Attached files

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EX-32.1 - EX-32.1 - PATTERSON UTI ENERGY INCpten-ex321_7.htm
EX-31.2 - EX-31.2 - PATTERSON UTI ENERGY INCpten-ex312_8.htm
EX-31.1 - EX-31.1 - PATTERSON UTI ENERGY INCpten-ex311_6.htm
EX-3.6 - EX-3.6 - PATTERSON UTI ENERGY INCpten-ex36_239.htm
EX-3.5 - EX-3.5 - PATTERSON UTI ENERGY INCpten-ex35_98.htm
EX-3.4 - EX-3.4 - PATTERSON UTI ENERGY INCpten-ex34_61.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, 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.

220,025,971 shares of common stock, $0.01 par value, as of July 26, 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

  

41

ITEM 4.

 

Controls and Procedures

  

41

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

42

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

ITEM 5.

 

Other Information

 

43

ITEM 6.

 

Exhibits

  

44

Signature  

 

 

  

45

 

 

 

 


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,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

241,908

 

 

$

42,828

 

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

   at June 30, 2018 and December 31, 2017, respectively

 

602,748

 

 

 

580,354

 

Federal and state income taxes receivable

 

1,169

 

 

 

1,152

 

Inventory

 

81,158

 

 

 

69,167

 

Other

 

80,975

 

 

 

53,354

 

Total current assets

 

1,007,958

 

 

 

746,855

 

Property and equipment, net

 

4,208,697

 

 

 

4,254,730

 

Goodwill and intangible assets

 

684,528

 

 

 

687,072

 

Deposits on equipment purchases

 

21,770

 

 

 

16,351

 

Deferred tax assets, net

 

1,857

 

 

 

3,875

 

Other

 

29,180

 

 

 

49,973

 

Total assets

$

5,953,990

 

 

$

5,758,856

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

371,518

 

 

$

319,621

 

Accrued expenses

 

229,851

 

 

 

226,629

 

Total current liabilities

 

601,369

 

 

 

546,250

 

Borrowings under revolving credit facility

 

 

 

 

268,000

 

Long-term debt, net of debt discount and issuance costs of $6,082 and $1,217

   at June 30, 2018 and December 31, 2017, respectively

 

1,118,918

 

 

 

598,783

 

Deferred tax liabilities, net

 

340,718

 

 

 

350,836

 

Other

 

12,646

 

 

 

12,494

 

Total liabilities

 

2,073,651

 

 

 

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 400,000,000 shares at June 30, 2018

   and 300,000,000 shares at December 31, 2017 with 266,687,633 and

   266,259,083 issued and 219,822,025 and 222,456,472 outstanding at

   June 30, 2018 and December 31, 2017, respectively

 

2,667

 

 

 

2,662

 

Additional paid-in capital

 

2,805,575

 

 

 

2,785,823

 

Retained earnings

 

2,047,379

 

 

 

2,105,897

 

Accumulated other comprehensive income

 

3,308

 

 

 

6,822

 

Treasury stock, at cost, 46,865,608 and 43,802,611 shares at June 30, 2018 and

   December 31, 2017, respectively

 

(978,590

)

 

 

(918,711

)

Total stockholders' equity

 

3,880,339

 

 

 

3,982,493

 

Total liabilities and stockholders' equity

$

5,953,990

 

 

$

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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling

$

349,922

 

 

$

270,111

 

 

$

677,725

 

 

$

428,839

 

Pressure pumping

 

425,303

 

 

 

290,044

 

 

 

832,087

 

 

 

431,218

 

Directional drilling

 

52,705

 

 

 

 

 

 

101,321

 

 

 

 

Other

 

26,488

 

 

 

19,031

 

 

 

52,449

 

 

 

24,304

 

Total operating revenues

 

854,418

 

 

 

579,186

 

 

 

1,663,582

 

 

 

884,361

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling

 

217,674

 

 

 

180,658

 

 

 

430,257

 

 

 

288,879

 

Pressure pumping

 

342,885

 

 

 

233,900

 

 

 

663,855

 

 

 

352,913

 

Directional drilling

 

43,685

 

 

 

 

 

 

81,374

 

 

 

 

Other

 

17,513

 

 

 

12,671

 

 

 

35,258

 

 

 

15,930

 

Depreciation, depletion, amortization and impairment

 

212,384

 

 

 

219,328

 

 

 

422,276

 

 

 

375,545

 

