upon the anticipated complexity of drilling the well, the on-site
drilling conditions, the type of equipment to be used, the Company's estimate of
the risks involved and the estimated duration of the work to be performed, among
other considerations. All of the horizontal wells drilled by the Company have
been done either on a turnkey or footage basis to the point where the vertical
drilling ends and horizontal drilling begins, and on a daywork basis beyond that
point.
Under daywork contracts, the Company provides the drilling rig, including
the required personnel, to the operator who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the drilling rig is utilized. Daywork contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, the Company generally does not incur any costs
due to "in hole" losses (such as time delays for various reasons, including
stuck drill strings and blow-outs).
Footage contracts usually require the Company to bear some of the drilling
costs in addition to providing the drilling rig. Under a footage contract, the
Company would normally determine the manner of drilling and type of equipment to
be used, subject to certain customer specifications, and also would bear the
risk and expense of mechanical malfunctions, equipment shortages and other
delays arising from drilling problems. Compensation is based on a
rate-per-foot-drilled basis at completion of the well. Prices of both footage
and daywork contracts vary depending upon various factors such as the location,
depth, duration and complexity of the well to be drilled, operating conditions
and other factors peculiar to each proposed well.
Under turnkey contracts, the Company contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment and
services required. The Company bears the risk of drilling the well to the
contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because the Company assumes substantially
greater economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, the Company
could sustain substantial losses.
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The following table sets forth for each of the periods indicated the
approximate percentage of the Company's drilling revenues attributable to
daywork, footage and turnkey contracts:
YEAR ENDED
DECEMBER 31,
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TYPE OF REVENUES 1996 1997 1998
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Daywork..................................................... 52% 62% 64%
Footage..................................................... 40 35 24
Turnkey..................................................... 8 3 12
Contract drilling operations depend on the availability of drill pipe and
bits, fuel and qualified personnel, some of which have been in short supply from
time to time. As favorable buying opportunities arise, the Company stockpiles
bits and other drilling rig parts.
The Company's ability to drill wells for which it has contracts may be
delayed by inclement weather. Sustained periods of inclement weather may have a
material adverse effect on the Company's revenues and cash flows.
CONTRACT DRILLING ACTIVITY. The following table sets forth certain
information regarding the Company's contract drilling activity for each of the
years in the three year period ended December 31, 1998.
YEAR ENDED
DECEMBER 31,
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1996 1997 1998
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Number of wells drilled................................... 464 1,115 1,028
Average rigs available for service........................ 42 73 106
Average rig utilization rate(1)........................... 76% 89% 54%
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(1) Rig utilization is based on a 365-day year for rigs available for service
during the periods indicated. A rig is utilized when it is operating or
being moved, assembled or dismantled under contract.
CUSTOMERS. For the year ended December 31, 1998, the Company drilled wells
for 251 nonaffiliated customers. This compares with 193 nonaffiliated customers
for the year ended December 31, 1997. No single customer accounted for 10% or
more of the Company's consolidated operating revenues for the fiscal year ended
December 31, 1998. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company's operations.
The Company's customers in the past 12 months have included, among others,
Abraxas Production, Apache Corporation, ARCO Permian, Burlington Resources Oil &
Gas Company, Chevron U.S.A., Cobra Oil and Gas, Costilla Petroleum, Louis
Dreyfuss Natural Gas Company, Enron Oil & Gas Company, Mitchell Energy
Corporation, Oryx Energy, Santa Fe Energy and Union Pacific Resources, Co.
As of December 31, 1998 the Company was drilling a total of 17 wells, none
of which were being drilled for affiliated parties.
DRILLING RIGS AND RELATED EQUIPMENT. The following table provides certain
information concerning the drilling rigs owned by the Company to date:
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC
------------------ ---------- ---------------
7,000 to 10,000....................................... 37(1) --
10,001 to 15,000...................................... 64 7
15,001 to 25,000...................................... 7(2) 4
--- --
Totals...................................... 108 11
=== ==
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(1) Includes 4 inoperable rigs.
(2) Includes 1 inoperable rig.
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The Company owns 101 trucks and 137 trailers. This equipment is used to rig
down, transport and rig up the Company's drilling rigs which minimizes the
Company's dependency upon third parties for these ancillary services and further
enhances the efficiency of the Company's contract drilling operations.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities variously located in Texas and New
Mexico. The Company believes that its operable drilling rigs and related
equipment are in good operating condition. In addition to normal repair and
maintenance expenses, the Company historically has spent significant funds for
its ongoing program of modifying and upgrading its equipment.
OIL AND NATURAL GAS OPERATIONS
GENERAL. The Company has been engaged in the development, exploration,
acquisition and production of oil and natural gas since 1982. The Company's oil
and natural gas activities have been designed to complement its land drilling
operations and are primarily concentrated in three operating areas of Texas: (i)
the Austin Chalk Trend, (ii) the Permian Basin and (iii) South Texas.
The Company's strategy for its oil and natural gas operations is to
increase its reserve base primarily through development drilling, as well as
selected acquisitions of leasehold acreage and producing properties. At December
31, 1998, the Company was the operator of 130 wells, of which it was the
drilling contractor for 122 wells.
OIL AND NATURAL GAS RESERVES. The Company engaged M. Brian Wallace, P.E.
Dallas, Texas, an independent petroleum engineer, to estimate the Company's
proved developed reserves, projected future production and estimated future net
revenues from production of proved developed reserves on its properties as of
December 31, 1996, 1997 and 1998. Mr. Wallace's estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. In determining the estimates of the
reserve quantities that are economically recoverable, Mr. Wallace used oil and
natural gas prices and estimated average development and production costs
provided by the Company.
The following table sets forth information as of the end of each of the
years in the three year period ended December 31, 1998 derived from the reserve
reports of Mr. Wallace. 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
owned by the Company. For further information concerning the present value of
estimated future net revenue from these proved developed reserves, see Note 16
of Notes to Consolidated Financial Statements included as a part of Item 8 of
this Report.
AS OF DECEMBER 31,
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1996 1997 1998
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(IN THOUSANDS)
Proved Developed Reserves:
Oil (Bbls).......................................... 1,062 945 946
Gas (Mcf)........................................... 7,627 3,788 3,490
Total (BOE)......................................... 2,333 1,576 1,528
Estimated future net revenue before income taxes.... $25,637 $15,012 $9,232
Present value of estimated future net revenues
before income taxes, discounted at 10%............ $17,893 $11,422 $6,770
The reserve data set forth above represents only estimates. The estimates
are based on various assumptions and, therefore, are inherently imprecise.
Actual future production, revenues, taxes, production costs and development
costs may vary substantially from those assumed in the estimates. Any
significant variance could materially affect the estimates set forth in this
Form 10-K. In addition, the reserve data may be subject to upward or downward
revisions depending upon, among other factors, production history and prevailing
oil and natural gas prices. Oil and natural gas prices have fluctuated widely in
recent years. There is no assurance that prices will be higher or lower than
prices used in estimating the Company's reserves.
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PRODUCTION. The Company's wells in the Austin Chalk Trend and South Texas
primarily produce natural gas and in the Permian Basin primarily produce oil.
The following table sets forth the Company's net oil and natural gas production,
average sales price and average production (lifting) costs associated with such
production during the periods indicated.
YEAR ENDED DECEMBER 31,
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1996 1997 1998
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Average net daily production:
Oil (Bbls).......................................... 641 1,159 835
Gas (Mcf)........................................... 4,586 4,024 2,742
Total (BOE)......................................... 1,406 1,830 1,292
Average sales prices:
Oil (per Bbl)....................................... $20.99 $17.86 $12.16
Gas (per Mcf)....................................... 2.01 2.19 1.93
Average production (lifting) costs (per BOE)........ $ 3.91 $ 3.41 $ 4.08
PRODUCTIVE WELLS. The following table sets forth information regarding the
number of productive wells in which the Company held a working interest as of
December 31, 1998. One or more completions in the same well bore are counted as
one well.
PRODUCTIVE
WELLS
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GROSS NET
----- ---
Oil......................................................... 185 56.56
Gas......................................................... 56 4.73
--- -----
Total.................................................. 241 61.29
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DEVELOPED AND UNDEVELOPED ACREAGE. The following table sets forth the
developed and undeveloped acreage in which the Company owned a working or
leasehold interest as of December 31, 1998:
DEVELOPED UNDEVELOPED
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LOCATION GROSS NET GROSS NET
-------- ----- --- ----- ---
Austin Chalk Trend and South Texas.......................... 34,118 6,260 89,330 22,459
Permian Basin............................................... 24,275 3,150 37,390 7,994
------ ----- ------- ------
Total.................................................. 58,393 9,410 126,720 30,453
====== ===== ======= ======
Many of the 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 subject to the lease prior to that date, in which
event the lease will remain in effect until the cessation of production. The
following table sets forth the gross and net acres subject to leases summarized
in the table of undeveloped acreage that will expire.
LEASE ACRES EXPIRING
--------------------
GROSS NET
----- ---
PERIOD ENDING:
December 31, 1999....................................... 35,397 6,767
December 31, 2000....................................... 40,485 8,901
December 31, 2001 and later............................. 50,838 14,785
------- ------
Total.............................................. 126,720 30,453
======= ======
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DRILLING ACTIVITIES. The following table set forth the results of the
Company's participation in the drilling of development and exploratory wells
during each of the years ended December 31, 1996, 1997 and 1998.
DEVELOPMENT WELLS EXPLORATORY WELLS
------------------------------- ------------------------------
PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
-------------- ------------- ------------- -------------
YEAR ENDED DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
----------------------- ----- --- ----- --- ----- --- ----- ---
1996...................................... 29 4.35 16 3.87 1 .16 6 1.00
1997...................................... 24 5.44 8 1.53 7 1.13 15 3.06
1998...................................... 23 4.45 6 1.74 3 .55 13 2.16
-- ----- -- ---- -- ---- -- ----
Total................................ 76 14.24 30 7.14 11 1.84 34 6.22
== ===== == ==== == ==== == ====
MARKETING OF CRUDE OIL AND NATURAL GAS. Crude oil is sold based upon 30-day
automatically renewable contracts with oil purchasers. Prices vary as world oil
prices fluctuate. Due to competitive conditions, the Company does not believe
that the loss of any one of its major crude oil purchasers would have a material
adverse effect on its business. The Company markets oil produced from Company
operated wells through a wholly-owned subsidiary. A company owned in part by the
son of Cloyce A. Talbott, the Company's Chairman and Chief Executive Officer, is
a first purchaser of substantially all of the oil produced from Company-operated
leases. See Note 18 of Notes to Consolidated Financial Statements included as a
part of Item 8 of this Report.
Most of the Company's natural gas is sold through third-party natural gas
brokers at spot market prices and is transported to market by interstate
pipelines. Contracts with these brokers are currently for less than five years
and allow for prices to adjust to the marketplace. The Company believes that
because of the competitive nature of the industry today, the loss of any one of
its natural gas purchasers would not have a material adverse effect on its
business. While the Company has not experienced any inability to market its
natural gas, if transportation space in the pipelines is restricted or is
unavailable, the Company's cash flow could be adversely affected.
No customer for oil and natural gas accounted for more than 10% of the
Company's consolidated revenues for the year ended December 31, 1998.
TITLE TO OIL AND NATURAL GAS PROPERTIES. Title to the Company's oil and
natural gas properties is subject to royalty, overriding royalty, carried
working, and other similar interests and cost sharing arrangements customary in
the oil and natural gas industry (including farmout agreements, operating
agreements and joint venture arrangements), liens for current taxes not yet due,
and to other minor defects and encumbrances. The Company believes that such
burdens do not materially detract from the value of such properties or from the
Company's interest therein or materially interfere with the operation of the
Company's business.
As is customary in the oil and natural gas industry in the case of
undeveloped properties, an in-house title review is made prior to or at the time
of acquisition. More comprehensive title investigations, including in most cases
receipt of a title opinion of legal counsel, are generally made before
commencement of drilling operations on undeveloped properties and also are
generally made before consummation of an acquisition of developed properties.
COMPETITION
CONTRACT DRILLING OPERATIONS. The contract drilling industry is highly
competitive. Price is generally the most important competitive factor in the
drilling industry. Other competitive factors include the availability of
drilling equipment and experienced personnel at or near the time and place
required by customers, the reputation of the drilling contractor in the drilling
industry and its relationship with existing customers. The Company believes that
it competes favorably with respect to all of these factors. Competition is
usually on a regional basis, although drilling rigs are mobile and can be moved
from one region to another in response to increased demand. An oversupply of
drilling rigs in any region may result. Demand for land drilling equipment is
also dependent on the exploration and development programs of oil and natural
gas companies, which are in
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turn influenced primarily by the financial condition of such companies, by
general economic conditions, by prices of oil and natural gas and, from time to
time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of the Company, some of which have substantially greater resources and longer
operating histories than the Company. Also, in recent years, many drilling
companies have consolidated or merged with other companies. Although this
consolidation has decreased the total number of competitors, management of the
Company believes that competition for drilling contracts will continue to be
intense for the foreseeable future.
OIL AND NATURAL GAS OPERATIONS. There is substantial competition for the
acquisition of oil and natural gas leases suitable for exploration and for the
hiring of experienced personnel. The Company's competitors in oil and natural
gas exploration, development and production include major integrated oil and
natural gas companies, numerous independent oil and natural gas companies,
drilling and production purchase programs and individual producers and
operators. The ability of the Company to increase its holdings of oil and
natural gas reserves in the future is directly dependent upon the Company's
ability to select, acquire and develop suitable prospects in competition with
these companies. Many competitors have financial resources, staffs, facilities
and other resources significantly greater than those of the Company.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and natural gas wells is subject to numerous
state and federal laws, rules and regulations. State statutory provisions
relating to oil and natural gas generally include requirements as to well
spacing, waste prevention, production limitations, disposal of produced waters,
pollution prevention and clean-up, obtaining drilling permits and similar
matters. Within the state of Texas, where substantially all of the Company's
operations are currently conducted, these regulations are principally enforced
by the Texas Railroad Commission. To date, the Company has not been required to
expend significant resources in order to satisfy applicable environmental laws
and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or extraordinary expenditures
associated 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 the Company could incur liability for
noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental hazards which would
materially affect its operations.
The contract drilling industry is dependent on demand for services from the
oil and natural gas exploration industry and, accordingly, is affected by
changing tax laws, price controls and other laws relating to the energy business
generally. The Company's business is affected generally 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, which could have an adverse effect on the Company's operations.
Several state and federal environmental laws and regulations currently apply to
the Company's operations and may become more stringent in the future. Although
the Company has utilized operating and disposal practices that were or are
currently standard in the industry, hydrocarbons and other materials may have
been disposed of or released in or under properties currently or formerly owned
or operated by the Company or its predecessors in interest. In addition, some of
these properties have been operated by third parties over whom the Company has
no control as to such entities' treatment of hydrocarbon and other materials an
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 by the Superfund Amendments and Reauthorization Act of 1986
(collectively, "CERCLA"), and comparable state statutes impose strict liability
on owners and operators of sites and on persons who disposed of or arranged for
the disposal of "hazardous substances" found at sites. The federal Resource
Conservation and Recover Act ("RCRA") and comparable state statutes govern the
disposal of "hazardous wastes." Although CERCLA currently excludes petroleum
from the definition of "hazardous substances," and RCRA also excludes certain
classes of exploration and production wastes from regulation, such exemptions by
Congress under both CERCLA and RCRA may be deleted, limited or modified in the
future. If such changes are made to
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CERCLA and/or RCRA, the Company 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 ("FWPCA") and the Oil Pollution Act
of 1990 ("OPA") and implementing regulations govern the prevention of
discharges, including oil and produced water spills, and liability for damages
into waters. The OPA is more comprehensive and stringent than previous oil
pollution liability and prevention laws and 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 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 OPA also expands the
authority and capability of the federal government to direct and manage oil
spill clean-up and operations, plus 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.
