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EX-32.1 - EX-32.1 SARBANES CERTIFICATION - PATTERSON UTI ENERGY INCpten-ex321_6.htm
EX-31.2 - EX-31.2 CFO CERTIFICATION - PATTERSON UTI ENERGY INCpten-ex312_8.htm
EX-31.1 - EX-31.1 CEO CERTIFICATION - PATTERSON UTI ENERGY INCpten-ex311_7.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended March 31, 2017

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.)

 

 

 

10713 W. SAM HOUSTON PKWY N, SUITE 800

HOUSTON, TEXAS

 

77064

(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      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     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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

 

Accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          

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

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

212,623,506 shares of common stock, $0.01 par value, as of April 28, 2017

 

 

 

 

 


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 loss

  

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

  

23

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

34

ITEM 4.

 

Controls and Procedures

  

34

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

35

ITEM 1A.

 

Risk Factors

  

35

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

ITEM 6.

 

Exhibits

  

38

Signature  

 

 

  

39

 

 

 

 


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,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

466,608

 

 

$

35,152

 

Accounts receivable, net of allowance for doubtful accounts of $3,186 and $3,191

   at March 31, 2017 and December 31, 2016, respectively

 

210,431

 

 

 

148,091

 

Federal and state income taxes receivable

 

1,878

 

 

 

2,126

 

Inventory

 

20,754

 

 

 

20,191

 

Other

 

30,273

 

 

 

41,322

 

Total current assets

 

729,944

 

 

 

246,882

 

Property and equipment, net

 

3,328,788

 

 

 

3,408,963

 

Goodwill and intangible assets

 

88,055

 

 

 

88,966

 

Deposits on equipment purchases

 

19,106

 

 

 

16,050

 

Deferred tax assets, net

 

4,771

 

 

 

4,124

 

Other

 

7,955

 

 

 

7,306

 

Total assets

$

4,178,619

 

 

$

3,772,291

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

158,226

 

 

$

125,667

 

Accrued expenses

 

135,940

 

 

 

139,148

 

Total current liabilities

 

294,166

 

 

 

264,815

 

Long-term debt, net of debt issuance cost of $1,476 and $1,563 at March 31, 2017

   and December 31, 2016, respectively

 

598,524

 

 

 

598,437

 

Deferred tax liabilities, net

 

614,361

 

 

 

650,661

 

Other

 

9,959

 

 

 

9,654

 

Total liabilities

 

1,517,010

 

 

 

1,523,567

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

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 209,729,770

   and 191,525,872 issued and 166,329,164 and 148,133,255 outstanding at

   March 31, 2017 and December 31, 2016, respectively

 

2,097

 

 

 

1,915

 

Additional paid-in capital

 

1,521,438

 

 

 

1,042,696

 

Retained earnings

 

2,049,476

 

 

 

2,116,341

 

Accumulated other comprehensive loss

 

(85

)

 

 

(1,134

)

Treasury stock, at cost, 43,400,606 and 43,392,617 shares at March 31, 2017 and

   December 31, 2016, respectively

 

(911,317

)

 

 

(911,094

)

Total stockholders' equity

 

2,661,609

 

 

 

2,248,724

 

Total liabilities and stockholders' equity

$

4,178,619

 

 

$

3,772,291

 

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,

 

 

2017

 

 

2016

 

Operating revenues:

 

 

 

 

 

 

 

Contract drilling

$

158,728

 

 

$

168,659

 

Pressure pumping

 

141,174

 

 

 

96,313

 

Other

 

5,273

 

 

 

3,967

 

Total operating revenues

 

305,175

 

 

 

268,939

 

Operating costs and expenses:

 

 

 

 

 

 

 

Contract drilling

 

108,221

 

 

 

80,898

 

Pressure pumping

 

119,013

 

 

 

87,813

 

Other

 

3,259

 

 

 

2,090

 

Depreciation, depletion, amortization and impairment

 

156,217

 

 

 

176,770

 

Selling, general and administrative

 

18,852

 

 

 

17,972

 

Acquisition related expenses

 

5,156

 

 

 

 

Other operating income, net

 

(12,904

)

 

 

(1,345

)

Total operating costs and expenses

 

397,814

 

 

 

364,198

 

Operating loss

 

(92,639

)

 

 

(95,259

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

406

 

 

 

110

 

Interest expense, net of amount capitalized

 

(8,270

)

 

 

(10,800

)

Other

 

17

 

 

 

16

 

Total other expense

 

(7,847

)

 

 

(10,674

)

Loss before income taxes

 

(100,486

)

 

 

(105,933

)