Selling, general and administrative

 

35,663

 

 

 

23,478

 

 

 

68,480

 

 

 

42,330

 

Merger and integration expenses

 

747

 

 

 

51,193

 

 

 

2,738

 

 

 

56,349

 

Other operating income, net

 

(7,129

)

 

 

(1,806

)

 

 

(9,550

)

 

 

(14,710

)

Total operating costs and expenses

 

863,422

 

 

 

719,422

 

 

 

1,694,688

 

 

 

1,117,236

 

Operating loss

 

(9,004

)

 

 

(140,236

)

 

 

(31,106

)

 

 

(232,875

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,360

 

 

 

642

 

 

 

3,783

 

 

 

1,048

 

Interest expense, net of amount capitalized

 

(12,667

)

 

 

(9,075

)

 

 

(26,292

)

 

 

(17,345

)

Other

 

216

 

 

 

131

 

 

 

385

 

 

 

148

 

Total other expense

 

(10,091

)

 

 

(8,302

)

 

 

(22,124

)

 

 

(16,149

)

Loss before income taxes

 

(19,095

)

 

 

(148,538

)

 

 

(53,230

)

 

 

(249,024

)

Income tax benefit

 

(8,382

)

 

 

(56,354

)

 

 

(8,100

)

 

 

(93,301

)

Net loss

$

(10,713

)

 

$

(92,184

)

 

$

(45,130

)

 

$

(155,723

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.05

)

 

$

(0.46

)

 

$

(0.21

)

 

$

(0.86

)

Diluted

$

(0.05

)

 

$

(0.46

)

 

$

(0.21

)

 

$

(0.86

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

220,093

 

 

 

201,204

 

 

 

220,436

 

 

 

180,747

 

Diluted

 

220,093

 

 

 

201,204

 

 

 

220,436

 

 

 

180,747

 

Cash dividends per common share

$

0.04

 

 

$

0.02

 

 

$

0.06

 

 

$

0.04

 

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,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(10,713

)

 

$

(92,184

)

 

$

(45,130

)

 

$

(155,723

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(1,530

)

 

 

1,939

 

 

 

(3,514

)

 

 

2,988

 

Total comprehensive loss

$

(12,243

)

 

$

(90,245

)

 

$

(48,644

)

 

$

(152,735

)

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

 

 

 

 

 

 

 

 

 

 

(45,130

)

 

 

 

 

 

 

 

 

(45,130

)

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,514

)

 

 

 

 

 

(3,514

)

Exercise of stock options

 

40

 

 

 

1

 

 

 

484

 

 

 

 

 

 

 

 

 

 

 

 

485

 

Issuance of common stock

 

381

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock units

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

19,272

 

 

 

 

 

 

 

 

 

 

 

 

19,272

 

Payment of cash dividends

 

 

 

 

 

 

 

 

 

 

(13,275

)

 

 

 

 

 

 

 

 

(13,275

)

Dividend equivalents

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

 

 

 

 

 

 

(113

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,879

)

 

 

(59,879

)

Balance, June 30, 2018

 

266,688

 

 

$

2,667

 

 

$

2,805,575

 

 

$

2,047,379

 

 

$

3,308

 

 

$

(978,590

)

 

$

3,880,339

 

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,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(45,130

)

 

$

(155,723

)

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

 

 

 

 

 

 

 

Depreciation, depletion, amortization and impairment

 

422,276

 

 

 

375,545

 

Dry holes and abandonments

 

562

 

 

 

28

 

Deferred income tax benefit

 

(8,100

)

 

 

(90,684

)

Stock-based compensation expense

 

19,272

 

 

 

22,170

 

Net gain on asset disposals

 

(17,472

)

 

 

(15,367

)

Amortization of debt discount and issuance costs

 

387

 

 

 

173

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(22,363

)

 

 

(135,542

)

Income taxes receivable

 

(22

)

 

 

(1,141

)

Inventory and other assets

 

(25,277

)

 

 

(29,186

)

Accounts payable

 

(23,432

)

 

 

58,372

 

Accrued expenses

 

(542

)

 

 

(13,002

)

Other liabilities

 

76

 

 

 

(258

)

Net cash provided by operating activities

 

300,235

 

 

 

15,385

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

(3,800

)

 

 

(434,194

)

Purchases of property and equipment

 

(317,783

)

 

 

(186,790

)

Proceeds from disposal of assets

 

21,005

 

 

