PATTERSON UTI ENERGY INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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


		For the quarterly period ended June 30, 2004


[ ]		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
(State or other jurisdiction of		75-2504748
incorporation or organization)		(I.R.S. Employer Identification No.)


P. O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS,		79550
(Address of principal executive offices)		(Zip Code)

(325) 574-6300
(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 [x]		No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yes [x]		No [ ]

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

166,888,659 shares of common stock, $0.01 par value, as of August 9, 2004

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

The following unaudited condensed consolidated financial statements include all adjustments which, in the opinion of management, are necessary in order to make such financial statements not misleading.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)


	June 30,			December 31,
	2004			2003
ASSETS
Current assets:
Cash and cash equivalents	$	63,353		$	100,483
Accounts receivable, net of allowance for doubtful accounts of $2,959 at June 30, 2004 and $2,133 at December 31, 2003		183,505			156,345
Federal and state income taxes receivable, net		—			12,667
Inventory		15,025			15,206
Deferred tax assets		21,645			16,449
Other		9,819			6,910

Total current assets		293,347			308,060
Property and equipment, at cost, net		785,153			693,631
Goodwill		101,360			51,179
Investment in equity securities		—			19,771
Other		13,914			2,686

Total assets	$	1,193,774		$	1,075,327

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	45,180		$	41,093
Accrued revenue distributions		11,863			8,545
Other		5,165			6,743
Accrued federal income taxes payable		4,301			—
Accrued expenses		51,658			52,066

Total current liabilities		118,167			108,447
Deferred tax liabilities		149,747			142,517
Other		4,906			3,822

Total liabilities		272,820			254,786

Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, par value $.01; authorized 1,000,000 shares, no shares issued		—			—
Common stock, par value $.01; authorized 200,000,000 shares at December 31, 2003 and 300,000,000 shares at June 30, 2004 with 169,971,598 (affected by a two-for-one stock split) and 82,483,148 issued and 166,858,502 (affected by a two-for-one stock split) and 80,976,600 outstanding at June 30, 2004 and December 31, 2003, respectively		1,700			825
Additional paid-in capital		579,314			506,018
Deferred compensation		(6,488	)		—
Retained earnings		354,522			318,419
Accumulated other comprehensive income		5,043			6,934
Treasury stock, at cost, 3,113,096 shares (affected by a two-for-one stock split) and 1,506,548 shares at June 30, 2004 and December 31, 2003, respectively		(13,137	)		(11,655	)

Total stockholders’ equity		920,954			820,541

Total liabilities and stockholders’ equity	$	1,193,774		$	1,075,327

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

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Operating revenues:
Drilling	$	188,222		$	163,951		$	367,397		$	299,532
Pressure pumping		14,577			9,800			28,827			18,311
Drilling and completion fluids		23,424			16,003			41,563			31,851
Oil and natural gas		8,287			5,870			15,502			11,169

		234,510			195,624			453,289			360,863

Operating costs and expenses:
Drilling		134,387			124,309			262,378			230,737
Pressure pumping		8,328			5,800			16,416			10,806
Drilling and completion fluids		19,837			13,922			35,476			28,303
Oil and natural gas		2,768			1,292			4,336			2,371
Depreciation, depletion, amortization and impairment		30,451			24,973			57,734			49,109
General and administrative		7,910			6,813			14,708			13,707
Bad debt expense		217			82			307			162
Other		(187	)		(720	)		(1,375	)		(3,329	)

		203,711			176,471			389,980			331,866

Operating income		30,799			19,153			63,309			28,997

Other income (expense):
Interest income		204			285			455			545
Interest expense		(54	)		(76	)		(130	)		(148	)
Other		172			319			257			1,660

		322			528			582			2,057

Income before income taxes and cumulative effect of change in accounting principle		31,121			19,681			63,891			31,054