Income tax benefit

 

(36,947

)

 

 

(35,430

)

Net loss

$

(63,539

)

 

$

(70,503

)

Net loss per common share:

 

 

 

 

 

 

 

Basic

$

(0.40

)

 

$

(0.48

)

Diluted

$

(0.40

)

 

$

(0.48

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

Basic

 

160,062

 

 

 

145,770

 

Diluted

 

160,062

 

 

 

145,770

 

Cash dividends per common share

$

0.02

 

 

$

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 LOSS

(unaudited, in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Net loss

$

(63,539

)

 

$

(70,503

)

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

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

1,049

 

 

 

6,678

 

Total comprehensive loss

$

(62,490

)

 

$

(63,825

)

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 (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2016

 

191,526

 

 

$

1,915

 

 

$

1,042,696

 

 

$

2,116,341

 

 

$

(1,134

)

 

$

(911,094

)

 

 

2,248,724

 

Net loss

 

 

 

 

 

 

 

 

 

 

(63,539

)

 

 

 

 

 

 

 

 

(63,539

)

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

1,049

 

 

 

 

 

 

1,049

 

Equity offering

 

18,170

 

 

 

182

 

 

 

471,388

 

 

 

 

 

 

 

 

 

 

 

 

471,570

 

Exercise of stock options

 

10

 

 

 

 

 

 

223

 

 

 

 

 

 

 

 

 

 

 

 

223

 

Issuance of restricted stock

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

7,131

 

 

 

 

 

 

 

 

 

 

 

 

7,131

 

Payment of cash dividends

 

 

 

 

 

 

 

 

 

 

(3,326

)

 

 

 

 

 

 

 

 

(3,326

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(223

)

 

 

(223

)

Balance, March 31, 2017

 

209,730

 

 

$

2,097

 

 

$

1,521,438

 

 

$

2,049,476

 

 

$

(85

)

 

$

(911,317

)

 

$

2,661,609

 

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,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(63,539

)

 

$

(70,503

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion, amortization and impairment

 

156,217

 

 

 

176,770

 

Deferred income tax benefit

 

(36,947

)

 

 

(11,616

)

Stock-based compensation expense

 

7,131

 

 

 

7,211

 

Net gain on asset disposals

 

(13,560

)

 

 

(2,445

)

Tax expense on stock-based compensation

 

 

 

 

(323

)

Amortization of debt issuance costs

 

87

 

 

 

362

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(62,291

)

 

 

37,362

 

Income taxes receivable

 

248

 

 

 

(3,346

)

Inventory and other assets

 

9,931

 

 

 

2,973

 

Accounts payable

 

11,252

 

 

 

(14,888

)

Accrued expenses

 

(3,233

)

 

 

(7,196

)

Other liabilities

 

261

 

 

 

(628

)

Net cash provided by operating activities

 

5,557

 

 

 

113,733

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(68,440

)

 

 

(21,301

)

Proceeds from disposal of assets

 

25,861

 

 

 

5,100

 

Net cash used in investing activities

 

(42,579

)

 

 

(16,201

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from equity offering

 

471,570

 

 

 

 

Dividends paid

 

(3,326

)

 

 

(14,712

)

Repayment of long-term debt

 

 

 

 

(10,000

)

Proceeds from borrowings under revolving credit facility

 

10,000

 

 

 

 

Repayment of borrowings under revolving credit facility

 

(10,000

)

 

 

 

Net cash provided by (used in) financing activities

 

468,244

 

 

 

(24,712

)

Effect of foreign exchange rate changes on cash

 

234

 

 

 

391

 

Net increase in cash and cash equivalents

 

431,456

 

 

 

73,211

 

Cash and cash equivalents at beginning of period

 

35,152

 

 

 

113,346

 

Cash and cash equivalents at end of period

$

466,608

 

 

$

186,557

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Net cash (paid) received during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized interest of $155 in 2017 and $185 in 2016

$

(634

)

 

$

(3,773

)

Income taxes

$

248

 

 

$

19,625

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net increase in payables for purchases of property and equipment

$

21,297

 

 

$

14,063

 

Net (increase) decrease in deposits on equipment purchases

$

(3,056

)

 

$

3,972

 

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 United States 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 (“U.S. GAAP”) 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 recurring adjustments considered necessary for a fair statement of the information in conformity with U.S. GAAP have been included. The unaudited condensed consolidated balance sheet as of December 31, 2016, as presented herein, was derived from the audited consolidated balance sheet of the Company, but does not include all disclosures required by U.S. GAAP. 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, 2016. The results of operations for the three months ended March 31, 2017 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 loss, which is a separate component of stockholders’ equity.

