The following unaudited condensed consolidated financial statements include all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Consolidation and Presentation
The unaudited interim condensed consolidated financial statements include the accounts of Patterson-UTI Energy, Inc. (the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Except for wholly-owned subsidiaries, the Company has no controlling financial interests in any entity which would require consolidation.
The unaudited interim condensed consolidated financial statements have been prepared by management of the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included either on the face of the financial statements or herein are sufficient to make the information presented not misleading. In the opinion of management, all recurring adjustments considered necessary for a fair statement of the information in conformity with U.S. GAAP have been included. The unaudited condensed consolidated balance sheet as of December 31, 2016, as presented herein, was derived from the audited consolidated balance sheet of the Company, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.
The U.S. dollar is the functional currency for all of the Company’s operations except for its Canadian operations, which use the Canadian dollar as its functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity.
In 2017, the Company adopted new guidance for the presentation of deferred tax liabilities and assets and such guidance was applied retrospectively, resulting in the reclassification of $36.4 million from current deferred tax assets as of December 31, 2016. Of this amount, $4.1 million was reclassified to long-term deferred tax assets and $32.3 million was reclassified to long-term deferred tax liabilities. During the fourth quarter of 2016, the Company changed its reporting segment presentation, as the Company no longer considers its oil and natural gas exploration and production activities to be significant to an understanding of the Company’s results. The Company now presents the oil and natural gas exploration and production activities, oilfield rental tool business, pipe handling components and related technology business and Middle East/North Africa activities as “Other,” and “Corporate” reflects only corporate activities. This change in segment presentation was applied retrospectively to all periods presented herein (See Note 6).
On December 12, 2016, the Company entered into an Agreement and Plan of Merger (the “merger agreement”) with Seventy Seven Energy Inc. (“SSE”), and the merger closed on April 20, 2017 (the “merger date”). The Company’s results include the results of operations of SSE since the merger date (See Note 2).
The Company provides a dual presentation of its net loss per common share in its unaudited condensed consolidated statements of operations: basic net loss per common share (“Basic EPS”) and diluted net loss per common share (“Diluted EPS”).
Basic EPS excludes dilution and is computed by first allocating earnings between common stockholders and holders of non-vested shares of restricted stock. Basic EPS is then determined by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding during the period, excluding non-vested shares of restricted stock.
Diluted EPS is based on the weighted average number of common shares outstanding plus the dilutive effect of potential common shares, including stock options, non-vested shares of restricted stock and restricted stock units. The dilutive effect of stock options and restricted stock units is determined using the treasury stock method. The dilutive effect of non-vested shares of restricted stock is based on the more dilutive of the treasury stock method or the two-class method, assuming a reallocation of undistributed earnings to common stockholders after considering the dilutive effect of potential common shares other than non-vested shares of restricted stock.
8
The following table presents information necessary to calculate net
loss
per share for the three
and
nine
months ended
September
3
0
,
201
7
and 201
6
as well as potentially dilutiv
e securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive (in thousands, except per share amounts):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
BASIC EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
$
|
(33,769
|
)
|
|
$
|
(84,143
|
)
|
|
$
|
(189,492
|
)
|
|
$
|
(240,512
|
)
|
Weighted average number of common shares outstanding, excluding
non-vested shares of restricted stock
|
|
211,875
|
|
|
|
146,326
|
|
|
|
191,237
|
|
|
|
146,014
|
|
Basic net loss per common share
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(1.65
|
)
|
DILUTED EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to common stockholders
|
$
|
(33,769
|
)
|
|
$
|
(84,143
|
)
|
|
$
|
(189,492
|
)
|
|
$
|
(240,512
|
)
|
Weighted average number of common shares outstanding, excluding
non-vested shares of restricted stock
|
|
211,875
|
|
|
|
146,326
|
|
|
|
191,237
|
|
|
|
146,014
|
|
Add dilutive effect of potential common shares
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of diluted common shares outstanding
|
|
211,875
|
|
|
|
146,326
|
|
|
|
191,237
|
|
|
|
146,014
|
|
Diluted net loss per common share
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(1.65
|
)
|
Potentially dilutive securities excluded as anti-dilutive
|
|
9,973
|
|
|
|
9,141
|
|
|
|
9,973
|
|
|
|
9,141
|
|
2. Acquisitions
Seventy Seven Energy Inc. (“SSE”)
On April 20, 2017, pursuant to the merger agreement, a subsidiary of the Company was merged with and into SSE, with SSE continuing as the surviving entity and one of the Company’s wholly owned subsidiaries (the “SSE merger”). Pursuant to the terms of the merger agreement, the Company acquired all of the issued and outstanding shares of common stock of SSE, in exchange for approximately 46.3 million shares of common stock of the Company. Concurrent with the closing of the merger, the Company repaid all of the outstanding debt of SSE totaling $472 million. Based on the closing price of the Company’s common stock on April 20, 2017, the total fair value of the consideration transferred to effect the acquisition of SSE was approximately $1.5 billion. On April 20, 2017, following the SSE merger, SSE was merged with and into a newly-formed subsidiary of the Company named Seventy Seven Energy LLC (“SSE LLC”), with SSE LLC continuing as the surviving entity and one of the Company’s wholly owned subsidiaries.
Through the SSE merger, the Company acquired a fleet of 91 drilling rigs, 36 of which the Company considers to be APEX® class rigs. Additionally, through the SSE merger, the Company acquired approximately 500,000 horsepower of modern, efficient fracturing equipment located in Oklahoma and Texas. The oilfield rentals business acquired through the SSE merger has a modern, well-maintained fleet of premium rental tools, and it provides specialized services for land-based oil and natural gas drilling, completion and workover activities.
The merger has been accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the fair value of the consideration transferred is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date, with the remaining unallocated amount recorded as goodwill.
The total fair value of the consideration transferred was determined as follows (in thousands, except stock price):
Shares of Company common stock issued to SSE shareholders
|
|
46,298
|
|
Company common stock price on April 20, 2017
|
$
|
22.45
|
|
Fair value of common stock issued
|
$
|
1,039,396
|
|
Plus SSE long-term debt repaid by Company
|
$
|
472,000
|
|
Total fair value of consideration transferred
|
$
|
1,511,396
|
|
9
The final determination
of the fair value of assets acquired and liabilities assumed at the merger date will be completed as soon as possible, but no later than one year from the merger date (the “measurement period”). The Company’s preliminary purchase price allocation is subje
ct to revision as additional information about
the
fair value of assets and liabilities becomes available. Additional information that existed as of the merger date
,
but at the time was unknown to the Company
,
may become known to the Company during the re
mainder of the measurement period. The final determination of fair value may differ materially from these preliminary estimates.
