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EX-32.1 - EX-32.1 - PATTERSON UTI ENERGY INCpten-ex321_8.htm
EX-31.2 - EX-31.2 - PATTERSON UTI ENERGY INCpten-ex312_9.htm
EX-31.1 - EX-31.1 - PATTERSON UTI ENERGY INCpten-ex311_6.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, 2018

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, smaller reporting company, or an emerging growth 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.

221,807,221 shares of common stock, $0.01 par value, as of April 27, 2018

 

 

 

 

 


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

  

28

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

38

ITEM 4.

 

Controls and Procedures

  

39

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

40

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

ITEM 6.

 

Exhibits

  

41

Signature  

 

 

  

42

 

 

 

 


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,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

304,251

 

 

$

42,828

 

Accounts receivable, net of allowance for doubtful accounts of $2,296 and $2,323

   at March 31, 2018 and December 31, 2017, respectively

 

596,888

 

 

 

580,354

 

Federal and state income taxes receivable

 

1,128

 

 

 

1,152

 

Inventory

 

72,069

 

 

 

69,167

 

Other

 

64,639

 

 

 

53,354

 

Total current assets

 

1,038,975

 

 

 

746,855

 

Property and equipment, net

 

4,217,049

 

 

 

4,254,730

 

Goodwill and intangible assets

 

689,398

 

 

 

687,072

 

Deposits on equipment purchases

 

18,645

 

 

 

16,351

 

Deferred tax assets, net

 

1,007

 

 

 

3,875

 

Other

 

50,650

 

 

 

49,973

 

Total assets

$

6,015,724

 

 

$

5,758,856

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

359,582

 

 

$

319,621

 

Accrued expenses

 

241,904

 

 

 

226,629

 

Total current liabilities

 

601,486

 

 

 

546,250

 

Borrowings under revolving credit facility

 

 

 

 

268,000

 

Long-term debt, net of debt discount and issuance costs of $6,164 and $1,217

   at March 31, 2018 and December 31, 2017, respectively

 

1,118,836

 

 

 

598,783

 

Deferred tax liabilities, net

 

348,250

 

 

 

350,836

 

Other

 

12,611

 

 

 

12,494

 

Total liabilities

 

2,081,183

 

 

 

1,776,363

 

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 266,298,983

   and 266,259,083 issued and 221,571,572 and 222,456,472 outstanding at

   March 31, 2018 and December 31, 2017, respectively

 

2,663

 

 

 

2,662

 

Additional paid-in capital

 

2,795,672

 

 

 

2,785,823

 

Retained earnings

 

2,067,007

 

 

 

2,105,897

 

Accumulated other comprehensive income

 

4,838

 

 

 

6,822

 

Treasury stock, at cost, 44,727,411 and 43,802,611 shares at March 31, 2018 and

   December 31, 2017, respectively

 

(935,639

)

 

 

(918,711

)

Total stockholders' equity

 

3,934,541

 

 

 

3,982,493

 

Total liabilities and stockholders' equity

$

6,015,724

 

 

$

5,758,856

 

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,

 

 

2018

 

 

2017

 

Operating revenues:

 

 

 

 

 

 

 

Contract drilling

$

327,803

 

 

$

158,728

 

Pressure pumping

 

406,784

 

 

 

141,174

 

Directional drilling

 

48,616

 

 

 

 

Other

 

25,961

 

 

 

5,273

 

Total operating revenues

 

809,164

 

 

 

305,175

 

Operating costs and expenses:

 

 

 

 

 

 

 

Contract drilling

 

212,583

 

 

 

108,221

 

Pressure pumping

 

320,970

 

 

 

119,013

 

Directional drilling

 

37,689

 

 

 

 

Other

 

17,745

 

 

 

3,259

 

Depreciation, depletion, amortization and impairment

 

209,892

 

 

 

156,217

 

Selling, general and administrative

 

32,817

 

 

 

18,852

 

Merger and integration expenses

 

1,991

 

 

 

5,156

 

Other operating income, net

 

(2,421

)

 

 

(12,904

)

Total operating costs and expenses

 

831,266

 

 

 

397,814

 

Operating loss

 

(22,102

)

 

 

(92,639

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

1,423

 

 

 

406

 

Interest expense, net of amount capitalized

 

(13,625

)

 

 

(8,270

)

Other

 

169

 

 

 

17

 

Total other expense

 

(12,033

)

 

 

(7,847

)

Loss before income taxes

 

(34,135

)

 

 

(100,486

)

Income tax expense (benefit)

 

282

 

 

 

(36,947

)

Net loss

$

(34,417

)

 

$

(63,539

)

Net loss per common share:

 

 

 

 

 

 

 

Basic

$

(0.16

)

 

$

(0.40

)

Diluted

$

(0.16

)

 

$

(0.40

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

Basic

 

220,783

 

 

 

160,062

 

Diluted

 

220,783

 

 

 

160,062

 

Cash dividends per common share

$

0.02

 

 

$

0.02

 

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,

 

 

2018

 

 

2017

 

Net loss

$

(34,417

)

 

$

(63,539

)

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

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(1,984

)

 

 

1,049

 

Total comprehensive loss

$

(36,401

)

 

$

(62,490

)

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, 2017

 

266,259

 

 

$

2,662

 

 

