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EX-31.1 - EX-31.1 - PATTERSON UTI ENERGY INCpten-ex311_7.htm
EX-31.2 - EX-31.2 - PATTERSON UTI ENERGY INCpten-ex312_6.htm
EX-10.2 - EX-10.2 - PATTERSON UTI ENERGY INCpten-ex102_252.htm
EX-32.1 - EX-32.1 - PATTERSON UTI ENERGY INCpten-ex321_8.htm
EX-10.1 - EX-10.1 - PATTERSON UTI ENERGY INCpten-ex101_278.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

R

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 0-22664

 

Patterson-UTI Energy, Inc.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

75-2504748

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

450 GEARS ROAD, SUITE 500

HOUSTON, TEXAS

 

77067

(Address of principal executive offices)

 

(Zip Code)

(281) 765-7100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes R    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

R

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes £    No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

147,370,198 shares of common stock, $0.01 par value, as of April 28, 2016

 

 

 

 

 


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

 

Financial Statements

  

 

 

 

Unaudited condensed consolidated balance sheets

  

3

 

 

Unaudited condensed consolidated statements of operations

  

4

 

 

Unaudited condensed consolidated statements of comprehensive income

  

5

 

 

Unaudited condensed consolidated statement of changes in stockholders’ equity

  

6

 

 

Unaudited condensed consolidated statements of cash flows

  

7

 

 

Notes to unaudited condensed consolidated financial statements

  

8

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

22

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

32

ITEM 4.

 

Controls and Procedures

  

32

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

33

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

33

ITEM 6.

 

Exhibits

  

34

Signature  

 

 

  

35

 

 

 

 


PART I  — FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

The following unaudited condensed consolidated financial statements include all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

186,557

 

 

$

113,346

 

Accounts receivable, net of allowance for doubtful accounts of $3,191 and $3,545

   at March 31, 2016 and December 31, 2015, respectively

 

182,781

 

 

 

219,672

 

Federal and state income taxes receivable

 

37,321

 

 

 

33,454

 

Inventory

 

13,220

 

 

 

14,716

 

Deferred tax assets, net

 

35,268

 

 

 

65,121

 

Other

 

39,064

 

 

 

40,227

 

Total current assets

 

494,211

 

 

 

486,536

 

Property and equipment, net

 

3,786,835

 

 

 

3,920,708

 

Goodwill and intangible assets

 

91,698

 

 

 

92,609

 

Deposits on equipment purchases

 

18,395

 

 

 

22,367

 

Other

 

7,031

 

 

 

7,264

 

Total assets

$

4,398,170

 

 

$

4,529,484

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

81,975

 

 

$

82,771

 

Accrued expenses

 

154,439

 

 

 

161,611

 

Current portion of long-term debt, net of debt issuance cost of $530 and $483 at March          31, 2016 and December 31, 2015, respectively

 

76,970

 

 

 

63,267

 

Total current liabilities

 

313,384

 

 

 

307,649

 

Long-term debt, net of debt issuance cost of $2,941 and $3,350 at March 31, 2016 and December 31, 2015, respectively

 

764,559

 

 

 

787,900

 

Deferred tax liabilities, net

 

822,364

 

 

 

863,833

 

Other

 

8,381

 

 

 

8,971

 

Total liabilities

 

1,908,688

 

 

 

1,968,353

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, par value $.01; authorized 1,000,000 shares, no shares issued

 

 

 

 

 

Common stock, par value $.01; authorized 300,000,000 shares with 190,374,862

   and 190,374,801 issued and 147,167,622 and 147,167,561 outstanding at

   March 31, 2016 and December 31, 2015, respectively

 

1,904

 

 

 

1,904

 

Additional paid-in capital

 

1,018,699

 

 

 

1,011,811

 

Retained earnings

 

2,373,339

 

 

 

2,458,554

 

Accumulated other comprehensive income

 

2,585

 

 

 

(4,093

)

