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EX-32.1 - EX-32.1 SARBANES CERTIFICATION - PATTERSON UTI ENERGY INCpten-ex321_7.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_6.htm
EX-10.5 - EX-10.5 - PATTERSON UTI ENERGY INCpten-ex105_344.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 June 30, 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.

213,350,278 shares of common stock, $0.01 par value, as of August 1, 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

  

26

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

39

ITEM 4.

 

Controls and Procedures

  

40

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

41

ITEM 1A.

 

Risk Factors

  

41

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

ITEM 6.

 

Exhibits

  

42

Signature  

 

 

  

43

 

 

 

 


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)

 

 

June 30,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

40,132

 

 

$

35,152

 

Accounts receivable, net of allowance for doubtful accounts of $3,116 and $3,191

   at June 30, 2017 and December 31, 2016, respectively

 

433,366

 

 

 

148,091

 

Federal and state income taxes receivable

 

3,666

 

 

 

2,126

 

Inventory

 

36,132

 

 

 

20,191

 

Other

 

58,453

 

 

 

41,322

 

Total current assets

 

571,749

 

 

 

246,882

 

Property and equipment, net

 

4,232,194

 

 

 

3,408,963

 

Goodwill and intangible assets

 

540,273

 

 

 

88,966

 

Deposits on equipment purchases

 

12,917

 

 

 

16,050

 

Deferred tax assets, net

 

1,339

 

 

 

4,124

 

Other

 

45,584

 

 

 

7,306

 

Total assets

$

5,404,056

 

 

$

3,772,291

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

255,327

 

 

$

125,667

 

Accrued expenses

 

217,521

 

 

 

139,148

 

Total current liabilities

 

472,848

 

 

 

264,815

 

Borrowings under revolving credit facility

 

115,000

 

 

 

 

Long-term debt, net of debt issuance cost of $1,390 and $1,563 at June 30, 2017

   and December 31, 2016, respectively

 

598,610

 

 

 

598,437

 

Deferred tax liabilities, net

 

588,594

 

 

 

650,661

 

Other

 

11,201

 

 

 

9,654

 

Total liabilities

 

1,786,253

 

 

 

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 256,914,385

   and 191,525,872 issued and 213,328,565 and 148,133,255 outstanding at

   June 30, 2017 and December 31, 2016, respectively

 

2,569

 

 

 

1,915

 

Additional paid-in capital

 

2,575,401

 

 

 

1,042,696

 

Retained earnings

 

1,953,023

 

 

 

2,116,341

 

Accumulated other comprehensive income (loss)

 

1,854

 

 

 

(1,134

)

Treasury stock, at cost, 43,585,820 and 43,392,617 shares at June 30, 2017 and

   December 31, 2016, respectively

 

(915,044

)

 

 

(911,094

)

Total stockholders' equity

 

3,617,803

 

 

 

2,248,724

 

Total liabilities and stockholders' equity

$

5,404,056

 

 

$

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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling

$

270,111

 

 

$

115,235

 

 

$

428,839

 

 

$

283,894

 

Pressure pumping

 

290,044

 

 

 

73,950

 

 

 

431,218

 

 

 

170,263

 

Other

 

19,031

 

 

 

4,722

 

 

 

24,304

 

 

 

8,689

 

Total operating revenues

 

579,186

 

 

 

193,907

 

 

 

884,361

 

 

 

462,846

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling

 

180,658

 

 

 

63,803

 

 

 

288,879

 

 

 

144,701

 

Pressure pumping

 

233,900

 

 

 

69,546

 

 

 

352,913

 

 

 

157,359

 

Other

 

12,671

 

 

 

1,650

 

 

 

15,930

 

 

 

3,740

 

Depreciation, depletion, amortization and impairment

 

219,328

 

 

 

170,975

 

 

 

375,545

 

 

 

347,745

 

Selling, general and administrative

 

23,478

 

 

 

17,087

 

 

 

42,330

 

 

 

35,059

 

Merger and integration expenses

 

51,193

 

 

 

 

 

 

56,349

 

 

 

 

Other operating income, net

 

(1,806

)

 

 

(4,822

)

 

 

(14,710

)

 

 

(6,167

)

Total operating costs and expenses

 

719,422

 

 

 

318,239

 

 

 

1,117,236

 

 

 

682,437

 

Operating loss

 

(140,236

)

 

 

(124,332

)

 

 

(232,875

)

 

 

(219,591

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

642

 

 

 

100

 

 

 

1,048

 

 

 