$

2,785,823

 

 

$

2,105,897

 

 

$

6,822

 

 

$

(918,711

)

 

 

3,982,493

 

Net loss

 

 

 

 

 

 

 

 

 

 

(34,417

)

 

 

 

 

 

 

 

 

(34,417

)

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,984

)

 

 

 

 

 

(1,984

)

Exercise of stock options

 

40

 

 

 

1

 

 

 

484

 

 

 

 

 

 

 

 

 

 

 

 

485

 

Stock-based compensation

 

 

 

 

 

 

 

9,365

 

 

 

 

 

 

 

 

 

 

 

 

9,365

 

Payment of cash dividends

 

 

 

 

 

 

 

 

 

 

(4,443

)

 

 

 

 

 

 

 

 

(4,443

)

Dividend equivalents

 

 

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

(30

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,928

)

 

 

(16,928

)

Balance, March 31, 2018

 

266,299

 

 

$

2,663

 

 

$

2,795,672

 

 

$

2,067,007

 

 

$

4,838

 

 

$

(935,639

)

 

$

3,934,541

 

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,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(34,417

)

 

$

(63,539

)

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

 

 

 

 

 

 

 

Depreciation, depletion, amortization and impairment

 

209,892

 

 

 

156,217

 

Dry holes and abandonments

 

96

 

 

 

 

Deferred income tax expense (benefit)

 

282

 

 

 

(36,947

)

Stock-based compensation expense

 

9,365

 

 

 

7,131

 

Net gain on asset disposals

 

(10,410

)

 

 

(13,560

)

Amortization of debt discount and issuance costs

 

170

 

 

 

87

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(16,468

)

 

 

(62,291

)

Income taxes receivable

 

19

 

 

 

248

 

Inventory and other assets

 

2,709

 

 

 

9,931

 

Accounts payable

 

(22,514

)

 

 

11,252

 

Accrued expenses

 

11,174

 

 

 

(3,233

)

Other liabilities

 

67

 

 

 

261

 

Net cash provided by operating activities

 

149,965

 

 

 

5,557

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition

 

(3,800

)

 

 

 

Purchases of property and equipment

 

(122,921

)

 

 

(68,440

)

Proceeds from disposal of assets

 

10,294

 

 

 

25,861

 

Net cash used in investing activities

 

(116,427

)

 

 

(42,579

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds of equity offering

 

 

 

 

471,570

 

Purchases of treasury stock

 

(16,928

)

 

 

 

Proceeds from exercise of options

 

485

 

 

 

 

Dividends paid

 

(4,443

)

 

 

(3,326

)

Debt issuance costs

 

(4,198

)

 

 

 

Proceeds from long-term debt

 

521,194

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

79,000

 

 

 

10,000

 

Repayment of borrowings under revolving credit facility

 

(347,000

)

 

 

(10,000

)

Net cash provided by financing activities

 

228,110

 

 

 

468,244

 

Effect of foreign exchange rate changes on cash

 

(225

)

 

 

234

 

Net increase in cash and cash equivalents

 

261,423

 

 

 

431,456

 

Cash and cash equivalents at beginning of period

 

42,828

 

 

 

35,152

 

Cash and cash equivalents at end of period

$

304,251

 

 

$

466,608

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Net cash (paid) received during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized interest of $340 in 2018 and $155 in 2017

$

(2,206

)

 

$

(634

)

Income taxes

$

21

 

 

$

248

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Receivable from property and equipment insurance

$

15,000

 

 

$

 

Net increase in payables for purchases of property and equipment

$

62,488

 

 

$

21,297

 

Net increase in deposits on equipment purchases

$

(2,294

)

 

$

(3,056

)

 

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 Presentation

Basis of 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 (“SEC”). 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, 2017, 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, 2017. The results of operations for the three months ended March 31, 2018 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 use 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.

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).  On October 11, 2017, the Company acquired all of the issued and outstanding limited liability company interests of MS Directional, LLC (f/k/a Multi-Shot, LLC) (“MS Directional”).  The Company’s results include the results of operations of MS Directional since October 11, 2017 (See Note 2).  The acquisition of MS Directional created a new directional drilling reporting segment for the Company (See Note 14).

Recently Issued Accounting Standards – In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to provide guidance on the recognition of revenue from customers.  Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services.  This guidance also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty, if any, of revenue and cash flows arising from contracts with customers.  The requirements in this update are effective during interim and annual periods beginning after December 15, 2017.  The Company adopted this new revenue guidance effective January 1, 2018, utilizing the modified retrospective method, and expanded its consolidated financial statement disclosures in order to comply with the update (See Note 3).  The adoption of this update did not have a material impact on the Company’s consolidated financial statements.  

In February 2016, the FASB issued an accounting standards update to provide guidance for the accounting for leasing transactions.  The standard requires the lessee to recognize a lease liability along with a right-of-use asset for all leases with a term longer than one year.  A lessee is permitted to make an accounting policy election by class of underlying asset to not recognize the lease liability and related right-of-use asset for leases with a term of one year or less.  The provisions of this standard also apply to situations where the Company is the lessor and may require the Company to separately account for lease components from non-lease components within a contract.  The requirements in this update are effective during interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.

