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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22664
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PATTERSON ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2504748
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
P.O. BOX 1416, 4510 LAMESA HIGHWAY,
SNYDER, TEXAS
79550
(Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (915) 573-1104
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Securities Registered Pursuant to 12(b) of the Act: None
Securities Registered Pursuant to 12(g) of the Act:
(TITLE OF CLASS)
Common Stock, $.01 Par Value
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 if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 22, 1999 was $142,705,758, based
upon the average bid and asked prices of $4.66 and $4.69, respectively, on the
Nasdaq National Market.
As of March 22, 1999, the registrant had outstanding 32,471,132 shares of
common stock, $.01 Par Value, its only class of voting stock.
DOCUMENT INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III
of this Annual Report on Form 10-K: Definitive Proxy Statement for the
registrant's 1999 Annual Meeting of Stockholders.
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PART I
The "Company" or "Patterson" is used in this report to refer to Patterson
Energy, Inc. and its consolidated subsidiaries. The Company may from time to
time make written or oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and its reports to stockholders. Items 1 and 2 contain forward-looking
statements and are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, statements relating to the drilling and completion of wells, well
operations, utilization rates of drilling rigs, reserve estimates (including
estimates for future net revenues associated with such reserves and the present
value of such future net reserves), business strategies and other plans and
objectives of the Company's management for future operations and activities and
other such matters. The words "believes," "budgeted," "plans," "intends,"
"strategy," or "anticipates" and similar expressions identify forward-looking
statements. The Company does not undertake to update, revise or correct any of
the forward-looking information. Readers are cautioned that such forward-looking
statements should be read in conjunction with the Company's disclosures under
the heading: "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995" beginning on page 13.
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ALL NUMERICAL INFORMATION CONTAINED IN THIS REPORT RELATING TO THE
COMPANY'S COMMON STOCK REFLECTS THE TWO-FOR-ONE SPLITS OF THE COMPANY'S COMMON
STOCK EFFECTED IN JULY 1997 AND IN JANUARY 1998, RESPECTIVELY.
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
OVERVIEW
Patterson is one of the leading providers of domestic land drilling
services to major and independent oil and natural gas companies. Formed in 1978
and reincorporated in 1993 as a Delaware Corporation, the Company focuses its
operations primarily in Texas and southeast New Mexico. The Company currently
has a drilling fleet of 119 drilling rigs, 114 of which are currently operable.
The Company is also engaged in the development, exploration, acquisition and
production of oil and natural gas and, to a lesser extent, provides contract
drilling fluid services to other oil and natural gas operators.
CONTRACT DRILLING OPERATIONS. The Company has established a reputation for
reliable, high quality drilling equipment and well-trained crews. The Company
continually seeks to modify and upgrade its equipment to maximize the
performance and capabilities of its drilling rig fleet, which the Company
believes provides it with a competitive advantage. Additionally, the Company has
the in-house capability to design, manufacture, repair and modify its drilling
rigs. Of the Company's drilling rigs, 82 are capable of drilling to depths
greater than 10,000 feet, including 11 that are capable of drilling to depths
greater than 15,000 feet. During the fiscal year ended December 31, 1998, the
Company drilled 1,028 wells for 251 non-affiliated customers maintaining an
average utilization rate of 54%.
Over the past five years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1993, the Company has
increased its contract drilling fleet by 106 drilling rigs. From 1993 (prior to
giving effect to the 1996 merger with Tucker Drilling Company, Inc. which was
treated as a pooling of interests for financial accounting purposes) to 1998,
the Company's consolidated operating revenues increased from $25.0 million to
$187.0 million, and earnings before interest expense, income taxes,
depreciation, depletion and amortization (EBITDA) increased from $4.3 million to
$36.1 million.
OIL AND NATURAL GAS OPERATIONS. The Company's oil and natural gas
activities are designed to complement its land drilling operations and diversify
the Company's overall business strategy. These activities are primarily focused
in mature producing regions in the Austin Chalk Trend, the Permian Basin and
South Texas. Oil and natural gas operations comprised approximately 4% of the
Company's consolidated operating revenues for the year ended December 31, 1998.
At December 31, 1998, the Company's proved developed reserves were approximately
1.5 million BOE and had a present value (discounted at 10% before income taxes)
of estimated future net revenues of approximately $6.8 million. The industry's
significantly reduced
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commodity prices, primarily the price of crude oil, have had a negative impact
on the valuation of the Company's oil and natural gas reserves. For the year end
December 31, 1998, the Company incurred a $3.8 million impairment charge to its
oil and natural gas properties.
The Company's business strategy for its oil and natural gas operations is
to increase its oil and natural gas reserves primarily through developmental and
exploratory drilling in producing areas. Although Patterson from time to time
will participate through a working interest in exploratory drilling, the focus
of the Company's drilling activities for the foreseeable future will be
exploration and development drilling in the Austin Chalk Trend, the Permian
Basin of West Texas and Southeastern New Mexico and in South Texas.
DRILLING FLUID OPERATIONS. In addition, the Company also provides contract
drilling fluid services to numerous operators in the oil and natural gas
industry. Operating revenues derived from these activities constitute
approximately 7% of the Company's consolidated operating revenues. Patterson
believes that these contract services integrate well with its other core
operating activities. The drilling fluid operations were added by the Company
during the current fiscal year with its acquisition of Lone Star Mud, Inc.
during January 1998 and Tejas Drilling Fluids, Inc. in September 1998.
The Company's headquarters are located at 4510 Lamesa Highway, Snyder,
Texas, and its telephone number at that address is (915) 573-1104. The Company
also has small offices in Austin, Houston, Dallas, Midland, San Angelo, Corpus
Christi, Texas, and twelve yard facilities variously located in its areas of
operations.
BUSINESS STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
enhancing its position as a leading domestic land drilling contractor. The
principal components of this strategy are as follows:
STRONG INDUSTRY REPUTATION. The Company believes that it has a strong
reputation within its existing markets for providing well maintained equipment,
high quality service and experienced personnel. The Company intends to build on
existing customer relationships in each of its areas of operation by offering
technically sophisticated drilling equipment and providing quality service to
its customers with an emphasis on efficiency, dependability and safety.
HIGH QUALITY ASSET BASE. The Company's drilling rigs are maintained in good
operating condition through an established program of modifications and
upgrades. The Company believes that the quality and operating condition of its
drilling equipment allow it to maximize utilization rates and pricing.
CONTINUED GROWTH THROUGH ACQUISITION. The Company believes that attractive
acquisition opportunities continue to exist to further expand its drilling rig
fleet in its core geographic operating areas as well as into other areas.
Following an acquisition, the Company refurbishes the drilling rigs to the
Company's standards of quality and dependability.
EFFICIENT OPERATIONS. Based on publicly available information, the Company
believes that it had one of the most competitive ratios of EBITDA to revenues in
the U.S. land drilling industry during 1998. The Company has produced these
results from the combination of providing premium contract drilling services and
operating under an efficient cost structure. In addition, the Company has
achieved cost reductions and efficiencies through acquisition related synergies.
The Company uses its fleet of trucks and trailers to rig down, transport and rig
up its drilling rigs, which further increases efficiency by reducing the time
and costs associated with these ancillary operations.
RECENT ACQUISITIONS
On January 5, 1998, the Company acquired 100% of the outstanding stock of
Lone Star Mud, Inc. ("Lone Star"), a privately-owned, non-affiliated company
based in Midland, Texas. The purchase price of approximately $13.0 million
consisted of $1.4 million in cash, 571,328 shares of the Company's common stock
valued at $17.41 per share, the assumption of $1.6 million of debt and
approximately $3,300 of other direct costs incurred relative to the transaction.
Pursuant to certain terms of the Company's existing loan agreement
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with Norwest Bank Texas, N.A. ("Norwest"), the outstanding balance of the above
mentioned assumed debt was paid in full.
On February 6, 1998, the Company completed the merger of Robertson Onshore
Drilling Company ("Robertson") a privately-owned, non-affiliated, contract
drilling company based in Dallas, Texas, with and into Patterson Onshore
Drilling Company, a wholly-owned subsidiary of Patterson Drilling Company. The
purchase price of approximately $42.2 million was funded using cash on hand of
approximately $3.25 million, proceeds of $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. The
assets acquired consisted of 15 operable drilling rigs and a shop and yard
located in Liberty City, Texas.
On September 17, 1998, the Company acquired 100% of the outstanding stock
of Tejas Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated
company based in Corpus Christi, Texas for $3.5 million cash and approximately
$74,000 of other direct costs incurred relative to the transaction.
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from a non-affiliated entity based in South
Texas. The Company's consideration for the acquired assets included 800,000
unregistered shares of the Company's common stock valued at $4.00 per share and
an additional cash payment to be determined one year from the acquisition date.