Treasury stock, at cost, 43,207,240 shares at March 31, 2016 and

   December 31, 2015

 

(907,045

)

 

 

(907,045

)

Total stockholders' equity

 

2,489,482

 

 

 

2,561,131

 

Total liabilities and stockholders' equity

$

4,398,170

 

 

$

4,529,484

 

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

 

 

3


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Operating revenues:

 

 

 

 

 

 

 

Contract drilling

$

168,659

 

 

$

401,478

 

Pressure pumping

 

96,313

 

 

 

249,721

 

Oil and natural gas

 

3,967

 

 

 

6,500

 

Total operating revenues

 

268,939

 

 

 

657,699

 

Operating costs and expenses:

 

 

 

 

 

 

 

Contract drilling

 

80,898

 

 

 

212,810

 

Pressure pumping

 

87,813

 

 

 

212,725

 

Oil and natural gas

 

2,090

 

 

 

2,798

 

Depreciation, depletion, amortization and impairment

 

176,770

 

 

 

175,382

 

Selling, general and administrative

 

17,972

 

 

 

20,537

 

Other operating (income) expense, net

 

(1,345

)

 

 

9,344

 

Total operating costs and expenses

 

364,198

 

 

 

633,596

 

Operating income (loss)

 

(95,259

)

 

 

24,103

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

110

 

 

 

283

 

Interest expense, net of amount capitalized

 

(10,800

)

 

 

(8,541

)

Other

 

16

 

 

 

-

 

Total other expense

 

(10,674

)

 

 

(8,258

)

Income (loss) before income taxes

 

(105,933

)

 

 

15,845

 

Income tax expense (benefit):

 

 

 

 

 

 

 

Current

 

(23,814

)

 

 

30,520

 

Deferred

 

(11,616

)

 

 

(23,800

)

Total income tax expense (benefit)

 

(35,430

)

 

 

6,720

 

Net income (loss)

$

(70,503

)

 

$

9,125

 

Net income (loss) per common share:

 

 

 

 

 

 

 

Basic

$

(0.48

)

 

$

0.06

 

Diluted

$

(0.48

)

 

$

0.06

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

Basic

 

145,770

 

 

 

144,983

 

Diluted

 

145,770

 

 

 

145,745

 

Cash dividends per common share

$

0.10

 

 

$

0.10

 

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

 

 

 

4


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Net income (loss)

$

(70,503

)

 

$

9,125

 

Other comprehensive income (loss), net of taxes of $0 for all periods:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

6,678

 

 

 

(8,578

)

Total comprehensive income (loss)

$

(63,825

)

 

$

547

 

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

 

 

 

5


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income

 

 

Stock

 

 

Total

 

Balance, December 31, 2015

 

190,375

 

 

$

1,904

 

 

$

1,011,811

 

 

$

2,458,554

 

 

$

(4,093

)

 

$

(907,045

)

 

 

2,561,131

 

Net loss

 

 

 

 

 

 

 

 

 

 

(70,503

)

 

 

 

 

 

 

 

 

(70,503

)

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

6,678

 

 

 

 

 

 

6,678

 

Issuance of restricted stock

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

7,211

 

 

 

 

 

 

 

 

 

 

 

 

7,211

 

Tax expense related to stock-

   based compensation

 

 

 

 

 

 

 

(323

)

 

 

 

 

 

 

 

 

 

 

 

(323

)

Payment of cash dividends

 

 

 

 

 

 

 

 

 

 

(14,712

)

 

 

 

 

 

 

 

 

(14,712

)

Balance, March 31, 2016

 

190,375

 

 

$

1,904

 

 

$

1,018,699

 

 

$

2,373,339

 

 

$

2,585

 

 

$

(907,045

)

 

$

2,489,482

 

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

 

 

 

6


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(70,503

)

 

$

9,125

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion, amortization and impairment

 

176,770

 

 

 

175,382

 

Dry holes and abandonments

 

-

 

 

 

46

 