The Company has spill protection control countermeasure (SPCC) plans in place
for its oil and natural gas properties in each of the areas in which it
operates. Failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to civil or criminal
actions. Although the liability for owners and operators is the same under the
FWPCA, the damages recoverable under the OPA are potentially much greater and
can include natural resource damages.
The operations of the Company are also subject to federal, state and local
regulations for the control of air emissions. The federal Clean Air Act ("CAA"),
as amended, and various state and local laws impose certain air quality
requirements on the Company. Amendments to the CAA revised the definition of
"major source" such that emissions from both wellhead and associated equipment
involved in oil and 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
The Company's operations are subject to the many hazards inherent in the
drilling business, including blow-outs, cratering, fires and explosions. These
hazards could cause personal injury or death, suspend drilling operations or
seriously damage or destroy 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
the Company's operations, particularly through oil or produced water spillage,
natural gas leaks and extensive, uncontrolled fires. In addition, the Company
could become subject to liability for reservoir damages. The occurrence of a
significant event, including pollution or environmental damages, could
materially affect the Company's operations and financial condition. As a
protection against operating hazards, the Company maintains insurance coverage
considered by the Company to be adequate, including all-risk physical damages,
employer's liability, commercial general liability and workers compensation
insurance. The Company currently has general liability insurance of $2.0 million
per occurrence with an aggregate of $2.0 million and excess liability and
umbrella coverage's of up to $50.0 million per occurrence with a $50.0 million
aggregate. The Company's customers generally require the Company to have at
least $1.0 million of third party liability coverage. Since April 1, 1992, the
Company has carried workers' compensation insurance, with a deductible of
$100,000 per occurrence. If multiple workers' compensation claims are filed, the
Company could incur significant expenses, which in turn could have a material
adverse impact on its financial condition and operations.
The Company believes that 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 drilling rigs; however, it does not carry insurance against loss of
earnings resulting from such damage or loss. In view of the difficulties that
may
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be encountered in renewing such insurance at reasonable rates, no assurance can
be given that the Company will be able to maintain the type and amount of
coverage that it considers adequate at reasonable rates or that any particular
types of coverage will be available.
EMPLOYEES
The Company employed approximately 1,202 full-time persons (83 office
personnel and 1,119 field personnel) at December 31, 1998. The number of
drilling rig employees will fluctuate depending upon the number of operable
drilling rigs and the demand for contract drilling services. The Company
considers its employee relations to be satisfactory. None of the Company's
employees are represented by a union.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings arising in the normal
course of its business. Management of the Company does not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. 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, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its 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, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, 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, the Company:
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenue,
profitability and future 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 factors as well as actions of state and local agencies, the U.S. and
foreign governments and international cartels. All of these factors are beyond
the control of the Company. Any significant or extended decline in oil and/or
natural gas prices will have a material adverse effect on the Company's
financial condition and operations and could impair access to sources of
capital. The price of oil rose to a six-year high of $25.75 per barrel in
January 1997, and fell to a low since then of $8.60 per barrel in December 1998.
These low level oil prices have materially adversely impacted the Company's
operations. See "Market Conditions for Contract Drilling Services," below.
Should oil prices remain at these levels or continue to decline or natural gas
prices decline, the Company's operations would be further adversely affected.
MARKET CONDITIONS FOR CONTRACT DRILLING SERVICES. The contract drilling
business experienced increased demand for drilling services from 1995 through
the third quarter of 1997 due to stronger oil and natural gas prices. However,
except for that period and other occasional upturns, the market for onshore
contract drilling services has generally been depressed since mid-1982. Since
this time and except during the occasional upturns, there have been
substantially more drilling rigs available than necessary to meet demand in most
operating and geographic segments of the domestic 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 the
Company, ongoing movement or reactivation of onshore drilling rigs or new
construction of drilling rigs could adversely affect rig utilization rates and
pricing, even in an environment of stronger oil and natural gas prices and
increased drilling activity. The Company cannot predict either the future level
of demand for its contract drilling services or future conditions in the
contract drilling industry. The Company's rig utilization rate reached an all
time high of approximately 91.5% in the third quarter of 1997 and fell to a low
since then of 29% during December 1998 due to low oil prices.
SUBSTANTIAL BANK DEBT -- IMPACT OF DEPRESSED OIL AND NATURAL GAS PRICES ON
ABILITY TO MAKE LOAN PAYMENTS AND TO SATISFY LOAN COVENANTS. The Company has a
bank term loan with a remaining principal balance of $55.7 million at December
31, 1998. All of the Company's contract drilling rigs and all of its oil and
natural gas properties are pledged as collateral on the loan and the remainder
of its assets are subject to a negative pledge. The loan is payable in monthly
principal installments of $714,286 until January 1, 2001, when the loan matures
and the then remaining principal balance and accrued interest becomes due and
payable. The loan agreement contains a number of covenants including financial
covenants, the failure of which to satisfy could at the bank's election cause
acceleration of the maturity date of the loan and require immediate
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repayment. At December 31, 1998, the Company was in violation of one of the loan
covenants which required positive net income. The bank waived the breach of this
covenant and agreed to replace the covenant with an earnings before interest
expense, income taxes, depreciation, depletion and amortization to interest
expense covenant. Failure of the Company to meet this amended covenant or any of
the other covenants could at the bank's election cause the maturity date of the
loan to be accelerated and become immediately due and payable. Failure of the
Company to pay the loan principal and interest could result in foreclosure on
the drilling rigs and oil and natural gas properties. The Company believes it
has sufficient working capital to pay monthly principal and interest payments
under the loan for at least the next 12 months without improvement in commodity
prices. The ability to meet the various loan covenants without improvement in
commodity prices could be more difficult.
FLUCTUATIONS IN SHORTAGES OF DRILL PIPE IN THE CONTRACT DRILLING
INDUSTRY. The increase in domestic drilling demand from mid-1995 through the
third quarter of 1997 and related increase in contract drilling activity
resulted in a shortage of drill pipe in the industry. This shortage caused the
price of drill pipe to increase significantly and required that orders for new
drill pipe be placed one year in advance. A return to higher demand levels for
contract drilling services could reinstate the problems associated with drill
pipe shortages.
RECENT RAPID GROWTH; ASSOCIATED RISKS. The Company has experienced rapid
and substantial growth over the past four years and, if favorable opportunities
arise in the future, intends to further expand its drilling fleet through
selected acquisitions. Continued growth could strain the Company's management,
operations, employees and resources. There can be no assurance that the Company
will be able to manage growth effectively or that it will be successful in
maintaining the market share attributable to operable drilling rigs acquired by
the Company. If the Company is unable to manage its growth, its business,
results of operations or financial condition could be materially adversely
affected.
NO ASSURANCE OF ADDITIONAL GROWTH THROUGH ACQUISITIONS. The Company's
growth has been enhanced materially by strategic acquisitions that have
substantially increased the Company's drilling rig fleet. Although the land
drilling industry has experienced significant consolidation over the past couple
of years, the Company believes that significant acquisition opportunities are
still available. However, there can be no assurance that suitable acquisition
candidates can be found, and the Company is likely to continue to face
competition from other companies for available acquisition opportunities. In
addition, if the prices paid by buyers of drilling rigs remain at current levels
or continue to rise, the Company may find fewer acceptable acquisition
opportunities. There can be no assurance that the Company will have sufficient
capital resources to complete acquisitions, that acquisitions can be completed
on terms acceptable to the Company or that any completed acquisition would
improve the Company's financial condition, results of operations, business or
prospects in any material manner.
FLUCTUATIONS IN AVAILABILITY OF QUALIFIED DRILLING RIG PERSONNEL. The
increase in domestic drilling demand from mid-1995 through the third quarter of
1997 and related increase in contract drilling activity resulted in a shortage
of qualified drilling rig personnel in the industry. This increase adversely
impaired the Company's ability to attract and retain sufficient qualified
personnel and to market and operate its drilling rigs. Further, the labor
shortages resulted in wage increases, which impacted the Company's operating
margins. A return to higher demand levels for contract drilling services could
reinstate the problems associated with labor shortages.
RELIANCE ON KEY PERSONNEL. The Company is highly dependent upon its
executive officers and key employees. The unexpected loss of the services of any
of these individuals, particularly Cloyce A. Talbott or A. Glenn Patterson, the
Chief Executive Officer and the President of the Company, respectively, could
have a detrimental effect on the Company. The Company has no employment
agreements with any of its executive officers. The Company maintains key man
insurance on the lives of Messrs. Talbott and Patterson in the amount of $3
million each.
COMPETITION. The Company encounters intense competition in its contract
drilling operations from other drilling contractors. The competitive environment
for contract drilling services involves such factors as drilling rates,
availability and condition of drilling rigs and equipment, reputation and
customer relations. Many of the
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competitors in each of the Company's lines of business have substantially
greater financial and other resources than the Company.
OPERATING HAZARDS AND UNINSURED RISKS. Contract drilling and oil and
natural gas activities are subject to a number of risks and hazards which could
cause serious injury or death to persons, suspension of drilling operations and
serious damage to equipment or property of others and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of toxic
gases or extensive uncontrolled fires. In addition, the Company could become
subject to liability for reservoir damages. The occurrence of a significant
event, including pollution or environmental damage, could materially affect the
Company's operations and financial condition. Although the Company believes that
it is adequately insured against normal and foreseeable risks in its operations
in accordance with industry standards, such insurance may not be adequate to
protect the Company against liability from all consequences of well disasters,
extensive fire damage or damage to the environment. No assurance can be given
that the Company will be able to maintain adequate insurance in the future at
rates it considers reasonable or that any particular types of coverage will be
available. Furthermore, a portion of the Company's contract drilling is done on
a turnkey basis, which involves substantial economic risks. Under turnkey
drilling contracts, the Company contracts to drill a well to a contract depth
under specified conditions for a fixed price. The risks to the Company under
this type of drilling contract are substantially greater than on a well drilled
on a daywork or footage basis since the Company assumes most of the risks
associated with the drilling operations generally assumed by the operator of the
well in a daywork or footage contract, including risk of blowout, machinery
breakdowns and abnormal drilling conditions. Accordingly, if severe drilling
problems are encountered in drilling wells under a turnkey contract, the Company
could suffer substantial losses associated with that contract. For the years
ended December 31, 1997 and 1998, the percentage of the Company's contract
drilling revenues attributable to turnkey contracts was 3.0% and 12.0%,
respectively.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION MATTERS. The Company's
operations are subject to numerous domestic laws and regulations that relate
directly or indirectly to the drilling of oil and natural gas wells, including
laws and regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have generally become more stringent in recent years,
and may in certain circumstances impose strict liability, rendering a person
liable for environmental damage without regard to negligence or fault on the
part of such person. To date, the Company has not been required to expend
significant resources in order to comply with applicable environmental laws and
regulations nor has it incurred any fines or penalties for noncompliance.
However, compliance costs under existing legal requirements and under any new
requirements could become material, and the Company could incur liability in the
future for noncompliance. Additional matters subject to governmental regulation
include discharge permits for drilling operations, performance bonds, reports
concerning operations, spacing of wells, unitization and pooling of properties,
disposal of produced water and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas.
------------------------------
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $0.01 per share is publicly traded on
the Nasdaq National Market and is quoted under the symbol "PTEN."
The following table sets forth the high and low sales prices of the
Company's common stock for the periods indicated:
HIGH LOW
---- ---
1997:
First quarter............................................... $ 8.75 $5.50
Second quarter.............................................. 11.69 6.63
Third quarter............................................... 26.56 11.13
Fourth quarter.............................................. 32.63 14.38
1998:
First quarter............................................... $20.00 $8.88
Second quarter.............................................. 15.63 9.25
Third quarter............................................... 10.06 4.06
Fourth quarter.............................................. 7.00 3.44
As of March 22, 1999, there were approximately 408 holders of record
(approximately 18,000 beneficial holders) of the Company's common stock.
The Company has not declared or paid cash dividends on its common stock in
the past and does not expect to declare or pay any cash dividends on its common
stock in the foreseeable future. The Company instead intends to retain its
earnings to support the operations and growth of its business. Any future cash
dividends would depend on future earnings, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of Directors.
The following subparagraph sets forth information concerning equity
securities sold by the Company during 1998 but not registered under the
Securities Act of 1993, as amended (the "Act"):
During January 1998, the Company issued a total of 571,328 shares of its
Common Stock valued at $17.41 per share as partial consideration for the
acquisition of 100% of the outstanding stock of Lone Star Mud, Inc. See Items 1
and 2, "Business and Properties -- Recent Acquisitions," for additional
information. No underwriter was involved in the transaction and no sales
commissions, fees or similar compensation were paid to any person in connection
with the issuance of the shares. The Company believes that the issuance of the
shares was exempt from the registration requirements of Section 5 of the Act by
virtue of Rule 506 under Regulation D of the Act.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company as of December 31,
1994, 1995, 1996, 1997 and 1998 and for each of the five years then ended were
derived from the consolidated financial statements of the Company which have
been audited by PricewaterhouseCoopers LLP, independent accountants. This
financial data 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.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
INCOME STATEMENT DATA:
Operating revenues:
Drilling..................................... $54,823 $57,599 $73,590 $178,332 $165,997
Oil and natural gas.......................... 4,707 6,845 10,118 12,445 7,170
Drilling fluids.............................. -- -- -- -- 13,397
------- ------- ------- -------- --------
Total..................................... 59,530 64,444 83,708 190,777 186,564
------- ------- ------- -------- --------
Operating costs and expenses:
Drilling..................................... 43,036 46,505 59,564 128,416 128,838
Oil and natural gas.......................... 2,654 2,669 3,465 4,402 3,676
Drilling fluids.............................. -- -- -- -- 10,205
Impairment of oil and natural gas
properties................................ -- 159 549 355 3,816
Depreciation, depletion and amortization..... 4,912 7,523 9,960 17,497 28,091
General and administrative................... 4,793 5,063 5,416 6,786 9,313
------- ------- ------- -------- --------
Total..................................... 55,395 61,919 78,954 157,456 183,939
------- ------- ------- -------- --------
Operating income............................... 4,135 2,525 4,754 33,321 2,625
------- ------- ------- -------- --------
Other income (expense)......................... 679 (111) (2,737) 1,787 (2,857)
------- ------- ------- -------- --------
Income (loss) before income taxes.............. 4,814 2,414 2,017 35,108 (232)
Income tax expense (benefit)................... (193) (787) (2,254) 12,866 93
------- ------- ------- -------- --------
Net income (loss).............................. $ 5,007 $ 3,201 $ 4,271 $ 22,242 $ (325)
======= ======= ======= ======== ========
Net income (loss) per common share:
Basic........................................ $ 0.31 $ 0.18 $ 0.22 $ 0.78 $ (0.01)
======= ======= ======= ======== ========
Diluted...................................... $ 0.31 $ 0.18 $ 0.21 $ 0.75 $ (0.01)
======= ======= ======= ======== ========
Weighted average number of common shares
outstanding:
Basic........................................ 16,120 17,517 19,167 28,492 31,645
======= ======= ======= ======== ========
Diluted...................................... 16,120 18,082 20,086 29,505 31,645
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Total assets................................... $49,509 $62,991 $87,913 $203,200 $236,605
Notes payable.................................. 6,886 13,816 25,849 23,250 55,714
Stockholders' equity........................... 30,310 37,656 43,482 146,932 156,852
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 the
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Company's financial position and on the Company's earnings per share, and other
such matters. The words "believes," "budgeted," "expects" or "estimates" and
similar expressions identify forward-looking statements. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Readers are cautioned that such forward-looking statements should be read in
conjunction with the Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of approximately
$31.0 million and cash and cash equivalents of approximately $9.0 million as
compared to working capital of approximately $46.5 million and cash and cash
equivalents of approximately $23.3 million as of December 31, 1997. The decrease
in the Company's working capital at December 31, 1998 was largely attributable
to cash expended by the Company related to acquisitions completed during fiscal
year 1998. Approximately $8.7 million of the aggregate $58.8 million purchase
price for the related acquisitions was funded using cash on hand at the
respective dates of acquisition. In addition, the Company assumed approximately
$3.4 million of debt, which was paid in full using cash on hand immediately
following the consummation of such acquisitions and made an $8.0 million payment
to the Internal Revenue Service for the Company's estimated Federal tax
liability. For the year ended December 31, 1998, the Company generated net cash
from operations of approximately $30.0 million, received proceeds of
approximately $299,000 from the exercise of stock options, sold property and
equipment for proceeds of approximately $1.4 million, received approximately
$566,000 from the sale of investment securities and borrowed $40.2 million under
a then existing credit facility. These funds were used primarily to acquire
drilling rigs, related equipment and associated intangible assets of
approximately $45.5 million, to provide certain necessary refurbishment of
approximately $26.4 million to the Company's operable drilling fleet, to reduce
certain notes payable by approximately $7.7 million and to fund leasehold
acquisition, exploration and development of approximately $7.7 million.