The contingent cash payment will be based on the sales price of the Company's
common stock in January 2000. The payment may be as high as $880,000 or as low
as zero.
INDUSTRY SEGMENTS
The Company's revenues, operating profits and identifiable operating assets
are primarily attributable to three industry segments: (i) contract drilling,
(ii) oil and natural gas exploration, development, acquisition and production
and (iii) drilling fluids. The contract drilling segment operated at a profit
during each of the years in the three-year period ended December 31, 1998. The
oil and natural gas segment operated at a profit for the years ended December
31, 1996 and 1997 and at a loss for the year ended December 31, 1998. The
drilling fluids segment generated a profit for the year ended December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 14 of Notes to Consolidated Financial Statements included
as a part of Items 7 and 8, respectively, of this Report for financial
information pertaining to these industry segments.
CONTRACT DRILLING OPERATIONS
GENERAL. The Company markets its contract drilling services to major oil
companies and independent oil and natural gas producers. The Company owns 119
drilling rigs, 114 of which are currently operable. Currently, 99 of the
operable drilling rigs are based in Texas (60 in west Texas, 22 in south Texas,
12 in east Texas and five in north Texas), nine are based in southeast New
Mexico, five in Mississippi and one in Utah. The drilling rigs have rated
maximum depth capabilities ranging from 7,000 feet to 25,000 feet.
The drilling rigs are equipped with engines, drawworks or hoists, derricks
or masts, pumps to circulate the drilling fluid (mud), blowout preventers, drill
string (pipe) and related equipment. Depth of the well and drill site conditions
are the principal factors in determining the size and type of drilling rig used
for a particular job. The Company's drilling rigs are utilized for both
exploration and development drilling and can be used for either vertical or
horizontal drilling.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant
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importance to prospective customers. The Company has and will continue to strive
to maintain its drilling fleet in good working condition. In addition to normal
repair and maintenance expenses, the Company spends significant funds each year
on an ongoing program of modifying and upgrading its drilling rigs. The Company
also strives to employ experienced and dedicated drilling supervisors for its
various drilling rigs in the field. The Company intends to continue its ongoing
rig maintenance program and to continue to retain high quality, experienced
drilling supervisors in order to build upon its reputation in the market place.
In addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
DRILLING CONTRACTS. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other matters. The contracts obligate
the Company to pay certain operating expenses, including wages of drilling
personnel and maintenance expenses and to furnish incidental drilling rig
supplies and equipment. The contracts are subject to termination by the customer
on short notice, usually upon payment of a fee. The Company generally
indemnifies its customers against claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. These customers generally indemnify
the Company against claims arising from other surface and subsurface pollution,
except claims arising from the Company's gross negligence.
The contracts provide for compensation to the Company on a daywork, footage
or turnkey basis, or a combination thereof, with rates bid by the Company which
are dependent upon the anticipated complexity of drilling the well, the on-site
drilling conditions, the type of equipment to be used, the Company's estimate of
the risks involved and the estimated duration of the work to be performed, among
other considerations. All of the horizontal wells drilled by the Company have
been done either on a turnkey or footage basis to the point where the vertical
drilling ends and horizontal drilling begins, and on a daywork basis beyond that
point.
Under daywork contracts, the Company provides the drilling rig, including
the required personnel, to the operator who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the drilling rig is utilized. Daywork contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, the Company generally does not incur any costs
due to "in hole" losses (such as time delays for various reasons, including
stuck drill strings and blow-outs).
Footage contracts usually require the Company to bear some of the drilling
costs in addition to providing the drilling rig. Under a footage contract, the
Company would normally determine the manner of drilling and type of equipment to
be used, subject to certain customer specifications, and also would bear the
risk and expense of mechanical malfunctions, equipment shortages and other
delays arising from drilling problems. Compensation is based on a
rate-per-foot-drilled basis at completion of the well. Prices of both footage
and daywork contracts vary depending upon various factors such as the location,
depth, duration and complexity of the well to be drilled, operating conditions
and other factors peculiar to each proposed well.
Under turnkey contracts, the Company contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment and
services required. The Company bears the risk of drilling the well to the
contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because the Company assumes substantially
greater economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, the Company
could sustain substantial losses.
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The following table sets forth for each of the periods indicated the
approximate percentage of the Company's drilling revenues attributable to
daywork, footage and turnkey contracts:
YEAR ENDED
DECEMBER 31,
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TYPE OF REVENUES 1996 1997 1998
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Daywork..................................................... 52% 62% 64%
Footage..................................................... 40 35 24
Turnkey..................................................... 8 3 12
Contract drilling operations depend on the availability of drill pipe and
bits, fuel and qualified personnel, some of which have been in short supply from
time to time. As favorable buying opportunities arise, the Company stockpiles
bits and other drilling rig parts.
The Company's ability to drill wells for which it has contracts may be
delayed by inclement weather. Sustained periods of inclement weather may have a
material adverse effect on the Company's revenues and cash flows.
CONTRACT DRILLING ACTIVITY. The following table sets forth certain
information regarding the Company's contract drilling activity for each of the
years in the three year period ended December 31, 1998.
YEAR ENDED
DECEMBER 31,
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1996 1997 1998
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Number of wells drilled................................... 464 1,115 1,028
Average rigs available for service........................ 42 73 106
Average rig utilization rate(1)........................... 76% 89% 54%
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(1) Rig utilization is based on a 365-day year for rigs available for service
during the periods indicated. A rig is utilized when it is operating or
being moved, assembled or dismantled under contract.
CUSTOMERS. For the year ended December 31, 1998, the Company drilled wells
for 251 nonaffiliated customers. This compares with 193 nonaffiliated customers
for the year ended December 31, 1997. No single customer accounted for 10% or
more of the Company's consolidated operating revenues for the fiscal year ended
December 31, 1998. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company's operations.
The Company's customers in the past 12 months have included, among others,
Abraxas Production, Apache Corporation, ARCO Permian, Burlington Resources Oil &
Gas Company, Chevron U.S.A., Cobra Oil and Gas, Costilla Petroleum, Louis
Dreyfuss Natural Gas Company, Enron Oil & Gas Company, Mitchell Energy
Corporation, Oryx Energy, Santa Fe Energy and Union Pacific Resources, Co.
As of December 31, 1998 the Company was drilling a total of 17 wells, none
of which were being drilled for affiliated parties.
DRILLING RIGS AND RELATED EQUIPMENT. The following table provides certain
information concerning the drilling rigs owned by the Company to date:
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC
------------------ ---------- ---------------
7,000 to 10,000....................................... 37(1) --
10,001 to 15,000...................................... 64 7
15,001 to 25,000...................................... 7(2) 4
--- --
Totals...................................... 108 11
=== ==
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(1) Includes 4 inoperable rigs.
(2) Includes 1 inoperable rig.
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The Company owns 101 trucks and 137 trailers. This equipment is used to rig
down, transport and rig up the Company's drilling rigs which minimizes the
Company's dependency upon third parties for these ancillary services and further
enhances the efficiency of the Company's contract drilling operations.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities variously located in Texas and New
Mexico. The Company believes that its operable drilling rigs and related
equipment are in good operating condition. In addition to normal repair and
maintenance expenses, the Company historically has spent significant funds for
its ongoing program of modifying and upgrading its equipment.
OIL AND NATURAL GAS OPERATIONS
GENERAL. The Company has been engaged in the development, exploration,
acquisition and production of oil and natural gas since 1982. The Company's oil
and natural gas activities have been designed to complement its land drilling
operations and are primarily concentrated in three operating areas of Texas: (i)
the Austin Chalk Trend, (ii) the Permian Basin and (iii) South Texas.
The Company's strategy for its oil and natural gas operations is to
increase its reserve base primarily through development drilling, as well as
selected acquisitions of leasehold acreage and producing properties. At December
31, 1998, the Company was the operator of 130 wells, of which it was the
drilling contractor for 122 wells.
OIL AND NATURAL GAS RESERVES. The Company engaged M. Brian Wallace, P.E.
Dallas, Texas, an independent petroleum engineer, to estimate the Company's
proved developed reserves, projected future production and estimated future net
revenues from production of proved developed reserves on its properties as of
December 31, 1996, 1997 and 1998. Mr. Wallace's estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. In determining the estimates of the
reserve quantities that are economically recoverable, Mr. Wallace used oil and
natural gas prices and estimated average development and production costs
provided by the Company.
The following table sets forth information as of the end of each of the
years in the three year period ended December 31, 1998 derived from the reserve
reports of Mr. Wallace. The present values (discounted at 10% before income
taxes) of estimated future net revenues shown in the table are not intended to
represent the current market value of the estimated oil and natural gas reserves
owned by the Company. For further information concerning the present value of
estimated future net revenue from these proved developed reserves, see Note 16
of Notes to Consolidated Financial Statements included as a part of Item 8 of
this Report.