In August 2016, the FASB issued an accounting standards update to clarify the presentation of cash receipts and payments in specific situations on the statement of cash flows.  The requirements in this update are effective during interim and annual periods in fiscal years beginning after December 15, 2017.  The adoption of this update on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.

8


In May 2017, the FASB issued an accounting standards update that provided clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting provisions.  The requirements in this update are effective during interim and annual periods in fiscal years beginning after December 15, 2017.  The adoption of this update on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.

In March 2018, the FASB issued an accounting standards update to update the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when significant U.S. tax law changes were enacted with the enactment of the Tax Cuts and Jobs Act (“Tax Reform”).  The adoption of this update in March 2018 did not have a material impact on the Company’s consolidated financial statements, as the Company was already following the SEC guidance.  See Note 12 for additional information.

 

 

 

2. Acquisitions

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. 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® rigs. Additionally, through the SSE merger, the Company acquired approximately 500,000 horsepower of modern, efficient fracturing equipment.  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

 

149,659

 

Inventory

 

8,518

 

Other current assets

 

19,038

 

Property and equipment

 

984,433

 

Other long-term assets

 

20,918

 

Intangible assets

 

22,500

 

Total identifiable assets acquired

 

1,242,872

 

Liabilities assumed

 

 

 

Accounts payable and accrued liabilities

 

133,415

 

Deferred income taxes

 

32,881

 

Other long-term liabilities

 

1,734

 

Total liabilities assumed

 

168,030

 

Net identifiable assets acquired

 

1,074,842

 

Goodwill

 

436,554

 

Total net assets acquired

$

1,511,396

 

The goodwill reflected above has decreased $1.9 million from the original preliminary purchase price allocation as a result of measurement period adjustments, primarily related to a valuation adjustment to a long-term asset offset by valuation adjustments to accounts payable and accrued liabilities and deferred income taxes.

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, access to new geographies, access to new product lines, increased scale of operations, supply chain and corporate efficiencies as well as infrastructure optimization.  The acquired goodwill was attributable to three operating segments, with $309 million to contract drilling, $121 million to pressure pumping and $6.3 million to oilfield rentals.

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

 

 

 

0.83

 

 

MS Directional

On October 11, 2017, the Company acquired all of the issued and outstanding limited liability company interests of MS Directional.  The aggregate consideration paid by the Company consisted of $69.8 million in cash and approximately 8.8 million shares of the Company’s common stock.  The purchase price was subject to customary post-closing adjustments relating to cash, net working capital and indebtedness of MS Directional as of the closing.  Based on the closing price of the Company’s common stock on the closing date of the transaction, the total fair value of the consideration transferred to effect the acquisition of MS Directional was approximately $257 million.  

MS Directional is a leading directional drilling services company in the United States, with operations in most major producing onshore oil and gas basins.  MS Directional provides a comprehensive suite of directional drilling services, including directional drilling, downhole performance motors, directional surveying, measurement while drilling, and wireline steering tools.  

10


The acquisition 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 MS Directional shareholders

 

8,798

 

Company common stock price on October 11, 2017

$

21.31

 

Fair value of common stock issued

$

187,494

 

Plus MS Directional long-term debt repaid by Company

$

63,000

 

Plus cash to sellers

$

6,781

 

Total fair value of consideration transferred

$

257,275

 

The final determination of the fair value of assets acquired and liabilities assumed at the acquisition date will be completed as soon as possible, but no later than one year from the acquisition 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 acquisition 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 MS Directional 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

$

2,021

 

Accounts receivable

 

42,782

 

Inventory

 

28,060

 

Other current assets

 

155

 

Property and equipment

 

63,998

 

Other long-term assets

 

318

 

Intangible assets

 

74,682

 

Total identifiable assets acquired

 

212,016

 

Liabilities assumed

 

 

 

Accounts payable and accrued liabilities

 

43,099

 

Other long-term liabilities

 

327

 

Total liabilities assumed

 

43,426

 

Net identifiable assets acquired

 

168,590

 

Goodwill

 

88,685

 

Total net assets acquired

$

257,275

 

The acquired goodwill is deductible for tax purposes.  Among the factors that contributed to a purchase price resulting in the recognition of goodwill was MS Directional’s reputation as an experienced provider of high-quality directional drilling services in a safe and efficient manner, access to new product lines, favorable market trends underlying these new business lines, earnings and growth opportunities and future technology development possibilities. All of the goodwill acquired is attributable to the directional drilling 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

 

 

 

 

 

 

 

Developed technology

$

48,000

 

 

 

10.00

 

Customer relationships

 

26,200

 

 

 

3.00

 

Internal use software

 

482

 

 

 

5.00

 

 

$

74,682

 

 

 

7.51

 