Deferred income tax benefit

 

(11,616

)

 

 

(23,800

)

Stock-based compensation expense

 

7,211

 

 

 

6,855

 

Net gain on asset disposals

 

(2,445

)

 

 

(2,916

)

Tax expense on stock based compensation

 

(323

)

 

 

(34

)

Amortization of debt issuance costs

 

362

 

 

 

163

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

37,362

 

 

 

176,672

 

Income taxes receivable/payable

 

(3,346

)

 

 

112,711

 

Inventory and other assets

 

2,973

 

 

 

9,561

 

Accounts payable

 

(14,888

)

 

 

(65,196

)

Accrued expenses

 

(7,196

)

 

 

5,559

 

Other liabilities

 

(628

)

 

 

857

 

Net cash provided by operating activities

 

113,733

 

 

 

404,985

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(21,301

)

 

 

(241,466

)

Proceeds from disposal of assets

 

5,100

 

 

 

5,827

 

Net cash used in investing activities

 

(16,201

)

 

 

(235,639

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(14,712

)

 

 

(14,640

)

Debt issuance costs

 

 

 

 

(1,940

)

Proceeds from long-term debt

 

 

 

 

200,000

 

Repayment of long-term debt

 

(10,000

)

 

 

(2,500

)

Proceeds from borrowings under revolving credit facility

 

 

 

 

54,000

 

Repayment of borrowings under revolving credit facility

 

 

 

 

(357,000

)

Net cash used in financing activities

 

(24,712

)

 

 

(122,080

)

Effect of foreign exchange rate changes on cash

 

391

 

 

 

(3,361

)

Net increase in cash and cash equivalents

 

73,211

 

 

 

43,905

 

Cash and cash equivalents at beginning of period

 

113,346

 

 

 

43,012

 

Cash and cash equivalents at end of period

$

186,557

 

 

$

86,917

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Net cash (paid) received during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized interest of $185 in 2016 and $1,667 in 2015

$

(3,773

)

 

$

(783

)

Income taxes

$

19,625

 

 

$

83,135

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net increase (decrease) in payables for purchases of property and equipment

$

14,063

 

 

$

(884

)

Net decrease in deposits on equipment purchases

$

3,972

 

 

$

32,220

 

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

 

 

 

7


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Consolidation and Presentation

The unaudited interim condensed consolidated financial statements include the accounts of Patterson-UTI Energy, Inc. (the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Except for wholly-owned subsidiaries, the Company has no controlling financial interests in any entity which would require consolidation.

The unaudited interim condensed consolidated financial statements have been prepared by management of the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included either on the face of the financial statements or herein are sufficient to make the information presented not misleading. In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for a fair statement of the information in conformity with accounting principles generally accepted in the United States of America have been included. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2015, as presented herein, was derived from the audited consolidated balance sheet of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year.

The U.S. dollar is the functional currency for all of the Company’s operations except for its Canadian operations, which uses the Canadian dollar as its functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive income, which is a separate component of stockholders’ equity.

During the first quarter of 2016, the Company determined that certain income and expense items should be classified as “other operating (income) expense, net” in the condensed consolidated statements of operations. This caption now includes gains and losses on asset disposals and expenses related to certain legal settlements.  Gains and losses on asset disposals were previously presented on a separate line in the condensed consolidated statements of operations.  Expenses related to legal settlements were previously included in operating costs of the respective operating segment or in selling, general and administrative expense.  For comparative purposes, all such prior period amounts were reclassified to conform to the current quarter presentation, including the Company’s previously disclosed $12.3 million legal settlement that was previously included in selling, general and administrative expense for the three months ended March 31, 2015.

The Company provides a dual presentation of its net income (loss) per common share in its unaudited condensed consolidated statements of operations: Basic net income (loss) per common share (“Basic EPS”) and diluted net income (loss) per common share (“Diluted EPS”).