210

 

Interest expense, net of amount capitalized

 

(9,075

)

 

 

(10,678

)

 

 

(17,345

)

 

 

(21,478

)

Other

 

131

 

 

 

17

 

 

 

148

 

 

 

33

 

Total other expense

 

(8,302

)

 

 

(10,561

)

 

 

(16,149

)

 

 

(21,235

)

Loss before income taxes

 

(148,538

)

 

 

(134,893

)

 

 

(249,024

)

 

 

(240,826

)

Income tax benefit

 

(56,354

)

 

 

(49,027

)

 

 

(93,301

)

 

 

(84,457

)

Net loss

$

(92,184

)

 

$

(85,866

)

 

$

(155,723

)

 

$

(156,369

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.46

)

 

$

(0.58

)

 

$

(0.86

)

 

$

(1.06

)

Diluted

$

(0.46

)

 

$

(0.58

)

 

$

(0.86

)

 

$

(1.06

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

201,204

 

 

 

145,944

 

 

 

180,747

 

 

 

145,857

 

Diluted

 

201,204

 

 

 

145,944

 

 

 

180,747

 

 

 

145,857

 

Cash dividends per common share

$

0.02

 

 

$

0.02

 

 

$

0.04

 

 

$

0.12

 

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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

$

(92,184

)

 

$

(85,866

)

 

$

(155,723

)

 

$

(156,369

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

1,939

 

 

 

469

 

 

 

2,988

 

 

 

7,147

 

Total comprehensive loss

$

(90,245

)

 

$

(85,397

)

 

$

(152,735

)

 

$

(149,222

)

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

 

 

 

 

 

 

 

 

 

 

(155,723

)

 

 

 

 

 

 

 

 

(155,723

)

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

2,988

 

 

 

 

 

 

2,988

 

Equity offering

 

18,170

 

 

 

182

 

 

 

471,388

 

 

 

 

 

 

 

 

 

 

 

 

471,570

 

Shares issued for acquisition

 

46,298

 

 

 

463

 

 

 

1,038,933

 

 

 

 

 

 

 

 

 

 

 

 

1,039,396

 

Exercise of stock options

 

10

 

 

 

 

 

 

223

 

 

 

 

 

 

 

 

 

 

 

 

223

 

Issuance of restricted stock

 

891

 

 

 

9

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock units

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

22,170

 

 

 

 

 

 

 

 

 

 

 

 

22,170

 

Payment of cash dividends

 

 

 

 

 

 

 

 

 

 

(7,595

)

 

 

 

 

 

 

 

 

(7,595

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,950

)

 

 

(3,950

)

Balance, June 30, 2017

 

256,914

 

 

$

2,569

 

 

$

2,575,401

 

 

$

1,953,023

 

 

$

1,854

 

 

$

(915,044

)

 

$

3,617,803

 

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)

 

 

Six Months Ended

 

 

June 30,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(155,723

)

 

$

(156,369

)

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

 

 

 

 

 

 

 

Depreciation, depletion, amortization and impairment

 

375,545

 

 

 

347,745

 

Dry holes and abandonments

 

28

 

 

 

 

Deferred income tax benefit

 

(90,684

)

 

 

(58,643

)

Stock-based compensation expense

 

22,170

 

 

 

14,192

 

Net gain on asset disposals

 

(15,367

)

 

 

(7,267

)

Tax expense on stock-based compensation

 

 

 

 

(2,995

)

Amortization of debt issuance costs

 

173

 

 

 

723

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(135,542

)

 

 

91,559

 

Income taxes receivable

 

(1,141

)

 

 

(2,329

)

Inventory and other assets

 

(29,186

)

 

 

3,795

 

Accounts payable

 

58,372

 

 

 

(25,738

)

Accrued expenses

 

(13,002

)

 

 

(21,658

)

Other liabilities

 

(258

)

 

 

(1,088

)

Net cash provided by operating activities

 

15,385

 

 

 

181,927

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition, net of cash acquired

 

(434,194

)

 

 

 

Purchases of property and equipment

 

(186,790

)

 

 

(51,834

)

Proceeds from disposal of assets

 

34,997

 

 

 

12,350

 

Net cash used in investing activities

 

(585,987

)

 

 

(39,484

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from equity offering

 

471,570

 

 

 

 

Purchases of treasury stock

 

(3,727

)

 

 

(3,611

)

Dividends paid

 

(7,595

)

 

 

(17,665

)

Repayment of long-term debt

 

 

 

 

 

(25,000

)