11


Pro Forma

The results of SSE’s operations since the SSE merger date of April 20, 2017 and the results of MS Directional since the acquisition date of October 11, 2017 are included in the Company’s condensed consolidated statement of operations.  It is impractical to quantify the contribution of the SSE operations since the merger, as the contract drilling and pressure pumping businesses were fully integrated into the Company’s existing operations in 2017.  The contribution of MS Directional for the three months ended March 31, 2018 accounts for substantially all of the Company’s directional drilling segment.  The following pro forma condensed combined financial information was derived from the historical financial statements of the Company, SSE and MS Directional and gives effect to the acquisitions as if they 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 the acquired entities, (iii) the 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 acquisitions. Additionally, the pro forma loss for the three months ended March 31, 2017 was adjusted to exclude the Company’s merger and integration-related costs of $5.2 million and SSE’s merger-related costs of $8.1 million.  The pro forma results of operations do not include any cost savings or other synergies that may result from the SSE merger or MS Directional acquisition.  The pro forma results of operations also do not include any estimated costs that have been or will be incurred by the Company to integrate the SSE and MS Directional operations.  The pro forma condensed combined financial information has been included for comparative purposes and are not necessarily indicative of the results that might have actually occurred had the SSE merger and MS Directional acquisition 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

 

 

March 31, 2017

 

 

 

 

 

Revenues

$

530,787

 

Net loss

 

(69,944

)

Loss per share

 

(0.32

)

Superior QC, LLC (“Superior QC”)

During February 2018, the Company acquired the business of Superior QC, including its assets and intellectual property.  Superior QC is a provider of software used to improve the accuracy of horizontal wellbore placement.  Superior QC’s measurement while drilling (MWD) survey fault detection, isolation and recovery (FDIR) service is a new data analytics technology to analyze MWD survey data in real-time and more accurately identify the position of the well.  The results of operations for the acquired Superior QC business are reported under the Company’s directional drilling business segment.  This acquisition was not material to the Company’s consolidated financial statements.

 

 

 

3. Revenues

ASC Topic 606 Revenue from Contracts with Customers

On January 1, 2018, the Company adopted the new revenue guidance under Topic 606, Revenue from Contracts with Customers, using the modified retrospective method for contracts that were not complete at December 31, 2017.  The adoption of the new accounting standard did not have a material impact on the Company’s consolidated financial statements and a cumulative adjustment was not recognized. Revenues for reporting periods beginning after January 1, 2018 are presented under Topic 606 while revenues prior to January 1, 2018 continue to be reported under previous revenue recognition requirements of Topic 605.

The Company’s contracts with customers include both long-term and short-term contracts.  Services that primarily drive revenue earned for the Company include the operating business segments of contract drilling, pressure pumping and directional drilling that comprise the Company’s reportable segments.  The Company also derives revenues from its other operations which include the Company’s operating business segments of oilfield rentals, oilfield technology, and oil and natural gas working interests.  For more information on the Company’s business segments, see Note 14.

Charges for services are considered a series of distinct services.  Since each distinct service in a series would be satisfied over time if it were accounted for separately, and the entity would measure its progress towards satisfaction using the same measure of progress for each distinct service in the series, the Company is able to account for these integrated services as a single performance obligation that is satisfied over time.

12


The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer, based on terms of the Company’s contracts with its customers. The consideration promised in a contract with a customer may include fixed amounts and/or variable amounts. Payments received for services are considered variable consideration as the time in service will fluctuate as the services are provided.  Topic 606 provides an allocation exception, which allows the Company to allocate variable consideration to one or more distinct services promised in a series of distinct services that form part of a single performance obligation as long as certain criteria are met.  These criteria state that the variable payment must relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service, and allocation of the variable consideration is consistent with the standards’ allocation objective.  Since payments received for services meet both of these criteria requirements, the Company recognizes revenue when the service is performed.  

An estimate of variable consideration should be constrained to the extent that it is not probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Payments received for other types of consideration are fully constrained as they are highly susceptible to factors outside the entity’s influence and therefore could be subject to a significant revenue reversal once resolved.  As such, revenue received for these types of consideration is recognized when the service is performed.  There are no unsatisfied performance obligations for which consideration is received.

Estimates of variable consideration are subject to change as facts and circumstances evolve.  As such, the Company will evaluate its estimates of variable consideration that are subject to constraints throughout the contract period and revise estimates, if necessary, at the end of each reporting period.

The Company is a working interest owner of oil and natural gas properties located in Texas and New Mexico.  The ownership terms are outlined in joint operating agreements for each well between the operator of the wells and the various interest owners, including the Company, who are considered non-operators of the well. The Company receives revenue each period for its working interest in the well during the period.  The revenue received for the working interests from these oil and gas properties does not fall under the scope of the new revenue standard, and therefore, will continue to be reported under current guidance ASC 932-323 Extractive Activities – Oil and Gas, Investments – Equity Method and Joint Ventures.

Reimbursement Revenue – Reimbursements for the purchase of supplies, equipment, personnel services, shipping and other services that are provided at the request of the Company’s customers are recorded as revenue when incurred.  The related costs are recorded as operating expenses when incurred.

The Company’s disaggregated revenue recognized from contracts with customers is included in Note 14.

Accounts Receivable and Contract Liabilities

Accounts receivable is the Company’s right to consideration once it becomes unconditional.  Payment terms range from 30 to 60 days.

Accounts receivable balances were $593 million and $577 million as of March 31, 2018 and December 31, 2017, respectively.  These balances do not include amounts related to the Company’s oil and gas working interests as those contracts are excluded from Topic 606.  Accounts receivable balances are included in “Accounts Receivable” in the Condensed Consolidated Balance Sheets.  