Basic EPS excludes dilution and is computed by first allocating earnings between common stockholders and holders of non-vested shares of restricted stock. Basic EPS is then determined by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding during the period, excluding non-vested shares of restricted stock.

Diluted EPS is based on the weighted average number of common shares outstanding plus the dilutive effect of potential common shares, including stock options, non-vested shares of restricted stock and restricted stock units. The dilutive effect of stock options and restricted stock units is determined using the treasury stock method. The dilutive effect of non-vested shares of restricted stock is based on the more dilutive of the treasury stock method or the two-class method, assuming a reallocation of undistributed earnings to common stockholders after considering the dilutive effect of potential common shares other than non-vested shares of restricted stock.

8


The following table presents information necessary to calculate net income (loss) per share for the three months March 31, 2016 and 2015 as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

BASIC EPS:

 

 

 

 

 

 

 

Net income (loss)

$

(70,503

)

 

$

9,125

 

Adjust for (income) loss attributed to holders of non-vested restricted stock

 

681

 

 

 

(86

)

Income attributed to common stockholders

$

(69,822

)

 

$

9,039

 

Weighted average number of common shares outstanding, excluding non-vested

   shares of restricted stock

 

145,770

 

 

 

144,983

 

Basic net income (loss) per common share

$

(0.48

)

 

$

0.06

 

DILUTED EPS:

 

 

 

 

 

 

 

Income (loss) attributed to common stockholders

$

(69,822

)

 

$

9,039

 

Weighted average number of common shares outstanding, excluding non-vested

   shares of restricted stock

 

145,770

 

 

 

144,983

 

Add dilutive effect of potential common shares

-

 

 

 

762

 

Weighted average number of diluted common shares outstanding

 

145,770

 

 

 

145,745

 

Diluted net income (loss) per common share

$

(0.48

)

 

$

0.06

 

Potentially dilutive securities excluded as anti-dilutive

 

7,740

 

 

 

5,569

 

 

 

2. Stock-based Compensation

 

The Company uses share-based payments to compensate employees and non-employee directors.  The Company recognizes the cost of share-based payments under the fair-value-based method.  Share-based awards consist of equity instruments in the form of stock options, restricted stock or restricted stock units and have included service and, in certain cases, performance conditions.  The Company’s share-based awards also included share-settled performance unit awards.  Share-settled performance unit awards are accounted for as equity awards.  The Company issues shares of common stock when vested stock options are exercised, when restricted stock is granted and when restricted stock units and share-settled performance unit awards vest.  

Stock Options — The Company estimates the grant date fair values of stock options using the Black-Scholes-Merton valuation model. Volatility assumptions are based on the historic volatility of the Company’s common stock over the most recent period equal to the expected term of the options as of the date the options are granted. The expected term assumptions are based on the Company’s experience with respect to employee stock option activity. Dividend yield assumptions are based on the expected dividends at the time the options are granted. The risk-free interest rate assumptions are determined by reference to United States Treasury yields. Weighted-average assumptions used to estimate the grant date fair values for stock options granted for the three month periods ended March 31, 2016 and 2015 follow:

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Volatility

 

39.52

%

 

 

38.47

%

Expected term (in years)

 

5.00

 

 

 

5.00

 

Dividend yield

 

2.65

%

 

 

2.41

%

Risk-free interest rate

 

1.76

%

 

 

1.65

%

 

 

9


Stock option activity from January 1, 2016 to March 31, 2016 follows:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Underlying

 

 

Exercise

 

 

Shares

 

 

Price

 

Outstanding at January 1, 2016

 

6,307,250

 

 

$

21.68

 

Granted

 

50,000

 

 

$

15.08

 

Exercised

 

 

 

 

 

Cancelled

 

 

 

 

 

Expired

 

(30,000

)

 

$

34.24

 

Outstanding at March 31, 2016

 

6,327,250

 

 

$

21.56

 

Exercisable at March 31, 2016

 

5,332,768

 

 

$

21.46

 