AS OF DECEMBER 31,
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1996 1997 1998
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(IN THOUSANDS)
Proved Developed Reserves:
Oil (Bbls).......................................... 1,062 945 946
Gas (Mcf)........................................... 7,627 3,788 3,490
Total (BOE)......................................... 2,333 1,576 1,528
Estimated future net revenue before income taxes.... $25,637 $15,012 $9,232
Present value of estimated future net revenues
before income taxes, discounted at 10%............ $17,893 $11,422 $6,770
The reserve data set forth above represents only estimates. The estimates
are based on various assumptions and, therefore, are inherently imprecise.
Actual future production, revenues, taxes, production costs and development
costs may vary substantially from those assumed in the estimates. Any
significant variance could materially affect the estimates set forth in this
Form 10-K. In addition, the reserve data may be subject to upward or downward
revisions depending upon, among other factors, production history and prevailing
oil and natural gas prices. Oil and natural gas prices have fluctuated widely in
recent years. There is no assurance that prices will be higher or lower than
prices used in estimating the Company's reserves.
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PRODUCTION. The Company's wells in the Austin Chalk Trend and South Texas
primarily produce natural gas and in the Permian Basin primarily produce oil.
The following table sets forth the Company's net oil and natural gas production,
average sales price and average production (lifting) costs associated with such
production during the periods indicated.
YEAR ENDED DECEMBER 31,
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1996 1997 1998
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Average net daily production:
Oil (Bbls).......................................... 641 1,159 835
Gas (Mcf)........................................... 4,586 4,024 2,742
Total (BOE)......................................... 1,406 1,830 1,292
Average sales prices:
Oil (per Bbl)....................................... $20.99 $17.86 $12.16
Gas (per Mcf)....................................... 2.01 2.19 1.93
Average production (lifting) costs (per BOE)........ $ 3.91 $ 3.41 $ 4.08
PRODUCTIVE WELLS. The following table sets forth information regarding the
number of productive wells in which the Company held a working interest as of
December 31, 1998. One or more completions in the same well bore are counted as
one well.
PRODUCTIVE
WELLS
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GROSS NET
----- ---
Oil......................................................... 185 56.56
Gas......................................................... 56 4.73
--- -----
Total.................................................. 241 61.29
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DEVELOPED AND UNDEVELOPED ACREAGE. The following table sets forth the
developed and undeveloped acreage in which the Company owned a working or
leasehold interest as of December 31, 1998:
DEVELOPED UNDEVELOPED
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LOCATION GROSS NET GROSS NET
-------- ----- --- ----- ---
Austin Chalk Trend and South Texas.......................... 34,118 6,260 89,330 22,459
Permian Basin............................................... 24,275 3,150 37,390 7,994
------ ----- ------- ------
Total.................................................. 58,393 9,410 126,720 30,453
====== ===== ======= ======
Many of the leases summarized in the table above as undeveloped acreage
will expire at the end of their respective primary terms unless production has
been obtained from the acreage subject to the lease prior to that date, in which
event the lease will remain in effect until the cessation of production. The
following table sets forth the gross and net acres subject to leases summarized
in the table of undeveloped acreage that will expire.
LEASE ACRES EXPIRING
--------------------
GROSS NET
----- ---
PERIOD ENDING:
December 31, 1999....................................... 35,397 6,767
December 31, 2000....................................... 40,485 8,901
December 31, 2001 and later............................. 50,838 14,785
------- ------
Total.............................................. 126,720 30,453
======= ======
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DRILLING ACTIVITIES. The following table set forth the results of the
Company's participation in the drilling of development and exploratory wells
during each of the years ended December 31, 1996, 1997 and 1998.
DEVELOPMENT WELLS EXPLORATORY WELLS
------------------------------- ------------------------------
PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
-------------- ------------- ------------- -------------
YEAR ENDED DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
----------------------- ----- --- ----- --- ----- --- ----- ---
1996...................................... 29 4.35 16 3.87 1 .16 6 1.00
1997...................................... 24 5.44 8 1.53 7 1.13 15 3.06
1998...................................... 23 4.45 6 1.74 3 .55 13 2.16
-- ----- -- ---- -- ---- -- ----
Total................................ 76 14.24 30 7.14 11 1.84 34 6.22
== ===== == ==== == ==== == ====
MARKETING OF CRUDE OIL AND NATURAL GAS. Crude oil is sold based upon 30-day
automatically renewable contracts with oil purchasers. Prices vary as world oil
prices fluctuate. Due to competitive conditions, the Company does not believe
that the loss of any one of its major crude oil purchasers would have a material
adverse effect on its business. The Company markets oil produced from Company
operated wells through a wholly-owned subsidiary. A company owned in part by the
son of Cloyce A. Talbott, the Company's Chairman and Chief Executive Officer, is
a first purchaser of substantially all of the oil produced from Company-operated
leases. See Note 18 of Notes to Consolidated Financial Statements included as a
part of Item 8 of this Report.
Most of the Company's natural gas is sold through third-party natural gas
brokers at spot market prices and is transported to market by interstate
pipelines. Contracts with these brokers are currently for less than five years
and allow for prices to adjust to the marketplace. The Company believes that
because of the competitive nature of the industry today, the loss of any one of
its natural gas purchasers would not have a material adverse effect on its
business. While the Company has not experienced any inability to market its
natural gas, if transportation space in the pipelines is restricted or is
unavailable, the Company's cash flow could be adversely affected.
No customer for oil and natural gas accounted for more than 10% of the
Company's consolidated revenues for the year ended December 31, 1998.
TITLE TO OIL AND NATURAL GAS PROPERTIES. Title to the Company's oil and
natural gas properties is subject to royalty, overriding royalty, carried
working, and other similar interests and cost sharing arrangements customary in
the oil and natural gas industry (including farmout agreements, operating
agreements and joint venture arrangements), liens for current taxes not yet due,
and to other minor defects and encumbrances. The Company believes that such
burdens do not materially detract from the value of such properties or from the
Company's interest therein or materially interfere with the operation of the
Company's business.
As is customary in the oil and natural gas industry in the case of
undeveloped properties, an in-house title review is made prior to or at the time
of acquisition. More comprehensive title investigations, including in most cases
receipt of a title opinion of legal counsel, are generally made before
commencement of drilling operations on undeveloped properties and also are
generally made before consummation of an acquisition of developed properties.
COMPETITION
CONTRACT DRILLING OPERATIONS. The contract drilling industry is highly
competitive. Price is generally the most important competitive factor in the
drilling industry. Other competitive factors include the availability of
drilling equipment and experienced personnel at or near the time and place
required by customers, the reputation of the drilling contractor in the drilling
industry and its relationship with existing customers. The Company believes that
it competes favorably with respect to all of these factors. Competition is
usually on a regional basis, although drilling rigs are mobile and can be moved
from one region to another in response to increased demand. An oversupply of
drilling rigs in any region may result. Demand for land drilling equipment is
also dependent on the exploration and development programs of oil and natural
gas companies, which are in
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turn influenced primarily by the financial condition of such companies, by
general economic conditions, by prices of oil and natural gas and, from time to
time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of the Company, some of which have substantially greater resources and longer
operating histories than the Company. Also, in recent years, many drilling
companies have consolidated or merged with other companies. Although this
consolidation has decreased the total number of competitors, management of the
Company believes that competition for drilling contracts will continue to be
intense for the foreseeable future.
OIL AND NATURAL GAS OPERATIONS. There is substantial competition for the
acquisition of oil and natural gas leases suitable for exploration and for the
hiring of experienced personnel. The Company's competitors in oil and natural
gas exploration, development and production include major integrated oil and
natural gas companies, numerous independent oil and natural gas companies,
drilling and production purchase programs and individual producers and
operators. The ability of the Company to increase its holdings of oil and
natural gas reserves in the future is directly dependent upon the Company's
ability to select, acquire and develop suitable prospects in competition with
these companies. Many competitors have financial resources, staffs, facilities
and other resources significantly greater than those of the Company.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and natural gas wells is subject to numerous
state and federal laws, rules and regulations. State statutory provisions
relating to oil and natural gas generally include requirements as to well
spacing, waste prevention, production limitations, disposal of produced waters,
pollution prevention and clean-up, obtaining drilling permits and similar
matters. Within the state of Texas, where substantially all of the Company's
operations are currently conducted, these regulations are principally enforced
by the Texas Railroad Commission. To date, the Company has not been required to
expend significant resources in order to satisfy applicable environmental laws
and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or extraordinary expenditures
associated with compliance with environmental rules and regulations in the
foreseeable future. However, compliance costs under existing laws or under any
new requirements could become material and the Company could incur liability for
noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental hazards which would
materially affect its operations.