In 2017, the Company adopted new guidance for the presentation of deferred tax liabilities and assets and such guidance was applied retrospectively, resulting in the retroactive adjustment of current deferred tax assets, net and deferred tax liabilities, net as of December 31, 2016.  During the fourth quarter of 2016, the Company changed its reporting segment presentation, as the Company no longer considers its oil and natural gas exploration and production activities to be significant to an understanding of the Company’s results.  The Company now presents the oil and natural gas exploration and production activities, pipe handling components and related technology business and Middle East/North Africa business as “Other,” and “Corporate” reflects only corporate activities.  This change in segment presentation was applied retrospectively to all periods presented herein (See Note 6).

The Company provides a dual presentation of its net loss per common share in its unaudited condensed consolidated statements of operations: Basic net loss per common share (“Basic EPS”) and diluted net 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 loss per share for the three months ended March 31, 2017 and 2016 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,

 

 

2017

 

 

2016

 

BASIC EPS:

 

 

 

 

 

 

 

Net loss

$

(63,539

)

 

$

(70,503

)

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

 

 

 

 

681

 

Loss attributed to other common stockholders

$

(63,539

)

 

$

(69,822

)

Weighted average number of common shares outstanding, excluding

   non-vested shares of restricted stock

 

160,062

 

 

 

145,770

 

Basic net loss per common share

$

(0.40

)

 

$

(0.48

)

DILUTED EPS:

 

 

 

 

 

 

 

Loss attributed to other common stockholders

$

(63,539

)

 

$

(69,822

)

Weighted average number of common shares outstanding, excluding

   non-vested shares of restricted stock

 

160,062

 

 

 

145,770

 

Add dilutive effect of potential common shares

 

 

 

 

 

Weighted average number of diluted common shares outstanding

 

160,062

 

 

 

145,770

 

Diluted net loss per common share

$

(0.40

)

 

$

(0.48

)

Potentially dilutive securities excluded as anti-dilutive

 

9,017

 

 

 

7,740

 

 

2. Acquisitions

On December 12, 2016, the Company entered into an Agreement and Plan of Merger (the “merger agreement”) with Seventy Seven Energy Inc. (“SSE”).  On April 20, 2017, pursuant to the merger agreement, a subsidiary of the Company was merged with and into SSE, with SSE continuing as the surviving entity and one of the Company’s wholly owned subsidiaries (the “SSE merger”). Pursuant to the terms of the merger agreement, the Company acquired all of the issued and outstanding shares of common stock of SSE, in exchange for approximately 46.3 million shares of common stock of the Company (net of 50% of the shares withheld to satisfy tax obligations upon vesting of SSE restricted stock units and excluding up to approximately 0.5 million shares to be issued on or before August 18, 2017 to former holders of SSE restricted stock units that were granted on or after December 12, 2016 for employee retention purposes). Concurrent with the closing of the merger, the Company repaid all of the outstanding debt of SSE totaling $472 million ($403 million net of cash from SSE).  Based on the closing price of the Company’s common stock on April 20, 2017, the total fair value of the consideration transferred to effect the acquisition of SSE was approximately $1.5 billion.  On April 20, 2017, following the SSE merger, SSE was merged with and into a newly-formed subsidiary of the Company named Seventy Seven Energy LLC (“SSE LLC”), with SSE LLC continuing as the surviving entity and one of the Company’s wholly owned subsidiaries.

Through the SSE merger, the Company acquired a fleet of 91 drilling rigs, 36 of which the Company considers to be APEX® class rigs. Additionally, through the SSE merger, the Company acquired approximately 500,000 horsepower of modern, efficient fracturing equipment located in the Anadarko Basin and Eagle Ford Shale.  The oilfield rentals business acquired through the SSE merger has a modern, well-maintained fleet of premium rental tools, and it provides specialized services for land-based oil and natural gas drilling, completion and workover activities.  

The Company’s consolidated results of operations will include the results the acquired SSE business beginning with the closing date of the acquisition of April 20, 2017.  Due to the timing of the closing of the acquisition, the Company has not completed the detailed valuation work necessary to determine the required estimates of the fair value of the acquired assets and liabilities assumed and the related allocation of purchase price.  SSE reported total assets of approximately $949 million as of December 31, 2016, consisting of $48.7 million of cash, $99.5 million of accounts receivable, $750 million of property and equipment and $50.8 million of other assets.  The Company’s preliminary allocation of purchase price to the assets acquired will be included in the Company’s future filings.