Restricted Stock — For all restricted stock awards to date, shares of common stock were issued when the awards were made. Non-vested shares are subject to forfeiture for failure to fulfill service conditions and, in certain cases, performance conditions. Non-forfeitable dividends are paid on non-vested shares of restricted stock. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock activity from January 1, 2016 to March 31, 2016 follows:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Grant Date

 

 

Shares

 

 

Fair Value

 

Non-vested restricted stock outstanding at January 1, 2016

 

1,432,250

 

 

$

24.56

 

Granted

 

15,000

 

 

$

15.08

 

Vested

 

(60,831

)

 

$

24.60

 

Forfeited

 

(14,939

)

 

$

25.24

 

Non-vested restricted stock outstanding March 31, 2016

 

1,371,480

 

 

$

24.45

 

Restricted Stock Units — For all restricted stock unit awards made to date, shares of common stock are not issued until the units vest.  Restricted stock units are subject to forfeiture for failure to fulfill service conditions.  Non-forfeitable cash dividend equivalents are paid on certain non-vested restricted stock units.  The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock unit activity from January 1, 2016 to March 31, 2016 follows:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Grant Date

 

 

Shares

 

 

Fair Value

 

Non-vested restricted stock units outstanding at January 1, 2016

 

41,686

 

 

$

26.22

 

Granted

 

 

 

$

 

Vested

 

 

 

$

 

Forfeited

 

 

 

$

 

Non-vested restricted stock units outstanding March 31, 2016

 

41,686

 

 

$

26.22

 

 

 

Performance Unit Awards.  The Company has granted stock-settled performance unit awards to certain executive officers (the “Stock-Settled Performance Units”) on an annual basis since 2010.  The Stock-Settled Performance Units provide for the recipients to receive a grant of shares of stock upon the achievement during a specified period of certain performance goals established by the Compensation Committee.  The performance period for the Stock-Settled Performance Units is the three year period commencing on April 1 of the year of grant, except that for the Stock-Settled Performance Units granted in 2013 the performance period has been extended pursuant to its terms, as described below.  

 

10


The performance goals for the Stock-Settled Performance Units are tied to the Company’s total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee.  These goals are considered to be market conditions under the relevant accounting standards and the market conditions were factored into the determination of the fair value of the respective performance units.  Generally, the recipients will receive a target number of shares if the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, is at the 50th percentile.  If the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, is at the 75th percentile or higher, then the recipients will receive two times the target number of shares.  If the Company’s total shareholder return during the performance period is positive, and, when compared to the peer group, is at the 25th percentile, then the recipients will only receive one-half of the target number of shares.  If the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, achievement is between the 25th and 75th percentile, then the shares to be received by the recipients will be determined on a pro-rata basis.  For the Stock-Settled Performance Units awarded prior to 2016, there is no payout unless the Company’s total shareholder return is positive and, when compared to the peer group, is at or above the 25th percentile.  

 

In respect of the 2013 Stock-Settled Performance Units, the performance period ended March 31, 2016, the Company’s total shareholder return for the performance period was negative, the Company’s total shareholder return for the performance period when compared to the peer group was above the 75th percentile, and there was no payout; provided, however, that pursuant to the terms of those 2013 awards, if, during the two-year period ending March 31, 2018, the Company’s total shareholder return for any 30 consecutive day period equals or exceeds 18 percent on an annualized basis from April 1, 2013 through the last day of such 30 consecutive day period, and the recipient is actively employed by the Company through the last day of the extended performance period, then the Company will issue to the recipient the number of shares equal to the amount the recipient would have been entitled to receive if the Company’s total shareholder return had been positive during the initial three year performance period.

 

For the Stock-Settled Performance Units granted in April 2016, if the Company’s total shareholder return is negative, and, when compared to the peer group is at or above the 25th percentile, then the recipients will receive one-half of the number of shares they would have received if the Company’s total shareholder return had been positive.