The contract drilling industry is dependent on demand for services from the
oil and natural gas exploration industry and, accordingly, is affected by
changing tax laws, price controls and other laws relating to the energy business
generally. The Company's business is affected generally by political
developments and by federal, state, foreign and local laws and regulations,
which relate to the oil and natural gas industry. The adoption of laws and
regulations affecting the oil and natural gas industry for economic,
environmental and other policy reasons could increase costs relating to drilling
and production, which could have an adverse effect on the Company's operations.
Several state and federal environmental laws and regulations currently apply to
the Company's operations and may become more stringent in the future. Although
the Company has utilized operating and disposal practices that were or are
currently standard in the industry, hydrocarbons and other materials may have
been disposed of or released in or under properties currently or formerly owned
or operated by the Company or its predecessors in interest. In addition, some of
these properties have been operated by third parties over whom the Company has
no control as to such entities' treatment of hydrocarbon and other materials an
the manner in which such materials may have been disposed of or released. The
federal Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986
(collectively, "CERCLA"), and comparable state statutes impose strict liability
on owners and operators of sites and on persons who disposed of or arranged for
the disposal of "hazardous substances" found at sites. The federal Resource
Conservation and Recover Act ("RCRA") and comparable state statutes govern the
disposal of "hazardous wastes." Although CERCLA currently excludes petroleum
from the definition of "hazardous substances," and RCRA also excludes certain
classes of exploration and production wastes from regulation, such exemptions by
Congress under both CERCLA and RCRA may be deleted, limited or modified in the
future. If such changes are made to
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CERCLA and/or RCRA, the Company could be required to remove and remediate
previously disposed of materials (including materials disposed of or released by
prior owners or operators) from properties (including ground water contaminated
with hydrocarbons) and to perform removal or remedial actions to prevent future
contamination.
The Federal Water Pollution Control Act ("FWPCA") and the Oil Pollution Act
of 1990 ("OPA") and implementing regulations govern the prevention of
discharges, including oil and produced water spills, and liability for damages
into waters. The OPA is more comprehensive and stringent than previous oil
pollution liability and prevention laws and imposes strict liability for a
comprehensive and expansive list of damages from an oil spill into waters from
facilities. Liability may be imposed for oil removal costs and a variety of
public and private damages. Penalties may also be imposed for violation of
federal safety, construction and operating regulations, and for failure to
report a spill or to cooperate fully in a clean-up. The OPA also expands the
authority and capability of the federal government to direct and manage oil
spill clean-up and operations, plus requires operators to prepare oil spill
response plans in cases where it can reasonably be expected that substantial
harm will be done to the environment by discharges on or into navigable waters.
The Company has spill protection control countermeasure (SPCC) plans in place
for its oil and natural gas properties in each of the areas in which it
operates. Failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to civil or criminal
actions. Although the liability for owners and operators is the same under the
FWPCA, the damages recoverable under the OPA are potentially much greater and
can include natural resource damages.
The operations of the Company are also subject to federal, state and local
regulations for the control of air emissions. The federal Clean Air Act ("CAA"),
as amended, and various state and local laws impose certain air quality
requirements on the Company. Amendments to the CAA revised the definition of
"major source" such that emissions from both wellhead and associated equipment
involved in oil and gas production may be added to determine if a source is a
"major source." As a consequence, more facilities may become major sources and
thus would be required to obtain operating permits. This permitting process may
require capital expenditures in order to comply with permit limits.
RISKS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including blow-outs, cratering, fires and explosions. These
hazards could cause personal injury or death, suspend drilling operations or
seriously damage or destroy the equipment involved and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damage to the environment, including property contamination
in the form of either soil or ground water contamination, could also result from
the Company's operations, particularly through oil or produced water spillage,
natural gas leaks and extensive, uncontrolled fires. In addition, the Company
could become subject to liability for reservoir damages. The occurrence of a
significant event, including pollution or environmental damages, could
materially affect the Company's operations and financial condition. As a
protection against operating hazards, the Company maintains insurance coverage
considered by the Company to be adequate, including all-risk physical damages,
employer's liability, commercial general liability and workers compensation
insurance. The Company currently has general liability insurance of $2.0 million
per occurrence with an aggregate of $2.0 million and excess liability and
umbrella coverage's of up to $50.0 million per occurrence with a $50.0 million
aggregate. The Company's customers generally require the Company to have at
least $1.0 million of third party liability coverage. Since April 1, 1992, the
Company has carried workers' compensation insurance, with a deductible of
$100,000 per occurrence. If multiple workers' compensation claims are filed, the
Company could incur significant expenses, which in turn could have a material
adverse impact on its financial condition and operations.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect the Company against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment. The Company also carries insurance to cover physical damage to or
loss of its drilling rigs; however, it does not carry insurance against loss of
earnings resulting from such damage or loss. In view of the difficulties that
may
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be encountered in renewing such insurance at reasonable rates, no assurance can
be given that the Company will be able to maintain the type and amount of
coverage that it considers adequate at reasonable rates or that any particular
types of coverage will be available.
EMPLOYEES
The Company employed approximately 1,202 full-time persons (83 office
personnel and 1,119 field personnel) at December 31, 1998. The number of
drilling rig employees will fluctuate depending upon the number of operable
drilling rigs and the demand for contract drilling services. The Company
considers its employee relations to be satisfactory. None of the Company's
employees are represented by a union.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings arising in the normal
course of its business. Management of the Company does not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to the future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for oil and natural gas. In recent years, oil and natural gas
prices and, therefore, the level of drilling, exploration, development and
production, have been extremely volatile. Prices are affected by market supply
and demand factors as well as actions of state and local agencies, the U.S. and
foreign governments and international cartels. All of these factors are beyond
the control of the Company. Any significant or extended decline in oil and/or
natural gas prices will have a material adverse effect on the Company's
financial condition and operations and could impair access to sources of
capital. The price of oil rose to a six-year high of $25.75 per barrel in
January 1997, and fell to a low since then of $8.60 per barrel in December 1998.
These low level oil prices have materially adversely impacted the Company's
operations. See "Market Conditions for Contract Drilling Services," below.
Should oil prices remain at these levels or continue to decline or natural gas
prices decline, the Company's operations would be further adversely affected.
MARKET CONDITIONS FOR CONTRACT DRILLING SERVICES. The contract drilling
business experienced increased demand for drilling services from 1995 through
the third quarter of 1997 due to stronger oil and natural gas prices. However,
except for that period and other occasional upturns, the market for onshore
contract drilling services has generally been depressed since mid-1982. Since
this time and except during the occasional upturns, there have been
substantially more drilling rigs available than necessary to meet demand in most
operating and geographic segments of the domestic drilling industry. As a
result, drilling contractors have had difficulty sustaining profit margins. In
addition to adverse effects that future declines in demand could have on the
Company, ongoing movement or reactivation of onshore drilling rigs or new
construction of drilling rigs could adversely affect rig utilization rates and
pricing, even in an environment of stronger oil and natural gas prices and
increased drilling activity. The Company cannot predict either the future level
of demand for its contract drilling services or future conditions in the
contract drilling industry. The Company's rig utilization rate reached an all
time high of approximately 91.5% in the third quarter of 1997 and fell to a low
since then of 29% during December 1998 due to low oil prices.
SUBSTANTIAL BANK DEBT -- IMPACT OF DEPRESSED OIL AND NATURAL GAS PRICES ON
ABILITY TO MAKE LOAN PAYMENTS AND TO SATISFY LOAN COVENANTS. The Company has a
bank term loan with a remaining principal balance of $55.7 million at December
31, 1998. All of the Company's contract drilling rigs and all of its oil and
natural gas properties are pledged as collateral on the loan and the remainder
of its assets are subject to a negative pledge. The loan is payable in monthly
principal installments of $714,286 until January 1, 2001, when the loan matures
and the then remaining principal balance and accrued interest becomes due and
payable. The loan agreement contains a number of covenants including financial
covenants, the failure of which to satisfy could at the bank's election cause
acceleration of the maturity date of the loan and require immediate
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repayment. At December 31, 1998, the Company was in violation of one of the loan
covenants which required positive net income. The bank waived the breach of this
covenant and agreed to replace the covenant with an earnings before interest
expense, income taxes, depreciation, depletion and amortization to interest
expense covenant. Failure of the Company to meet this amended covenant or any of
the other covenants could at the bank's election cause the maturity date of the
loan to be accelerated and become immediately due and payable. Failure of the
Company to pay the loan principal and interest could result in foreclosure on
the drilling rigs and oil and natural gas properties. The Company believes it
has sufficient working capital to pay monthly principal and interest payments
under the loan for at least the next 12 months without improvement in commodity
prices. The ability to meet the various loan covenants without improvement in
commodity prices could be more difficult.