On January 5, 1998, the Company completed the acquisition of Lone Star Mud,
Inc. ("Lone Star"), a privately-owned, non-affiliated company based in Midland,
Texas for a purchase price of approximately $13.0 million consisting of $1.4
million in cash, 571,328 shares of the Company's common stock valued at $17.41
per share, which was the market price on the acquisition date, the assumption of
$1.6 million of debt and approximately $3,300 of direct costs incurred related
to the acquisition. Lone Star is a provider of drilling fluids to the oil and
natural gas industry. Management of the Company viewed the acquisition as an
opportunity to enter into a related segment of the oilfield service industry,
which would integrate well with the Company's existing operations.
On February 6, 1998, the Company completed its merger with Robertson
Onshore Drilling Company ("Robertson"), a privately-owned, non-affiliated
contract drilling company based in Dallas, Texas. The purchase price of $42.2
million consisted of $3.25 million in cash, $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. As a
result of the merger, the Company acquired 15 operable drilling rigs, increasing
the Company's rig fleet to 114 drilling rigs, and a shop and yard located in
Liberty City, Texas.
On September 17, 1998, the Company completed the acquisition of Tejas
Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated company based
in Corpus Christi, Texas for a purchase price of approximately $3.5 million cash
and approximately $74,000 of direct costs incurred related to the acquisition.
Tejas is a provider of drilling fluids to the oil and natural gas industry with
its primary focus of operations in the south Texas region.
At May 31, 1998, the Company's existing $70.0 million line of credit with
Norwest Bank Texas, N.A. ("Norwest") converted to a term note with a maturity
date of January 1, 2001 with a seven-year, level-principal amortization. The
note bears interest at the 30-day LIBOR rate plus 2.375%. At the time of
conversion, the Company had drawn $60.0 million under the available credit
facility. The Company is currently making monthly principal and interest
payments of approximately $1.1 million as required by the underlying agreement
until its maturity at January 1, 2001.
18
19
At December 31, 1998, the Company was in violation of the positive net
income covenant provision of such credit agreement. The Company obtained a
waiver of such violation from Norwest as of December 31, 1998. In addition, the
credit agreement was further amended to replace the positive net income covenant
with an earnings before interest expense, income taxes, depreciation, depletion
and amortization (EBITDA) to quarterly interest expense provision. The Company
must maintain on a quarterly basis an EBITDA to interest expense of at least
2.25 to 1.0. Although there can be no assurances, management does not anticipate
a future violation of such covenant.
Management believes that the current level of cash and short-term
investments, together with cash generated from operations should be sufficient
to meet the Company's immediate capital needs. From time to time, the Company
reviews acquisition opportunities relating to its business. The timing, size or
success of any acquisition and the associated capital commitments are
unpredictable. Should further opportunities for growth requiring capital arise,
the Company believes it would be able to satisfy these needs through a
combination of working capital, cash 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, 1998 AND 1997
For the year ended December 31, 1998, contract drilling revenues were
approximately $166.0 million as compared to $178.3 million for the same period
in 1997, a decrease of approximately 7%. Average rig utilization was 54% on an
average of 106 rigs available for service for the year ended December 31, 1998
as compared to 89% on an average of 73 rigs available for service for the twelve
months ended December 31, 1997. Direct drilling costs were $128.8 million or 78%
of drilling revenues for the year ended December 31, 1998, while direct drilling
costs were $128.4 million or 72% of related drilling revenues for 1997. General
and administrative expense for the contract drilling operations was
approximately $6.1 million for the year ended December 31, 1998 as compared to
approximately $5.4 million in 1997. The increase in general and administrative
expense was largely attributable to additional expense associated with the
administrative offices of Lone Star Mud Company and Robertson Onshore Drilling
Company acquired by the Company during January and February 1998, respectively.
The administrative responsibilities of the Robertson Onshore operations were
terminated during July 1998 and absorbed by the Company's personnel in Snyder,
Texas. Depreciation and amortization expense for the contract drilling segment
increased from $12.5 million for the year ended December 31, 1997 to
approximately $22.4 million for the same twelve-month period in 1998. The
increase in depreciation and amortization expense was largely attributable to
the increased number of drilling rigs added by acquisitions completed during
fiscal years 1997 and 1998. For the twelve months ended December 31, 1998,
operating income from the Company's contract drilling operations was
approximately $9.3 million as compared to approximately $32.7 million in 1997.
The decreased profitability was largely attributable to the 35% decrease in the
Company's rig utilization rates , a change in drilling contracts which required
the Company to bear certain costs in associated with drilling wells that in 1997
was paid by the Company's customers, and, to a lesser extent, moderate decrease
during 1998 by the Company in its daily drilling rates. These three factors are
reflective of the detrimental impact the industry's weakened commodity prices
had on the Company's operations.
Oil and natural gas sales revenues were approximately $5.6 million for the
year ended December 31, 1998, as compared to approximately $10.8 million in
1997. The volume of oil and natural gas sold by the Company decreased by
approximately 29% in 1998, as compared to fiscal year 1997. The average price
per Bbl of crude oil received by the Company was $12.16 in 1998, as compared to
$17.86 in 1997, and the average price per Mcf of natural gas was $1.93 in 1998,
as compared to $2.19 in 1997. Lease operating and production costs were $4.08
per BOE in 1998, as compared to $3.41 per BOE in 1997. General and
administrative expense for the oil and natural gas segment was approximately
$1.3 million and $1.4 million for the years ended December 31, 1998 and 1997,
respectively. Exploration costs increased moderately by approximately 3% to
$669,000 for the year ended December 31, 1998. Depreciation and depletion
expense was approximately $4.8 million in 1998, as compared to approximately
$5.0 million in 1997. During 1998, primarily as a result of the industry's
significantly reduced commodity prices, the Company impaired certain of its oil
and natural gas
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20
properties by $3.8 million. The Company incurred impairment expense of
approximately $355,000 in 1997. Other revenues generated by the oil and natural
gas segment, consisting primarily of fees generated from lease operating
activities, were approximately $1.5 million and $1.6 million for the years ended
December 31, 1998 and 1997, respectively. For the year ended December 31, 1998,
the oil and natural gas segment generated a loss from operations of
approximately $6.2 million as compared to income of approximately $2.4 million
for the year ended December 31, 1997. The decrease in the segment's operating
results was primarily attributable to the decrease in the underlying commodity
prices, particularly the 32% decrease in the price received for crude oil, as
discussed above.
Although the contract drilling and oil and natural gas segments represent
the Company's core operations, the Company derived operating revenues of
approximately $13.4 million from its drilling fluid services. For the year ended
December 31, 1998, the Company incurred approximately $13.0 million of operating
costs associated with its drilling fluid activities, including depreciation and
amortization expense of approximately $895,000 and general and administrative
expense of approximately $1.9 million. The Company generated approximately
$360,000 of operating income from its contract drilling fluid services for the
year ended December 31, 1998.
For the year ended December 31, 1998, the Company incurred interest expense
of approximately $4.5 million as compared to $1.0 million in 1997. This increase
was due to the additional $36.75 million borrowed during February 1998 in the
Company's acquisition of Robertson. In 1998, the Company recognized a net gain
on the sale of property and equipment of $636,000 as compared to approximately
$1.5 million in 1997. The decrease in 1998 was largely attributable to the sale
of the Company's interest in an oil and natural gas property of approximately
$813,000 during fiscal year 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997, contract drilling revenues were
approximately $178.3 million as compared to $73.6 million for the same period in
1996, an increase of approximately 142%. Average rig utilization increased
approximately 13% to 89% for the twelve months ended December 31, 1997. Direct
drilling costs were $128.4 million or 72% of drilling revenues for the year
ended December 31, 1997, while direct drilling costs were $59.6 million or 81%
of related drilling revenues for 1996. The increase in contract drilling
revenues and associated drilling costs was primarily attributable to the
addition of 35 drilling rigs to the Company's operable drilling fleet during
fiscal year 1997 and the addition of 13 operable drilling rigs during the fourth
quarter of 1996. General and administrative expense for the contract drilling
operations was approximately $5.4 million for the year ended December 31, 1997
as compared to approximately $4.0 million in 1996. As a result of the Company's
recent capital acquisitions, depreciation expense increased from approximately
$6.8 million in 1996 to approximately $12.5 million for the year ended December
31, 1997. These increased levels of depreciation expense are expected to
continue for the foreseeable future. For the twelve months ended December 31,
1997, income from the Company's contract drilling operations was approximately
$32.7 million as compared to approximately $3.9 million in 1996. This increased
profitability was largely attributable to the increased rig utilization rate
attained during 1997 and, to a lesser extent, moderate increases realized by the
Company during 1997 in its daily drilling rates.
Oil and natural gas sales revenues were approximately $10.8 million for the
year ended December 31, 1997, as compared to approximately $8.3 million in 1996.
The volume of oil and natural gas sold by the Company increased by approximately
30% in 1997, as compared to fiscal year 1996. The average price per Bbl of crude
oil received by the Company was $17.86 in 1997, as compared to $20.99 in 1996,
and the average price per Mcf of natural gas was $2.19 in 1997, as compared to
$2.01 in 1996. Lease operating production costs were $3.41 per BOE in 1997, as
compared to $3.91 per BOE in 1996. General and administrative expense for the
oil and natural gas segment was approximately $1.4 million for each of the years
ended December 31, 1997 and 1996. Exploration costs were $647,000 for the year
ended December 31, 1997, as compared to approximately $466,000 in 1996.
Depreciation and depletion expense was approximately $5.0 million in 1997, as
compared to approximately $3.1 million in 1996. The Company incurred impairment
expense of approximately $355,000 and $549,000 for the years ended December 31,
1997 and 1996, respectively. Other revenues generated by the oil and natural gas
segment, consisting primarily of fees generated from lease
20
21
operating activities, were approximately $1.6 million and $1.8 million for the
years ended December 31, 1997 and 1996, respectively. For the year ended
December 31, 1997, the oil and natural gas segment generated income from
operations of approximately $2.4 million as compared to income of approximately
$1.6 million for the year ended December 31, 1996.
For the year ended December 31, 1997, the Company incurred interest expense
of $1.045 million as compared to $1.6 million in 1996. The decrease in interest
expense related to the Company's early retirement of its notes payable during
the first quarter of 1997 using proceeds provided by its equity offering
completed during that time. In 1997, the Company recognized a net gain on the
sale of property and equipment of $1.5 million as compared to approximately
$546,000 in 1996. The increase in 1997 was largely attributable to the sale of
the Company's interest in an oil and natural gas property of approximately
$813,000.
In 1997, as a result of the Company's increased profitability and reduced
benefit of certain deferred tax assets, the Company incurred income tax expense
of approximately $12.9 million as compared to a net income tax benefit of $2.3
million in 1996. As previously reported, the Company fully reduced its valuation
allowance existing against its deferred tax assets in prior periods recognizing
the related benefit. To the degree that the Company generates income in excess
of its remaining deferred tax assets, it will incur income tax expense at its
effective statutory rate.
INCOME TAXES
At December 31, 1998, the Company had tax net operating loss ("NOL")
carryforwards of approximately $4.2 million. These NOL carryforwards expire at
various dates from 1999 through 2012, subject to certain limitations. Prior to
August 3, 1995, the Company realized substantial federal income tax savings due
to the NOL carryforwards. The utilization of these NOL carryforwards prior to
that date effectively reduced the current federal income tax rate. During 1995,
the Company's NOL carryforwards became subject to an annual limitation due to a
change of over 50% in the stock ownership of the Company as defined in Internal
Revenue Service Code Section 382(g). The NOL carryforwards that can be utilized
to offset net income in any year will be equal to approximately $3.3 million.
The NOL limitation is determined by the value of the Company's equity on August
2, 1995, the day prior to the ownership change, times 5.88%, the Federal long-
term exempt rate on that date as published by the U.S. Treasury Department, or
$1.8 million, and approximately $1.5 million which is determined by the value of
Tucker Drilling Company, Inc.'s equity on July 29, 1996, the day prior to
consummation of the Merger, times 5.78%, the Federal long-term exempt rate on
that date.
During the year ended December 31, 1996, the Company began recording
non-cash Federal deferred income taxes based primarily on the relationship
between the amount of the Company's unused Federal NOL carryforwards and the
temporary differences between the book basis and tax basis in the Company's
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 its deferred income taxes, the Company will incur
deferred income tax expense as these benefits are utilized. The Company incurred
deferred income tax expense of approximately $6.5 million and $2.5 million for
the years ended December 31, 1998 and 1997, respectively.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
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 the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations. The sharp decline in crude oil prices beginning in the fourth
quarter of 1997 has materially impacted the Company's operations. Should oil
prices remain at current
21
22
levels or continue to decline or natural gas prices decline significantly from
current prices, the Company's operations would be further adversely affected.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
RECENTLY-ISSUED ACCOUNTING STANDARDS
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting and presentation of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Company's adoption of SFAS No. 130 did not result in any significant changes to
its related reporting disclosures.
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The Company's adoption of
SFAS No. 131 did not result in any significant changes to its related reporting
disclosures.
The FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
("SFAS No. 132") in February 1998. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement recognition of those plans. This statement is effective for fiscal
years beginning after December 15, 1998. The Company's adoption of SFAS No. 132
in September 1998 did not result in any changes to the Company.
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133")
in June 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The provisions of
SFAS No. 133 are not expected to have a material impact to the Company.