The Company does not have any contract asset balances, and as such, contract balances are not presented at the net amount at a contract level.  Contract liabilities include prepayments received from customers prior to the requested services being completed.  Once the services are complete and have been invoiced, the prepayment is applied against the customer’s account to offset the accounts receivable balance.  Also included in contract liabilities are payments received from customers for the initial mobilization of newly constructed or upgraded rigs that were moved on location to the initial well site.  These mobilization payments are allocated to the overall performance obligation and amortized over the initial term of the contract.  During the three months ended March 31, 2018, approximately $405,000 was amortized and recorded in drilling revenue.

Contract liability balances for customer prepayments were $1.8 million and $9.1 million as of March 31, 2018 and December 31, 2017, respectively.  Contract liability balances for deferred mobilization payments relating to newly constructed or upgraded rigs were $4.3 million and $4.7 million as of March 31, 2018 and December 31, 2017, respectively. Contract liability balances are included in “Accounts Payable” in the Condensed Consolidated Balance Sheets.

Contract Costs

Costs incurred for newly constructed or rig upgrades based on a contract with a customer are considered capital improvements and are capitalized to drilling equipment and depreciated over the estimated useful life of the asset.  

13


Practical Expedients Adopted with Topic 606

The Company has elected to adopt the following practical expedients upon the transition date to Topic 606 on January 1, 2018:

 

Use of portfolio approach: An entity can apply this guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

 

 

Excluding disclosure about transaction price: As a practical expedient, an entity need not disclose the information for a performance obligation if either of the following conditions is met:

 

 

a)

The performance obligation is part of a contract that has an original expected duration of one year or less.

 

 

b)

The entity recognizes revenue from the satisfaction of the performance obligation.

 

 

Excluding sales taxes from the transaction price: The scope of this policy election is the same as the scope of the policy election under previous guidance. This election provides exclusion from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction and collected by the entity from a customer.

 

 

Significant financing component: An entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

 

 

Completed contracts and treatment of contract modification: The FASB provided some relief from a full retrospective method in the form of four practical expedients and provided the option of a modified retrospective method with one practical expedient.  Under that practical expedient, contracts modified prior to the beginning of the earliest reporting period presented under the new standard (e.g., January 1, 2016 for a public entity electing the full retrospective method), an entity can reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented under the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition.

 

 

Costs of obtaining a contract: An entity can immediately expense costs of obtaining a contract if they would be amortized within a year.

 

 

 

4. Inventory

Inventory consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):

 

March 31,

 

 

December 31,

 

  

2018

 

 

2017

 

Finished goods

$

2,269

 

 

$

2,270

 

Work-in-process

 

1,175

 

 

 

529

 

Raw materials and supplies

 

68,625

 

 

 

66,368

 

Inventory

$

72,069

 

 

$

69,167

 

 

 

 

14


5. Property and Equipment

Property and equipment consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Equipment

$

8,155,843

 

 

$

8,066,404

 

Oil and natural gas properties

 

215,488

 

 

 

211,566

 

Buildings

 

184,897

 

 

 

185,475

 

Land

 

26,015

 

 

 

26,593

 

Total property and equipment

 

8,582,243

 

 

 

8,490,038

 

Less accumulated depreciation, depletion and impairment

 

(4,365,194

)

 

 

(4,235,308

)

Property and equipment, net

$

4,217,049

 

 

$

4,254,730

 

 

On a periodic basis, the Company evaluates its fleet of drilling rigs for marketability based on the condition of inactive rigs, expenditures that would be necessary to bring them to working condition and the expected demand for drilling services by rig type (such as drilling conventional, vertical wells versus drilling longer, horizontal wells using higher specification rigs).  The components comprising rigs that will no longer be marketed are evaluated, and those components with continuing utility to the Company’s other marketed rigs are transferred to other rigs or to the Company’s yards to be used as spare equipment.  The remaining components of these rigs are retired.  

In addition, 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, 2018 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, 2018 with respect to its contract drilling segment, its pressure pumping segment, its directional drilling segment or its other operations, except for oil and natural gas properties, which are discussed in the following paragraph.  Management’s expectations of future operating results were based on the assumption that activity levels in all segments and its other operations will remain relatively stable or improve in response to relatively stable or increasing oil prices.  

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.  Impairment expense related to proved and unproved oil and natural gas properties totaled approximately $2,000 in the three months ended March 31, 2018 and $503,000 in the three months ended March 31, 2017 and is included in depreciation, depletion, amortization and impairment in the condensed consolidated statements of operations.  

 

 

 

6. Goodwill and Intangible Assets

Goodwill — Goodwill by operating segment as of March 31, 2018 and changes for the three months then ended are as follows (in thousands):

 

Contract

 

 

Pressure

 

 

Directional

 

 

Oilfield

 

 

 

 

 

 

Drilling

 

 

Pumping

 

 

Drilling

 

 

Rentals

 

 

Total

 

Balance at beginning of period

$

395,060

 

 

 

121,444

 

 

$

88,685

 

 

 

6,284

 

 

$

611,473

 

Goodwill acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

395,060

 

 

$

121,444

 

 

$

88,685

 

 

$

6,284

 

 

$

611,473

 

 

There were no accumulated impairment losses related to goodwill as of March 31, 2018 or December 31, 2017.