The total target number of shares with respect to the Stock-Settled Performance Units for the awards in 2012-2015 is set forth below:

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Target number of shares

 

190,600

 

 

 

154,000

 

 

 

236,500

 

 

 

192,000

 

 

Because the performance units are stock-settled awards, they are accounted for as equity awards and measured at fair value on the date of grant using a Monte Carlo simulation model. The fair value of the Stock-Settled Performance Units is set forth below (in thousands):

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Fair value at date of grant

$

4,052

 

 

$

5,388

 

 

$

5,564

 

 

$

3,065

 

 

These fair value amounts are charged to expense on a straight-line basis over the performance period. Compensation expense associated with the Stock-Settled Performance Units is shown below (in thousands):

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Three months ended March 31, 2016

$

338

 

 

$

449

 

 

$

464

 

 

NA

 

Three months ended March 31, 2015

NA

 

 

$

449

 

 

$

464

 

 

$

255

 

 

 

11


3. Property and Equipment

Property and equipment consisted of the following at March 31, 2016 and December 31, 2015 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Equipment

$

6,937,451

 

 

$

6,963,148

 

Oil and natural gas properties

 

199,166

 

 

 

200,923

 

Buildings

 

96,765

 

 

 

96,470

 

Land

 

22,370

 

 

 

22,370

 

 

 

7,255,752

 

 

 

7,282,911

 

Less accumulated depreciation, depletion and impairment

 

(3,468,917

)

 

 

(3,362,203

)

Property and equipment, net

$

3,786,835

 

 

$

3,920,708

 

 

The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable (a “triggering event”).  Based on recent commodity prices, results of operations for the period ended March 31, 2016 and management’s expectations of results of operations in future periods, the Company concluded that no triggering event occurred during the first quarter of 2016 with respect to its contract drilling segment or its pressure pumping segment.  Management’s expectations of results of operations in future periods were based on the assumption that activity levels in both segments will begin to recover by early 2017 in response to improved future oil prices.  

With respect to the long-lived assets in the Company’s oil and natural gas exploration and production segment, the Company assesses the recoverability of long-lived assets each quarter due to revisions in oil and natural gas reserve estimates and expectations about future commodity prices.  The Company’s analysis indicated that the carrying amounts of certain oil and natural gas properties were not recoverable at March 31, 2016.  The Company’s estimates of expected future net cash flows from impaired properties are used in measuring the fair value of such properties.  The Company recorded impairment charges of $2.2 million during the first quarter of 2016 related to its oil and natural gas properties.  

 

 

12


4. Business Segments

The Company’s revenues, operating income (losses) and identifiable assets are primarily attributable to three business segments: (i) contract drilling of oil and natural gas wells, (ii) pressure pumping services and (iii) the investment, on a non-operating working interest basis, in oil and natural gas properties. Each of these segments represents a distinct type of business. These segments have separate management teams which report to the Company’s chief operating decision maker. The results of operations in these segments are regularly reviewed by the chief operating decision maker for purposes of determining resource allocation and assessing performance.

The following tables summarize selected financial information relating to the Company’s business segments (in thousands):

 

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

Contract drilling

$

168,757

 

 

$

402,241

 

Pressure pumping

 

96,313

 

 

 

249,721

 

Oil and natural gas

 

3,967

 

 

 

6,500

 

Total segment revenues

 

269,037

 

 

 

658,462

 

Elimination of intercompany revenues (a)

 

(98

)

 

 

(763

)

Total revenues

$

268,939

 

 

$

657,699

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

   Contract drilling

$

(35,096

)

 

$

68,398

 

   Pressure pumping

 

(43,959

)

 

 

(15,016

)

   Oil and natural gas

 

(2,855

)

 

 

(4,562

)

 

 

(81,910

)

 

 

48,820

 

Corporate and other

 

(14,694

)

 

 

(15,373

)

Other operating income (expense), net (b)

 

1,345

 

 

 

(9,344

)

Interest income

 

110

 

 

 

283

 

Interest expense

 