YEAR 2000 COMPLIANCE PROGRAM
During fiscal year 1997, the Company began implementation of its program
for alleviating potential business interruptions that could be caused by the
year 2000. The Company's program identified two principal areas of concern:
supporting information technology systems ("IT systems") and the Company's
related vulnerability to external providers of services and materials.
The Company currently maintains three separate infrastructures to
facilitate the processing of daily transactions and financial reporting. Each of
the lines of business engaged in by the Company function separately from the
other and therefore operates on individual computer platforms. The Company has
completed its conversion of each of the computer platforms resulting in the
replacement and modification of certain hardware and software applications that
previously were determined not to be compliant with year 2000 issues.
The ability of the Company to conduct its business efficiently and
productively requires that providers of services and materials to the Company,
as well as, major customers to the Company (collectively referred to herein as
"external agents") be year 2000 compliant. The Company has implemented a process
whereby
22
23
external agents are identified and prioritized by level of exposure. Management
of the Company is in the process of assessing the readiness and effectiveness of
its external agents for the year 2000. Surveys, solicitations and other forms of
inquiry are being used to make this determination. Management intends to
interpret the responses and information gathered and determine on an individual
basis whether the Company is vulnerable to that external agent. This process
will continue through January 2000 as a means to provide a continuous update as
to the external agents' status and success.
The Company does not expect the total cost associated with the Company's
efforts to become year 2000 compliant to be material to the Company's financial
position. The total amount expended on the project through December 31, 1998 was
approximately $1.75 million. The Company expects to significantly reduce its
level of uncertainty about year 2000 issues and, in particular, about the year
2000 compliance and readiness of its external agents. Accordingly, the Company
does not deem it necessary to formally adopt a contingency plan.
The failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of its program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The foregoing disclosure constitutes "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk associated with the floating rate
portion of the interest charged on its $55.7 million term loan with Norwest Bank
Texas, N.A. The term loan, which matures on January 1, 2001, bears interest at
LIBOR plus 2.375%. The Company's exposure to interest rate risk due to changes
in LIBOR is not expected to be material and at December 31, 1998, the fair value
of the obligation approximates its related carrying value because the obligation
bears interest at the current market rate.
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.
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24
PART III
The information required by Part III is omitted from this report because
the Company will file a definitive Proxy Statement for the Company's 1999 Annual
Meeting of Stockholders (the "Proxy Statement") pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this Form 10-K 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.
24
25
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 Schedules.
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 Asset Purchase Agreement, dated April 22, 1997, among and
between Patterson Drilling Company and Ziadril, Inc.(4)
2.4 Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(3)
2.4.1 Amendment to Asset Purchase Agreement, dated June 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.5 Agreement, dated June 4, 1997, among Patterson Energy Inc.,
Patterson Drilling Company, Greathouse Foundation and Myrle
Greathouse, Trustee under Agreement dated June 2, 1997.(5)
2.6 Asset Purchase Agreement, dated September 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and McGee
Drilling Company.(4)
2.7 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.8 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.9 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).
2.10 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.
3.1 Restated Certificate of Incorporation.(8)
3.1.1 Certificate of Amendment to the Certificate of
Incorporation.(9)
3.2 Bylaws.(1)
4.1 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock.(10)
4.2 Registration Rights Agreement, dated June 12, 1997, among
Patterson Energy Inc. and Wes-Tex Drilling Company,
Greathouse Foundation and Myrle Greathouse, Trustee under
Agreement dated June 2, 1997.(11)
25
26
4.3 Stock Purchase Warrant of Patterson Energy, Inc., dated June 12, 1997.(11)
10.1 Credit Agreement dated December 9, 1997 among Patterson Energy, Inc., Patterson Drilling Company,
Patterson Petroleum, Inc., Patterson Trading Company, Inc. and Norwest Bank Texas, N.A.(6)
10.1.1 Promissory Note dated December 9, 1997 among Patterson Energy, Inc. and Norwest Bank Texas, N.A.(6)
10.1.2 Security Agreement dated December 9, 1997 between Patterson Drilling Company and Norwest Bank Texas,
N.A.(6)
10.1.3 Corporate Guarantees of Patterson Drilling Company, Patterson Petroleum, Inc. and Patterson Petroleum
Trading Company, Inc.(6)
10.1.4 Amendment to Credit Agreement dated March 4, 1999 among Patterson Energy, Inc., Patterson Drilling
Company, Patterson Petroleum, Inc., Patterson Trading Company, Inc. and Norwest Bank Texas, N.A.
10.2 Aircraft Lease, dated December 20, 1998, (effective January 1, 1999) between Talbott Aviation, Inc. and
Patterson Energy, Inc.
10.3 Participation Agreement, dated October 19, 1994, between Patterson Petroleum Trading Company, Inc. and
BHT Marketing, Inc.(12)
10.3.1 Participation Agreement dated October 24, 1995, between Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(13)
10.4 Crude Oil Purchase Contract, dated October 19, 1994, between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(14)
10.4.1 Crude Oil Purchase Contract, dated October 24, 1995, between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(13)
10.5 Patterson Energy, Inc. 1993 Stock Incentive Plan, as amended.(15)
10.6 Patterson Energy, Inc. Non-Employee Directors' Stock Option Plan, as amended.(16)
10.7 Model Form Operating Agreement.(17)
10.8 Form of Drilling Bid Proposal and Footage Drilling Contract.(17)
10.9 Form of Turnkey Drilling Agreement.(17)
21.1 Subsidiaries of the registrant.(18)
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule as of December 31, 1998 and for the year then ended.
- ---------------
(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
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 herein by reference to Item 16, "Exhibits" to Amendment No. 1
to Registration Statement on Form S-3 (File No. 333-29035); filed August 5,
1997.
(5) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11, 1997.
(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated November 14, 1997 and filed December 24, 1997.
(7) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits," to Form 8-K dated January 23, 1998; filed February 3, 1998.
26
27
(8) 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, 1996; filed
August 12, 1996.
(9) 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, 1997; filed
August 14, 1997.
(10) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.
(11) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19, 1997.
(12) Incorporated herein by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
33-68058-FW).
(13) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(14) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(15) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917); filed March 13, 1998.
(16) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471); filed November 4, 1997.
(17) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
filed with the Securities and Exchange Commission on August 30, 1993.
(18) Incorporated by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 1997.
(19) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
January 5, 1998.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Securities and Exchange
Commission during the fiscal quarter ended December 31, 1998.
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28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Patterson Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
Date: March 31, 1999 By: /s/ CLOYCE A. TALBOTT
------------------------------------
Cloyce A. Talbott
Chairman of the Board and 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 Energy,
Inc. and in the capacities indicated as of March 30, 1998.
SIGNATURE TITLE
--------- -----
/s/ CLOYCE A. TALBOTT Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer and Director
Cloyce A. Talbott
(Principal Executive Officer)
/s/ A. GLENN PATTERSON President, Chief Operating Officer and
- -------------------------------------------------------- Director
A. Glenn Patterson
/s/ JAMES C. BROWN Vice President -- Finance, Chief
- -------------------------------------------------------- Financial Officer, Secretary and
James C. Brown Treasurer
(Principal Accounting Officer)
/s/ ROBERT C. GIST Director
- --------------------------------------------------------
Robert C. Gist
/s/ KENNETH E. DAVIS Director
- --------------------------------------------------------
Kenneth E. Davis
/s/ VINCENT A. ROSSI, JR. Director
- --------------------------------------------------------
Vincent A. Rossi, Jr.
29
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants -- PricewaterhouseCoopers
LLP....................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for each of the
years ended December 31, 1996, 1997 and 1998........... F-4
Consolidated Statements of Stockholders' Equity for each
of the years ended December 31, 1996, 1997 and 1998.... F-5
Consolidated Statements of Cash Flows for each of the
years ended December 31, 1996, 1997 and 1998........... F-6
Notes to Consolidated Financial Statements................ F-8
F-1
30
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Patterson
Energy, Inc. and Subsidiaries as of December 31, 1997 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 1, 1999
F-2
31
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1997 1998
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,338 $ 8,986
Marketable securities..................................... 566 --
Accounts receivable:
Trade, less allowance for doubtful accounts of $378,110
and $417,519 at December 31, 1997 and 1998,
respectively........................................... 44,732 28,616
Oil and natural gas sales................................. 773 426
Costs of uncompleted drilling contracts in excess of
related billings....................................... -- 100
Accrued federal income taxes receivable................... -- 8,400
Inventory................................................. -- 1,283
Deferred income taxes..................................... 2,309 1,568
Undeveloped oil and natural gas properties held for
resale................................................. 4,781 3,214
Other current assets...................................... 515 890
-------- --------
Total current assets.............................. 77,014 53,483
Property and equipment, at cost, net........................ 100,405 136,677
Intangible assets, net...................................... 24,644 45,875
Other assets................................................ 1,137 570
-------- --------
Total assets...................................... $203,200 $236,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable........................ $ 1,467 $ 8,571
Accounts payable:
Trade.................................................. 12,126 9,748
Revenue distribution................................... 3,352 1,390
Other.................................................. 1,569 73
Accrued expenses.......................................... 5,142 3,170
Accrued state and federal income taxes payable............ 6,874 --
-------- --------
Total current liabilities............................ 30,530 22,952
-------- --------
Deferred income taxes, net.................................. 3,268 9,566
Deferred liabilities........................................ 687 92
Note payable, less current maturities....................... 21,783 47,143
-------- --------
25,738 56,801
-------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, par value $.01; authorized 1,000,000
shares, no shares issued............................... -- --
Common stock, par value $.01; authorized 50,000,000 shares
with 30,967,084 and 31,671,132 issued and outstanding
at December 31, 1997 and 1998, respectively............ 310 317
Additional paid-in capital................................ 102,306 112,544
Retained earnings......................................... 44,316 43,991
-------- --------
Total stockholders' equity........................... 146,932 156,852
-------- --------
Total liabilities and stockholders' equity........... $203,200 $236,605
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
32
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues:
Drilling.................................................. $73,590 $178,332 $165,997
Drilling fluids........................................... -- -- 13,397
Oil and natural gas sales................................. 8,299 10,773 5,641
Well operation fees....................................... 1,499 1,632 1,442
Other..................................................... 320 40 87
------- -------- --------
83,708 190,777 186,564
------- -------- --------
Operating costs and expenses:
Direct drilling costs..................................... 59,564 128,416 128,838
Drilling fluids........................................... -- -- 10,205
Lease operating and production............................ 2,012 2,274 1,924
Impairment of oil and natural gas properties.............. 549 355 3,816
Exploration costs......................................... 466 647 669
Dry holes and abandonments................................ 987 1,481 1,083
Depreciation, depletion and amortization.................. 9,960 17,497 28,091
General and administrative................................ 5,416 6,786 9,313
------- -------- --------
78,954 157,456 183,939
------- -------- --------
Operating income............................................ 4,754 33,321 2,625
------- -------- --------
Other income (expense):
Net gain on sale of assets................................ 546 1,499 636
Interest income........................................... 478 1,056 767
Interest expense.......................................... (1,612) (1,045) (4,471)
Non-recurring acquisition costs........................... (2,268) -- --
Other..................................................... 119 277 211
------- -------- --------
(2,737) 1,787 (2,857)
------- -------- --------
Income (loss) before income taxes........................... 2,017 35,108 (232)
------- -------- --------
Income tax expense (benefit):
Current................................................... 174 10,353 (6,358)
Deferred.................................................. (2,428) 2,513 6,451
------- -------- --------
(2,254) 12,866 93
------- -------- --------
Net income (loss)........................................... $ 4,271 $ 22,242 $ (325)
======= ======== ========
Net income (loss) per common share:
Basic..................................................... $ 0.22 $ 0.78 $ (0.01)
======= ======== ========
Diluted................................................... $ 0.21 $ 0.75 $ (0.01)
======= ======== ========
Weighted average number of common shares outstanding:
Basic..................................................... 19,167 28,492 31,645
======= ======== ========
Diluted................................................... 20,086 29,505 31,645
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
33
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- -----
(IN THOUSANDS)
December 31, 1995.............................. 18,988 $190 $ 18,904 $18,562 $ 37,656
Issuance of common stock..................... 208 2 1,428 -- 1,430
Exercise of stock options.................... 425 4 880 -- 884
Conversion of 301,260 redeemable warrants.... 153 2 (2) -- --
Net income................................... -- -- -- 4,271 4,271
Adjustment to conform fiscal years (see Note
2)........................................ -- -- -- (759) (759)
------ ---- -------- ------- --------
December 31, 1996.............................. 19,774 198 21,210 22,074 43,482
Issuance of common stock..................... 9,384 94 68,221 -- 68,315
Issuance of stock purchase warrant........... -- -- 1,248 -- 1,248
Exercise of stock options.................... 1,009 10 2,323 -- 2,333
Conversion of stock purchase warrant......... 800 8 6,392 -- 6,400
Tax benefit related to exercise of stock
options................................... -- -- 2,912 -- 2,912
Net income................................... -- -- -- 22,242 22,242
------ ---- -------- ------- --------
December 31, 1997.............................. 30,967 310 102,306 44,316 146,932
Issuance of common stock..................... 571 5 9,941 -- 9,946
Exercise of stock options.................... 133 2 297 -- 299
Net loss..................................... -- -- (325) (325)
------ ---- -------- ------- --------
December 31, 1998.............................. 31,671 $317 $112,544 $43,991 $156,852
====== ==== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
34
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 4,271 $ 22,242 $ (325)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Abandonment of oil and natural gas properties............. 121 -- 694
Depreciation, depletion and amortization.................. 9,960 17,497 28,091
Impairment of oil and natural gas properties.............. 549 355 3,816
Net gain on sale of assets................................ (546) (1,499) (636)
Tax benefit related to exercise of stock options.......... -- 2,912 --
Deferred income tax expense (benefit)..................... (2,428) 2,513 6,451
Increase (decrease) in deferred compensation
liabilities............................................ 349 (27) (595)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable..... (10,558) (20,989) 16,116
(Increase) decrease in oil and natural gas sales
receivable........................................ (512) 226 347
Increase in inventory held for resale................ -- -- (1,283)
Increase in accrued Federal income taxes
receivable........................................ -- -- (8,400)
(Increase) decrease in undeveloped oil and natural
gas properties held for resale.................... (2,548) (111) 873
(Increase) decrease in other current assets.......... (99) 32 (475)
Increase (decrease) in trade accounts payable........ 4,301 (3) (2,378)
Increase (decrease) in revenue distribution
payable........................................... 828 920 (1,962)
Increase (decrease) in accrued state and federal
income taxes payable.............................. (13) 6,752 (6,874)
Increase (decrease) in accrued expenses.............. 649 3,018 (1,972)
Increase (decrease) in other current payables........ 331 604 (1,496)
-------- -------- --------
Net cash provided by operating activities......... 4,655 34,442 29,992
-------- -------- --------
Cash flows from investing activities:
Net sales (purchases) of investment securities............ 1,927 (22) 566
Acquisitions.............................................. (17,078) (49,400) (45,453)
Purchases of property and equipment....................... (6,895) (34,861) (34,148)
Sales of property and equipment........................... 1,229 4,164 1,361
Change in other assets.................................... (99) (13) 567
-------- -------- --------
Net cash used in investing activities............. (20,916) (80,132) (77,107)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 17,469 23,250 40,150
Payments on notes payable................................. (5,837) (25,849) (7,686)
Issuance of common stock and redeemable warrants.......... -- 59,400 --
Proceeds from exercise of stock options................... 914 8,733 299
-------- -------- --------
Net cash provided by financing activities......... 12,546 65,534 32,763
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (3,715) 19,844 (14,352)
Cash and cash equivalents at beginning of year.............. 7,209 3,494 23,338
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 3,494 $ 23,338 $ 8,986
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 1,657 $ 1,045 $ 4,471
Income taxes........................................... 174 691 8,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
35
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Noncash investing and financing activities:
During 1998, the Company acquired Lone Star Mud, Inc., Robertson Onshore
Drilling Company and Tejas Drilling Fluids, Inc. for an aggregate purchase price
of approximately $58.8 million of which, approximately $45.5 million was paid in
cash as follows (see Note 2):
(IN
THOUSANDS)
Purchase price.............................................. $58,799
Less non-cash items:
Common stock issued....................................... (9,946)
Debt assumed.............................................. (3,400)
-------
Total cash paid................................... $45,453
=======
During 1997, the Company completed five separate asset acquisitions for an
aggregate purchase price of approximately $59.6 million of which, approximately
$49.4 million was paid in cash as follows (see Note 2):
(IN
THOUSANDS)
Fair value of assets acquired............................... $59,563
Less non-cash items:
Common stock issued....................................... (8,915)
Three-year stock purchase warrant......................... (1,248)
-------
Total cash paid................................... $49,400
=======
During the year ended December 31, 1996, 301,260 redeemable warrants
relative to the Underwriter's Warrant Agreement dated November 2, 1993, as
amended on November 15, 1994 and June 18, 1996, were converted in which 152,896
shares of the Company's common stock were issued and 148,364 shares of such
common stock were forfeited to the Company in lieu of a cash payment (see Note
9).