FLUCTUATIONS IN SHORTAGES OF DRILL PIPE IN THE CONTRACT DRILLING
INDUSTRY. The increase in domestic drilling demand from mid-1995 through the
third quarter of 1997 and related increase in contract drilling activity
resulted in a shortage of drill pipe in the industry. This shortage caused the
price of drill pipe to increase significantly and required that orders for new
drill pipe be placed one year in advance. A return to higher demand levels for
contract drilling services could reinstate the problems associated with drill
pipe shortages.
RECENT RAPID GROWTH; ASSOCIATED RISKS. The Company has experienced rapid
and substantial growth over the past four years and, if favorable opportunities
arise in the future, intends to further expand its drilling fleet through
selected acquisitions. Continued growth could strain the Company's management,
operations, employees and resources. There can be no assurance that the Company
will be able to manage growth effectively or that it will be successful in
maintaining the market share attributable to operable drilling rigs acquired by
the Company. If the Company is unable to manage its growth, its business,
results of operations or financial condition could be materially adversely
affected.
NO ASSURANCE OF ADDITIONAL GROWTH THROUGH ACQUISITIONS. The Company's
growth has been enhanced materially by strategic acquisitions that have
substantially increased the Company's drilling rig fleet. Although the land
drilling industry has experienced significant consolidation over the past couple
of years, the Company believes that significant acquisition opportunities are
still available. However, there can be no assurance that suitable acquisition
candidates can be found, and the Company is likely to continue to face
competition from other companies for available acquisition opportunities. In
addition, if the prices paid by buyers of drilling rigs remain at current levels
or continue to rise, the Company may find fewer acceptable acquisition
opportunities. There can be no assurance that the Company will have sufficient
capital resources to complete acquisitions, that acquisitions can be completed
on terms acceptable to the Company or that any completed acquisition would
improve the Company's financial condition, results of operations, business or
prospects in any material manner.
FLUCTUATIONS IN AVAILABILITY OF QUALIFIED DRILLING RIG PERSONNEL. The
increase in domestic drilling demand from mid-1995 through the third quarter of
1997 and related increase in contract drilling activity resulted in a shortage
of qualified drilling rig personnel in the industry. This increase adversely
impaired the Company's ability to attract and retain sufficient qualified
personnel and to market and operate its drilling rigs. Further, the labor
shortages resulted in wage increases, which impacted the Company's operating
margins. A return to higher demand levels for contract drilling services could
reinstate the problems associated with labor shortages.
RELIANCE ON KEY PERSONNEL. The Company is highly dependent upon its
executive officers and key employees. The unexpected loss of the services of any
of these individuals, particularly Cloyce A. Talbott or A. Glenn Patterson, the
Chief Executive Officer and the President of the Company, respectively, could
have a detrimental effect on the Company. The Company has no employment
agreements with any of its executive officers. The Company maintains key man
insurance on the lives of Messrs. Talbott and Patterson in the amount of $3
million each.
COMPETITION. The Company encounters intense competition in its contract
drilling operations from other drilling contractors. The competitive environment
for contract drilling services involves such factors as drilling rates,
availability and condition of drilling rigs and equipment, reputation and
customer relations. Many of the
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competitors in each of the Company's lines of business have substantially
greater financial and other resources than the Company.
OPERATING HAZARDS AND UNINSURED RISKS. Contract drilling and oil and
natural gas activities are subject to a number of risks and hazards which could
cause serious injury or death to persons, suspension of drilling operations and
serious damage to equipment or property of others and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of toxic
gases or extensive uncontrolled fires. In addition, the Company could become
subject to liability for reservoir damages. The occurrence of a significant
event, including pollution or environmental damage, could materially affect the
Company's operations and financial condition. Although the Company believes that
it is adequately insured against normal and foreseeable risks in its operations
in accordance with industry standards, such insurance may not be adequate to
protect the Company against liability from all consequences of well disasters,
extensive fire damage or damage to the environment. No assurance can be given
that the Company will be able to maintain adequate insurance in the future at
rates it considers reasonable or that any particular types of coverage will be
available. Furthermore, a portion of the Company's contract drilling is done on
a turnkey basis, which involves substantial economic risks. Under turnkey
drilling contracts, the Company contracts to drill a well to a contract depth
under specified conditions for a fixed price. The risks to the Company under
this type of drilling contract are substantially greater than on a well drilled
on a daywork or footage basis since the Company assumes most of the risks
associated with the drilling operations generally assumed by the operator of the
well in a daywork or footage contract, including risk of blowout, machinery
breakdowns and abnormal drilling conditions. Accordingly, if severe drilling
problems are encountered in drilling wells under a turnkey contract, the Company
could suffer substantial losses associated with that contract. For the years
ended December 31, 1997 and 1998, the percentage of the Company's contract
drilling revenues attributable to turnkey contracts was 3.0% and 12.0%,
respectively.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION MATTERS. The Company's
operations are subject to numerous domestic laws and regulations that relate
directly or indirectly to the drilling of oil and natural gas wells, including
laws and regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have generally become more stringent in recent years,
and may in certain circumstances impose strict liability, rendering a person
liable for environmental damage without regard to negligence or fault on the
part of such person. To date, the Company has not been required to expend
significant resources in order to comply with applicable environmental laws and
regulations nor has it incurred any fines or penalties for noncompliance.
However, compliance costs under existing legal requirements and under any new
requirements could become material, and the Company could incur liability in the
future for noncompliance. Additional matters subject to governmental regulation
include discharge permits for drilling operations, performance bonds, reports
concerning operations, spacing of wells, unitization and pooling of properties,
disposal of produced water and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas.
------------------------------
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $0.01 per share is publicly traded on
the Nasdaq National Market and is quoted under the symbol "PTEN."
The following table sets forth the high and low sales prices of the
Company's common stock for the periods indicated:
HIGH LOW
---- ---
1997:
First quarter............................................... $ 8.75 $5.50
Second quarter.............................................. 11.69 6.63
Third quarter............................................... 26.56 11.13
Fourth quarter.............................................. 32.63 14.38
1998:
First quarter............................................... $20.00 $8.88
Second quarter.............................................. 15.63 9.25
Third quarter............................................... 10.06 4.06
Fourth quarter.............................................. 7.00 3.44
As of March 22, 1999, there were approximately 408 holders of record
(approximately 18,000 beneficial holders) of the Company's common stock.
The Company has not declared or paid cash dividends on its common stock in
the past and does not expect to declare or pay any cash dividends on its common
stock in the foreseeable future. The Company instead intends to retain its
earnings to support the operations and growth of its business. Any future cash
dividends would depend on future earnings, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of Directors.