The following table represents the preliminary allocation of the total purchase price of SSE to the assets acquired and the l
iabilities assumed based on the fair value at the merger date, with
the
excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill (in thousands):
Identifiable assets acquired
|
|
|
|
Cash and cash equivalents
|
$
|
37,806
|
|
Accounts receivable
|
|
149,598
|
|
Inventory
|
|
8,036
|
|
Other current assets
|
|
19,250
|
|
Property and equipment
|
|
984,430
|
|
Other long-term assets
|
|
14,546
|
|
Intangible assets
|
|
22,500
|
|
Total identifiable assets acquired
|
|
1,236,166
|
|
Liabilities assumed
|
|
|
|
Accounts payable and accrued liabilities
|
|
130,100
|
|
Deferred income taxes
|
|
31,402
|
|
Other long-term liabilities
|
|
1,734
|
|
Total liabilities assumed
|
|
163,236
|
|
Net identifiable assets acquired
|
|
1,072,930
|
|
Goodwill
|
|
438,466
|
|
Total net assets acquired
|
$
|
1,511,396
|
|
The acquired goodwill is not deductible for tax purposes. Among the factors that contributed to a purchase price resulting in the recognition of goodwill was SSE’s reputation as an experienced provider of high-quality contract drilling and pressure pumping services in a safe and efficient manner. See Note 7 for a breakdown of goodwill acquired by operating segment.
A portion of the fair value consideration transferred has been provisionally assigned to identifiable intangible assets as follows:
|
Fair Value
|
|
|
Weighted Average Useful Life
|
|
(in thousands)
|
|
|
(in years)
|
Assets
|
|
|
|
|
|
Favorable drilling contracts
|
$
|
22,500
|
|
|
1
|
10
The results of SSE’s operations since the merger date are
included in our consolidated statement of operations. The following pro forma condensed combined financial information was derived from the historical financial statements of the Company and SSE and gives effect to the merger as if it had occurred on Janu
ary 1, 2016. The below information reflects pro forma adjustments based on available information and certain assumptions the Company believes are reasonable, including (i) adjustments related to the depreciation and amortization o
f
the fair value of acqui
red intangibles and fixed assets, (ii) removal of the historical interest expense of SSE, (iii) tax benefit of the aforementioned pro forma adjustments, and (iv) adjustments related to the common shares outstanding to reflect the impact of the consideratio
n exchanged in the merger. Additionally,
t
he pro forma loss for the
three months ended September 30, 2017 was adjusted to exclude the Company’s merger and integration
-
related costs of $9.4 million. The pro forma loss for the
nine
months ended
September
30, 2017 w
as
adjusted to exclude the Company’s merger
and integration
-
related costs of $
6
5.8
million and SSE’s merger
-
related costs of $
3
6.7
million. The pro forma results of operations do not include any cost savings or other synergies that may result fr
om the SSE merger or any estimated costs that have been or will be incurred by the Company to integrate the SSE operations.
The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative
of the results that might have actually occurred had the SSE merger taken place on January 1, 2016; furthermore, the financial information is not intended to be a projection of future results. The following table summarizes selected financial information
of the Company on
a
pro forma basis (in thousands, except per share data):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
684,989
|
|
|
$
|
326,227
|
|
|
$
|
1,811,903
|
|
|
$
|
1,082,554
|
|
Net loss
|
|
(27,627
|
)
|
|
|
(117,185
|
)
|
|
|
(189,098
|
)
|
|
|
(346,481
|
)
|
Loss per share
|
|
(0.13
|
)
|
|
|
(0.56
|
)
|
|
|
(0.89
|
)
|
|
|
(1.65
|
)
|
Multi-Shot, LLC (“MS Directional”)
On October 11, 2017, the Company acquired all of the issued and outstanding limited liability company interests of Multi-Shot, LLC (“MS Directional”). The aggregate consideration paid by the Company to the sellers consisted of $75 million in cash and 8,798,391 shares of the Company’s common stock. The purchase price is subject to customary post-closing adjustments relating to cash, net working capital and indebtedness of MS Directional as of the closing. Based on the closing price of the Company’s common stock on the closing date of the transaction, the total fair value of the consideration transferred to effect the acquisition of MS Directional was approximately $262 million.
MS Directional is a leading directional drilling services company in the United States, with operations in most major producing onshore oil and gas basins. MS Directional provides a comprehensive suite of directional drilling services, including directional drilling, downhole performance motors, directional surveying, measurement while drilling, and wireline steering tools.
The Company’s consolidated results of operations will include the results of the acquired MS Directional business beginning with the closing date of the acquisition of October 11, 2017. Due to the timing of the closing of the acquisition, the Company has not completed the detailed valuation work necessary to determine the required estimates of the fair value of the acquired assets and liabilities assumed and the related allocation of purchase price. MS Directional had total assets of approximately $104 million as of December 31, 2016, consisting of $21.4 million of accounts receivable, $23.9 million of inventory, $53.8 million of property and equipment and $4.9 million of other assets. The Company’s preliminary allocation of purchase price to the assets acquired will be included in future SEC filings of the Company.
As this transaction closed subsequent to the end of the third quarter of 2017, the condensed consolidated financial statements and accompanying notes do not reflect any amounts relating to MS Directional.
3. Stock-based Compensation
The Company uses share-based payments to compensate employees and non-employee directors. The Company recognizes the cost of share-based payments under the fair-value-based method. Share-based awards include equity instruments in the form of stock options, restricted stock or restricted stock units that have included service conditions and, in certain cases, performance conditions. The Company’s share-based awards also include share-settled performance unit awards. Share-settled performance unit awards are accounted for as equity awards. The Company issues shares of common stock when vested stock options are exercised, when restricted stock is granted and when restricted stock units and share-settled performance unit awards vest.
11
The Patterson-UTI Energy, Inc. 2014 Long
-Term Incentive Plan (the “2014 Plan”) was originally approved by the Company’s stockholders effective as of April 17, 2014. On June 29, 2017, the Company’s stockholders approved the amendment and restatement of the 2014 Plan (the “Amended and Restated Pl
an”) to increase the number of shares available for
future
issuance under the plan to 10,049,156 shares. The aggregate number of shares of Common Stock authorized for grant under the Amended and Restated Plan is 18.9 million, which includes the 9.1 millio
n shares previously authorized under the 2014 Plan.
Stock Options
— The Company estimates the grant date fair values of stock options using the Black-Scholes-Merton valuation model. Volatility assumptions are based on the historic volatility of the Company’s common stock over the most recent period equal to the expected term of the options as of the date such options are granted. The expected term assumptions are based on the Company’s experience with respect to employee stock option activity. Dividend yield assumptions are based on the expected dividends at the time the options are granted. The risk-free interest rate assumptions are determined by reference to United States Treasury yields. No options were granted in the three or nine months ended September 30, 2017. Weighted-average assumptions used to estimate the grant date fair values for stock options granted for the three and nine month periods ended September 30, 2016 follow:
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2016
|
|
|
2016
|
|
Volatility
|
|
34.87
|
%
|
|
|
35.11
|
%
|
Expected term (in years)
|
|
5.00
|
|
|
|
5.00
|
|
Dividend yield
|
|
0.42
|
%
|
|
|
2.05
|
%
|
Risk-free interest rate
|
|
1.20
|
%
|
|
|
1.40
|
%
|
Stock option activity from January 1, 2017 to September 30, 2017 follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Underlying
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Per Share
|
|
Outstanding at January 1, 2017
|
|
6,687,150
|
|
|
$
|
20.68
|
|
Exercised
|
|
(10,000
|
)
|
|
$
|
22.29
|
|
Expired
|
|
(600,000
|
)
|
|
$
|
24.17
|
|
Outstanding at September 30, 2017
|
|
6,077,150
|
|
|
$
|
20.34
|
|
Exercisable at September 30, 2017
|
|
5,421,310
|
|
|
$
|
20.50
|
|
Restricted Stock
— For all restricted stock awards made to date, shares of common stock were issued when the awards were made. Non-vested shares are subject to forfeiture for failure to fulfill service conditions, and, in certain cases, performance conditions. Non-forfeitable dividends are paid on non-vested shares of restricted stock. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.