Income tax expense (benefit):
Current		14,655			10,642			19,204			13,762
Deferred		(3,141	)		(3,163	)		4,398			(1,961	)

		11,514			7,479			23,602			11,801

Income before cumulative effect of change in accounting principle		19,607			12,202			40,289			19,253
Cumulative effect of change in accounting principle, net of related income tax benefit of approximately $287		—			—			—			(469	)

Net income	$	19,607		$	12,202		$	40,289		$	18,784

Net income per common share:
Basic:
Income before cumulative effect of change in accounting principle	$	0.12		$	0.08		$	0.24		$	0.12

Cumulative effect of change in accounting principle	$	—		$	—		$	—		$	—

Net income	$	0.12		$	0.08		$	0.24		$	0.12

Diluted:
Income before cumulative effect of change in accounting principle	$	0.12		$	0.07		$	0.24		$	0.12

Cumulative effect of change in accounting principle	$	—		$	—		$	—		$	—

Net income	$	0.12		$	0.07		$	0.24		$	0.11

Weighted average number of common shares outstanding:
Basic		166,681			161,058			165,211			160,694

Diluted		169,062			164,914			168,005			164,218

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

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(in thousands)


	Common Stock												Accumulated
	Number				Additional								other
	of				paid-in		Deferred			Retained			comprehensive			Treasury
	shares		Amount		capital		compensation			earnings			income			stock			Total
Balance, December 31, 2003		82,483	$	825	$	506,018	$	—		$	318,419		$	6,934		$	(11,655	)	$	820,541
Issuance of common stock		1,388		14		49,462		—			—			—			—			49,476
Issuance of restricted stock		195		2		6,749		(6,751	)		—			—			—			—
Amortization of deferred compensation expense		—		—		—		263			—			—			—			263
Exercise of stock options		920		9		8,689		—			—			—			—			8,698
Tax benefit related to exercise of stock options		—		—		8,396		—			—			—			—			8,396
Foreign currency translation adjustment		—		—		—		—			—			(1,891	)		—			(1,891	)
Purchase of treasury stock		—		—		—		—			—			—			(1,482	)		(1,482	)
Payment of cash dividend (See Note 13)		—		—		—		—			(3,336	)		—			—			(3,336	)
Effect of two-for-one stock split (See Note 13)		84,986		850		—		—			(850	)		—			—			—
Net income		—		—		—		—			40,289			—			—			40,289

Balance, June 30, 2004		169,972	$	1,700	$	579,314	$	(6,488	)	$	354,522		$	5,043		$	(13,137	)	$	920,954

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

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (Unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	40,289		$	18,784
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, amortization and impairment		57,734			49,109
Dry holes and abandonments		815			—
Provision for bad debts		307			162
Deferred income tax expense (benefit)		4,398			(1,961	)
Tax benefit related to exercise of stock options		8,396			5,992
Amortization of deferred compensation		263			—
Gain on sale of property and equipment		(1,375	)		(877	)
Cumulative effect of change in accounting principle, net of tax		—			(469	)
Changes in operating assets and liabilities, net of acquired assets and liabilities assumed:
Accounts receivable		(21,969	)		(36,457	)
Federal and state income taxes		16,953			25,708
Inventory and other current assets		(2,206	)		359
Accounts payable		4,445			7,427
Accrued expenses		(13,333	)		9,852
Other liabilities		(4,033	)		840

Net cash provided by operating activities		90,684			78,469

Cash flows from investing activities:
Acquisitions, net of cash acquired		(32,514	)		(32,783	)
Purchases of property and equipment		(89,723	)		(51,182	)
Proceeds from sales of property and equipment		1,986			1,859
Restricted cash deposited to collateralize retained insurance losses		(11,316	)		—
Change in other assets		—			(1,304	)

Net cash used in investing activities		(131,567	)		(83,410	)

Cash flows from financing activities:
Purchase of treasury stock		(1,482	)		—
Dividends paid		(3,336	)		—
Proceeds from exercise of stock options and warrants		8,698			9,488