During the year ended December 31, 1996, the Company acquired three
drilling rigs from a non-affiliated entity. The related purchase price consisted
of $100,000 cash, a promissory note of $400,000 payable to the seller and the
issuance of 208,000 shares of the Company's common stock valued at $1.4 million
(see Notes 2 and 9).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
36
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies follows:
Principles of consolidation -- The consolidated financial statements
include the accounts of Patterson Energy, Inc. ("Patterson") and its
wholly-owned subsidiaries, Patterson Drilling Company, Patterson Onshore
Drilling Company, Lone Star Mud, Inc., Patterson Petroleum, Inc., Patterson
Petroleum Trading Company, Inc. and Patterson Drilling Programs, Inc.
(collectively referred to herein as the "Company"). All significant intercompany
accounts and transactions have been eliminated.
Description of business -- The Company engages in onshore contract drilling
of oil and natural gas, the development, exploration, acquisition and production
of oil and natural gas and provides contract drilling fluid services to the oil
and natural gas industry. The Company provides contract drilling services to
major oil and gas companies and independent producers primarily in Texas and
southeast New Mexico.
The contract drilling business experienced increased demand for drilling
services from 1995 through the third quarter of 1997 due to stronger crude oil
and natural gas prices. However, except for that period and other occasional
upturns, the market for onshore contract drilling and other related services has
generally been depressed since mid-1982, when crude oil and natural gas prices
began to weaken. A particularly sharp decline in demand for these services
occurred in 1986 because of the worldwide collapse in crude oil prices. Since
this time and except during the occasional upturns, there have been
substantially more drilling rigs available than necessary to meet demand in most
operating and geographic segments of the domestic drilling industry. In addition
to adverse effects that future declines in demand could have on the Company,
ongoing movement or reactivation of onshore drilling rigs or new construction of
drilling rigs could adversely affect rig utilization rates and pricing, even in
an environment of stronger oil and natural gas prices and increased drilling
activity. The Company cannot predict either the future level of demand for its
contract drilling and other related services or future conditions in the oil and
natural gas industry. The Company's rig utilization rate reached an all time
high of approximately 91.5% in the third quarter of 1997, but has weakened since
then due to a significant reduction in the price of crude oil. Should crude oil
or natural gas prices remain at these levels or continue to decline, the
Company's operations could be further adversely affected.
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.
Drilling operations -- The Company follows the percentage-of-completion
method of accounting for footage and day work 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.
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct costs
and appropriate portions of indirect costs (including maintenance, repairs and
depreciation) related to the contracts in progress are deferred and recognized
as revenues and expenses in the period the contracts are completed.
Provisions for losses are made on incomplete contracts when significant
losses are anticipated.
Inventory -- Inventory consists primarily of chemical products to be used
in conjunction with the Company's contract drilling fluid activities. The
inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
F-8
37
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Undeveloped oil and natural gas properties held for resale -- Undeveloped
oil and natural gas properties held for resale represent leasehold interests in
unproven oil and natural gas properties which the Company expects to sell. Also
included are leasehold costs programmed for development under arrangements which
will provide for reimbursement of such costs to the Company. Such properties are
carried at the lower of cost or net realizable value. The Company recognizes
gains or losses upon disposition or impairment of the properties.
Property and equipment -- Property and equipment (other than oil and
natural gas) -- Depreciation is provided on the straight-line method over the
estimated useful lives as defined below. The Company incurred depreciation
expense of approximately $7.0 million, $11.7 million and $20.2 million for the
years ended December 31, 1996, 1997 and 1998, respectively.
LIVES (YEARS)
-------------
Drilling rigs and related equipment......................... 2-15
Office furniture............................................ 3-10
Buildings................................................... 5-20
Automotive equipment........................................ 2-7
Other....................................................... 3-7
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 as
incurred. 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 $3.0
million, $4.8 million and $4.6 million for the years ended December 31, 1996,
1997 and 1998, respectively.
Impairment of long-lived assets -- In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," net capitalized
costs of long-lived assets, certain identifiable intangibles and goodwill in
excess of estimated future net revenues 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 oil and natural gas properties is
periodically assessed on a field basis as determined by an independent reserve
engineer. The Company incurred approximately $549,000, $355,000 and $3.8 million
of impairment to such properties at December 31, 1996, 1997 and 1998,
respectively. Impairment to the Company's oil and natural gas properties was
primarily attributable to a significant decline in the market price of crude
oil.
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 income. 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
F-9
38
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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
contractual lives. Amortization expense charged to operations at December 31,
1997 and 1998 was approximately $942,452 and $3.3 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 based on the weighted average number of shares outstanding during the
year. Diluted EPS includes common stock equivalents, which are dilutive to
earnings per share. For the years ended December 31, 1996 and 1997, the dilutive
securities, consisting of certain stock options and warrants as described in
Notes 9 and 10, were approximately 919,000 and 1.0 million, respectively.
Dilutive securities of 1.5 million were excluded from the 1998 calculation of
Diluted EPS as a result of the Company's net loss for the year.
Stock splits -- On July 25, 1997 and January 23, 1998, the Company effected
two-for-one splits of its common stock. All information regarding earnings per
share, weighted average number of common shares outstanding, stock options and
warrants issued and exercised and all other related disclosures herein reflect
the effects of such stock splits for all periods presented (see Note 9).
Income taxes -- Income taxes are based on earnings reported for financial
statement purposes. The provision for income taxes differs from the amounts
currently payable because of permanent and temporary differences in the
recognition of certain income and expense items for financial reporting and tax
reporting purposes.
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted statutory rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets primarily result from
net operating loss carryforwards, certain accrued but unpaid insurance losses,
alternative minimum tax credit carryforwards and investment tax credit
carryforwards. Deferred tax liabilities primarily result from differences
between the financial statement and tax basis of the Company's fixed assets.
Investment tax credits are recorded under the flow through method as a
reduction of the provision for income taxes.
The Company files a consolidated Federal income tax return.
Stock based compensation -- The Company grants stock options under
stock-based incentive compensation plans, (the "Plans"). The Company applies APB
Opinion 25 and related Interpretations in accounting for the Plans. In 1995, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of the Plans. Adoption of the cost
recognition provisions of SFAS No. 123 is optional and the Company decided not
to elect these provisions. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS No. 123 in 1995 are required by
SFAS No. 123 and are presented in Note 10.
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 -- During 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and
presentation of comprehensive income and its components (revenues, expenses,
F-10
39
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
gains and losses) in a full set of general-purpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 requires that an enterprise (i) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company's adoption of SFAS No. 130 did not
result in any changes to its related reporting disclosures.
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The Company's adoption of
SFAS No. 131 did not result in any significant changes to its related reporting
disclosures.
The FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
("SFAS No. 132") in February 1998. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement recognition of those plans. This statement is effective for fiscal
years beginning after December 15, 1998. The Company's adoption of SFAS No. 132
in September 1998 did not result in any changes to the Company.
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133")
in June 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The provisions of
SFAS No. 133 are not expected to have a material impact to the Company.
Reclassifications -- Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements in order for them to conform with the
1998 presentation. The reclassifications had no effect on net income or
stockholders' equity for these years.
2. MERGER AND ACQUISITIONS
1998 MERGER AND ACQUISITIONS
Lone Star Mud, Inc. -- On January 5, 1998, the Company acquired 100% of the
outstanding stock of Lone Star Mud, Inc. ("Lone Star"), a privately-owned,
non-affiliated company based in Midland, Texas. The purchase price of
approximately $13.0 million consisted of $1.4 million in cash, 571,328 shares of
the Company's common stock valued at $17.41 per share, the assumption of $1.6
million of debt and approximately $3,300 of other direct costs incurred relative
to the transaction. Pursuant to certain terms of the Company's existing loan
agreement with Norwest Bank Texas, N.A. ("Norwest"), the outstanding balance of
the above mentioned debt was paid in full. The fair market values of the assets
acquired were estimated and the purchase price, as of the date of the
acquisition, was allocated as follows (in thousands):
Net assets acquired......................................... $ 3,069
Goodwill.................................................... 9,911
-------
Total purchase price...................................... $12,980
=======
F-11
40
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
Robertson Onshore Drilling Company -- On February 6, 1998, the Company
completed the merger of Robertson Onshore Drilling Company ("Robertson") a
privately-owned, non-affiliated, contract drilling company based in Dallas,
Texas, with and into Patterson Onshore Drilling Company, a wholly-owned
subsidiary of Patterson Drilling Company. The purchase price of approximately
$42.2 million was funded using cash on hand of approximately $3.25 million,
proceeds of $36.75 million provided by the Company's line of credit, the
assumption of $1.8 million of debt and approximately $444,000 of direct costs
incurred related to the acquisition. The assets acquired consisted of 15
operable drilling rigs and a shop and yard located in Liberty City, Texas. The
purchase price, as of the date of the acquisition, was allocated based on
estimated fair values as follows (in thousands):
Net assets acquired......................................... $31,565
Goodwill.................................................... 10,680
-------
Total purchase price...................................... $42,245
=======
Tejas Drilling Fluids, Inc. -- On September 17, 1998, the Company acquired
100% of the outstanding stock of Tejas Drilling Fluids, Inc. ("Tejas"), a
privately-owned, non-affiliated company based in Corpus Christi, Texas for $3.5
million cash and approximately $74,000 of other direct costs incurred relative
to the transaction. The fair market values of the assets acquired were estimated
and the purchase price, as of the date of acquisition, was allocated as follows
(in thousands):
Net assets acquired......................................... $ 263
Goodwill.................................................... 2,061
Covenants not to compete.................................... 1,250
------
Total purchase price...................................... $3,574
======
1997 MERGER AND ACQUISITIONS
Wes-Tex Drilling Company -- On June 12, 1997, the Company consummated an
acquisition to purchase 21 contract drilling rigs, related rolling stock, a shop
and a yard from Wes-Tex Drilling Company ("Wes-Tex"), a privately-owned,
non-affiliated contract drilling company based in Abilene, Texas. The purchase
price of approximately $35.4 million consisted of $25.0 million in cash, 1.132
million shares of Patterson's common stock valued at $7.875 per share, a
three-year stock purchase warrant (valued at $1.56 per share) to purchase
800,000 additional shares of Patterson common stock at an exercise price of
$8.00 per share and approximately $190,000 of other direct costs incurred
relative to the transaction. The acquisition was funded using $19.0 million of
cash on hand and $6.0 million provided by the Company's credit facility
maintained with Norwest Bank Texas, N.A. (the "Norwest Line") (see Note 7). The
purchase price, as of the date of acquisition, was allocated based on estimated
fair values as follows (in thousands):
Contract drilling assets.................................... $17,450
Goodwill.................................................. 16,629
Covenants not to compete.................................. 1,273
-------
Total purchase price................................... $35,352
=======
The Company's operating results since the date of this transaction include
the operations of Wes-Tex. The following summary, prepared on a pro forma basis,
combines the consolidated results of operations as if Wes-Tex had been acquired
January 1, 1996, after including the impact of certain adjustments, such as
restatement of depreciation using fair values instead of book values of the
assets acquired, the increased
F-12
41
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
interest expense on the acquisition debt, increased amortization expense on
intangible assets, conforming accounting treatment of wells in progress and the
related income tax effects.
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................. $128,900 $213,863
Net income............................................... 3,759 22,319
Net income per basic share............................... 0.20 0.78
Net income per diluted share............................. 0.19 0.76
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.
Other 1997 asset acquisitions -- During 1997, in four separate transactions
with non-affiliated entities, the Company acquired 17 contract drilling rigs,
other related drilling equipment and rolling stock, five yards, two shops and an
office. Total consideration paid for these assets was $24.2 million, of which
$7.0 million was funded using cash on hand and $17.3 million was provided by the
Norwest Line. The related purchase prices as of the respective dates of
acquisition were allocated based on estimated fair values as follows (in
thousands):
Contract drilling assets.................................... $16,541
Goodwill.................................................... 7,269
Covenants not to compete.................................... 400
-------
Total purchase price................................... $24,210
=======
The aforementioned acquisitions completed during fiscal years 1997 and 1998
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.
1996 MERGER AND ACQUISITIONS
Tucker Drilling Company, Inc. -- On April 22, 1996, as amended on May 16,
1996, the Company executed the Agreement and Plan of Merger among Patterson
Energy, Inc., Patterson Drilling Company ("Patterson Drilling") and Tucker
Drilling Company, Inc. ("Tucker") (the "Merger Agreement") providing for the
merger of Patterson Drilling with and into Tucker. The merger was consummated on
July 30, 1996 after a required approval of the stockholders of both Patterson
and Tucker, with Tucker as the surviving corporation, wholly-owned by Patterson
and operating under the assumed name of Patterson Drilling Company.
Pursuant to the terms of the Merger Agreement, each share of Tucker common
stock outstanding on July 30, 1996 was converted into 0.74 of a share ("Exchange
Ratio") of Patterson common stock, par value $0.01 per share, and all options to
purchase shares of Tucker common stock outstanding on that date became options
to purchase Patterson common stock, as adjusted by the Exchange Ratio, upon the
terms of the governing stock option plans.
F-13
42
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
A total of 6.3 million shares of Patterson common stock was issued pursuant
to the merger and an additional 298,368 shares of Patterson common stock were
reserved for issuance under the outstanding Tucker stock options.
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.
Certain adjustments were made in 1996 to conform the previous accounting
policies and fiscal year end of Tucker with those of the Company. Consequently,
the operations of Tucker for the three months ended March 31, 1996 (Tuckers'
fiscal year end) are reflected in the consolidated financial statements of the
Company for the year ended December 31, 1996.