15


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 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 quantitative impairment test.  From time to time, the Company may perform quantitative testing for goodwill impairment in lieu of performing the qualitative assessment.  If the 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 — The following table presents the gross carrying amount and accumulated amortization of the intangible assets as of March 31, 2018 and December 31, 2017 (in thousands):

 

March 31, 2018

 

 

December 31, 2017

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

$

26,200

 

 

$

(4,126

)

 

 

22,074

 

 

$

26,200

 

 

$

(1,943

)

 

$

24,257

 

Developed technology

 

55,772

 

 

 

(2,274

)

 

 

53,498

 

 

 

48,000

 

 

 

(1,137

)

 

 

46,863

 

Favorable drilling contracts

 

22,500

 

 

 

(20,583

)

 

 

1,917

 

 

 

22,500

 

 

 

(18,482

)

 

 

4,018

 

Internal use software

 

482

 

 

 

(46

)

 

 

436

 

 

 

482

 

 

 

(21

)

 

 

461

 

 

$

104,954

 

 

$

(27,029

)

 

$

77,925

 

 

$

97,182

 

 

$

(21,583

)

 

$

75,599

 

 

Amortization expense on intangible assets of approximately $5.4 million and $911,000 was recorded in the three months ended March 31, 2018 and 2017, respectively.

 

 

 

7. Accrued Expenses

Accrued expenses consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Salaries, wages, payroll taxes and benefits

$

55,079

 

 

$

50,443

 

Workers' compensation liability

 

81,266

 

 

 

80,751

 

Property, sales, use and other taxes

 

24,825

 

 

 

29,332

 

Insurance, other than workers' compensation

 

14,170

 

 

 

10,816

 

Accrued interest payable

 

18,579

 

 

 

7,558

 

Accrued merger and integration

 

8,685

 

 

 

16,101

 

Other

 

39,300

 

 

 

31,628

 

Total

$

241,904

 

 

$

226,629

 

 

 

 

8. Long Term Debt

2018 Credit AgreementOn March 27, 2018, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) among the Company, as borrower, Wells Fargo Bank, National Association, as administrative agent, letter of credit issuer, swing line lender and lender, each of the other lenders and letter of credit issuers party thereto, The Bank of Nova Scotia and U.S. Bank National Association, as Co-Syndication Agents, Royal Bank of Canada, as Documentation Agent and Wells Fargo Securities, LLC, The Bank of Nova Scotia and U.S. Bank National Association, as Co-Lead Arrangers and Joint Book Runners.

The Credit Agreement is a committed senior unsecured revolving credit facility that permits aggregate borrowings of up to $600 million, including a letter of credit facility that, at any time outstanding, is limited to $150 million and a swing line facility that, at any time outstanding, is limited to $20 million.  Subject to customary conditions, the Company may request that the lenders’ aggregate commitments be increased by up to $300 million, not to exceed total commitments of $900 million.  The maturity date under the Credit Agreement is March 27, 2023.  The Company has the option, subject to certain conditions, to exercise two one-year extensions of the maturity date.

16


Loans under the Credit Agreement bear interest by reference, at the Company’s election, to the LIBOR rate or base rate, provided, that swing line loans bear interest by reference only to the base rate.  The applicable margin on LIBOR rate loans varies from 1.00% to 2.00% and the applicable margin on base rate loans varies from 0.00% to 1.00%, in each case determined based upon the Company’s credit rating.  A letter of credit fee is payable by the Company equal to the applicable margin for LIBOR rate loans times the daily amount available to be drawn under outstanding letters of credit.  The commitment fee rate payable to the lenders varies from 0.100% to 0.300% based on the Company’s credit rating.

No subsidiaries of the Company are currently required to be a guarantor under the Credit Agreement.  However, if any subsidiary guarantees or incurs debt in excess of the Priority Debt Basket (as defined in the Credit Agreement), such subsidiary is required to become a guarantor under the Credit Agreement.

The Credit Agreement contains representations, warranties, affirmative and negative covenants and events of default and associated remedies that the Company believes are customary for agreements of this nature, including certain restrictions on the ability of the Company and each subsidiary of the Company to incur debt and grant liens.  If the Company’s credit rating is below investment grade, the Company will become subject to a restricted payment covenant, which would require the Company to have a Pro Forma Debt Service Coverage Ratio (as defined in the Credit Agreement) greater than or equal to 1.50 to 1.00 immediately before and immediately after making any restricted payment.  The Credit Agreement also requires that the Company’s total debt to capitalization ratio, expressed as a percentage, not exceed 50%.  The Credit Agreement generally defines the debt to capitalization ratio as the ratio of (a) total borrowed money indebtedness to (b) the sum of such indebtedness plus consolidated net worth, with consolidated net worth determined as of the end of the most recently ended fiscal quarter.

As of March 31, 2018, the Company had no amounts outstanding under the revolving credit facility.  The Company had $81,000 in letters of credit outstanding under the revolving credit facility at March 31, 2018 and, as a result, had available borrowing capacity of approximately $600 million at that date.

2015 Reimbursement Agreement — On March 16, 2015, the Company entered into a Reimbursement Agreement (the “Reimbursement Agreement”) with The Bank of Nova Scotia (“Scotiabank”), pursuant to which the Company may from time to time request that Scotiabank issue an unspecified amount of letters of credit.  As of March 31, 2018, the Company had $54.9 million in letters of credit outstanding under the Reimbursement Agreement.  