The following subparagraph sets forth information concerning equity
securities sold by the Company during 1998 but not registered under the
Securities Act of 1993, as amended (the "Act"):
During January 1998, the Company issued a total of 571,328 shares of its
Common Stock valued at $17.41 per share as partial consideration for the
acquisition of 100% of the outstanding stock of Lone Star Mud, Inc. See Items 1
and 2, "Business and Properties -- Recent Acquisitions," for additional
information. No underwriter was involved in the transaction and no sales
commissions, fees or similar compensation were paid to any person in connection
with the issuance of the shares. The Company believes that the issuance of the
shares was exempt from the registration requirements of Section 5 of the Act by
virtue of Rule 506 under Regulation D of the Act.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company as of December 31,
1994, 1995, 1996, 1997 and 1998 and for each of the five years then ended were
derived from the consolidated financial statements of the Company which have
been audited by PricewaterhouseCoopers LLP, independent accountants. This
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes thereto, included as Items 7 and 8,
respectively, of this Report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
INCOME STATEMENT DATA:
Operating revenues:
Drilling..................................... $54,823 $57,599 $73,590 $178,332 $165,997
Oil and natural gas.......................... 4,707 6,845 10,118 12,445 7,170
Drilling fluids.............................. -- -- -- -- 13,397
------- ------- ------- -------- --------
Total..................................... 59,530 64,444 83,708 190,777 186,564
------- ------- ------- -------- --------
Operating costs and expenses:
Drilling..................................... 43,036 46,505 59,564 128,416 128,838
Oil and natural gas.......................... 2,654 2,669 3,465 4,402 3,676
Drilling fluids.............................. -- -- -- -- 10,205
Impairment of oil and natural gas
properties................................ -- 159 549 355 3,816
Depreciation, depletion and amortization..... 4,912 7,523 9,960 17,497 28,091
General and administrative................... 4,793 5,063 5,416 6,786 9,313
------- ------- ------- -------- --------
Total..................................... 55,395 61,919 78,954 157,456 183,939
------- ------- ------- -------- --------
Operating income............................... 4,135 2,525 4,754 33,321 2,625
------- ------- ------- -------- --------
Other income (expense)......................... 679 (111) (2,737) 1,787 (2,857)
------- ------- ------- -------- --------
Income (loss) before income taxes.............. 4,814 2,414 2,017 35,108 (232)
Income tax expense (benefit)................... (193) (787) (2,254) 12,866 93
------- ------- ------- -------- --------
Net income (loss).............................. $ 5,007 $ 3,201 $ 4,271 $ 22,242 $ (325)
======= ======= ======= ======== ========
Net income (loss) per common share:
Basic........................................ $ 0.31 $ 0.18 $ 0.22 $ 0.78 $ (0.01)
======= ======= ======= ======== ========
Diluted...................................... $ 0.31 $ 0.18 $ 0.21 $ 0.75 $ (0.01)
======= ======= ======= ======== ========
Weighted average number of common shares
outstanding:
Basic........................................ 16,120 17,517 19,167 28,492 31,645
======= ======= ======= ======== ========
Diluted...................................... 16,120 18,082 20,086 29,505 31,645
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Total assets................................... $49,509 $62,991 $87,913 $203,200 $236,605
Notes payable.................................. 6,886 13,816 25,849 23,250 55,714
Stockholders' equity........................... 30,310 37,656 43,482 146,932 156,852
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Item 7 contains forward-looking statements, which are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These statements include, without limitation, statements relating to
liquidity, financing of operations, continued volatility of oil and natural gas
prices, source and sufficiency of funds required for capital needs and
additional rig acquisitions (if further opportunities arise), future utilization
of net operating loss carryforwards, impact of inflation on the
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Company's financial position and on the Company's earnings per share, and other
such matters. The words "believes," "budgeted," "expects" or "estimates" and
similar expressions identify forward-looking statements. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Readers are cautioned that such forward-looking statements should be read in
conjunction with the Company's disclosures under the heading: "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995" beginning on page 13.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of approximately
$31.0 million and cash and cash equivalents of approximately $9.0 million as
compared to working capital of approximately $46.5 million and cash and cash
equivalents of approximately $23.3 million as of December 31, 1997. The decrease
in the Company's working capital at December 31, 1998 was largely attributable
to cash expended by the Company related to acquisitions completed during fiscal
year 1998. Approximately $8.7 million of the aggregate $58.8 million purchase
price for the related acquisitions was funded using cash on hand at the
respective dates of acquisition. In addition, the Company assumed approximately
$3.4 million of debt, which was paid in full using cash on hand immediately
following the consummation of such acquisitions and made an $8.0 million payment
to the Internal Revenue Service for the Company's estimated Federal tax
liability. For the year ended December 31, 1998, the Company generated net cash
from operations of approximately $30.0 million, received proceeds of
approximately $299,000 from the exercise of stock options, sold property and
equipment for proceeds of approximately $1.4 million, received approximately
$566,000 from the sale of investment securities and borrowed $40.2 million under
a then existing credit facility. These funds were used primarily to acquire
drilling rigs, related equipment and associated intangible assets of
approximately $45.5 million, to provide certain necessary refurbishment of
approximately $26.4 million to the Company's operable drilling fleet, to reduce
certain notes payable by approximately $7.7 million and to fund leasehold
acquisition, exploration and development of approximately $7.7 million.
On January 5, 1998, the Company completed the acquisition of Lone Star Mud,
Inc. ("Lone Star"), a privately-owned, non-affiliated company based in Midland,
Texas for a purchase price of approximately $13.0 million consisting of $1.4
million in cash, 571,328 shares of the Company's common stock valued at $17.41
per share, which was the market price on the acquisition date, the assumption of
$1.6 million of debt and approximately $3,300 of direct costs incurred related
to the acquisition. Lone Star is a provider of drilling fluids to the oil and
natural gas industry. Management of the Company viewed the acquisition as an
opportunity to enter into a related segment of the oilfield service industry,
which would integrate well with the Company's existing operations.
On February 6, 1998, the Company completed its merger with Robertson
Onshore Drilling Company ("Robertson"), a privately-owned, non-affiliated
contract drilling company based in Dallas, Texas. The purchase price of $42.2
million consisted of $3.25 million in cash, $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. As a
result of the merger, the Company acquired 15 operable drilling rigs, increasing
the Company's rig fleet to 114 drilling rigs, and a shop and yard located in
Liberty City, Texas.
On September 17, 1998, the Company completed the acquisition of Tejas
Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated company based
in Corpus Christi, Texas for a purchase price of approximately $3.5 million cash
and approximately $74,000 of direct costs incurred related to the acquisition.
Tejas is a provider of drilling fluids to the oil and natural gas industry with
its primary focus of operations in the south Texas region.
At May 31, 1998, the Company's existing $70.0 million line of credit with
Norwest Bank Texas, N.A. ("Norwest") converted to a term note with a maturity
date of January 1, 2001 with a seven-year, level-principal amortization. The
note bears interest at the 30-day LIBOR rate plus 2.375%. At the time of
conversion, the Company had drawn $60.0 million under the available credit
facility. The Company is currently making monthly principal and interest
payments of approximately $1.1 million as required by the underlying agreement
until its maturity at January 1, 2001.
18
19
At December 31, 1998, the Company was in violation of the positive net
income covenant provision of such credit agreement. The Company obtained a
waiver of such violation from Norwest as of December 31, 1998. In addition, the
credit agreement was further amended to replace the positive net income covenant
with an earnings before interest expense, income taxes, depreciation, depletion
and amortization (EBITDA) to quarterly interest expense provision. The Company
must maintain on a quarterly basis an EBITDA to interest expense of at least
2.25 to 1.0. Although there can be no assurances, management does not anticipate
a future violation of such covenant.
Management believes that the current level of cash and short-term
investments, together with cash generated from operations should be sufficient
to meet the Company's immediate capital needs. From time to time, the Company
reviews acquisition opportunities relating to its business. The timing, size or
success of any acquisition and the associated capital commitments are
unpredictable. Should further opportunities for growth requiring capital arise,
the Company believes it would be able to satisfy these needs through a
combination of working capital, cash from operations, and either debt or equity
financing. However, there can be no assurance that such capital would be
available.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, contract drilling revenues were
approximately $166.0 million as compared to $178.3 million for the same period
in 1997, a decrease of approximately 7%. Average rig utilization was 54% on an
average of 106 rigs available for service for the year ended December 31, 1998
as compared to 89% on an average of 73 rigs available for service for the twelve
months ended December 31, 1997. Direct drilling costs were $128.8 million or 78%
of drilling revenues for the year ended December 31, 1998, while direct drilling
costs were $128.4 million or 72% of related drilling revenues for 1997. General
and administrative expense for the contract drilling operations was
approximately $6.1 million for the year ended December 31, 1998 as compared to
approximately $5.4 million in 1997. The increase in general and administrative
expense was largely attributable to additional expense associated with the
administrative offices of Lone Star Mud Company and Robertson Onshore Drilling
Company acquired by the Company during January and February 1998, respectively.
The administrative responsibilities of the Robertson Onshore operations were
terminated during July 1998 and absorbed by the Company's personnel in Snyder,
Texas. Depreciation and amortization expense for the contract drilling segment
increased from $12.5 million for the year ended December 31, 1997 to
approximately $22.4 million for the same twelve-month period in 1998. The
increase in depreciation and amortization expense was largely attributable to
the increased number of drilling rigs added by acquisitions completed during
fiscal years 1997 and 1998. For the twelve months ended December 31, 1998,
operating income from the Company's contract drilling operations was
approximately $9.3 million as compared to approximately $32.7 million in 1997.
The decreased profitability was largely attributable to the 35% decrease in the
Company's rig utilization rates , a change in drilling contracts which required
the Company to bear certain costs in associated with drilling wells that in 1997
was paid by the Company's customers, and, to a lesser extent, moderate decrease
during 1998 by the Company in its daily drilling rates. These three factors are
reflective of the detrimental impact the industry's weakened commodity prices
had on the Company's operations.
