PTEN Patterson UTI Energy Inc

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2015

or

For the transition period from                     to                     

Commission file number 0-22664

 

Patterson-UTI Energy, Inc.

(Exact name of registrant as specified in its charter)

 

 

(281) 765-7100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes R     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes R    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes £    No R

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

147,178,930 shares of common stock, $0.01 par value, as of October 22, 2015

 

 

 

 

 

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

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PART I  — FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

The following unaudited condensed consolidated financial statements include all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)

 

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

 

 

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 

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

 

 

 

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

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

 

 

 

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

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

 

 

 

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

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

 

 

 

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

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 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 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 adjustments which are of a normal recurring nature considered necessary for a fair statement of the information in conformity with accounting principles generally accepted in the United States of America have been included. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2014, as presented herein, was derived from the audited consolidated balance sheet of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2014. The results of operations for the nine months ended September 30, 2015 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 uses the Canadian dollar as its functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive income, which is a separate component of stockholders’ equity.

The carrying values of cash and cash equivalents, trade receivables and accounts payable approximate fair value.

The Company provides a dual presentation of its net income (loss) per common share in its unaudited condensed consolidated statements of operations: Basic net income (loss) per common share (“Basic EPS”) and diluted net income (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.

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The following table presents information necessary to calculate net income (loss) per share for the three and nine month periods ended September 30, 2015 and 2014 as well as potentially dilutive 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):

 

 

 

2. 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 consist of equity instruments in the form of stock options, restricted stock or restricted stock units and have included service 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.

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 the 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. 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, 2015 and 2014 follow:

 

 

 

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Stock option activity from January 1, 2015 to September 30, 2015 follows:

 

Restricted Stock — For all restricted stock awards 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, 2015 to September 30, 2015 follows:

 

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.  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.

Restricted stock unit activity from January 1, 2015 to September 30, 2015 follows:

 

 

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Performance Unit Awards — In 2011, 2012, 2013, 2014 and 2015, the Company granted stock-settled performance unit awards to certain executive officers (the “Stock-Settled Performance Units”). The Stock-Settled Performance Units provide for the recipients to receive a grant of shares of stock upon the achievement of certain performance goals established by the Compensation Committee during the performance period. The performance units will only have a payout if total shareholder return is positive for the performance period and, when compared to the peer group, is at or above the 25th percentile. The performance period for the Stock-Settled Performance Units is the three year period commencing on April 1 of the year of grant. For the 2012 and 2013 Stock-Settled Performance Units, the performance period can extend for an additional two years in certain circumstances. The performance goals for the Stock-Settled 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 performance units. Generally, the recipients will receive a target number of shares if the Company’s total shareholder return is positive and, when compared to the peer group, is at the 50^th percentile and two times the target if at the 75^th percentile or higher. If the Company’s total shareholder return is positive, and, when compared to the peer group, is at the 25^th percentile, the recipients will only receive one-half of the target number of shares. The grant of shares when achievement is between the 25^th and 75^th percentile will be determined on a pro-rata basis. The target number of shares with respect to the 2012 Stock-Settled Performance Units was 192,000. The performance period for the 2012 Stock-Settled Performance Units ended on March 31, 2015, and the Company’s total shareholder return was at the 87^th percentile. In April 2015, 384,000 shares were issued to settle the 2012 Stock-Settled Performance Units.

The total target number of shares with respect to the Stock-Settled Performance Units is set forth below:

 

Because the performance units are stock-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 Stock-Settled Performance Units is set forth below (in thousands):

 

 

 

These fair value amounts are charged to expense on a straight-line basis over the performance period. Compensation expense associated with the Stock-Settled Performance Units is shown below (in thousands):

 

 

 

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3. Property and Equipment

Property and equipment consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

 

 

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 will be retired.  In the quarter ended September 30, 2015, the Company identified 24 mechanical rigs and 9 non-APEX® electric rigs that will no longer be marketed.  Also, the Company has 15 additional mechanical rigs that are not currently operating.  Although these 15 rigs remain marketable, the Company has lower expectations with respect to utilization of these rigs due to the industry shift to higher specification drilling rigs.  The Company recorded a charge of $131 million related to the retirement of the 33 rigs, the 15 mechanical rigs that remain marketable but are not operating, and the write-down of excess spare rig components to their realizable values.  

The Company also periodically evaluates its pressure pumping assets and in the quarter ended September 30, 2015, recorded a charge of $22.0 million for the write-down of pressure pumping equipment and certain closed facilities.  