Restricted stock activity from January 1, 2017 to September 30, 2017 follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Date Fair Value
|
|
|
Shares
|
|
|
Per Share
|
|
Non-vested restricted stock outstanding at January 1, 2017
|
|
1,427,455
|
|
|
$
|
22.26
|
|
Granted
|
|
890,904
|
|
|
$
|
21.78
|
|
Vested
|
|
(724,626
|
)
|
|
$
|
23.62
|
|
Forfeited
|
|
(16,003
|
)
|
|
$
|
22.80
|
|
Non-vested restricted stock outstanding at September 30, 2017
|
|
1,577,730
|
|
|
$
|
21.36
|
|
Restricted Stock Units
— For all restricted stock unit awards made to date, shares of common stock are not issued until the units vest. Restricted stock units are subject to forfeiture for failure to fulfill service conditions and, in certain cases, performance conditions. Non-forfeitable cash dividend equivalents are paid on certain non-vested restricted stock units. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.
12
Restricted stock un
it activity from January 1, 2017
to
Sep
tember
3
0
, 201
7
follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Date Fair Value
|
|
|
Shares
|
|
|
Per Share
|
|
Non-vested restricted stock units outstanding at January 1, 2017
|
|
191,655
|
|
|
$
|
19.85
|
|
Granted
|
|
1,090,292
|
|
|
$
|
19.75
|
|
Assumed (1)
|
|
505,551
|
|
|
$
|
22.45
|
|
Vested
|
|
(549,451
|
)
|
|
$
|
22.24
|
|
Forfeited
|
|
(38,374
|
)
|
|
$
|
21.61
|
|
Non-vested restricted stock units outstanding at September 30, 2017
|
|
1,199,673
|
|
|
$
|
19.71
|
|
|
(1)
|
R
estricted stock unit awards under the Seventy Seven Energy Inc. 2016 Omnibus Incentive Plan, which was adopted, assumed, amended and renamed by the Company in connection with the SSE merger. No additional awards will be made under this plan.
|
Performance Unit Awards.
The Company has granted share-settled performance unit awards to certain executive officers (the “Performance Units”) on an annual basis since 2010. The Performance Units provide for the recipients to receive a grant of shares of common stock upon the achievement of certain performance goals during a specified period established by the Compensation Committee. The performance period for the Performance Units is the three-year period commencing on April 1 of the year of grant, except that for the Performance Units granted in 2013 the performance period was extended pursuant to its terms, as described below, and for the Performance Units granted in 2017 the three-year performance period commenced on May 1.
The performance goals for the Performance Units are tied to the Company’s total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee. These goals are considered to be market conditions under the relevant accounting standards and the market conditions were factored into the determination of the fair value of the respective Performance Units. Generally, the recipients will receive a target number of shares if the Company’s total shareholder return during the performance period, when compared to the peer group, is at the 50
th
percentile. If the Company’s total shareholder return during the performance period, when compared to the peer group, is at the 75
th
percentile or higher, then the recipients will receive two times the target number of shares. If the Company’s total shareholder return during the performance period, when compared to the peer group, is at the 25
th
percentile, then the recipients will only receive one-half of the target number of shares. If the Company’s total shareholder return during the performance period, when compared to the peer group, is between the 25
th
and 75
th
percentile, then the shares to be received by the recipients will be determined on a pro-rata basis.
For the Performance Units awarded prior to 2016, there is no payout unless the Company’s total shareholder return is positive and, when compared to the peer group, is at or above the 25
th
percentile. In respect of the 2013 Performance Units, for which the performance period ended March 31, 2016, the Company’s total shareholder return for the performance period was negative, the Company’s total shareholder return for the performance period when compared to the peer group was above the 75
th
percentile, and there was no payout; provided, however, that pursuant to the terms of those 2013 awards, if, during the two-year period ending March 31, 2018, the Company’s total shareholder return for any 30 consecutive day period equals or exceeds 18 percent on an annualized basis from April 1, 2013 through the last day of such 30 consecutive day period, and the recipient is actively employed by the Company through the last day of the extended performance period, then the Company will issue to the recipient the number of shares equal to the amount the recipient would have been entitled to receive had the Company’s total shareholder return been positive during the initial three-year performance period.
For the Performance Units granted in April 2016, if the Company’s total shareholder return is negative, and, when compared to the peer group is at or above the 25th percentile, then the recipients will receive one-half of the number of shares they would have received had the Company’s total shareholder return been positive. For the Performance Units granted in May 2017, the payout is based on relative performance and does not have an absolute performance requirement.
The total target number of shares with respect to the Performance Units for the awards in 2013-2017 is set forth below:
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
Target number of shares
|
|
186,198
|
|
|
|
185,000
|
|
|
|
190,600
|
|
|
|
154,000
|
|
|
|
236,500
|
|
13
Because the performance units are share-settled awards, they are accounted for as equity awards and measured at fair value on the date of grant using a Monte Carlo simulation model. The fair value of the Performance Units is set forth below (in thousands):
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
Fair value at date of grant
|
$
|
5,780
|
|
|
$
|
3,854
|
|
|
$
|
4,052
|
|
|
$
|
5,388
|
|
|
$
|
5,564
|
|
These fair value amounts are charged to expense on a straight-line basis over the performance period. Compensation expense associated with the Performance Units is shown below (in thousands):
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
|
Unit Awards
|
|
Three months ended September 30, 2017
|
$
|
482
|
|
|
$
|
321
|
|
|
$
|
338
|
|
|
NA
|
|
|
NA
|
|
Three months ended September 30, 2016
|
NA
|
|
|
$
|
321
|
|
|
$
|
338
|
|
|
$
|
449
|
|
|
NA
|
|
Nine months ended September 30, 2017
|
$
|
803
|
|
|
$
|
963
|
|
|
$
|
1,013
|
|
|
$
|
449
|
|
|
NA
|
|
Nine months ended September 30, 2016
|
NA
|
|
|
$
|
642
|
|
|
$
|
1,013
|
|
|
$
|
1,347
|
|
|
$
|
464
|
|
4. Inventory
Inventory consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Finished goods
|
$
|
1,332
|
|
|
$
|
—
|
|
Work-in-process
|
|
3,910
|
|
|
|
1,803
|
|
Raw materials and supplies
|
|
35,430
|
|
|
|
18,388
|
|
Inventory
|
$
|
40,672
|
|
|
$
|
20,191
|
|
5. Property and Equipment
Property and equipment consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Equipment
|
$
|
7,882,765
|
|
|
$
|
6,809,129
|
|
Oil and natural gas properties
|
|
209,912
|
|
|
|
201,568
|
|
Buildings
|
|
186,452
|
|
|
|
97,029
|
|
Land
|
|
26,630
|
|
|
|
22,270
|
|
Total property and equipment
|
|
8,305,759
|
|
|
|
7,129,996
|
|
Less accumulated depreciation, depletion and impairment
|
|
(4,107,474
|
)
|
|
|
(3,721,033
|
)
|
Property and equipment, net
|
$
|
4,198,285
|
|
|
$
|
3,408,963
|
|
On a periodic basis, the Company evaluates its fleet of drilling rigs for marketability based on the condition of inactive rigs, expenditures that would be necessary to bring them to working condition and the expected demand for drilling services by rig type (such as drilling conventional, vertical wells versus drilling longer, horizontal wells using higher specification rigs). The components comprising rigs that will no longer be marketed are evaluated, and those components with continuing utility to the Company’s other marketed rigs are transferred to other rigs or to the Company’s yards to be used as spare equipment. The remaining components of these rigs are retired. In the second quarter of 2017,
the Company recorded an impairment charge of $29.0 million for the write-down of drilling equipment with no continuing utility as a result of the upgrade of certain rigs to super-spec capability.