Oil and natural gas sales revenues were approximately $5.6 million for the
year ended December 31, 1998, as compared to approximately $10.8 million in
1997. The volume of oil and natural gas sold by the Company decreased by
approximately 29% in 1998, as compared to fiscal year 1997. The average price
per Bbl of crude oil received by the Company was $12.16 in 1998, as compared to
$17.86 in 1997, and the average price per Mcf of natural gas was $1.93 in 1998,
as compared to $2.19 in 1997. Lease operating and production costs were $4.08
per BOE in 1998, as compared to $3.41 per BOE in 1997. General and
administrative expense for the oil and natural gas segment was approximately
$1.3 million and $1.4 million for the years ended December 31, 1998 and 1997,
respectively. Exploration costs increased moderately by approximately 3% to
$669,000 for the year ended December 31, 1998. Depreciation and depletion
expense was approximately $4.8 million in 1998, as compared to approximately
$5.0 million in 1997. During 1998, primarily as a result of the industry's
significantly reduced commodity prices, the Company impaired certain of its oil
and natural gas
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20
properties by $3.8 million. The Company incurred impairment expense of
approximately $355,000 in 1997. Other revenues generated by the oil and natural
gas segment, consisting primarily of fees generated from lease operating
activities, were approximately $1.5 million and $1.6 million for the years ended
December 31, 1998 and 1997, respectively. For the year ended December 31, 1998,
the oil and natural gas segment generated a loss from operations of
approximately $6.2 million as compared to income of approximately $2.4 million
for the year ended December 31, 1997. The decrease in the segment's operating
results was primarily attributable to the decrease in the underlying commodity
prices, particularly the 32% decrease in the price received for crude oil, as
discussed above.
Although the contract drilling and oil and natural gas segments represent
the Company's core operations, the Company derived operating revenues of
approximately $13.4 million from its drilling fluid services. For the year ended
December 31, 1998, the Company incurred approximately $13.0 million of operating
costs associated with its drilling fluid activities, including depreciation and
amortization expense of approximately $895,000 and general and administrative
expense of approximately $1.9 million. The Company generated approximately
$360,000 of operating income from its contract drilling fluid services for the
year ended December 31, 1998.
For the year ended December 31, 1998, the Company incurred interest expense
of approximately $4.5 million as compared to $1.0 million in 1997. This increase
was due to the additional $36.75 million borrowed during February 1998 in the
Company's acquisition of Robertson. In 1998, the Company recognized a net gain
on the sale of property and equipment of $636,000 as compared to approximately
$1.5 million in 1997. The decrease in 1998 was largely attributable to the sale
of the Company's interest in an oil and natural gas property of approximately
$813,000 during fiscal year 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997, contract drilling revenues were
approximately $178.3 million as compared to $73.6 million for the same period in
1996, an increase of approximately 142%. Average rig utilization increased
approximately 13% to 89% for the twelve months ended December 31, 1997. Direct
drilling costs were $128.4 million or 72% of drilling revenues for the year
ended December 31, 1997, while direct drilling costs were $59.6 million or 81%
of related drilling revenues for 1996. The increase in contract drilling
revenues and associated drilling costs was primarily attributable to the
addition of 35 drilling rigs to the Company's operable drilling fleet during
fiscal year 1997 and the addition of 13 operable drilling rigs during the fourth
quarter of 1996. General and administrative expense for the contract drilling
operations was approximately $5.4 million for the year ended December 31, 1997
as compared to approximately $4.0 million in 1996. As a result of the Company's
recent capital acquisitions, depreciation expense increased from approximately
$6.8 million in 1996 to approximately $12.5 million for the year ended December
31, 1997. These increased levels of depreciation expense are expected to
continue for the foreseeable future. For the twelve months ended December 31,
1997, income from the Company's contract drilling operations was approximately
$32.7 million as compared to approximately $3.9 million in 1996. This increased
profitability was largely attributable to the increased rig utilization rate
attained during 1997 and, to a lesser extent, moderate increases realized by the
Company during 1997 in its daily drilling rates.
Oil and natural gas sales revenues were approximately $10.8 million for the
year ended December 31, 1997, as compared to approximately $8.3 million in 1996.
The volume of oil and natural gas sold by the Company increased by approximately
30% in 1997, as compared to fiscal year 1996. The average price per Bbl of crude
oil received by the Company was $17.86 in 1997, as compared to $20.99 in 1996,
and the average price per Mcf of natural gas was $2.19 in 1997, as compared to
$2.01 in 1996. Lease operating production costs were $3.41 per BOE in 1997, as
compared to $3.91 per BOE in 1996. General and administrative expense for the
oil and natural gas segment was approximately $1.4 million for each of the years
ended December 31, 1997 and 1996. Exploration costs were $647,000 for the year
ended December 31, 1997, as compared to approximately $466,000 in 1996.
Depreciation and depletion expense was approximately $5.0 million in 1997, as
compared to approximately $3.1 million in 1996. The Company incurred impairment
expense of approximately $355,000 and $549,000 for the years ended December 31,
1997 and 1996, respectively. Other revenues generated by the oil and natural gas
segment, consisting primarily of fees generated from lease
20
21
operating activities, were approximately $1.6 million and $1.8 million for the
years ended December 31, 1997 and 1996, respectively. For the year ended
December 31, 1997, the oil and natural gas segment generated income from
operations of approximately $2.4 million as compared to income of approximately
$1.6 million for the year ended December 31, 1996.
For the year ended December 31, 1997, the Company incurred interest expense
of $1.045 million as compared to $1.6 million in 1996. The decrease in interest
expense related to the Company's early retirement of its notes payable during
the first quarter of 1997 using proceeds provided by its equity offering
completed during that time. In 1997, the Company recognized a net gain on the
sale of property and equipment of $1.5 million as compared to approximately
$546,000 in 1996. The increase in 1997 was largely attributable to the sale of
the Company's interest in an oil and natural gas property of approximately
$813,000.
In 1997, as a result of the Company's increased profitability and reduced
benefit of certain deferred tax assets, the Company incurred income tax expense
of approximately $12.9 million as compared to a net income tax benefit of $2.3
million in 1996. As previously reported, the Company fully reduced its valuation
allowance existing against its deferred tax assets in prior periods recognizing
the related benefit. To the degree that the Company generates income in excess
of its remaining deferred tax assets, it will incur income tax expense at its
effective statutory rate.
INCOME TAXES
At December 31, 1998, the Company had tax net operating loss ("NOL")
carryforwards of approximately $4.2 million. These NOL carryforwards expire at
various dates from 1999 through 2012, subject to certain limitations. Prior to
August 3, 1995, the Company realized substantial federal income tax savings due
to the NOL carryforwards. The utilization of these NOL carryforwards prior to
that date effectively reduced the current federal income tax rate. During 1995,
the Company's NOL carryforwards became subject to an annual limitation due to a
change of over 50% in the stock ownership of the Company as defined in Internal
Revenue Service Code Section 382(g). The NOL carryforwards that can be utilized
to offset net income in any year will be equal to approximately $3.3 million.
The NOL limitation is determined by the value of the Company's equity on August
2, 1995, the day prior to the ownership change, times 5.88%, the Federal long-
term exempt rate on that date as published by the U.S. Treasury Department, or
$1.8 million, and approximately $1.5 million which is determined by the value of
Tucker Drilling Company, Inc.'s equity on July 29, 1996, the day prior to
consummation of the Merger, times 5.78%, the Federal long-term exempt rate on
that date.
During the year ended December 31, 1996, the Company began recording
non-cash Federal deferred income taxes based primarily on the relationship
between the amount of the Company's unused Federal NOL carryforwards and the
temporary differences between the book basis and tax basis in the Company's
assets. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. As a result of fully
recognizing the benefit of its deferred income taxes, the Company will incur
deferred income tax expense as these benefits are utilized. The Company incurred
deferred income tax expense of approximately $6.5 million and $2.5 million for
the years ended December 31, 1998 and 1997, respectively.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations. The sharp decline in crude oil prices beginning in the fourth
quarter of 1997 has materially impacted the Company's operations. Should oil
prices remain at current
21
22
levels or continue to decline or natural gas prices decline significantly from
current prices, the Company's operations would be further adversely affected.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
RECENTLY-ISSUED ACCOUNTING STANDARDS
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting and presentation of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Company's adoption of SFAS No. 130 did not result in any significant changes to
its related reporting disclosures.
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The Company's adoption of
SFAS No. 131 did not result in any significant changes to its related reporting
disclosures.
The FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
("SFAS No. 132") in February 1998. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement recognition of those plans. This statement is effective for fiscal
years beginning after December 15, 1998. The Company's adoption of SFAS No. 132
in September 1998 did not result in any changes to the Company.
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133")
in June 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The provisions of
SFAS No. 133 are not expected to have a material impact to the Company.
YEAR 2000 COMPLIANCE PROGRAM
During fiscal year 1997, the Company began implementation of its program
for alleviating potential business interruptions that could be caused by the
year 2000. The Company's program identified two principal areas of concern:
supporting information technology systems ("IT systems") and the Company's
related vulnerability to external providers of services and materials.
The Company currently maintains three separate infrastructures to
facilitate the processing of daily transactions and financial reporting. Each of
the lines of business engaged in by the Company function separately from the
other and therefore operates on individual computer platforms. The Company has
completed its conversion of each of the computer platforms resulting in the
replacement and modification of certain hardware and software applications that
previously were determined not to be compliant with year 2000 issues.