Net cash provided by financing activities		3,880			9,488

Net increase (decrease) in cash and cash equivalents		(37,003	)		4,547
Foreign currency translation adjustment		(127	)		755
Cash and cash equivalents at beginning of period		100,483			82,154

Cash and cash equivalents at end of period	$	63,353		$	87,456

Supplemental disclosure of cash flow information:
Net cash received (paid) during the period for:
Interest	$	(130	)	$	(145	)
Income taxes	$	8,000		$	18,530

Non-Cash investing and financing activities:

In February 2004, the Company completed its merger with TMBR/Sharp Drilling, Inc. (“TMBR”) in which one of its wholly-owned subsidiaries acquired 100% of the remaining outstanding shares of TMBR for a net cash payment of approximately $32.5 million ($40.4 million paid to TMBR shareholders less $7.9 million in cash acquired in the transaction) and the issuance of 2.78 million shares of the Company’s common stock valued at $17.82 per share, adjusted to reflect the two-for-one stock split in the form of a stock dividend on June 20, 2004. The assets of TMBR included 18 land-based drilling rigs and related equipment, shop facilities, equipment yards and their oil and natural gas properties. The transaction was accounted for as a business combination and the purchase price was allocated among the assets acquired and liabilities assumed based on their estimated fair market values (See Note 2).

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

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Consolidation and Presentation

The 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.

The interim condensed consolidated financial statements have been prepared by management of the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for presentation of the information have been included. The unaudited condensed consolidated balance sheet as of December 31, 2003, as presented herein, was derived from the audited balance sheet of the Company. 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 year ended December 31, 2003, as amended.

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 functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive income, which is a separate component of stockholders’ equity (see Note 4 of these Notes to Unaudited Condensed Consolidated Financial Statements).

The Company provides a dual presentation of its earnings per share in its Condensed Consolidated Statements of Income: Basic Earnings per Share (“Basic EPS”) and Diluted Earnings per Share (“Diluted EPS”). Basic EPS is computed using the weighted average number of shares outstanding during the periods presented. Diluted EPS includes common stock equivalents, generally stock options and warrants which are dilutive to earnings per share. For the three months ended June 30, 2004 and 2003, dilutive securities included in the calculation of Diluted EPS were 2.4 million shares and 3.9 million shares, respectively. For the six months ended June 30, 2004 and 2003, dilutive securities included in the calculation of Diluted EPS were 2.8 million shares and 3.5 million shares, respectively. For the three and six months ended June 30, 2004, there were 540,000 potentially dilutive options and warrants which were excluded from the calculation of Diluted EPS as their exercise price was greater than the average market price for the period. For the six months ended June 30, 2003, there were 30,000 potentially dilutive options and warrants which were excluded from the calculation of Diluted EPS as their exercise price was greater than the average market price for the period.

On April 28, 2004, the Company’s Board of Directors authorized a two-for-one stock split in the form of a stock dividend which was distributed on June 30, 2004 to holders of record on June 14, 2004. At June 30, 2004, an adjustment was made to reclassify an amount from retained earnings to common stock to account for the par value of the common stock issued as a stock dividend. This adjustment had no overall effect on equity. The June 30, 2003 balance sheet was not restated as a result of this transaction; however, historical earnings per share amounts included in the statements of income and elsewhere in this report have been restated as if the two-for-one stock split had occurred on January 1, 2003.

The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications have been made to the 2003 consolidated financial statements in order for them to conform with the 2004 presentation.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

2. Recent Acquisitions

On February 11, 2004, the Company completed its merger with TMBR/Sharp Drilling, Inc. (“TMBR”), a Texas corporation, in which one of its wholly-owned subsidiaries acquired 100 % of the remaining outstanding shares of TMBR. Operations of TMBR subsequent to February 11, 2004, are included in the Company’s consolidated financial statements. The transaction was accounted for as a business combination and the purchase price was allocated among the assets acquired and liabilities assumed based on their estimated fair market values. The assets of TMBR included 18 land-based drilling rigs and related equipment, shop facilities, equipment yards and their oil and natural gas properties.