14
In addition, t
he Company evaluates the recoverability of its long-lived assets whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable (a “triggering event”). Based on recent commodity prices,
the Company’s
results of operations for the
three
and
nine
month
period
s
ended
September
3
0
,
201
7
and management’s expectat
ions of
operating
results in future periods, the Company concluded that no triggering event occurred during the
nine
months ended
September
3
0
,
201
7
with respect to its contract drilling
segment, its
pressure pumping segment
or its other operations, except
for oil and natural gas properties
,
which
are
discussed in the following paragraph
. Management
’s expectations of
future operating
results were based on the assumption
that activity levels in both segments
and its other operations
will
remain relatively s
table
i
n response to relatively stable oil prices.
The Company reviews its proved oil and natural gas properties for impairment whenever a triggering event occurs, such as downward revisions in reserve estimates or decreases in expected future oil and natural gas prices. Proved properties are grouped by field, and undiscounted cash flow estimates are prepared based on the Company’s expectation of future pricing over the lives of the respective fields. These cash flow estimates are reviewed by an independent petroleum engineer. If the net book value of a field exceeds its undiscounted cash flow estimate, impairment expense is measured and recognized as the difference between net book value and fair value. Impairment expense related to proved and unproved oil and natural gas properties totaled $1.3 million in the third quarter of 2017 and $3.5 million for the nine months ended September 30, 2017 and is included in depreciation, depletion, amortization and impairment in the condensed consolidated statements of operations.
6. Business Segments
At September 30, 2017, the Company’s revenues, loss before income taxes and identifiable assets were primarily attributable to two business segments: (i) contract drilling of oil and natural gas wells and (ii) pressure pumping services. Each of these segments represents a distinct type of business and has a separate management team that reports to the Company’s chief operating decision maker. The results of operations in these segments are regularly reviewed by the chief operating decision maker for purposes of determining resource allocation and assessing performance.
15
The following tables summarize
selected financial information relating to the Company’s business segments (in thousands):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling
|
$
|
301,954
|
|
|
$
|
123,863
|
|
|
$
|
731,496
|
|
|
$
|
407,855
|
|
Pressure pumping
|
|
362,441
|
|
|
|
78,165
|
|
|
|
793,659
|
|
|
|
248,428
|
|
Other operations (a)
|
|
22,832
|
|
|
|
4,284
|
|
|
|
48,092
|
|
|
|
12,973
|
|
Elimination of intercompany revenues (b)
|
|
(2,238
|
)
|
|
|
(179
|
)
|
|
|
(3,897
|
)
|
|
|
(277
|
)
|
Total revenues
|
$
|
684,989
|
|
|
$
|
206,133
|
|
|
$
|
1,569,350
|
|
|
$
|
668,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling
|
$
|
(20,397
|
)
|
|
$
|
(67,786
|
)
|
|
$
|
(155,465
|
)
|
|
$
|
(173,331
|
)
|
Pressure pumping
|
|
16,841
|
|
|
|
(46,569
|
)
|
|
|
(1,414
|
)
|
|
|
(136,553
|
)
|
Other operations
|
|
(6,516
|
)
|
|
|
228
|
|
|
|
(13,030
|
)
|
|
|
(2,263
|
)
|
Corporate
|
|
(31,735
|
)
|
|
|
(13,400
|
)
|
|
|
(119,483
|
)
|
|
|
(41,138
|
)
|
Other operating income, net (c)
|
|
3,791
|
|
|
|
4,118
|
|
|
|
18,501
|
|
|
|
10,285
|
|
Interest income
|
|
101
|
|
|
|
63
|
|
|
|
1,149
|
|
|
|
273
|
|
Interest expense
|
|
(9,584
|
)
|
|
|
(10,244
|
)
|
|
|
(26,929
|
)
|
|
|
(31,722
|
)
|
Other
|
|
78
|
|
|
|
19
|
|
|
|
226
|
|
|
|
52
|
|
Loss before income taxes
|
$
|
(47,421
|
)
|
|
$
|
(133,571
|
)
|
|
$
|
(296,445
|
)
|
|
$
|
(374,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, amortization and impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling
|
$
|
133,603
|
|
|
$
|
115,652
|
|
|
$
|
405,576
|
|
|
$
|
357,153
|
|
Pressure pumping
|
|
51,274
|
|
|
|
44,587
|
|
|
|
141,329
|
|
|
|
141,557
|
|
Other operations
|
|
9,534
|
|
|
|
1,856
|
|
|
|
19,826
|
|
|
|
8,393
|
|
Corporate
|
|
2,231
|
|
|
|
1,369
|
|
|
|
5,456
|
|
|
|
4,106
|
|
Total depreciation, depletion, amortization and impairment
|
$
|
196,642
|
|
|
$
|
163,464
|
|
|
$
|
572,187
|
|
|
$
|
511,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling
|
$
|
106,879
|
|
|
$
|
17,551
|
|
|
$
|
222,426
|
|
|
$
|
46,001
|
|
Pressure pumping
|
|
27,230
|
|
|
|
8,330
|
|
|
|
85,423
|
|
|
|
27,662
|
|
Other operations
|
|
8,647
|
|
|
|
2,401
|
|
|
|
21,016
|
|
|
|
5,621
|
|
Corporate
|
|
305
|
|
|
|
395
|
|
|
|
986
|
|
|
|
1,227
|
|
Total capital expenditures
|
$
|
143,061
|
|
|
$
|
28,677
|
|
|
$
|
329,851
|
|
|
$
|
80,511
|
|
|
September 30,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
Contract drilling
|
$
|
3,950,748
|
|
|
$
|
3,032,819
|
|
Pressure pumping
|
|
1,227,384
|
|
|
|
653,630
|
|
Other operations
|
|
166,900
|
|
|
|
48,885
|
|
Corporate (d)
|
|
127,943
|
|
|
|
36,957
|
|
Total assets
|
$
|
5,472,975
|
|
|
$
|
3,772,291
|
|
(a)
|
Other operations includes the Company’s oilfield rental tools business, pipe handling components and related technology business, the oil and natural gas working interests and the Middle East/North Africa activities.
|
(b)
|
For 2016, intercompany revenues consists of contract drilling intercompany revenues for services provided to other operations. For 2017, intercompany revenues also includes revenues from other operations for services provided to contract drilling, pressure pumping and within other operations.
|
(c)
|
Other operating income includes net gains associated with the disposal of assets related to corporate strategy decisions of the executive management group. Accordingly, the related gains have been excluded from the operating results of specific segments. This caption also includes expenses related to certain legal settlements net of insurance reimbursements.
|
(
d
)
|
Corporate assets primarily include cash on hand and certain property and equipment.
|
16
7. Goodwill and Intangible Assets
Goodwill
— Goodwill by operating segment as of September 30, 2017 and changes for the nine months then ended are as follows (in thousands):
|
Contract
|
|
|
Pressure
|
|
|
|
|
|
|
Drilling
|
|
|
Pumping
|
|
|
Total
|
|
Balance at beginning of period
|
$
|
86,234
|
|
|
$
|
—
|
|
|
$
|
86,234
|
|
Goodwill acquired
|
|
300,819
|
|
|
|
137,647
|
|
|
|
438,466
|
|
Balance at end of period
|
$
|
387,053
|
|
|
$
|
137,647
|
|
|
$
|
524,700
|
|
There were no accumulated impairment losses related to goodwill as of September 30, 2017 or December 31, 2016.