As this transaction closed subsequent to the end of the first quarter of 2017, the condensed consolidated financial statements and accompanying notes do not reflect any amounts relating to SSE.

 

9


3. 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 that have included service conditions and, in certain cases, performance conditions.  The Company’s share-based awards also include 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 such 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. No options were granted in the three months ended March 31, 2017. Weighted-average assumptions used to estimate the grant date fair values for stock options granted for the three month period ended March 31, 2016 follow:

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

Volatility

 

39.52

%

Expected term (in years)

 

5.00

 

Dividend yield

 

2.65

%

Risk-free interest rate

 

1.76

%

 

 

Stock option activity from January 1, 2017 to March 31, 2017 follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Underlying

 

 

Exercise Price

 

 

Shares

 

 

Per Share

 

Outstanding at January 1, 2017

 

6,687,150

 

 

$

20.68

 

Exercised

 

(10,000

)

 

$

22.29

 

Outstanding at March 31, 2017

 

6,677,150

 

 

$

20.68

 

Exercisable at March 31, 2017

 

5,466,836

 

 

$

21.02

 

Restricted Stock — For all restricted stock awards made 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, 2017 to March 31, 2017 follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Date Fair Value

 

 

Shares

 

 

Per Share

 

Non-vested restricted stock outstanding at January 1, 2017

 

1,427,455

 

 

$

22.26

 

Granted

 

32,500

 

 

$

26.92

 

Vested

 

(53,021

)

 

$

23.54

 

Forfeited

 

(8,602

)

 

$

23.20

 

Non-vested restricted stock outstanding at March 31, 2017

 

1,398,332

 

 

$

22.31

 

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.

10


Restricted stock unit activity from January 1, 2017 to March 31, 2017 follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Date Fair Value

 

 

Shares

 

 

Per Share

 

Non-vested restricted stock units outstanding at January 1, 2017

 

191,655

 

 

$

19.85

 

Forfeited

 

(852

)

 

$

19.03

 

Non-vested restricted stock units outstanding at March 31, 2017

 

190,803

 

 

$

19.86

 

 

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

The performance goals for the 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, 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 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.  

For the 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 had the Company’s total shareholder return been positive.

In respect of the 2013 Performance Units, for which 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 had the Company’s total shareholder return been positive during the initial three-year performance period.

The total target number of shares with respect to the Performance Units for the awards in 2013-2016 is set forth below:

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Target number of shares

 

185,000

 

 

 

190,600

 

 

 

154,000

 

 

 

236,500

 

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 Performance Units is set forth below (in thousands):

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Fair value at date of grant

$

3,854

 

 

$

4,052

 

 

$

5,388

 

 

$

5,564

 

11


 

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

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Three months ended March 31, 2017

$

321

 

 

$

338

 

 

$

449

 

 

NA

 

Three months ended March 31, 2016

NA

 

 

$

338

 

 

$

449

 

 

$

464

 

 

 

4. Inventory

Inventory consisted of the following at March 31, 2017 and December 31, 2016 (in thousands):

 

 

March 31,

 

 

December 31,

 

  

2017

 

 

2016

 

Finished goods

$

870

 

 

$

 

Work-in-process

 

1,642

 

 

 

1,803

 

Raw materials and supplies

 

18,242

 

 

 

18,388

 

Inventory

$

20,754

 

 

$

20,191

 

 

 

5. Property and Equipment

Property and equipment consisted of the following at March 31, 2017 and December 31, 2016 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Equipment

$

6,831,966

 

 

$

6,809,129

 

Oil and natural gas properties

 

206,262

 

 

 

201,568

 

Buildings

 

99,388

 

 

 

97,029

 

Land

 

11,757

 

 

 

22,270

 

Total property and equipment

 

7,149,373

 

 

 

7,129,996

 

Less accumulated depreciation, depletion and impairment

 

(3,820,585

)

 

 

(3,721,033

)

Property and equipment, net

$

3,328,788

 

 

$

3,408,963

 

 

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, the Company’s results of operations for the three month period ended March 31, 2017 and management’s expectations of operating results in future periods, the Company concluded that no triggering event occurred during the three months ended March 31, 2017 with respect to its contract drilling or pressure pumping segments.  Management’s expectations of future operating results were based on the assumption that activity levels in both segments will continue to increase throughout 2017 if prices for these commodities remain at or above current levels.  