The purchase price was calculated as follows (in thousands, except per share data and exchange ratio):


Cash of $9.09 per share for the 4,447 TMBR shares outstanding at February 11, 2004, excluding the 1,059 TMBR shares owned by Patterson-UTI	$	40,423
Patterson-UTI shares issued at $17.82 per share (4,447 TMBR shares X ..624332 exchange ratio X $17.82) (post stock-split)		49,476
1,059 TMBR shares previously acquired by the Company		19,771
Acquisition costs		12,511
Less: Cash acquired		(7,909	)

Total purchase price	$	114,270

The purchase price was allocated among assets acquired and liabilities assumed based on their estimated fair market values as follows (in thousands):


Current assets	$	6,287
Fixed assets		62,534
Other long term assets		172
Deferred tax assets		11,216
Goodwill		50,181
Current liabilities		(6,382	)
Other long term liabilities		(677	)
Deferred tax liability		(9,061	)

Total purchase allocation	$	114,270

The purchase price allocation is based on preliminary estimates, including estimates of federal tax contingencies, which are subject to change once additional information becomes available. Changes to these estimates could result in changes to the purchase price allocation.

The Company acquired TMBR to increase its productive asset base in the Permian Basin, which is one of the most active land drilling regions in the U.S. TMBR was well established in the contract drilling industry and maintained favorable customer relationships. Goodwill was recognized in the transaction as a result of these factors.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

2. Recent Acquisitions — (continued)

The following represents pro-forma unaudited financial information as if the merger had been completed on January 1, 2003 (in thousands, except per share amounts):


	Three months		Six months ended
	ended June 30,		June 30,
	2003		2004		2003
Revenue	$	207,757	$	457,876	$	383,019
Income before cumulative effect of change in accounting principle		12,921		39,990		19,615
Net income		12,921		39,990		19,146
Earnings per share:
Basic	$	0.08	$	0.24	$	0.12

Diluted	$	0.08	$	0.24	$	0.12

Since the merger was completed on February 11, 2004, and the results of TMBR have been included subsequent to that date, no pro-forma information for the three months ended June 30, 2004 is necessary.

3. Stock-based Compensation

At June 30, 2004, the Company had seven


	Page
PART I — Financial Information
ITEM 1. Financial Statements
Unaudited condensed consolidated balance sheets		3
Unaudited condensed consolidated statements of income		4
Unaudited condensed consolidated statement of changes in stockholders’ equity		5
Unaudited condensed consolidated statements of changes in cash flows		6
Notes to unaudited condensed consolidated financial statements		7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		25
ITEM 4. Controls and Procedures		25
Forward Looking Statements and Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995		26
PART II — Other Information
ITEM 1. Legal Proceeding		27
ITEM 2. Changes in Securities and Use of Proceeds		27
ITEM 4. Submission of Matters to a Vote of Security Holders		27
ITEM 6. Exhibits and Reports on Form 8-K		28
Signatures		30
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification of CEO & CFO Pursuant to Section 906
Restated Certificate of Incorporation
Amendment to Restated Certificate of Incorporation
Restricted Stock Agreement - Mark S. Siegel
Restricted Stock Agreement - Cloyce A. Talbott
Restricted Stock Agreement - A. Glenn Patterson
Restricted Stock Agreement - Kenneth N. Berns
Restricted Stock Agreement - Jonathan D. Nelson
Restricted Stock Agreement - John E. Vollmer III
Amendment to the Amended and Restated 1997 Long-Term Incentive Plan
Certication of Chief Executive Officer
Certication of Chief Financial Officer
Certification of CEO and CFO Pursuant to Section 906

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