(10,800

)

 

 

(8,541

)

Other

 

16

 

 

 

-

 

Income (loss) before income taxes

$

(105,933

)

 

$

15,845

 

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Identifiable assets:

 

 

 

 

 

 

 

Contract drilling

$

3,342,096

 

 

$

3,457,044

 

Pressure pumping

 

760,692

 

 

 

813,704

 

Oil and natural gas

 

30,183

 

 

 

34,073

 

Corporate and other (c)

 

265,199

 

 

 

224,663

 

Total assets

$

4,398,170

 

 

$

4,529,484

 

 

 

(a)

Consists of contract drilling intercompany revenues for services provided to the oil and natural gas exploration and production segment.

(b)

Other operating income (expense) includes net gains or losses associated with the disposal of assets related to corporate strategy decisions of the executive management group.  Accordingly, the related gains or losses have been excluded from the results of specific segments.  This caption also includes expenses related to certain legal settlements.  

(c)

Corporate and other assets primarily include cash on hand, income tax receivables and certain deferred tax assets.

 

 

13


5. Goodwill and Intangible Assets

Goodwill — All of the Company’s goodwill at both March 31, 2016 and December 31, 2015 related to the contract drilling operating segment.  Goodwill as of March 31, 2016 and changes for the three months then ended are as follows (in thousands):

 

 

Three Months Ended

 

 

March 31, 2016

 

Balance at beginning of period

$

86,234

 

Changes to goodwill

 

Balance at end of period

$

86,234

 

 

There were no impairment losses related to the goodwill in the contract drilling operating segment as of March 31, 2016 or December 31, 2015.

Goodwill is evaluated at least annually as of December 31, or when circumstances require, to determine if the fair value of recorded goodwill has decreased below its carrying value.  For purposes of impairment testing, goodwill is evaluated at the reporting unit level.  The Company’s reporting units for impairment testing have been determined to be its operating segments.  The Company first determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying value after considering qualitative, market and other factors, and if it is, then goodwill impairment is determined using a two-step quantitative impairment test.  From time to time, the Company may perform the first step of the quantitative testing for goodwill impairment in lieu of performing the qualitative assessment.  The first step of the quantitative testing is to compare the fair value of an entity’s reporting units to the respective carrying value of those reporting units.  If the carrying value of a reporting unit exceeds its fair value, the second step of the quantitative testing is performed whereby the fair value of the reporting unit is allocated to its identifiable tangible and intangible assets and liabilities with any remaining fair value representing the fair value of goodwill.  If this resulting fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized in the amount of the shortfall.

Intangible Assets — Intangible assets were recorded in the pressure pumping operating segment in connection with the fourth quarter 2010 acquisition of the assets of a pressure pumping business. As a result of the purchase price allocation, the Company recorded an intangible asset related to the customer relationships acquired. The intangible asset was recorded at fair value on the date of acquisition.

The value of the customer relationships was estimated using a multi-period excess earnings model to determine the present value of the projected cash flows associated with the customers in place at the time of the acquisition and taking into account a contributory asset charge. The resulting intangible asset is being amortized on a straight-line basis over seven years. Amortization expense of approximately $911,000 was recorded in the three months ended March 31, 2016 and 2015 associated with customer relationships.

The following table presents the gross carrying amount and accumulated amortization of the customer relationships as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

March 31, 2016

 

 

December 31, 2015

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

$

25,500

 

 

$

(20,036

)

 

$

5,464

 

 

$

25,500

 

 

$

(19,125

)

 

$

6,375

 

 

 

6. Accrued Expenses

Accrued expenses consisted of the following at March 31, 2016 and December 31, 2015 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Salaries, wages, payroll taxes and benefits

$

22,631

 

 

$

27,055

 

Workers' compensation liability

 

72,322

 

 

 

75,358

 

Property, sales, use and other taxes

 

3,547

 

 

 

9,061

 

Insurance, other than workers' compensation

 

12,606