The ability of the Company to conduct its business efficiently and
productively requires that providers of services and materials to the Company,
as well as, major customers to the Company (collectively referred to herein as
"external agents") be year 2000 compliant. The Company has implemented a process
whereby
22
23
external agents are identified and prioritized by level of exposure. Management
of the Company is in the process of assessing the readiness and effectiveness of
its external agents for the year 2000. Surveys, solicitations and other forms of
inquiry are being used to make this determination. Management intends to
interpret the responses and information gathered and determine on an individual
basis whether the Company is vulnerable to that external agent. This process
will continue through January 2000 as a means to provide a continuous update as
to the external agents' status and success.
The Company does not expect the total cost associated with the Company's
efforts to become year 2000 compliant to be material to the Company's financial
position. The total amount expended on the project through December 31, 1998 was
approximately $1.75 million. The Company expects to significantly reduce its
level of uncertainty about year 2000 issues and, in particular, about the year
2000 compliance and readiness of its external agents. Accordingly, the Company
does not deem it necessary to formally adopt a contingency plan.
The failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of its program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The foregoing disclosure constitutes "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk associated with the floating rate
portion of the interest charged on its $55.7 million term loan with Norwest Bank
Texas, N.A. The term loan, which matures on January 1, 2001, bears interest at
LIBOR plus 2.375%. The Company's exposure to interest rate risk due to changes
in LIBOR is not expected to be material and at December 31, 1998, the fair value
of the obligation approximates its related carrying value because the obligation
bears interest at the current market rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are filed as a part of this report at the end of Part
IV hereof beginning at page F-1, Index to Consolidated Financial Statements, and
are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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24
PART III
The information required by Part III is omitted from this report because
the Company will file a definitive Proxy Statement for the Company's 1999 Annual
Meeting of Stockholders (the "Proxy Statement") pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this Form 10-K and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
24
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1 of this report.
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because they are not
applicable or the information required therein is included elsewhere in the
financial statements or notes thereto.
(a)(3) Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein.
2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger.(1)
2.2 Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(2)
2.2.1 Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(3)
2.3 Asset Purchase Agreement, dated April 22, 1997, among and
between Patterson Drilling Company and Ziadril, Inc.(4)
2.4 Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(3)
2.4.1 Amendment to Asset Purchase Agreement, dated June 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.5 Agreement, dated June 4, 1997, among Patterson Energy Inc.,
Patterson Drilling Company, Greathouse Foundation and Myrle
Greathouse, Trustee under Agreement dated June 2, 1997.(5)
2.6 Asset Purchase Agreement, dated September 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and McGee
Drilling Company.(4)
2.7 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.8 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.9 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).
2.10 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.
3.1 Restated Certificate of Incorporation.(8)
3.1.1 Certificate of Amendment to the Certificate of
Incorporation.(9)
3.2 Bylaws.(1)
4.1 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock.(10)
4.2 Registration Rights Agreement, dated June 12, 1997, among
Patterson Energy Inc. and Wes-Tex Drilling Company,
Greathouse Foundation and Myrle Greathouse, Trustee under
Agreement dated June 2, 1997.(11)
25
26
4.3 Stock Purchase Warrant of Patterson Energy, Inc., dated June 12, 1997.(11)
10.1 Credit Agreement dated December 9, 1997 among Patterson Energy, Inc., Patterson Drilling Company,
Patterson Petroleum, Inc., Patterson Trading Company, Inc. and Norwest Bank Texas, N.A.(6)
10.1.1 Promissory Note dated December 9, 1997 among Patterson Energy, Inc. and Norwest Bank Texas, N.A.(6)
10.1.2 Security Agreement dated December 9, 1997 between Patterson Drilling Company and Norwest Bank Texas,
N.A.(6)
10.1.3 Corporate Guarantees of Patterson Drilling Company, Patterson Petroleum, Inc. and Patterson Petroleum
Trading Company, Inc.(6)
10.1.4 Amendment to Credit Agreement dated March 4, 1999 among Patterson Energy, Inc., Patterson Drilling
Company, Patterson Petroleum, Inc., Patterson Trading Company, Inc. and Norwest Bank Texas, N.A.
10.2 Aircraft Lease, dated December 20, 1998, (effective January 1, 1999) between Talbott Aviation, Inc. and
Patterson Energy, Inc.
10.3 Participation Agreement, dated October 19, 1994, between Patterson Petroleum Trading Company, Inc. and
BHT Marketing, Inc.(12)
10.3.1 Participation Agreement dated October 24, 1995, between Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(13)
10.4 Crude Oil Purchase Contract, dated October 19, 1994, between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(14)
10.4.1 Crude Oil Purchase Contract, dated October 24, 1995, between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(13)
10.5 Patterson Energy, Inc. 1993 Stock Incentive Plan, as amended.(15)
10.6 Patterson Energy, Inc. Non-Employee Directors' Stock Option Plan, as amended.(16)
10.7 Model Form Operating Agreement.(17)
10.8 Form of Drilling Bid Proposal and Footage Drilling Contract.(17)
10.9 Form of Turnkey Drilling Agreement.(17)
21.1 Subsidiaries of the registrant.(18)
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule as of December 31, 1998 and for the year then ended.
- ---------------
(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment No. 2
to Registration Statement on Form SB-2 (File No. 33-68058-FW); filed
October 28, 1993.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.
(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.
(4) Incorporated herein by reference to Item 16, "Exhibits" to Amendment No. 1
to Registration Statement on Form S-3 (File No. 333-29035); filed August 5,
1997.
(5) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11, 1997.
(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated November 14, 1997 and filed December 24, 1997.
(7) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits," to Form 8-K dated January 23, 1998; filed February 3, 1998.
26
27
(8) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended September 30, 1996; filed
August 12, 1996.
(9) Incorporated herein by reference to Item 6. "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended June 30, 1997; filed
August 14, 1997.
(10) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.
(11) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19, 1997.
(12) Incorporated herein by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
33-68058-FW).
(13) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(14) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(15) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917); filed March 13, 1998.
(16) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471); filed November 4, 1997.
(17) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
filed with the Securities and Exchange Commission on August 30, 1993.
(18) Incorporated by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 1997.
(19) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
January 5, 1998.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Securities and Exchange
Commission during the fiscal quarter ended December 31, 1998.
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28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Patterson Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
Date: March 31, 1999 By: /s/ CLOYCE A. TALBOTT
------------------------------------
Cloyce A. Talbott
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Patterson Energy,
Inc. and in the capacities indicated as of March 30, 1998.
SIGNATURE TITLE
--------- -----
/s/ CLOYCE A. TALBOTT Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer and Director
Cloyce A. Talbott
(Principal Executive Officer)
/s/ A. GLENN PATTERSON President, Chief Operating Officer and
- -------------------------------------------------------- Director
A. Glenn Patterson
/s/ JAMES C. BROWN Vice President -- Finance, Chief
- -------------------------------------------------------- Financial Officer, Secretary and
James C. Brown Treasurer
(Principal Accounting Officer)
/s/ ROBERT C. GIST Director
- --------------------------------------------------------
Robert C. Gist
/s/ KENNETH E. DAVIS Director
- --------------------------------------------------------
Kenneth E. Davis
/s/ VINCENT A. ROSSI, JR. Director
- --------------------------------------------------------
Vincent A. Rossi, Jr.
29
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants -- PricewaterhouseCoopers
LLP....................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for each of the
years ended December 31, 1996, 1997 and 1998........... F-4
Consolidated Statements of Stockholders' Equity for each
of the years ended December 31, 1996, 1997 and 1998.... F-5
Consolidated Statements of Cash Flows for each of the
years ended December 31, 1996, 1997 and 1998........... F-6
Notes to Consolidated Financial Statements................ F-8
F-1
30
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Patterson
Energy, Inc. and Subsidiaries as of December 31, 1997 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 1, 1999
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PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1997 1998
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,338 $ 8,986
Marketable securities..................................... 566 --
Accounts receivable:
Trade, less allowance for doubtful accounts of $378,110
and $417,519 at December 31, 1997 and 1998,
respectively........................................... 44,732 28,616
Oil and natural gas sales................................. 773 426
Costs of uncompleted drilling contracts in excess of
related billings....................................... -- 100
Accrued federal income taxes receivable................... -- 8,400
Inventory................................................. -- 1,283
Deferred income taxes..................................... 2,309 1,568
Undeveloped oil and natural gas properties held for
resale................................................. 4,781 3,214
Other current assets...................................... 515 890
-------- --------
Total current assets.............................. 77,014 53,483
Property and equipment, at cost, net........................ 100,405 136,677
Intangible assets, net...................................... 24,644 45,875
Other assets................................................ 1,137 570