Goodwill is evaluated at least annually as of December 31, or when circumstances require, to determine if the fair value of recorded goodwill has decreased below its carrying value. For impairment testing purposes, goodwill is evaluated at the reporting unit level. The Company’s reporting units for impairment testing are its operating segments. The Company determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying value after considering qualitative, market and other factors, and if this is the case, any necessary goodwill impairment is determined using a quantitative impairment test. From time to time, the Company may perform quantitative testing for goodwill impairment in lieu of performing the qualitative assessment. If the resulting fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized for the amount of the shortfall.
Intangible Assets
— The following table presents the gross carrying amount and accumulated amortization of the intangible assets as of September 30, 2017 and December 31, 2016 (in thousands):
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer relationships
|
$
|
25,500
|
|
|
$
|
(25,500
|
)
|
|
$
|
—
|
|
|
$
|
25,500
|
|
|
$
|
(22,768
|
)
|
|
$
|
2,732
|
|
Favorable drilling contracts
|
|
22,500
|
|
|
|
(13,518
|
)
|
|
|
8,982
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
48,000
|
|
|
$
|
(39,018
|
)
|
|
$
|
8,982
|
|
|
$
|
25,500
|
|
|
$
|
(22,768
|
)
|
|
$
|
2,732
|
|
Amortization expense on intangible assets of approximately $6.6 million and $911,000 was recorded in the three months ended September 30, 2017 and 2016, respectively, and amortization expense on intangible assets of approximately $16.3 million and $2.7 million was recorded in the nine months ended September 30, 2017 and 2016, respectively.
8. Accrued Expenses
Accrued expenses consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Salaries, wages, payroll taxes and benefits
|
$
|
56,777
|
|
|
$
|
21,138
|
|
Workers' compensation liability
|
|
82,509
|
|
|
|
67,775
|
|
Property, sales, use and other taxes
|
|
29,382
|
|
|
|
6,766
|
|
Insurance, other than workers' compensation
|
|
10,881
|
|
|
|
9,566
|
|
Accrued interest payable
|
|
14,091
|
|
|
|
6,740
|
|
Accrued merger and integration
|
|
20,538
|
|
|
|
—
|
|
Other
|
|
31,648
|
|
|
|
27,163
|
|
Total
|
$
|
245,826
|
|
|
$
|
139,148
|
|
17
9
. Long Term Debt
2012 Credit Agreement
— On September 27, 2012, the Company entered into a Credit Agreement (the “Base Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, letter of credit issuer, swing line lender and lender, and each of the other lenders party thereto. The Base Credit Agreement (as amended, the “Credit Agreement”) is a committed senior unsecured credit facility that includes a revolving credit facility.
On July 8, 2016, the Company entered into Amendment No. 2 to Credit Agreement (“Amendment No. 2”), which amended the Base Credit Agreement to, among other things, make borrowing under the revolving credit facility subject to a borrowing base calculated by reference to the Company’s and certain of its subsidiaries’ eligible equipment, inventory, accounts receivable and unencumbered cash as described in Amendment No. 2. The revolving credit facility contains a letter of credit facility that is limited to $50 million and a swing line facility that is limited to $20 million, in each case outstanding at any time. The maturity date under the Base Credit Agreement was September 27, 2017 for the revolving facility; however, Amendment No. 2 extended the maturity date of $357.9 million in revolving credit commitments of certain lenders to March 27, 2019. On January 17, 2017, the Company entered into Amendment No. 3 to Credit Agreement, which amended the Credit Agreement by restating the definition of Consolidated EBITDA to provide for the add-back of transaction expenses related to the SSE merger. On January 24, 2017, the Company entered into an agreement with certain lenders under its revolving credit facility to increase the aggregate commitments under its revolving credit facility to approximately $595.8 million, subject to the satisfaction of certain conditions. The aggregate commitment increase became effective on April 20, 2017 upon the consummation of the SSE merger and the repayment and termination of the SSE credit facility. On April 20, 2017, the Company entered into Amendment No. 4 to Credit Agreement which permitted outstanding letters of credit under the SSE credit facility to be deemed to be incurred under the Company’s credit facility and increased the amount of the accordion feature of the Company’s revolving credit facility to permit aggregate commitments to be increased to an amount not to exceed $700 million (subject to satisfaction of certain conditions and the procurement of additional commitments from new or existing lenders). On April 20, 2017, the Company also entered into an additional commitment increase agreement with certain of its lenders pursuant to which total commitments available under the Company’s revolving credit facility (after giving effect to both commitment increases) increased to $632 million through September 2017 and to $490 million through March 2019. On October 27, 2017, the Company entered into an additional commitment increase agreement with certain of its lenders pursuant to which total commitments available under the Company’s revolving credit facility increased to $500 million through March 2019.
Loans under the Credit Agreement bear interest by reference, at the Company’s election, to the LIBOR rate or base rate, provided, that swing line loans bear interest by reference only to the base rate. Until September 27, 2017, the applicable margin on LIBOR rate loans varied from 2.75% to 3.25% and the applicable margin on base rate loans varied from 1.75% to 2.25%, in each case determined based upon the Company’s debt to capitalization ratio. Based on the Company’s debt to capitalization ratio at March 31, 2017, the applicable margin on LIBOR loans was 2.75% and the applicable margin on base rate loans was 1.75% as of July 1, 2017. Beginning September 27, 2017, the applicable margin on LIBOR rate loans varies from 3.25% to 3.75% and the applicable margin on base rate loans varies from 2.25% to 2.75%, in each case determined based on the Company’s excess availability under the revolving credit facility. As of September 30, 2017, the applicable margin on LIBOR rate loans was 3.25% and the applicable margin on base rate loans was 2.25%. A letter of credit fee is payable by the Company equal to the applicable margin for LIBOR rate loans times the daily amount available to be drawn under outstanding letters of credit. The commitment fee rate payable to the lenders for the unused portion of the revolving credit facility is 0.50%.
Each domestic subsidiary of the Company unconditionally guarantees all existing and future indebtedness and liabilities of the other guarantors and the Company arising under the Credit Agreement, other than (a) Ambar Lone Star Fluid Services LLC, (b) domestic subsidiaries that directly or indirectly have no material assets other than equity interests in, or capitalization indebtedness owed by, foreign subsidiaries, and (c) any subsidiary having total assets of less than $1 million. Such guarantees also cover obligations of the Company and any subsidiary of the Company arising under any interest rate swap contract with any person while such person is a lender or an affiliate of a lender under the Credit Agreement.