A corresponding stockholders' equity adjustment has been recorded at
December 31, 1996 as a result of including Tucker's operations for the three
months ended March 31, 1996 with Patterson's operations for each of the years
ended December 31, 1995 and 1996. Selected unaudited information related to the
operations of Tucker for the three months ended March 31, 1996 is as follows (in
thousands):
(UNAUDITED)
Revenues.................................................... $3,972
Operating loss.............................................. (218)
Net income.................................................. 759
Sledge Cattle Company, Inc. d/b/a Gene Sledge Drilling
Corporation -- During October 1996, the Company executed a Stock Purchase
Agreement (the "Purchase Agreement") with the owners of 100% of the outstanding
stock of Sledge Cattle Company, Inc. d/b/a Gene Sledge Drilling Corporation
("Sledge"), a non-affiliated contract drilling company. The Purchase Agreement
included, among other things, the acquisition of six oil and gas drilling rigs,
related drilling equipment and inventory, three rig hauling trucks and one yard
and shop facility for a purchase price of $14.7 million. The acquisition was
funded by a cash payment of $4.3 million and proceeds of $10.4 million provided
by a credit facility maintained with The CIT Group/ Equipment Financing, Inc.
(see Note 7). At the date of acquisition, Sledge had working capital of
approximately $4.3 million and immediately following consummation of the
Purchase Agreement, certain assets, unrelated to the oil and natural gas
industry, were sold back to the previous owners of Sledge for $1.7 million.
The operating results of this acquisition are included in the Company's
consolidated statements of income from the date of acquisition. The following
unaudited pro forma summary as of December 31, 1996 presents the consolidated
results of operations as if Sledge had been acquired as of January 1, 1996,
after giving effect to certain adjustments, including the elimination of certain
revenues and other income and expenses attributed to the assets not acquired
from Sledge, and increased interest expense on the acquisition debt and related
income tax effects (in thousands, except per share data).
(UNAUDITED)
Revenues.................................................... $90,806
Net income.................................................. 4,078
Net income per basic share.................................. 0.21
Net income per diluted share................................ 0.20
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,
F-14
43
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
they are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from combined operations.
Other 1996 asset acquisitions -- During November and December 1996, in two
separate transactions with non-affiliated entities, the Company acquired 15
contract drilling rigs and other related equipment. The total consideration paid
for these assets was $4.2 million consisting of $2.4 million cash, a $400,000
promissory note payable and the issuance of 208,000 shares of the Company's
common stock, valued for purposes of the transaction at $1.4 million (see Notes
7 and 9).
3. CASH
Included in cash as of December 31, 1997 and 1998 was approximately $3.3
million and $1.4 million respectively, of monthly oil and natural gas sales to
be distributed to revenue owners subsequent to year-end.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and
1998 (in thousands):
1997 1998
---- ----
Drilling rigs and related equipment...................... $144,104 $199,331
Producing oil and natural gas properties................. 24,024 27,856
Other equipment.......................................... 917 2,135
Buildings................................................ 3,771 3,953
Land..................................................... 984 1,534
-------- --------
173,800 234,809
Less accumulated depreciation and depletion.............. (73,395) (98,132)
-------- --------
$100,405 $136,677
======== ========
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1997 and 1998
(in thousands):
1997 1998
---- ----
Goodwill.................................................... $23,708 $46,482
Covenants not to compete.................................... 1,673 2,673
Other....................................................... 205 979
------- -------
25,586 50,134
Less accumulated amortization............................... (942) (4,259)
------- -------
$24,644 $45,875
======= =======
F-15
44
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1997 and 1998
(in thousands):
1997 1998
---- ----
Salaries, wages and related payroll taxes................... $2,302 $1,276
Workers' compensation liability............................. 1,615 1,157
Sales tax................................................... 548 472
Employee benefit plan contributions......................... 568 --
Other....................................................... 109 265
------ ------
$5,142 $3,170
====== ======
7. NOTE PAYABLE
Note payable consisted of the following at December 31, 1997 and 1998 (in
thousands):
1997 1998
---- ----
Line of credit agreement with Norwest Bank Texas, N.A.
providing for an advancing, non-revolving credit facility of
$70.0 million, monthly payments of interest only at the
London Interbank Offered Rate (LIBOR) plus 2.375% (7.921% at
December 31, 1998) through May 1998 at which time the
outstanding principal balance converted to a term loan with
a maturity date of January 1, 2001 and a seven-year level
principal amortization. The obligation is collateralized by
certain accounts receivable, drilling rigs and other related
drilling equipment.......................................... $23,250 $55,714
Less current maturities................................... (1,467) (8,571)
------- -------
$21,783 $47,143
======= =======
During February 1997, using proceeds provided by its equity offering
completed during January and February of 1997 (see Note 9), the Company paid,
prior to maturity, its notes payable and accrued interest amounts under loan
agreements with The CIT Group/Equipment Financing, Inc. and Norwest Bank Texas,
Wichita Falls, N.A. of approximately $25.8 million. The Company expensed
approximately $191,000 of prepayment penalties and an additional $74,000 in
deferred financing costs with the early retirement of such notes payable. These
amounts are included in interest expense at December 31, 1997 as management
considers these amounts immaterial to treat as an extraordinary item.
During June 1997, the Company entered into a line of credit agreement with
Norwest Bank Texas, N.A. (Norwest) providing for a credit facility of $30.0
million. The terms of its Norwest credit included interest only payments at
LIBOR plus 2.50% through December 31, 1997 at which time the outstanding
principal amount would convert to a term note with a maturity date of January 1,
2000 maturity date and a seven-year level principal amortization. The Company
borrowed $23.25 million under the credit facility to partially fund its 1997
asset acquisitions (see Note 2).
During December 1997, the Company and Norwest Bank Texas, Wichita Falls,
N.A. ("Norwest") renegotiated the terms of its existing credit agreement
replacing it with a new agreement (the "Norwest Line") providing for an
advancing, non-revolving credit facility of $60.0 million. During February 1998,
the existing credit facility was increased to $70.0 million. The Norwest Line
was payable interest only at LIBOR plus 2.375% through May 31, 1998, at which
time the outstanding principal balance of $60.0 million converted to a term loan
with a January 1, 2001 maturity date and a seven-year level principal
amortization. Using proceeds from the Norwest Line, the Company paid a $75,000
origination fee and all amounts then
F-16
45
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTE PAYABLE -- (CONTINUED)
outstanding under its previous Norwest credit facility, including principal of
$23.25 million and accrued interest of approximately $94,000. During February
1998, the Company borrowed $36.75 million under the Norwest Line to fund its
acquisition of Robertson Onshore Drilling Company as described in Note 2.
Five-year maturities of note payable -- Scheduled maturities of the Norwest
Line for the periods subsequent to December 31, 1998, are as follows (in
thousands):
1999........................................................ $ 8,571
2000........................................................ 8,571
2001........................................................ 38,572
-------
Total.................................................. $55,714
=======
The Norwest Line contains a number of representations, warranties and
covenants, the breach of which, at the election of Norwest, would accelerate the
maturity date of the outstanding principal balance.
The more restrictive covenants include:
- Maintenance on a quarterly basis of a ratio of consolidated cash flow
to current maturities of long-term debt of at least 2.0 to 1.0;
- Maintenance on a quarterly basis of a ratio of consolidated debt to
tangible net worth not to exceed 1.10 to 1.0;
- Maintenance on a quarterly basis of a ratio of current assets to
current liabilities of at least 1.4 to 1.0;
- Maintenance on a quarterly basis of positive net income;
- Without written consent of Norwest, the Company cannot conduct any
business not currently being conducted by the Company, nor liquidate,
dissolve or merge into any other entity; and
- The Company shall not pay, or authorize the payment of, any dividends
on any stock, debenture or other security without the prior written
consent of Norwest.
Other restrictive covenants under the terms of the Norwest Line require
that the underlying collateral not be subjected to impairment, sold, conveyed,
transferred, encumbered, mortgaged, pledged, assigned or hypothecated in any
manner without the express written consent of Norwest. At December 31, 1998, the
Company was in violation of the positive net income covenant provision. The
Company has obtained an unconditional waiver of such violation from Norwest as
of December 31, 1998. In addition, the Norwest Line was further amended to
replace the positive net income covenant with an earnings before interest
expense, income taxes, depreciation, depletion and amortization (EBITDA) to
quarterly interest expense provision. The Company must maintain on a quarterly
basis an EBITDA to interest expense of at least 2.25 to 1.0. In addition, the
Company must provide a pledge of its oil and natural gas properties to Norwest.
The estimated fair value of the Company's long-term debt obligations
approximates its related carrying value because the underlying debt agreement
bears interest at current market rates.
A commercial bank has issued a letter of credit to the Company's workers'
compensation insurance carrier on behalf of the Company in the amount of
$150,000 which is fully collateralized by a certificate of deposit.
Additionally, the Company maintains letters of credit in the aggregate amount of
$340,289 with a bank for the benefit of an insurance company as collateral for
retrospective premiums and retained losses which could become payable under the
terms of the Company's insurance contract. These letters of credit
F-17
46
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTE PAYABLE -- (CONTINUED)
expire in November 1999, but provide for an indefinite number of annual
extensions of the expiration date and are fully collateralized by the Company's
cash. No amounts have been drawn under the letters of credit.
8. COMMITMENTS AND CONTINGENCIES
Supplemental Executive Retirement Plan -- Effective April 1, 1991 the
Tucker Drilling Company, Inc. Supplemental Executive Retirement Plan (the
"Plan") was established for certain officers and key employees. Pursuant to
agreements, as amended on April 22, 1996 and May 16, 1996 with related
participants of the Plan, the Company was obligated to pay each participant, or
the designated beneficiary, a lump sum at such participant's death, disability
or retirement. The amount to be paid to each participant was equal to the
participant's vested benefit at such date, limited, however, to related benefits
received from underlying insurance policies as described below.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants and an annuity from which the premiums on
the life insurance policies were paid. During 1998, the life insurance policies
were cancelled and the respective cash values were distributed to the Plan
participants.
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 $2.0 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 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. The Company has never been fined or incurred liability
for pollution or other environmental damage in connection with its operations.
The Company is involved in various routine litigation incident to its
business. In the Company's opinion, none of these proceedings will have a
material adverse effect on the financial condition of the Company.
9. STOCKHOLDERS' EQUITY
During January 1998, the Company acquired the outstanding stock of Lone
Star. The purchase price consisted of $1.4 million in cash, 571,328 shares of
the Company's common stock valued at $17.41 per share, the assumption of $1.6
million of debt and approximately $3,300 of other direct costs (see Note 2).
On July 1, 1997, the stockholders of Patterson approved an amendment to
Patterson's Certificate of Incorporation increasing the number of authorized
shares of common stock from 9 million shares to 18 million shares. During
December 1997, the stockholders of Patterson approved a second amendment to
Patterson's Certificate of Incorporation further increasing the number of
authorized shares of common stock to 50 million shares.
F-18
47
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY -- (CONTINUED)
During July and December 1997, the Company's Board of Directors authorized
two-for-one stock splits in the form of 100% stock dividends payable on July 25,
1997 and January 23, 1998, respectively. Par value of the Company's common stock
remained at $0.01 per share. Earnings per share and weighted average number of
common shares outstanding have been restated for all periods presented to
reflect the stock splits. As such, the Consolidated Statements of Stockholders'
Equity and pertinent footnote disclosures contained herein have been restated to
retroactively apply the effects of the stock splits.
During June 1997, the Company issued 1.1 million shares of common stock
valued at $7.875 per share as partial consideration for its acquisition of 21
contract drilling rigs and other related drilling equipment (see Note 2).
During January 1997, the Company completed a public offering of 7.1 million
shares of common stock at a price of $7.6875 per share. During February 1997,
the underwriters of the Company's public offering exercised their overallotment
option to purchase 1.2 million additional shares of common stock. Net proceeds
from the offering totaled approximately $59.4 million to the Company.
In December 1996, the Company acquired three drilling rigs from a
non-affiliated party. The purchase price for the rigs consisted of $100,000
cash, a $400,000 promissory note and the issuance of 208,000 shares of the
Company's common stock valued at $1.4 million (see Note 2).
In July 1996, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation providing for an increase of 4,000,000
shares in the total number of authorized shares of the Company's common stock
and the issuance of 6.3 million shares in connection with the Company's merger
with Tucker (see Note 2).
In July 1996, pursuant to the terms of the Underwriters' Warrant Agreement
dated November 2, 1993 as amended on November 15, 1994 and June 18, 1996, the
Company issued 152,896 shares of common stock upon the conversion of 301,260
warrants. In lieu of a cash payment for the exercise of such warrants, the
respective warrant holders elected to forfeit 148,364 shares of common stock
back to the Company.
10. STOCK OPTIONS AND WARRANTS
Employee Stock Incentive Plans -- In August 1993, the Company adopted the
Patterson Energy, Inc. 1993 Stock Incentive Plan (the "Stock Incentive Plan").
The purpose of the Stock Incentive Plan is to provide continuing incentives to
the Company's key employees, which may include, but shall not necessarily be
limited to, members of the Board of Directors (excluding members of the
Compensation Committee) and officers of the Company. The Stock Incentive Plan
provides for an authorization of 2.8 million shares of common stock for issuance
thereunder. Under the Stock Incentive Plan, the Company may grant to key
employees awards of stock options and restricted stock or any combination
thereof. The Company may grant both incentive stock options ("incentive stock
options") intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended, and options which are not qualified as incentive stock
options. The options become immediately exercisable in the event of a change in
control (as defined in the Stock Incentive Plan) of the Company.
Under the Stock Incentive Plan, the exercise price of incentive stock
options must be at least equal to the fair market value of the stock on date of
grant and the exercise price of non-incentive stock options may not be less than
80% of the fair market value on date of grant.
Stock options covering a total of 1.6 million shares of common stock have
been granted to date under the Stock Incentive Plan to five executive officers
and various other employees of the Company, including Mr. Patterson (options
covering 455,000 shares or approximately 25% of the total options granted). The
outstanding options were variously granted since 1995. Each of the options has a
10-year term and the exercise
F-19
48
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
prices were equal to the fair market value of the Company's common stock on the
respective grant dates. The options granted to the employees vest either (i) 20%
a year, beginning on the grant date and 20% for the next four anniversaries of
the date of grant, or (ii) 11.2% for the first five years, beginning on the
grant date, and 22% on each of the next two anniversaries of the grant date. A
total of 354,520 options granted under the Stock Incentive Plan have been
exercised, 29,216 have been forfeited and 11,984 have expired as of December 31,
1998.
In March 1983, the Board of Directors of Tucker approved and implemented an
Incentive Stock Option Plan which was amended in 1988 to allow for the granting
of nonqualified stock options and in 1991 was further amended to eliminate stock
appreciation rights. The purpose of the plan was to attract and retain key
employees and directors and to provide such persons with a proprietary interest
in Tucker through the granting and exercise of stock options. The maximum number
of shares of common stock available for issuance under the plan was 507,640
shares.
In June 1994, the Board of Directors of Tucker adopted the Tucker Drilling
Company, Inc. 1994 Non-Qualified Stock Option Plan. Officers and directors were
not eligible to receive options from this plan. The maximum number of shares
available for issuance under the plan was 82,880 shares.