Under the terms of the Reimbursement Agreement, the Company will reimburse Scotiabank on demand for any amounts that Scotiabank has disbursed under any letters of credit.  Fees, charges and other reasonable expenses for the issuance of letters of credit are payable by the Company at the time of issuance at such rates and amounts as are in accordance with Scotiabank’s prevailing practice.  The Company is obligated to pay to Scotiabank interest on all amounts not paid by the Company on the date of demand or when otherwise due at the LIBOR rate plus 2.25% per annum, calculated daily and payable monthly, in arrears, on the basis of a calendar year for the actual number of days elapsed, with interest on overdue interest at the same rate as on the reimbursement amounts.

The Company has also agreed that if obligations under the Credit Agreement are secured by liens on any of its or any of its subsidiaries’ property, then the Company’s reimbursement obligations and (to the extent similar obligations would be secured under the Credit Agreement) other obligations under the Reimbursement Agreement and any letters of credit will be equally and ratably secured by all property subject to such liens securing the Credit Agreement.

Pursuant to a Continuing Guaranty dated as of March 16, 2015, the Company’s payment obligations under the Reimbursement Agreement are jointly and severally guaranteed as to payment and not as to collection by subsidiaries of the Company that from time to time guarantee payment under the Credit Agreement.  No subsidiaries of the Company currently guarantee payment under the Credit Agreement.

Series A & B Senior Notes — On October 5, 2010, the Company completed the issuance and sale of $300 million in aggregate principal amount of its 4.97% Series A Senior Notes due October 5, 2020 (the “Series A Notes”) in a private placement. The Series A Notes bear interest at a rate of 4.97% per annum. The Company pays interest on the Series A Notes on April 5 and October 5 of each year. The Series A Notes will mature on October 5, 2020.

On June 14, 2012, the Company completed the issuance and sale of $300 million in aggregate principal amount of its 4.27% Series B Senior Notes due June 14, 2022 (the “Series B Notes”) in a private placement. The Series B Notes bear interest at a rate of 4.27% per annum. The Company pays interest on the Series B Notes on April 5 and October 5 of each year. The Series B Notes will mature on June 14, 2022.

17


The Series A Notes and Series B Notes are senior unsecured obligations of the Company which rank equally in right of payment with all other unsubordinated indebtedness of the Company. The Series A Notes and Series B Notes are guaranteed on a senior unsecured basis by each of the existing domestic subsidiaries of the Company other than subsidiaries that are not required to be guarantors under the Credit Agreement. No subsidiaries of the Company are currently required to be a guarantor under the Credit Agreement.

The Series A Notes and Series B Notes are prepayable at the Company’s option, in whole or in part, provided that in the case of a partial prepayment, prepayment must be in an amount not less than 5% of the aggregate principal amount of the notes then outstanding, at any time and from time to time at 100% of the principal amount prepaid, plus accrued and unpaid interest to the prepayment date, plus a “make-whole” premium as specified in the note purchase agreements. The Company must offer to prepay the notes upon the occurrence of any change of control. In addition, the Company must offer to prepay the notes upon the occurrence of certain asset dispositions if the proceeds therefrom are not timely reinvested in productive assets. If any offer to prepay is accepted, the purchase price of each prepaid note is 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the prepayment date.

The respective note purchase agreements require compliance with two financial covenants. The Company must not permit its debt to capitalization ratio to exceed 50% at any time. The note purchase agreements generally define the debt to capitalization ratio as the ratio of (a) total borrowed money indebtedness to (b) the sum of such indebtedness plus consolidated net worth, with consolidated net worth determined as of the last day of the most recently ended fiscal quarter. The Company also must not permit its interest coverage ratio as of the last day of a fiscal quarter to be less than 2.50 to 1.00. The note purchase agreements generally define the interest coverage ratio as the ratio of EBITDA for the four prior fiscal quarters to interest charges for the same period. The Company was in compliance with these covenants at March 31, 2018.

Events of default under the note purchase agreements include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, a cross default event, a judgment in excess of a threshold event, the guaranty agreement ceasing to be enforceable, the occurrence of certain ERISA events, a change of control event and bankruptcy and other insolvency events. If an event of default under the note purchase agreements occurs and is continuing, then holders of a majority in principal amount of the respective notes have the right to declare all the notes then-outstanding to be immediately due and payable. In addition, if the Company defaults in payments on any note, then until such defaults are cured, the holder thereof may declare all the notes held by it pursuant to the note purchase agreement to be immediately due and payable.

2028 Senior Notes – On January 19, 2018, the Company completed its offering of $525 million aggregate principal amount of the Company’s 3.95% Senior Notes due 2028 (the “2028 Notes”) initially guaranteed on a senior unsecured basis by certain of its subsidiaries.  These guarantees were automatically released in connection with the Company’s entry into the Credit Agreement on March 27, 2018. The net proceeds before offering expenses were approximately $521 million of which the Company used $239 million to repay amounts outstanding under its revolving credit facility.  The Company intends to use the remainder of the net proceeds for general corporate purposes.

The Company pays interest on the 2028 Notes on February 1 and August 1 of each year.  The 2028 Notes will mature on February 1, 2028.  The 2028 Notes bear interest at a rate of 3.95% per annum.