 

34,997

 

Collection of note receivable

 

23,760

 

 

 

 

Net cash used in investing activities

 

(276,818

)

 

 

(585,987

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds of equity offering

 

 

 

 

471,570

 

Purchases of treasury stock

 

(59,879

)

 

 

(3,727

)

Proceeds from exercise of options

 

485

 

 

 

 

Dividends paid

 

(13,275

)

 

 

(7,595

)

Debt issuance costs

 

(4,333

)

 

 

 

Proceeds from long-term debt

 

521,194

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

79,000

 

 

 

161,000

 

Repayment of borrowings under revolving credit facility

 

(347,000

)

 

 

(46,000

)

Net cash provided by financing activities

 

176,192

 

 

 

575,248

 

Effect of foreign exchange rate changes on cash

 

(529

)

 

 

334

 

Net increase in cash and cash equivalents

 

199,080

 

 

 

4,980

 

Cash and cash equivalents at beginning of period

 

42,828

 

 

 

35,152

 

Cash and cash equivalents at end of period

$

241,908

 

 

$

40,132

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Net cash (paid) received during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized interest of $722 in 2018 and $409 in 2017

$

(15,573

)

 

$

(16,640

)

Income taxes

$

21

 

 

$

967

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Receivable from property and equipment insurance

$

15,000

 

 

$

 

Net increase in payables for purchases of property and equipment

$

75,032

 

 

$

33,938

 

Issuance of common stock for business acquisitions

$

 

 

$

1,039,396

 

Net (increase) decrease in deposits on equipment purchases

$

(5,419

)

 

$

3,133

 

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 and six months ended June 30, 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 fracturing equipment.  The oilfield rentals business acquired through the SSE merger has a 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 following table represents the final 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.  

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.

10


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 and six months ended June 30, 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 June 30, 2017 was adjusted to exclude the Company’s merger and integration-related costs of $51.2 million and SSE’s merger-related costs of $28.7 million.  The pro forma loss for the six months ended June 30, 2017 was adjusted to exclude the Company’s merger and integration 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 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

 

 

Six Months Ended

 

 

June 30, 2017

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

Revenues

$

677,452

 

 

$

1,208,239

 

Net loss

 

(73,911

)

 

 

(143,855

)

Loss per share

 

(0.34

)

 

 

(0.65

)

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 $598 million and $577 million as of June 30, 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 six months ended June 30, 2018, contract liabilities increased approximately $669,000 due to customer payments relating to the initial mobilization of upgraded rigs, and decreased approximately $802,000 due to amounts amortized and recorded in drilling revenue.

Contract liability balances for customer prepayments were $2.2 million and $9.1 million as of June 30, 2018 and December 31, 2017, respectively.  Contract liability balances for deferred mobilization payments relating to newly constructed or upgraded rigs were $4.6 million and $4.7 million as of June 30, 2018 and December 31, 2017, respectively. Contract liability balances for customer prepayments are included in “Accounts Payable” and contract liability balances for deferred mobilization payments are included in “Accrued Liabilities” 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.

 

 

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 June 30, 2018 and December 31, 2017 (in thousands):

 

June 30,

 

 

December 31,

 

  

2018

 

 

2017

 

Finished goods

$

2,462

 

 

$

2,270

 

Work-in-process

 

2,281

 

 

 

529

 

Raw materials and supplies

 

76,415

 

 

 

66,368

 

Inventory

$

81,158

 

 

$

69,167

 

 

 

 

5. Property and Equipment

Property and equipment consisted of the following at June 30, 2018 and December 31, 2017 (in thousands):

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Equipment

$

8,275,471

 

 

$

8,066,404

 

Oil and natural gas properties

 

215,846

 

 

 

211,566

 

Buildings

 

185,282

 

 

 

185,475

 

Land

 

26,144

 

 

 

26,593

 

Total property and equipment

 

8,702,743

 

 

 

8,490,038

 

Less accumulated depreciation, depletion and impairment

 

(4,494,046

)

 

 

(4,235,308

)

Property and equipment, net

$

4,208,697

 

 

$

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.  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.  

14


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 and six month periods ended June 302018 and management’s expectations of operating results in future periods, the Company concluded that no triggering event occurred during the six months ended June 30, 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 $4,000 in the three months ended June 30, 2018 and $6,000 in the six months ended June 30, 2018 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 June 30, 2018 and changes for the six 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

 

Changes to goodwill