Each of the plans provide that options may be granted to purchase shares at
prices not less than the fair market value at date of grant. The exercise period
is governed by option agreements, but in no event may the exercise period extend
beyond ten years from the date of grant. As discussed in Note 2, existing stock
options and other employee incentive plans of Tucker became plans to purchase or
receive common stock of the Company upon consummation of the merger of the
Company and Tucker. At December 31, 1998, 8,288 options granted under the above
mentioned plans were outstanding to purchase common stock of the Company, 1,184
options have been forfeited and 1,184 options have expired as of December 31,
1998.
Non-Employee Directors' Stock Option Plan -- In June 1995, Patterson
adopted the Non-Employee Directors' Stock Option Plan (the "Outside Directors'
Plan"). The purpose of the Outside Directors' Plan is to encourage and provide
incentive for high level performance by non-employee directors of the Company.
An aggregate of 120,000 shares of Common Stock are reserved for issuance under
the Outside Directors' Plan to directors who are not employees of the Company.
As directed by the Outside Directors' Plan, the exercise price of the
options will be equal to the fair market value of the Company's common stock on
the date of grant. Outside directors are automatically granted options to
purchase 20,000 shares and an additional 4,000 shares for each subsequent year
that they serve up to a maximum of 40,000 shares per director. Each option is
exercisable one year after the date of grant and expires five years from the
date of grant. The options become immediately exercisable in the event of a
change of control (as defined in the Outside Directors' Plan) of the Company.
F-20
49
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
The table below sets forth information regarding options granted under the
Outside Directors' Plan. Each of the options are granted with an exercise price
per share equal to fair market value on the grant date.
DATE GRANTED OPTIONS GRANTED EXERCISE PRICE/SHARE
- ------------ --------------- --------------------
June 6, 1995...................... 40,000 .................... $ 2.25
June 6, 1996...................... 8,000 .................... 4.31
July 30, 1996..................... 20,000 .................... 4.38
June 6, 1997...................... 8,000 .................... 10.00
July 30, 1997..................... 4,000 .................... 15.81
June 6, 1998...................... 8,000 .................... 11.06
July 30, 1998..................... 4,000 .................... 7.38
------
Total options granted........ 92,000
======
A summary of the status of the Company's stock options issued under the
Stock Incentive Plan and the Outside Directors' Plan as of December 31, 1996,
1997 and 1998 and the changes during each of the three years then ended are
presented below (in thousands):
1996 1997 1998
--------------------------- --------------------------- ---------------------------
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.......................... 760 $2.64 $ 788 $ 2.70 1,145 $ 9.39
Granted at the money.......... 28 4.36 648 14.76 515 9.79
---- ----- ------ ------ ------ ------
Total granted.............. 788 2.70 1,436 8.14 1,660 9.51
---- ----- ------ ------ ------ ------
Exercised..................... -- -- 291 2.88 133 2.31
Forfeited..................... -- -- -- -- 30 12.47
Expired....................... -- -- -- -- 13 11.62
---- ----- ------ ------ ------ ------
Outstanding at end of year...... 788 $2.70 $1,145 $ 9.39 1,484 $10.08
==== ===== ====== ====== ====== ======
Exercisable at end of year...... 374 $2.81 $ 361 $ 6.70 574 $ 8.96
==== ===== ====== ====== ====== ======
Weighted average fair value of
options granted during the
year.......................... N/A $1.93 N/A $ 6.15 N/A $ 4.99
==== ===== ====== ====== ====== ======
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------------
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTED LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICES
- ------------------------ ----------- --------------- ---------------- ----------- ----------------
$1.81 to $5.00 378,768 6.71 $ 2.89 245,136 $ 3.05
$5.01 to $15.81 1,104,800 8.85 $12.56 328,800 $13.36
--------- ---- ------ ------- ------
1,483,568 8.30 $10.08 573,936 $ 8.96
========= ==== ====== ======= ======
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1995, 1996, 1997 and
F-21
50
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
1998 respectively; dividend yield of 0.00%; risk-free interest rates are
different for each grant and range from 5.61% to 6.60%; the expected term is 5
years; and a volatility of 38.68% for all 1995 and 1996 grants, 35.97% for all
1997 grants and 51.08% for all 1998 grants.
Public Relations Services Stock Options -- During November 1994, February
1995 and July 1995, the Company issued options covering a total of 500,000
shares of common stock to two consultants as partial compensation for public
relations services rendered to the Company. All options granted to the
consultants have an exercise price no less than the fair market value of the
stock at date of grant. The respective options were fully exercisable upon grant
date. In November 1994, 130,000 options were granted at $1.88 per share and
50,000 options were granted at $2.13 per share. In February 1995, 80,000 options
were granted at $2.19 per share which had a fair value of $0.56 per option and
in July 1995, 240,000 options were granted at $2.41 per share which had a fair
value of $1.04 per option. At December 31, 1996, 80,000 options with an exercise
price of $2.41 per share have been exercised. The remaining 420,000 options were
exercised during 1997.
The fair values of these options were determined using the following
assumptions: dividend yield of 0.00%; risk-free interest rates of 7.74% and
5.92%, for January 1 and July 1, respectively; expected lives of 5 years; and
volatility of 38.68%.
Pro Forma Stock-Based Compensation Disclosure -- Had the compensation cost
for the Company's stock-based compensation plan been determined consistent with
SFAS No. 123, the Company's net income (loss) and net income (loss) per common
share for 1996, 1997 and 1998 would approximate the pro forma amounts below:
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ ------------------- -------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ----- -------- ----- -------- -----
SFAS No. 123 charge net of income tax... $ -- $ 162 $ -- $ 1,329 $ -- $ 1,817
APB 25 charge........................... $ -- $ -- $ -- $ -- $ -- $ --
Net income (loss)....................... $4,271 $4,109 $22,242 $20,913 $ (325) $(2,142)
====== ====== ======= ======= ====== =======
Net income (loss) per common share:
Basic................................. $ 0.22 $ 0.21 $ 0.78 $ 0.73 $(0.01) $ (0.07)
====== ====== ======= ======= ====== =======
Diluted............................... $ 0.21 $ 0.20 $ 0.75 $ 0.71 $(0.01) $ (0.07)
====== ====== ======= ======= ====== =======
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.
Underwriters' Warrants -- In November 1993, the underwriters of the
Company's initial public offering were issued warrants as partial consideration
for their underwriting services for the initial public offering. The warrants
gave the underwriters the right to purchase 301,260 shares of the Company's
common stock at a price of $2.17 per share and 301,260 redeemable warrants at
$0.09 per warrant. In November 1995, 301,260 redeemable warrants were issued to
the underwriters due to a partial exercise of the warrants. These redeemable
warrants were immediately exercised by the underwriters at a price of $1.88 per
share resulting in the issuance of 142,308 shares of the Company's common stock.
In July 1996 the remaining 301,260 warrants were exercised in which 152,896
shares of the Company's common stock were issued (see Note 9).
Stock Purchase Warrants -- In May 1995, the Company issued 300,000 warrants
exercisable at $2.25 per share as partial consideration for the purchase of
three drilling rigs and related equipment (see Note 9). The warrants were
exercisable upon issuance and would have expired on December 31, 1997. During
F-22
51
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
November 1997, the Company registered certain securities with the Commission on
a Form S-3 Registration Statement which included the aforementioned 300,000
shares upon exercise of the underlying warrants.
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:
WEIGHTED
AVERAGE
GRANTED SHARES EXERCISE PRICE
------- ------ --------------
1996................................................. 28,000 $ 4.36
1997................................................. 1,448,000 11.02
1998................................................. 515,000 9.79
EXERCISED
1996................................................. 578,032 $ 2.10
1997................................................. 1,808,720 4.88
1998................................................. 132,720 2.31
SURRENDERED
1996................................................. 148,364 $ 2.17
1997................................................. 1,184 2.07
1998................................................. 43,568 12.10
OUTSTANDING AT YEAR END
1996................................................. 1,506,760 $ 2.39
1997................................................. 1,144,856 9.37
1998................................................. 1,483,568 10.08
EXERCISABLE AT YEAR END
1996................................................. 1,080,360 $ 2.30
1997................................................. 347,800 6.78
1998................................................. 573,936 8.96
11. LEASES
The Company incurred rent expense, consisting primarily of daily rental
charges for the use of drilling equipment, of $1.8 million, $5.0 million and
$4.3 million, for the periods ended December 31, 1996, 1997 and 1998,
respectively. The Company's obligations under non-cancelable operating lease
agreements are not material to the Company's operations.
F-23
52
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 consists of the following (in thousands):
1996 1997 1998
---- ---- ----
Federal income tax expense (benefit):
Current.......................................... $ 52 $ 9,444 $(6,358)
Deferred......................................... (2,428) 2,420 6,451
------- ------- -------
(2,376) 11,864 93
State income tax expense:
Current.......................................... 122 909 --
Deferred......................................... -- 93 --
------- ------- -------
Total income tax expense (benefit)................. $(2,254) $12,866 $ 93
======= ======= =======
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1996, 1997 and 1998:
1996 1997 1998
---- ---- ----
Statutory tax rate................................ 34.0% 35.0% 34.0%
Reduction of valuation allowance.................. (151.8) -- --
Nondeductible amortization........................ -- -- (102.75)
Statutory depletion in excess of basis............ -- (1.1) 44.29
State income taxes................................ 6.1 2.9 --
Non-deductible expenses........................... -- -- (12.83)
Other, net........................................ -- (0.2) (2.8)
------ ---- -------
Effective tax rate................................ (111.7)% 36.6% (40.09)%
====== ==== =======
There is approximately $8.4 million of Federal income taxes receivable in
current assets at December 31, 1998 and approximately $6.0 million of Federal
income taxes payable was accrued at December 31, 1997. The Company reduced its
accrued Federal and state income tax payable in 1997 by approximately $2.9
million due to a tax benefit received from the exercise of certain stock
options. There was $920,600 of accrued state income taxes accrued at December
31, 1997.
As of January 1, 1994, a deferred tax asset valuation allowance of
approximately $6.0 million was due primarily to net operating loss ("NOL")
carryforwards which were not expected to be utilized before their respective
expiration dates or which benefits the Company was unable to predict would more
likely than not be realized. During each of the years ended December 31, 1995
and 1996, the Company changed its estimate with respect to its net deferred tax
assets and, accordingly, reduced the related valuation allowance by
approximately $1.7 million and $2.1 million, respectively. To the extent the
valuation allowance was reduced, the related tax benefit was credited to income
tax expense.
F-24
53
PATTERSON 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):
JANUARY 1, NET DECEMBER 31, NET DECEMBER 31, NET DECEMBER 31,
1996 CHANGE 1996 CHANGE 1997 CHANGE 1998
---------- ------ ------------ ------ ------------ ------ ------------
Deferred tax assets:
Net operating loss
carryforwards.............. $ 2,669 $ (258) $2,411 $(1,195) $ 1,216 $ 218 $ 1,434
Investment tax credit
carryforwards.............. 469 (94) 375 -- 375 -- 375
AMT credit carryforwards....... 282 -- 282 -- 282 -- 282
Depletion carryforwards........ 612 (218) 394 (394) --
Property and equipment......... -- -- -- -- -- -- --
Other.......................... 272 (18) 254 796 1,050 78 1,128
------- ------- ------ ------- ------- ------- --------
4,304 (588) 3,716 (793) 2,923 296 3,219
Valuation allowance............ (2,095) 2,095 -- -- -- -- --
------- ------- ------ ------- ------- ------- --------
Deferred tax assets............ 2,209 1,507 3,716 (793) 2,923 296 3,219
Deferred tax liabilities:
Property and equipment basis
difference................. (802) (1,527) (2,329) (1,553) (3,882) (7,335) (11,217)
------- ------- ------ ------- ------- ------- --------
Net deferred tax asset
(liability)........... $ 1,407 $ (20) $1,387 $(2,346) $ (959) $(7,039) $ (7,998)
======= ======= ====== ======= ======= ======= ========
For tax return purposes, the Company had tax NOL carryforwards of
approximately $4.2 million at December 31, 1998. If unused, the aforementioned
tax NOL carryforwards will expire in various amounts in years 1999 to 2012.
During the years ended December 31, 1996 and 1997, the Company utilized
approximately $2.2 million and $3.6 million, respectively, of NOL carryforwards.
During 1995, the Company's NOL carryforwards became subject to an annual
limitation due to a change of over 50% in the stock ownership of the Company as
defined in Internal Revenue Service Code Section 382(g). The NOL carryforwards
that can be utilized to offset net income in any year will be equal to
approximately $3.3 million plus any unused benefit from the prior year. The NOL
limitation is determined by the value of Patterson's equity on August 2, 1995,
the day prior to the ownership change, times 5.88%, the Federal long-term exempt
rate on that date as published by the U.S. Treasury Department, or $1.8 million,
and approximately $1.5 million which is determined by the value of Tucker's
equity on July 29, 1996, the day prior to consummation of the Merger, times
5.78%, the Federal long-term exempt rate on that date.
During the year ended December 31, 1996, the Company began recording
non-cash Federal deferred income taxes based primarily on the relationship
between the amount of the Company's unused Federal NOL carryforwards and the
temporary differences between the book basis and tax basis in the Company's
assets.
13. EMPLOYEE BENEFITS
Effective January 1, 1992, the Company established a 401(k) profit sharing
plan for all eligible employees. Company contributions are discretionary. In
March 1998, the Company contributed $519,559 to the plan. The amount of the
contribution was included in accrued expenses at December 31, 1997. No matching
contribution was accrued or paid by the Company for the 1998 fiscal year.
14. BUSINESS SEGMENTS
The Company conducts its business through three distinct operating
activities: contract drilling of oil and natural gas wells, oil and natural gas
exploration, development, acquisition and production and, to a lesser degree,
providing drilling fluid services to operators in the oil and natural gas
industry. Although the drilling
F-25
54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS -- (CONTINUED)
fluid operations do not meet the quantitative thresholds to warrant disclosure
as a business segment, management of the Company considers its drilling fluid
operations an integral part of its business.
Contract Drilling Services. The Company markets its contract drilling
services to major oil companies and independent oil and natural gas producers.
The Company owns 119 drilling rigs, 114 of which are currently operable.
Currently, 99 of the operable drilling rigs are based in Texas (60 in west
Texas, 22 in south Texas, 12 in east Texas and five in north Texas), nine are
based in southeast New Mexico, five in Mississippi and one in Utah. The drilling
rigs have rated maximum depth capabilities ranging from 7,000 feet to 25,000
feet.
Oil and Natural Gas Operations. The Company has been engaged in the
development, exploration, acquisition and production of oil and natural gas
since 1982. The Company's oil and natural gas activities are designed to
complement its land drilling operations and diversify the Company's overall
business strategy. These activities are primarily focused in mature producing
regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 4% of the Company's consolidated
operating revenues for the year ended December 31, 1998. The Company's business
strategy for its oil and natural gas operations is to increase its oil and
natural gas reserves primarily through developmental and exploratory drilling in
producing areas. At December 31, 1998, the Company's proved developed reserves
were approximately 1.5 million BOE and had a present value (discounted at 10%
before income taxes) of estimated future net revenues of approximately $6.8
million. The industry's significantly reduced commodity prices, primarily the
price of crude oil, have had a negative impact on the valuation of the Company's
oil and natural gas reserves. For each of the years ended December 31, 1996,
1997 and 1998, the Company incurred $549,000, $355,000 and $3.8 million,
respectively, of impairment charge to its oil and natural gas properties.