Proceeds from borrowings under revolving credit facility

 

161,000

 

 

 

 

Repayment of borrowings under revolving credit facility

 

(46,000

)

 

 

 

Net cash provided by (used in) financing activities

 

575,248

 

 

 

(46,276

)

Effect of foreign exchange rate changes on cash

 

334

 

 

 

114

 

Net increase in cash and cash equivalents

 

4,980

 

 

 

96,281

 

Cash and cash equivalents at beginning of period

 

35,152

 

 

 

113,346

 

Cash and cash equivalents at end of period

$

40,132

 

 

$

209,627

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Net cash (paid) received during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized interest of $409 in 2017 and $286 in 2016

$

(16,640

)

 

$

(20,252

)

Income taxes

$

967

 

 

$

19,603

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net increase in payables for purchases of property and equipment

$

33,938

 

 

$

9,283

 

Issuance of common stock for business acquisition

$

1,039,396

 

 

$

 

Net decrease in deposits on equipment purchases

$

3,133

 

 

$

4,397

 

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 and six months ended June 30, 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, oilfield rental tool business, 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).

On December 12, 2016, the Company entered into an Agreement and Plan of Merger (the “merger agreement”) with Seventy Seven Energy Inc. (“SSE”), and the merger closed on April 20, 2017 (the “merger date”).  The Company’s results include the results of operations of SSE since the merger date (See Note 2).  

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 and six months ended June 30, 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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

BASIC EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(92,184

)

 

$

(85,866

)

 

$

(155,723

)

 

$

(156,369

)

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

 

 

 

 

846

 

 

 

 

 

 

1,526

 

Loss attributed to other common stockholders

$

(92,184

)

 

$

(85,020

)

 

$

(155,723

)

 

$

(154,843

)

Weighted average number of common shares outstanding, excluding

   non-vested shares of restricted stock

 

201,204

 

 

 

145,944

 

 

 

180,747

 

 

 

145,857

 

Basic net loss per common share

$

(0.46

)

 

$

(0.58

)

 

$

(0.86

)

 

$

(1.06

)

DILUTED EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss attributed to other common stockholders

$

(92,184

)

 

$

(85,020

)

 

$

(155,723

)

 

$

(154,843

)

Weighted average number of common shares outstanding, excluding

   non-vested shares of restricted stock

 

201,204

 

 

 

145,944

 

 

 

180,747

 

 

 

145,857

 

Add dilutive effect of potential common shares

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of diluted common shares outstanding

 

201,204

 

 

 

145,944

 

 

 

180,747

 

 

 

145,857

 

Diluted net loss per common share

$

(0.46

)

 

$

(0.58

)

 

$

(0.86

)

 

$

(1.06

)

Potentially dilutive securities excluded as anti-dilutive

 

9,475

 

 

 

9,370

 

 

 

9,475

 

 

 

9,370

 

 

2. Acquisitions

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. Concurrent with the closing of the merger, the Company repaid all of the outstanding debt of SSE totaling $472 million.  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 Oklahoma and Texas.  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 merger has been accounted for as a business combination using the acquisition method.  Under the acquisition method of accounting, the fair value of the consideration transferred is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date, with the remaining unallocated amount recorded as goodwill.

The total fair value of the consideration transferred was determined as follows (in thousands, except stock price):

Shares of Company common stock issued to SSE shareholders

 

46,298

 

Company common stock price on April 20, 2017

$

22.45

 

Fair value of common stock issued

$

1,039,396

 

Plus SSE long-term debt repaid by Company

$

472,000

 

Total fair value of consideration transferred

$

1,511,396

 

9


The final determination of the fair value of assets acquired and liabilities assumed at the merger date will be completed as soon as possible, but no later than one year from the merger date (the “measurement period”).  The Company’s preliminary purchase price allocation is subject to revision as additional information about the fair value of assets and liabilities becomes available.  Additional information that existed as of the merger date, but at the time was unknown to the Company, may become known to the Company during the remainder of the measurement period.  The final determination of fair value may differ materially from these preliminary estimates.  The following table represents the preliminary allocation of the total purchase price of SSE to the assets acquired and the liabilities assumed based on the fair value at the merger date, with the excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill (in thousands):  

Identifiable assets acquired

 

 

 

Cash and cash equivalents

$

37,806

 

Accounts receivable

 

149,598

 

Inventory

 

8,036

 

Other current assets

 

19,250

 

Property and equipment

 

984,430

 

Other long-term assets

 

14,546

 