The Credit Agreement requires compliance with two financial covenants. The Company must not permit its debt to capitalization ratio to exceed 40%. The Credit Agreement generally defines the debt to capitalization ratio as the ratio of (a) total borrowed money indebtedness to (b) the sum of such indebtedness plus consolidated net worth, with consolidated net worth determined as of the last day of the most recently ended fiscal quarter. The Company also must not permit its interest coverage ratio as of the last day of a fiscal quarter to be less than 3.00 to 1.00. The Credit Agreement generally defines the interest coverage ratio as the ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) of the four prior fiscal quarters to interest charges for the same period. The Company was in compliance with these covenants at September 30, 2017.
18
The Credit Agreement
limits the Co
mpany’s ability to make investments in foreign subsidiaries or joint ventures such that, if the book value of all such investments since September 27, 2012 is above 20% of the total
consolidated
book value of the assets of the Company and its subsidiaries
on a pro forma basis, the Company will not be able to make such investment.
The Credit Agreement
also
restricts the Company’s ability to pay dividends and make equity repurchases, subject to certain exceptions, including an exception allowing such restric
ted payments if
,
before and immediately after giving effect to such restricted payment, the Pro Forma Debt Service Coverage Ratio (as defined in
the Credit Agreement
) is at least 1.50 to 1.00. In addition,
the Credit Agreement
requires that, if the
consolidated cash balance of the Company and its subsidiaries, subject to certain exclusions, is more than $100
million at the end of the day on which a borrowing is made, the Company can only use the proceeds from such borrowing to fund acquisitions, capi
tal expenditures and the repurchase of indebtedness, and if such proceeds are not used in such manner within three business days, the Company must repay such unused proceeds on the fourth business day following such borrowings
.
The Credit Agreement also contains customary representations, warranties and affirmative and negative covenants.
Events of default under the Credit Agreement include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, as well as a cross default event, loan document enforceability event, change of control event and bankruptcy and other insolvency events. If an event of default occurs and is continuing, then a majority of the lenders have the right, among others, to (i) terminate the commitments under the Credit Agreement, (ii) accelerate and require the Company to repay all the outstanding amounts owed under any loan document (provided that in limited circumstances with respect to insolvency and bankruptcy of the Company, such acceleration is automatic), and (iii) require the Company to cash collateralize any outstanding letters of credit.
As of September 30, 2017, the Company had $144 million outstanding under the revolving credit facility at a weighted average interest rate of 4.83%. The Company had $4.6 million in letters of credit outstanding at September 30, 2017 and, as a result, had available borrowing capacity of $342 million at that date.
2015 Reimbursement Agreement
— On March 16, 2015, the Company entered into a Reimbursement Agreement (the “Reimbursement Agreement”) with The Bank of Nova Scotia (“Scotiabank”), pursuant to which the Company may from time to time request that Scotiabank issue an unspecified amount of letters of credit. As of September 30, 2017, the Company had $54.9 million in letters of credit outstanding under the Reimbursement Agreement.
Under the terms of the Reimbursement Agreement, the Company will reimburse Scotiabank on demand for any amounts that Scotiabank has disbursed under any letters of credit. Fees, charges and other reasonable expenses for the issuance of letters of credit are payable by the Company at the time of issuance at such rates and amounts as are in accordance with Scotiabank’s prevailing practice. The Company is obligated to pay to Scotiabank interest on all amounts not paid by the Company on the date of demand or when otherwise due at the LIBOR rate plus 2.25% per annum, calculated daily and payable monthly, in arrears, on the basis of a calendar year for the actual number of days elapsed, with interest on overdue interest at the same rate as on the reimbursement amounts.
The Company has also agreed that if obligations under the Credit Agreement are secured by liens on any of its or any of its subsidiaries’ property, then the Company’s reimbursement obligations and (to the extent similar obligations would be secured under the Credit Agreement) other obligations under the Reimbursement Agreement and any letters of credit will be equally and ratably secured by all property subject to such liens securing the Credit Agreement.
Pursuant to a Continuing Guaranty dated as of March 16, 2015, the Company’s payment obligations under the Reimbursement Agreement are jointly and severally guaranteed as to payment and not as to collection by subsidiaries of the Company that from time to time guarantee payment under the Credit Agreement.
Senior Notes
— On October 5, 2010, the Company completed the issuance and sale of $300 million in aggregate principal amount of its 4.97% Series A Senior Notes due October 5, 2020 (the “Series A Notes”) in a private placement. The Series A Notes bear interest at a rate of 4.97% per annum. The Company pays interest on the Series A Notes on April 5 and October 5 of each year. The Series A Notes will mature on October 5, 2020.
On June 14, 2012, the Company completed the issuance and sale of $300 million in aggregate principal amount of its 4.27% Series B Senior Notes due June 14, 2022 (the “Series B Notes”) in a private placement. The Series B Notes bear interest at a rate of 4.27% per annum. The Company pays interest on the Series B Notes on April 5 and October 5 of each year. The Series B Notes will mature on June 14, 2022.
The Series A Notes and Series B Notes are senior unsecured obligations of the Company which rank equally in right of payment with all other unsubordinated indebtedness of the Company. The Series A Notes and Series B Notes are guaranteed on a senior unsecured basis by each of the existing domestic subsidiaries of the Company other than subsidiaries that are not required to be guarantors under the Credit Agreement.
19
Th
e Series A Notes and Series B Notes are prepayable at the Company’s option, in whole or in part, provided that in the case of a partial prepayment, prepayment must be in an amount not less than 5% of the aggregate principal amount of the notes then outstan
ding, at any time and from time to time at 100% of the principal amount prepaid, plus accrued and unpaid interest to the prepayment date, plus a “make-whole” premium as specified in the note purchase agreements.
The Company must offer to prepay the notes
upon the occurrence of any change of control.
In addition, the Company must offer to prepay the notes upon the occurrence of certain asset dispositions if the proceeds therefrom are not timely reinvested in productive assets.
If any offer to prepay is ac
cepted, the purchase price of each prepaid note is 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the prepayment date.
The respective note purchase agreements require compliance with two financial covenants. The Company must not permit its debt to capitalization ratio to exceed 50% at any time. The note purchase agreements generally define the debt to capitalization ratio as the ratio of (a) total borrowed money indebtedness to (b) the sum of such indebtedness plus consolidated net worth, with consolidated net worth determined as of the last day of the most recently ended fiscal quarter. The Company also must not permit its interest coverage ratio as of the last day of a fiscal quarter to be less than 2.50 to 1.00. The note purchase agreements generally define the interest coverage ratio as the ratio of EBITDA for the four prior fiscal quarters to interest charges for the same period. The Company was in compliance with these covenants at September 30, 2017.
Events of default under the note purchase agreements include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, a cross default event, a judgment in excess of a threshold event, the guaranty agreement ceasing to be enforceable, the occurrence of certain ERISA events, a change of control event and bankruptcy and other insolvency events. If an event of default under the note purchase agreements occurs and is continuing, then holders of a majority in principal amount of the respective notes have the right to declare all the notes then-outstanding to be immediately due and payable. In addition, if the Company defaults in payments on any note, then until such defaults are cured, the holder thereof may declare all the notes held by it pursuant to the note purchase agreement to be immediately due and payable.