Drilling Fluid Services. The Company provides contract drilling fluid
services to numerous operators in the oil and natural gas industry. Operating
revenues derived from these activities constitute approximately 7% of the
Company's consolidated operating revenues. Patterson believes that these
contract services integrate well with its other core operating activities. The
drilling fluid operations were added by the Company during the current fiscal
year with its acquisitions of Lone Star Mud, Inc. during January 1998 and Tejas
Drilling Fluids, Inc. in September 1998 and have operations throughout Texas,
New Mexico, Oklahoma and Colorado.
DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
Revenues:
Contract drilling......................................... $73,590 $178,332 $165,997
Oil and natural gas....................................... 10,118 12,445 7,170
Drilling fluids........................................... -- -- 13,397
------- -------- --------
Total revenues.............................................. $83,708 $190,777 $186,564
======= ======== ========
Income (loss) from operations:
Contract drilling......................................... $ 3,869 $ 32,745 $ 9,329
Oil and natural gas....................................... 1,550 2,352 (6,217)
Drilling fluids........................................... -- -- 360
------- -------- --------
5,419 35,097 3,472
General corporate expense(a).............................. (2,268) -- --
Interest income........................................... 478 1,056 767
Interest expense.......................................... (1,612) (1,045) (4,471)
------- -------- --------
Income (loss) before income taxes......................... $ 2,017 $ 35,108 $ (232)
======= ======== ========
F-26
55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS -- (CONTINUED)
DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
Identifiable assets:
Contract drilling......................................... $63,506 $162,726 $185,237
Oil and natural gas....................................... 24,407 23,777 15,411
Drilling fluids........................................... -- -- 20,063
Corporate(b).............................................. -- 16,697 15,894
------- -------- --------
Total assets................................................ $87,913 $203,200 $236,605
======= ======== ========
Depreciation, depletion and amortization:
Contract drilling......................................... $ 6,837 $ 12,541 $ 22,416
Oil and natural gas....................................... 3,123 4,956 4,780
Drilling fluids........................................... -- -- 895
------- -------- --------
Total depreciation, depletion and amortization.............. $ 9,960 $ 17,497 $ 28,091
======= ======== ========
Capital expenditures:
Contract drilling......................................... $19,867 $ 74,495 $ 67,471
Oil and natural gas....................................... 4,106 9,766 7,734
Drilling fluids........................................... -- -- 4,396
------- -------- --------
Total capital expenditures.................................. $23,973 $ 84,261 $ 79,601
======= ======== ========
- ---------------
(a) The general corporate expense for 1996 is comprised entirely of
non-recurring acquisition costs. All other general corporate revenues and
expenses, except for interest income and interest expense, have been
allocated to the business segments of the Company.
(b) Corporate assets primarily include cash on hand managed by the parent
corporation and certain deferred Federal income tax assets.
15. OIL AND NATURAL GAS EXPENDITURES
Gross oil and natural gas expenditures by the Company for the years ended
December 31, 1996, 1997 and 1998 are summarized below (in thousands):
DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
Property acquisition costs........................... $ 666 $ 2,577 $1,585
Exploration costs.................................... 3,684 7,680 6,510
Development costs.................................... 2,174 2,412 1,126
------ ------- ------
$6,524 $12,669 $9,221
====== ======= ======
The aggregate amount of capitalized costs of oil and natural gas properties
as of December 31, 1997 and 1998 is comprised of the following (in thousands):
DECEMBER 31,
--------------------
1997 1998
---- ----
Proved properties........................................ $ 24,024 $ 27,856
Accumulated depreciation, depletion and amortization..... (15,696) (21,809)
-------- --------
Net proved properties.................................... $ 8,328 $ 6,047
======== ========
F-27
56
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED
DATA (UNAUDITED)
The following table sets forth information with respect to quantities of
net proved developed oil and natural gas reserves and changes in those reserves
for the years ended December 31, 1996, 1997 and 1998. The quantities were
estimated by an independent petroleum engineer. The Company's proved developed
oil and natural gas reserves are located entirely within the United States.
ESTIMATES OF RESERVES AND PRODUCTION PERFORMANCE ARE SUBJECTIVE AND MAY
CHANGE MATERIALLY AS ACTUAL PRODUCTION INFORMATION BECOMES AVAILABLE.
OIL AND NATURAL GAS RESERVE QUANTITIES
OIL (BBLS) GAS (MCF)
---------- ---------
(IN THOUSANDS)
Estimated quantity, January 1, 1996....................... 757 5,270
Revision in previous estimates............................ 39 464
Extensions, discoveries and other additions............... 215 1,972
Purchases................................................. 289 1,687
Sales of reserves-in-place................................ (3) (87)
Production................................................ (235) (1,679)
----- ------
Estimated quantity, January 1, 1997....................... 1,062 7,627
Revision in previous estimates............................ 193 (973)
Extensions, discoveries and other additions............... 411 294
Purchases................................................. -- --
Sales of reserves-in-place................................ (336) (2,003)
Production................................................ (385) (1,157)
----- ------
Estimated quantity, January 1, 1998....................... 945 3,788
Revision in previous estimates............................ 140 (596)
Extensions, discoveries and other additions............... 146 1,100
Purchases................................................. -- --
Sales of reserves-in-place................................ (1) (7)
Production................................................ (284) (795)
----- ------
Estimated quantity, January 1, 1999....................... 946 3,490
===== ======
F-28
57
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED
DATA (UNAUDITED) -- (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND NATURAL GAS PRODUCING ACTIVITIES
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Oil and natural gas sales................................... $8,299 $10,773 $ 5,641
Gain (loss) on sale of oil and natural gas properties....... (101) 803 68
------ ------- -------
8,198 11,576 5,709
------ ------- -------
Costs and expenses:
Production costs.......................................... 2,012 2,274 1,924
Exploration expenses...................................... 1,453 2,128 1,752
Depreciation, depletion and amortization.................. 3,123 4,956 4,780
Impairment of oil and natural gas properties.............. 549 355 3,816
Income tax expense (benefit).............................. 362 633 (2,231)
------ ------- -------
7,499 10,346 10,041
------ ------- -------
Results of operations for oil and natural gas producing
activities................................................ $ 699 $ 1,230 $(4,332)
====== ======= =======
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND
NATURAL GAS RESERVES, DISCOUNTED AT 10% PER ANNUM
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Future gross revenues............................ $42,930 $23,933 $16,451
Future development and production costs.......... (17,293) (8,921) (7,219)
Future income tax expense(a)..................... (6,581) (3,679) (1,929)
------- ------- -------
Future net cash flows............................ 19,056 11,333 7,303
Discount at 10% per annum........................ (5,756) (2,710) (1,953)
------- ------- -------
Standardized measure of discounted future net
cash flows.................................... $13,300 $ 8,623 $ 5,350
======= ======= =======
- ---------------
(a) Future income taxes are computed by applying the statutory tax rate to
future net cash flows less the tax basis of the properties and net operating
loss attributable to oil and gas operations and investment tax credit
carryforwards as of year-end; statutory depletion and tax credits applicable
to future oil and gas-producing activities are also considered in the income
tax computation.
F-29
58
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED
DATA (UNAUDITED) -- (CONTINUED)
CHANGES IN THE STANDARDIZED MEASURE OF NET CASH FLOWS OF PROVED DEVELOPED OIL
AND GAS RESERVES DISCOUNTED AT 10% PER ANNUM
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Standardized measure at beginning of year................... $ 8,668 $ 13,300 $ 8,623
Sales and transfers of oil and gas produced, net of
production costs.......................................... (6,288) (5,195) (2,773)
Net changes in sales price and future production and
development costs......................................... 2,015 1,347 (5,056)
Extensions, discoveries and improved recovery, less related
costs..................................................... 9,505 5,061 3,018
Sales of minerals-in-place.................................. -- (4,775) (9)
Revision of previous quantity estimates..................... 1,249 (1,024) (804)
Accretion of discount....................................... 631 1,922 1,193
Changes in production rates and other....................... 1,943 231 (224)
Net change in income taxes.................................. (4,423) (2,244) 1,382
------- -------- --------
Standardized measure at end of year....................... $13,300 $ 8,623 $ 5,350
======= ======== ========
17. 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,
1997 and 1998, the Company's demand deposits and temporary cash investments
consisted of the following (in thousands):
1997 1998
---- ----
Deposit in FDIC and SIPC-insured institutions under $100,000
and cash on hand.......................................... $ 1,490 $ 1,755
Deposit in FDIC and SIPC-insured institutions over $100,000
and cash on hand.......................................... 28,792 11,097
------- -------
30,282 12,852
Less outstanding checks and other reconciling items......... (6,944) (3,866)
------- -------
Cash and cash equivalents................................... 23,338 8,986
Investment in U.S. Treasury securities...................... 566 --
------- -------
$23,904 $ 8,986
======= =======
Concentrations of credit risk with respect to trade receivables are
primarily focused on contract drilling receivables. The concentration is
mitigated by the diversification of customers for which the Company provides
drilling services. No significant losses from individual contracts were
experienced during the years ended December 31, 1996, 1997 and 1998. Included in
general and administrative expense for the periods ended December 31, 1996, 1997
and 1998 are provisions for doubtful receivables of $126,596, $122,069 and
$90,000, 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-30
59
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. RELATED PARTY TRANSACTIONS
Use of Assets -- The Company leases a 1981 Beech King-Air 90 airplane owned
by an affiliate of the Company's Chairman of the Board/Chief Executive Officer.
Under the terms of the lease, the Company pays 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 $267,001, $171,803 and $211,495
for the lease of the airplane during 1996, 1997 and 1998, respectively.
Contract Drilling Services -- A company owned in part by a relative of the
Chairman of the Board/Chief Executive Officer, contracted drilling services from
the Company during 1996 and 1997. Revenues for 1996 and 1997 were approximately
$919,743 and $1.382 million respectively, for these services.
Sales of Oil -- A company owned in part by a relative of the Chairman of
the Board/Chief Executive Officer, acted as the first purchaser of oil produced
from leases operated by the Company during 1996, 1997 and 1998. Sales of oil to
that entity, both royalty and working interest (including the Company) were
approximately $19.6 million, $12.9 million and $8.1 million for 1996, 1997 and
1998, respectively.
Joint Operation of Oil and Natural Gas Properties -- The Company operates
certain oil and natural gas properties in which the Chairman of the Board/Chief
Executive Officer, the President/Chief Operating 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 $6.3 million, $10.5 million and $6.9
million from these properties in 1996, 1997 and 1998, respectively, to the
aforementioned persons or entities. These persons or entities reimbursed the
Company for joint operating costs of $5.3 million, $12.8 million and $7.4
million in 1996, 1997 and 1998, respectively.
19. SUBSEQUENT EVENT
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from Padre Industries, Inc., a privately-held,
non-affiliated entity based in Corpus Christi, Texas. The purchase price of
approximately $4.0 million consisted of 800,000 unregistered shares of the
Company's common stock valued at $4.00 per share and a contingent payment based
on a guarantee that the Company's common stock will be trading at $5.00 per
share one year from the acquisition date. The contingent cash payment will be
calculated by multiplying the 800,000 shares by the difference of the closing
sales price of the Company's common stock one year from the closing date and
$5.00. The maximum cash payment will be $800,000 [($5.00 -- $4.00) x 800,000]
plus $80,000 of interest. The cash payment and interest thereon will be ratably
reduced if the price of the Company's common stock, one year from the
acquisition date exceeds $5.00. No cash payment will be required if the
Company's common stock is at least $5.50 per share one year from the acquisition
date.
F-31
60
INDEX TO EXHIBITS
EXHIBIT
NO.
- -------
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 Asset Purchase Agreement, dated April 22, 1997, among and
between Patterson Drilling Company and Ziadril, Inc.(4)
2.4 Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(3)
2.4.1 Amendment to Asset Purchase Agreement, dated June 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.5 Agreement, dated June 4, 1997, among Patterson Energy Inc.,
Patterson Drilling Company, Greathouse Foundation and Myrle
Greathouse, Trustee under Agreement dated June 2, 1997.(5)
2.6 Asset Purchase Agreement, dated September 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and McGee
Drilling Company.(4)
2.7 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.8 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.9 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).
2.10 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.
3.1 Restated Certificate of Incorporation.(8)
3.1.1 Certificate of Amendment to the Certificate of
Incorporation.(9)
3.2 Bylaws.(1)
4.1 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock.(10)
4.2 Registration Rights Agreement, dated June 12, 1997, among
Patterson Energy Inc. and Wes-Tex Drilling Company,
Greathouse Foundation and Myrle Greathouse, Trustee under
Agreement dated June 2, 1997.(11)
4.3 Stock Purchase Warrant of Patterson Energy, Inc., dated June
12, 1997.(11)
10.1 Credit Agreement dated December 9, 1997 among Patterson
Energy, Inc., Patterson Drilling Company, Patterson
Petroleum, Inc., Patterson Trading Company, Inc. and Norwest
Bank Texas, N.A.(6)
10.1.1 Promissory Note dated December 9, 1997 among Patterson
Energy, Inc. and Norwest Bank Texas, N.A.(6)
10.1.2 Security Agreement dated December 9, 1997 between Patterson
Drilling Company and Norwest Bank Texas, N.A.(6)
10.1.3 Corporate Guarantees of Patterson Drilling Company,
Patterson Petroleum, Inc. and Patterson Petroleum Trading
Company, Inc.(6)
61
EXHIBIT
NO.
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10.1.4 Amendment to Credit Agreement dated March 4, 1999 among
Patterson Energy, Inc., Patterson Drilling Company,
Patterson Petroleum, Inc., Patterson Trading Company, Inc.
and Norwest Bank Texas, N.A.
10.2 Aircraft Lease, dated December 20, 1998, (effective January
1, 1999) between Talbott Aviation, Inc. and Patterson
Energy, Inc.
10.3 Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT Marketing,
Inc.(12)
10.3.1 Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT Marketing,
Inc.(13)
10.4 Crude Oil Purchase Contract, dated October 19, 1994, between
Patterson Petroleum, Inc. and BHT Marketing, Inc.(14)
10.4.1 Crude Oil Purchase Contract, dated October 24, 1995, between
Patterson Petroleum, Inc. and BHT Marketing, Inc.(13)
10.5 Patterson Energy, Inc. 1993 Stock Incentive Plan, as
amended.(15)
10.6 Patterson Energy, Inc. Non-Employee Directors' Stock Option
Plan, as amended.(16)
10.7 Model Form Operating Agreement.(17)
10.8 Form of Drilling Bid Proposal and Footage Drilling
Contract.(17)
10.9 Form of Turnkey Drilling Agreement.(17)
21.1 Subsidiaries of the registrant.(18)
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers
LLP.
27.1 Financial Data Schedule as of December 31, 1998 and for the
year then ended.
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(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 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 herein by reference to Item 16, "Exhibits" to Amendment No. 1
to Registration Statement on Form S-3 (File No. 333-29035); filed August 5,
1997.
(5) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11, 1997.
(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated November 14, 1997 and filed December 24, 1997.
(7) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits," to Form 8-K dated January 23, 1998; filed February 3, 1998.
(8) 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, 1996; filed
August 12, 1996.
(9) 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, 1997; filed August
14, 1997.
(10) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.
(11) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19, 1997.
62
(12) Incorporated herein by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
33-68058-FW).
(13) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(14) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(15) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917); filed March 13, 1998.
(16) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471); filed November 4, 1997.
(17) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
filed with the Securities and Exchange Commission on August 30, 1993.
(18) Incorporated by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 1997.
(19) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
January 5, 1998.