The 2028 Notes are senior unsecured obligations of the Company, which rank equally with all of the Company’s other existing and future senior unsecured debt and will rank senior in right of payment to all of the Company’s other future subordinated debt.  The 2028 Notes will be effectively subordinated to any of the Company’s future secured debt to the extent of the value of the assets securing such debt.  In addition, the 2028 Notes will be structurally subordinated to the liabilities (including trade payables) of the Company’s subsidiaries that do not guarantee the 2028 Notes.  No subsidiaries of the Company are currently required to be a guarantor under the 2028 Notes.  If subsidiaries of the Company guarantee the 2028 Notes in the future, such guarantees (the “Guarantees”) will rank equally in right of payment with all of the guarantors’ future unsecured senior debt and senior in right of payment to all of the guarantors’ future subordinated debt.  The Guarantees will be effectively subordinated to any of the guarantors’ future secured debt to the extent of the value of the assets securing such debt.  

The Company, at its option, may redeem the Notes in whole or part, at any time or from time to time at a redemption price equal to 100% of the principal amount of such 2028 Notes to be redeemed, plus accrued and unpaid interest, if any, on those 2028 Notes to the redemption date, plus a make-whole premium.  Additionally, commencing on November 1, 2027, the Company, at its option, may redeem the 2028 Notes in whole or part, at a redemption price equal to 100% of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, if any, on those 2028 Notes to the redemption date.

The indenture pursuant to which the 2028 Notes were issued includes covenants that, among other things, limit the Company and its subsidiaries’ ability to incur certain liens, engage in sale and lease-back transactions or consolidate, merge, or transfer all or substantially all of their assets.  These covenants are subject to important qualifications and limitations set forth in the indenture.

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Upon the occurrence of a change of control, as defined in the indenture, each holder of the 2028 Notes may require the Company to purchase all or a portion of such holder’s 2028 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

The indenture also provides for events of default which, if any of them occurs, would permit or require the principal of, premium, if any, and accrued interest, if any, on the 2028 Notes to become or to be declared due and payable.

Debt issuance costs – Debt issuance costs are deferred and recognized as interest expense over the term of the underlying debt.  Interest expense related to the amortization of debt issuance costs was approximately $938,000 and $626,000 for the three months ended March 31, 2018 and 2017, respectively.  Amortization of debt issuance costs for the three months ended March 31, 2018 includes $317,000 of debt issuance costs related to lenders of the Company’s previous credit agreement who did not participate in the 2018 Credit Agreement.

Presented below is a schedule of the principal repayment requirements of long-term debt as of March 31, 2018 (in thousands):

Year ending December 31,

 

 

 

2018

$

 

2019

 

 

2020

 

300,000

 

2021

 

 

2022

 

300,000

 

Thereafter

 

525,000

 

Total

$

1,125,000

 

 

 

 

9. Commitments and Contingencies     

As of March 31, 2018, the Company maintained letters of credit in the aggregate amount of $55.0 million primarily for the benefit of various insurance companies as collateral for retrospective premiums and retained losses which could become payable under the terms of the underlying insurance contracts. These letters of credit expire annually at various times during the year and are typically renewed. As of March 31, 2018, no amounts had been drawn under the letters of credit.

As of March 31, 2018, the Company had commitments to purchase major equipment and make investments totaling approximately $183 million for its drilling, pressure pumping, directional drilling and oilfield rentals businesses.

The Company’s pressure pumping business has entered into agreements to purchase minimum quantities of proppants and chemicals from certain vendors. These agreements expire in 2018, 2021 and 2041. As of March 31, 2018, the remaining obligation under these agreements was approximately $130 million, of which approximately $24.8 million relates to purchases required during the remainder of 2018. In the event the required minimum quantities are not purchased during certain periods, the Company could be required to make a liquidated damages payment to the respective vendor for any shortfall.

On January 22, 2018, an accident at a drilling site in Pittsburg County, Oklahoma resulted in the losses of life of five people, including three of the Company’s employees. Lawsuits have been filed in the District Court for Pittsburg County, Oklahoma in connection with the five individuals who lost their lives in the accident.  These lawsuits allege various causes of action against the Company including negligence, gross negligence, knowledge that injury or death was substantially certain, acting with purpose, recklessness, wrongful death and survival, and the plaintiffs seek an unspecified amount of damages, including punitive or exemplary damages, costs, interest, and other relief. The Company disputes the plaintiffs’ allegations and intends to defend itself vigorously.  Based on the information the Company has available as of the date of this Report, the Company believes that it has adequate insurance to cover any losses, excluding the applicable insurance deductibles and investigation-related expenses.  However, if this accident is not fully covered by insurance or an enforceable and recoverable indemnity from a third party, it could have a material adverse effect on the Company’s business, financial condition, cash flows and results of operations.

The Company is party to various other legal proceedings arising in the normal course of its business.  The Company does not believe that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition, results of operations or cash flows.

 

 

 

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10. Stockholders’ Equity

Cash Dividends — The Company paid cash dividends during the three months ended March 31, 2018 and 2017 as follows:

2018:

Per Share

 

 

Total

 

 

 

 

 

 

(in thousands)

 

Paid on March 22, 2018

$

0.02

 

 

$

4,443

 

 

2017:

Per Share

 

 

Total