The Company reviews its proved oil and natural gas properties for impairment whenever a triggering event occurs, such as downward revisions in reserve estimates or decreases in expected future oil and natural gas prices.  Proved properties are grouped by field, and undiscounted cash flow estimates are prepared based on the Company’s expectation of future pricing over the lives of the respective fields.  These cash flow estimates are reviewed by an independent petroleum engineer.  If the net book value of a field exceeds its undiscounted cash flow estimate, impairment expense is measured and recognized as the difference between net book value and fair value.  The fair value estimates used in measuring impairment are based on internally developed unobservable inputs including reserve volumes and future production, pricing and operating costs (Level 3 inputs in the fair value hierarchy of fair value accounting).  The expected future net cash flows are discounted using an annual rate of 10% to determine fair value.  The Company reviews unproved oil and natural gas properties quarterly to assess potential impairment.  The Company’s impairment assessment is made on a lease-by-lease basis and considers factors such as the Company’s intent to drill, lease terms and abandonment of an area.  If an unproved property is determined to be impaired, the related property costs are expensed.  Impairment expense related to proved and unproved oil and natural gas properties totaled $503,000 for the three months ended March 31, 2017 and is included in depreciation, depletion, amortization and impairment in the condensed consolidated statements of operations.   

 

 

12


6. Business Segments

The Company’s revenues, loss before income taxes and identifiable assets are primarily attributable to two business segments: (i) contract drilling of oil and natural gas wells and (ii) pressure pumping services. Each of these segments represents a distinct type of business and has a separate management team that reports 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,

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

Contract drilling

$

159,055

 

 

$

168,757

 

Pressure pumping

 

141,174

 

 

 

96,313

 

Other operations (a)

 

5,618

 

 

 

3,967

 

Elimination of intercompany revenues (b)

 

(672

)

 

 

(98

)

Total revenues

$

305,175

 

 

$

268,939

 

 

 

 

 

 

 

 

 

Loss before income taxes:

 

 

 

 

 

 

 

Contract drilling

$

(61,706

)

 

$

(35,096

)

Pressure pumping

 

(22,891

)

 

 

(43,959

)

Other operations

 

(1,951

)

 

 

(3,231

)

Corporate

 

(18,995

)

 

 

(14,318

)

Other operating income, net (c)

 

12,904

 

 

 

1,345

 

Interest income

 

406

 

 

 

110

 

Interest expense

 

(8,270

)

 

 

(10,800

)

Other

 

17

 

 

 

16

 

Loss before income taxes

$

(100,486

)

 

$

(105,933

)

 

  

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Identifiable assets:

 

 

 

 

 

 

 

Contract drilling

$

2,985,997

 

 

$

3,032,819

 

Pressure pumping

 

680,301

 

 

 

653,630

 

Other operations

 

48,569

 

 

 

48,885

 

Corporate (d)

 

463,752

 

 

 

36,957

 

Total assets

$

4,178,619

 

 

$

3,772,291

 

 

 

(a)

Other operations includes the Company’s pipe handling components and related technology business, the oil and natural gas working interests and the Middle East/North Africa business.

(b)

Consists of contract drilling intercompany revenues for services provided to the oil and natural gas exploration and production segment. In 2017, intercompany revenues also includes revenues between the pipe handling component manufacturer and the pipe handling component service provider.

(c)

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

(d)

Corporate assets primarily include cash on hand and certain property and equipment.

 

 

13


7. Goodwill and Intangible Assets

Goodwill — All of the Company’s goodwill at both March 31, 2017 and December 31, 2016 related to the contract drilling operating segment.  Goodwill as of March 31, 2017 and changes for the three months then ended are as follows (in thousands):

 

 

Three Months Ended

 

 

March 31, 2017

 

Balance at beginning of period

$

86,234

 

Changes to goodwill

 

Balance at end of period

$

86,234

 

 

There were no accumulated impairment losses related to goodwill as of March 31, 2017 or December 31, 2016.

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 impairment testing purposes, goodwill is evaluated at the reporting unit level.  The Company’s reporting units for impairment testing are 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 this is the case, any necessary 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 assets, 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 for 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, 2017 and 2016.

The following table presents the gross carrying amount and accumulated amortization of the customer relationships as of March 31, 2017 and December 31, 2016 (in thousands):

 

 

March 31, 2017

 

 

December 31, 2016

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

$

25,500

 

 

$

(23,679

)

 

$

1,821

 

 

$

25,500

 

 

$

(22,768

)

 

$

2,732

 

 

 

8. Accrued Expenses

Accrued expenses consisted of the following at March 31, 2017 and December 31, 2016 (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Salaries, wages, payroll taxes and benefits

$

26,286

 

 

$

21,138

 

Workers' compensation liability

 

66,481

 

 

 

67,775

 

Property, sales, use and other taxes

 

4,290

 

 

 

6,766