Debt issuance costs are deferred and recognized as interest expense over the term of the underlying debt. Interest expense related to the amortization of debt issuance costs was approximately $710,000 and $2.0 million for the three months ended September 30, 2017 and 2016, respectively, and $2.0 million and $3.5 million for the nine months ended September 30, 2017 and 2016, respectively. Amortization of debt issuance costs for the three and nine months ended September 30, 2016 includes $1.4 million of costs related to the early termination of term loan agreements.
Presented below is a schedule of the principal repayment requirements of long-term debt as of September 30, 2017 (in thousands):
Year ending December 31,
|
|
|
|
2017
|
$
|
—
|
|
2018
|
|
—
|
|
2019
|
|
144,000
|
|
2020
|
|
300,000
|
|
2021
|
|
—
|
|
Thereafter
|
|
300,000
|
|
Total
|
$
|
744,000
|
|
10. Commitments and Contingencies
As of September 30, 2017, the Company maintained letters of credit in the aggregate amount of $59.5 million primarily for the benefit of various insurance companies as collateral for retrospective premiums and retained losses which could become payable under the terms of the underlying insurance contracts. These letters of credit expire annually at various times during the year and are typically renewed. As of September 30, 2017, no amounts had been drawn under the letters of credit.
As of September 30, 2017, the Company had commitments to purchase major equipment and make investments totaling approximately $191 million for its drilling, pressure pumping and oilfield rental tools businesses.
The Company’s pressure pumping business has entered into agreements to purchase minimum quantities of proppants and chemicals from certain vendors. These agreements expire in 2017, 2018, 2021 and 2041. As of September 30, 2017, the remaining obligation under these agreements was approximately $86.9 million, of which approximately $345,000 and $9.5 million relates to purchases required during the remainder of 2017 and 2018, respectively. In the event the required minimum quantities are not purchased during certain periods, the Company could be required to make a liquidated damages payment to the respective vendor for any shortfall.
20
T
he Company is party to various legal proceedings arising in th
e normal course of its business. T
he Company does not believe that the outcome of these proceedings, either individually or
in the aggregate, will have a material adverse effect
on its financial condition, results of operations or cash flows.
11. Stockholders’ Equity
Stock Offering
– On January
27, 2017, the Company completed an offering of 18.2 million shares of its common stock and raised net proceeds of $472 million. The Company used the net proceeds of the offering to repay SSE’s outstanding indebtedness of approximately $472 million.
Cash Dividends
— The Company paid cash dividends during the nine months ended September 30, 2017 and 2016 as follows:
2017:
|
Per Share
|
|
|
Total
|
|
|
|
|
|
|
(in thousands)
|
|
Paid on March 22, 2017
|
$
|
0.02
|
|
|
$
|
3,326
|
|
Paid on June 22, 2017
|
|
0.02
|
|
|
|
4,269
|
|
Paid on September 21, 2017
|
|
0.02
|
|
|
|
4,271
|
|
Total cash dividends
|
$
|
0.06
|
|
|
$
|
11,866
|
|
2016:
|
Per Share
|
|
|
Total
|
|
|
|
|
|
|
(in thousands)
|
|
Paid on March 24, 2016
|
$
|
0.10
|
|
|
$
|
14,712
|
|
Paid on June 23, 2016
|
|
0.02
|
|
|
|
2,953
|
|
Paid on September 22, 2016
|
|
0.02
|
|
|
|
2,953
|
|
Total cash dividends
|
$
|
0.14
|
|
|
$
|
20,618
|
|
On October 25, 2017, the Company’s Board of Directors approved a cash dividend on its common stock in the amount of $0.02 per share to be paid on December 21, 2017 to holders of record as of December 7, 2017. The amount and timing of all future dividend payments, if any, are subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial condition, terms of the Company’s debt agreements and other factors.
On September 6, 2013, the Company’s Board of Directors approved a stock buyback program that authorizes purchase of up to $200 million of the Company’s common stock in open market or privately negotiated transactions. As of September 30, 2017, the Company had remaining authorization to purchase approximately $187 million of the Company’s outstanding common stock under the stock buyback program. Shares purchased under a buyback program are accounted for as treasury stock.
During the nine months ended September 30, 2017, the Company withheld 369,862 shares with respect to employees’ tax withholding obligations upon vesting of restricted shares and 7,989 shares with respect to the exercise of a stock option. These shares were acquired at fair market value pursuant to the terms of the 2014 Plan.
Treasury stock acquisitions during the nine months ended September 30, 2017 were as follows (dollars in thousands):
|
Shares
|
|
|
Cost
|
|
Treasury shares at beginning of period
|
|
43,392,617
|
|
|
$
|
911,094
|
|
Purchases pursuant to stock buyback program
|
|
5,503
|
|
|
|
109
|
|
Acquisitions pursuant to long-term incentive plan
|
|
377,851
|
|
|
|
6,923
|
|
Treasury shares at end of period
|
|
43,775,971
|
|
|
$
|
918,126
|
|
On April 20, 2017, pursuant to the merger agreement, the Company acquired all of the issued and outstanding shares of common stock of SSE, in exchange for approximately 46.3 million shares of common stock of the Company.
On October 11, 2017, the Company acquired all of the issued and outstanding limited liability company interests of MS Directional for $75 million in cash and approximately 8.8 million shares of the Company’s common stock.
21
1
2
. Income Taxes
The Company’s effective income tax rate for the three months ended September 30, 2017 was 28.8%, compared with 37.0% for the three months ended September 30, 2016. For the nine months ended September 30, 2017, the effective income tax rate was 36.1%, compared to 35.8% for the nine months ended September 30, 2016. The effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in pretax income in countries with varying statutory tax rates, impact of state and local taxes, and other differences related to the recognition of income and expense between U.S. GAAP and tax.
Compared with the third quarter of 2016, the lower effective tax rate for the third quarter of 2017 was primarily related to the impact of share-based payment transactions and non-deductible transaction costs associated with the SSE merger, as well as true-up adjustments of U.S. taxes for tax return filings during the third quarter of 2017.
13. Fair Values of Financial Instruments
The carrying values of cash and cash equivalents, trade receivables and accounts payable approximate fair value due to the short-term maturity of these items. These fair value estimates are considered Level 1 fair value estimates in the fair value hierarchy of fair value accounting.
The estimated fair value of the Company’s outstanding debt balances as of September 30, 2017 and December 31, 2016 is set forth below (in thousands):
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
4.97% Series A Senior Notes
|
$
|
300,000
|
|
|
$
|
305,440
|
|
|
$
|
300,000
|
|
|
$
|
283,534
|
|
4.27% Series B Senior Notes
|
|
300,000
|
|
|
|
296,172
|
|
|
|
300,000
|
|
|
|
263,194
|
|
Total debt
|
$
|
600,000
|
|
|
$
|
601,612
|
|
|
$
|
600,000
|
|
|
$
|
546,728
|
|
The fair values of the Series A Notes and Series B Notes at September 30, 2017 and December 31, 2016 are based on discounted cash flows associated with the respective notes using current market rates of interest at those respective dates. For the Series A Notes, the current market rates used in measuring this fair value were 4.32% at September 30, 2017 and 6.65% at December 31, 2016. For the Series B Notes, the current market rates used in measuring this fair value were 4.58% at September 30, 2017 and 7.02% at December 31, 2016. These fair value estimates are based on observable market inputs and are considered Level 2 fair value estimates in the fair value hierarchy of fair value accounting.