Intangible assets

 

22,500

 

Total identifiable assets acquired

 

1,236,166

 

Liabilities assumed

 

 

 

Accounts payable and accrued liabilities

 

130,100

 

Deferred income taxes

 

31,402

 

Other long-term liabilities

 

1,734

 

Total liabilities assumed

 

163,236

 

Net identifiable assets acquired

 

1,072,930

 

Goodwill

 

438,466

 

Total net assets acquired

$

1,511,396

 

The acquired goodwill is not deductible for tax purposes.  Among the factors that contributed to a purchase price resulting in the recognition of goodwill was SSE’s reputation as an experienced provider of high-quality contract drilling and pressure pumping services in a safe and efficient manner.  See Note 7 for a breakdown of goodwill acquired by operating segment.

A portion of the fair value consideration transferred has been provisionally assigned to identifiable intangible assets as follows:

 

Fair Value

 

 

Weighted Average Useful Life

 

(in thousands)

 

 

(in years)

Assets

 

 

 

 

 

Favorable drilling contracts

$

22,500

 

 

1

Liabilities

 

 

 

 

 

Unfavorable drilling contracts

$

2,532

 

 

1

10


The results of SSE’s operations since the merger date are included in our consolidated statement of operations.  Operations acquired in the SSE merger contributed revenues of $190 million and a pretax loss of $16.9 million for the period from the merger date until June 30, 2017.  The following pro forma condensed combined financial information was derived from the historical financial statements of the Company and SSE and gives effect to the merger as if it had occurred on January 1, 2016.  The below information reflects pro forma adjustments based on available information and certain assumptions the Company believes are reasonable, including (i) adjustments related to the depreciation and amortization of the fair value of acquired intangibles and fixed assets, (ii) removal of the historical interest expense of SSE, (iii) tax benefit of the aforementioned pro forma adjustments, and (iv) adjustments related to the common shares outstanding to reflect the impact of the consideration exchanged in the merger.  Additionally, pro forma loss for the three months ended June 30, 2017 was adjusted to exclude the Company’s merger related costs of $51.2 million and SSE’s merger related costs of $28.9 million.  The pro forma loss for the six months ended June 30, 2017 was adjusted to exclude the Company’s merger related costs of $56.3 million and SSE’s merger related costs of $36.7 million.  The pro forma results of operations do not include any cost savings or other synergies that may result from the SSE merger or any estimated costs that have been or will be incurred by the Company to integrate the SSE operations.  The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the SSE merger taken place on January 1, 2016; furthermore, the financial information is not intended to be a projection of future results.  The following table summarizes selected financial information of the Company on a pro forma basis (in thousands, except per share data):

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

631,770

 

 

$

332,027

 

 

$

1,126,914

 

 

$

756,327

 

Net loss

 

(85,184

)

 

 

(133,530

)

 

 

(117,317

)

 

 

(229,295

)

Loss per share

 

(0.40

)

 

 

(0.63

)

 

 

(0.56

)

 

 

(1.09

)

 

 

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.  

The Patterson-UTI Energy, Inc. 2014 Long-Term Incentive Plan (the “2014 Plan”) was originally approved by the Company’s stockholders effective as of April 17, 2014.  On June 29, 2017, the Company’s stockholders approved the amendment and restatement of the 2014 Plan (the “Amended and Restated Plan”) to increase the number of shares available for future issuance under the plan to 10,049,156 shares.  The aggregate number of shares of Common Stock authorized for grant under the Amended and Restated Plan is 18.9 million, which includes the 9.1 million shares previously authorized under the 2014 Plan.

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 or six months ended June 30, 2017. Weighted-average assumptions used to estimate the grant date fair values for stock options granted for the three and six month periods ended June 30, 2016 follow:

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2016

 

Volatility

 

34.87

%

 

 

35.13

%

Expected term (in years)

 

5.00

 

 

 

5.00

 

Dividend yield

 

2.16

%

 

 

2.19

%

Risk-free interest rate

 

1.40

%

 

 

1.42

%

 

 

11


Stock option activity from January 1, 2017 to June 30, 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

 

Expired

 

(600,000

)

 

$

24.17

 

Outstanding at June 30, 2017

 

6,077,150

 

 

$

20.34

 

Exercisable at June 30, 2017

 

5,271,650

 

 

$

20.53

 

 

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 June 30, 2017 follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Date Fair Value

 

 

Shares

 

 

Per Share

 

Non-vested restricted stock outstanding at January 1, 2017

 

1,427,455