22
1
4
. Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to provide guidance on the recognition of revenue from customers. Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. This guidance also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty, if any, of revenue and cash flows arising from contracts with customers. The requirements in this update are effective during interim and annual periods beginning after December 15, 2017. The Company has identified and reviewed revenue streams and is in the process of performing a detailed analysis of a subset of contracts representative of the revenue streams. At this time, the Company expects to adopt this new revenue guidance utilizing the modified retrospective method of adoption in the first quarter of 2018. The Company is currently evaluating the impact that the new revenue standard will have on its consolidated financial statements upon adoption.
In February 2016, the FASB issued an accounting standards update to provide guidance for the accounting for leasing transactions. The standard requires the lessee to recognize a lease liability along with a right-of-use asset for all leases with a term longer than one year. A lessee is permitted to make an accounting policy election by class of underlying asset to not recognize the lease liability and related right-of-use asset for leases with a term of one year or less. The provisions of this standard also apply to situations where the Company is the lessor and will require the Company to separate lease components from non-lease components within a contract. The requirements in this update are effective during interim and annual periods beginning after December 15, 2018. The Company previously disclosed its intention to adopt this standard at the same time as it adopts the new revenue standard discussed above; however, the Company now expects to adopt this new guidance in the first quarter of 2019. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.
In November 2015, the FASB issued an accounting standards update to provide guidance for the presentation of deferred tax liabilities and assets. Under this guidance, for a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. This guidance became effective for the Company during the three months ended March 31, 2017. The adoption of this update was applied retrospectively, resulting in the reclassification of $36.4 million from current deferred tax assets as of December 31, 2016. Of this amount, $4.1 million was reclassified to long-term deferred tax assets and $32.3 million was reclassified to long-term deferred tax liabilities.
In March 2016, the FASB issued an accounting standards update to provide guidance for the accounting for share-based payment transactions, including the related income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance became effective for the Company during the three months ended March 31, 2017. The Company believes this guidance has caused and will continue to cause volatility in its effective tax rates and diluted earnings per share due to the tax effects related to share-based payments being recorded in the statement of operations. The volatility in future periods will depend on the Company’s stock price and the number of shares that vest in the case of restricted stock, restricted stock units and performance stock units, or the number of shares that are exercised in the case of stock options.
In August 2016, the FASB issued an accounting standards update to clarify the presentation of cash receipts and payments in specific situations on the statement of cash flows. The requirements in this update are effective during interim and annual periods in fiscal years beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued an accounting standards update to eliminate Step 2 from the goodwill impairment test. An entity will now perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The requirements in this update are effective during interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company adopted this update in 2017, which did not have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued an accounting standards update that provided clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting provisions. The requirements in this update are effective during interim and annual periods in fiscal years beginning after December 15, 2017. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
23
S
PECIAL NOTE
REGARDING FORWARD LOOKING STATEMENT
S
This Quarterly Report on Form 10-Q (this “Report”) and other public filings and press releases by us contain “forward-looking statements” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended. These “forward-looking statements” involve risk and uncertainty. These forward-looking statements include, without limitation, statements relating to: liquidity; revenue and cost expectations and backlog; financing of operations; oil and natural gas prices; rig counts, source and sufficiency of funds required for building new equipment, upgrading existing equipment and additional acquisitions (if opportunities arise); impact of inflation; demand for our services; competition; equipment availability; government regulation; debt service obligations; and other matters. Our forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and often use words such as “anticipate,” “believe,” “budgeted,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict”, “potential”, “project,” “pursue,” “should,” “strategy,” “target,” or “will,” or the negative thereof and other words and expressions of similar meaning. The forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances.
On April 20, 2017, we completed our previously announced merger with Seventy Seven Energy Inc. (“SSE”), pursuant to which a subsidiary of ours was merged with and into SSE, with SSE continuing as the surviving entity and one of our wholly owned subsidiaries (the “SSE merger”). On October 11, 2017, we completed our acquisition of Multi-Shot, LLC (“MS Directional”). These forward-looking statements include, without limitation, our expectations with respect to:
|
•
|
synergies, costs and other anticipated financial impacts of the SSE merger and the MS Directional acquisition;
|
•
future financial and operating results of the combined company; and
•
the combined company’s plans, objectives, expectations and intentions with respect to future operations and services.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from actual future results expressed or implied by the forward-looking statements. These risks and uncertainties also include those set forth under “Risk Factors,” in Item 1A of Part II of this Report, as well, as among others, risks and uncertainties relating to:
|
•
|
the diversion of management time on merger-related issues;
|
|
•
|
the ultimate timing, outcome and results of integrating our operations with those of SSE and MS Directional;
|
|
•
|
the effects of our business combination with SSE and MS Directional acquisition, including the combined company’s future financial condition, results of operations, strategy and plans;
|
|
•
|
potential adverse reactions or changes to business relationships resulting from the SSE merger and MS Directional acquisition;
|
|
•
|
expected benefits from the SSE merger and MS Directional acquisition and our ability to realize those benefits;
|
|
•
|
the results of merger-related litigation, settlements and investigations;
|
|
•
|
availability of capital and the ability to repay indebtedness when due;
|
|
•
|
volatility in customer spending and in oil and natural gas prices that could adversely affect demand for our services and their associated effect on rates;
|
|
•
|
utilization, margins and planned capital expenditures;
|
|
•
|
interest rate volatility;
|
|
•
|
compliance with covenants under our debt agreements;
|
|
•
|
excess availability of land drilling rigs and pressure pumping equipment, including as a result of reactivation or construction;
|
|
•
|
equipment specialization and new technologies;
|
|
•
|
operating hazards attendant to the oil and natural gas business;
|
|
•
|
failure by customers to pay or satisfy their contractual obligations (particularly with respect to fixed-term contracts);
|
|
•
|
difficulty in building and deploying new equipment;
|
24
|
•
|
expansion and development trends of the oil and natural gas industry;
|
|
•
|
shortages, delays in delivery, and interruptions in supply, of equipment and materials;
|
|
•
|
the ability to retain management and field personnel;
|
|
•
|
the ability to effectively identify and enter new markets;
|
|
•
|
the ability to realize backlog;
|
|
•
|
strength and financial resources of competitors;
|
|
•
|
environmental risks and ability to satisfy future environmental costs;
|
|
•
|
global economic conditions;
|
|
•
|
adverse oil and natural gas industry conditions;
|
|
•
|
adverse credit and equity market conditions;
|
|
•
|
competition and demand for our services;
|
|
•
|
liabilities from operations for which we do not have and receive full indemnification or insurance;
|
|
•
|
governmental regulation;
|
|
•
|
ability to obtain insurance coverage on commercially reasonable terms;
|
|
•
|
other financial, operational and legal risks and uncertainties detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”).
|
We caution that the foregoing list of factors is not exhaustive. Additional information concerning these and other risk factors is contained in our Annual Report on Form 10-K for the year ended December 31, 2016, our Quarterly Reports on Form 10-Q for the three months ended March 31, 2017 and June 30, 2017 and other SEC filings. You are cautioned not to place undue reliance on any of our forward-looking statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to update publicly or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise. In the event that we update any forward-looking statement, no inference should be made that we will make additional updates with respect to that statement, related matters or any other forward-looking statements. All subsequent written and oral forward-looking statements concerning us or other matters and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above.
25