The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable (a “triggering event”).  During the first quarter of 2015, oil prices averaged $48.54 per barrel and reached a low of $43.39 per barrel on March 17, 2015.  Oil prices improved during the second quarter of 2015 and averaged $57.85 per barrel.  Although the price improvement was earlier than the Company projected, this improvement was generally consistent with the Company’s assumption at December 31, 2014, that oil prices would improve late in 2015 and continue to improve in 2016, resulting in improved activity levels for both the contract drilling and pressure pumping businesses.  During the second quarter of 2015 as oil prices increased, the Company received requests from customers to reactivate drilling rigs to resume operations in the third quarter of 2015.  The Company believed this was an indication that future activity levels would be improving for both the contract drilling and pressure pumping businesses.  During the third quarter of 2015, however, oil prices declined and averaged $46.42 per barrel and reached a new low for 2015 of $38.22 per barrel on August 24, 2015.  With lower oil prices in August, the Company lowered its expectations with respect to future activity levels in both the contract drilling and pressure pumping businesses.  In light of the Company’s revised expectations of the duration of the lower oil and natural gas commodity price environment and the related deterioration of the markets for contract drilling and pressure pumping services during the third quarter of 2015, management deemed it necessary to assess the recoverability of long-lived asset groups for both contract drilling and pressure pumping.  The Company performed a Step 1 analysis as required by ASC 360-10-35 to assess the recoverability of long-lived assets within its contract drilling and pressure pumping segments.  With respect to these assets, future cash flows were estimated over the expected remaining life of the assets, and the Company determined that, on an undiscounted basis, expected cash flows exceeded the carrying value of the long-lived assets, and no impairment was indicated.  The expected cash flows for the contract drilling segment include the backlog of commitments for contract drilling revenues under term contracts, which was approximately $801 million at September 30, 2015.  Rigs not under term contracts will be subject to pricing in the spot market.  Utilization and rates for rigs in the spot market and for the pressure pumping segment were estimated based upon the Company’s historical experience in prior downturns.  Also, the expected cash flows for the contract drilling and pressure pumping segments are based on the assumption that activity levels in both segments would begin to recover in the first quarter of 2017 in response to improved oil prices.   While management believes these assumptions with respect to future pricing for oil and natural gas are reasonable, actual future prices may vary significantly from the ones that were assumed.  The timeframe over which oil and natural gas prices will recover is highly uncertain.  Potential events that could affect the Company’s assumptions regarding future prices and the timeframe for a recovery are affected by factors such as:

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All of these factors are beyond the Company’s control. If the current lower oil and natural gas commodity price environment were to last into 2017 and beyond, the Company’s actual cash flows would likely be less than the expected cash flows used in this assessment and could result in impairment charges in the future and such impairment could be material.  

With respect to the long-lived assets in the Company’s oil and natural gas exploration and production segment, the Company assesses the recoverability of long-lived assets each quarter due to revisions in its oil and natural gas reserve estimates and expectations about future commodity prices.  The Company’s analysis indicated that the carrying amounts of certain oil and natural gas properties were not recoverable at various testing dates in 2015.  The Company’s estimates of expected future net cash flows from impaired properties are used in measuring the fair value of such properties.  The Company recorded impairment charges of $9.3 million in 2015, including $1.9 million in the quarter ended September 30, 2015, related to its oil and natural gas properties.  

 

 

4. Business Segments

The Company’s revenues, operating profits and identifiable assets are primarily attributable to three business segments: (i) contract drilling of oil and natural gas wells, (ii) pressure pumping services and (iii) the investment, on a non-operating working interest basis, in oil and natural gas properties. Each of these segments represents a distinct type of business. These segments have separate management teams which report 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. Separate financial data for each of our business segments is provided in the table below (in thousands):

 

 

 

 

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5. Goodwill and Intangible Assets

Goodwill — Goodwill by operating segment as of September 30, 2015 and changes for the nine months then ended are as follows (in thousands):

 

 

There were no accumulated impairment losses related to the goodwill in the contract drilling operating segment as of September 30, 2015 or December 31, 2014.

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 purposes of impairment testing, goodwill is evaluated at the reporting unit level.  The Company’s reporting units for impairment testing have been determined to be its operating segments.  The Company first 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.  If so, then goodwill impairment is determined using a two-step impairment test.  From time to time, the Company may perform the first step of the quantitative testing for goodwill impairment in lieu of performing the qualitative assessment.  The first step is to compare the fair value of an entity’s reporting units to the respective carrying value of those reporting units.  If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed whereby the fair value of the reporting unit is allocated to its identifiable tangible and intangible assets and liabilities with any remaining fair value representing the fair value of goodwill.  If this resulting fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized in the amount of the shortfall.

 

During the first quarter of 2015, oil prices averaged $48.54 per barrel and reached a low of $43.39 per barrel on March 17, 2015.  Oil prices improved during the second quarter of 2015 and averaged $57.85 per barrel.  Although the price improvement was earlier than the Company projected, this improvement was generally consistent with the Company’s assumption at December 31, 2014, that oil prices would improve in late 2015 and continue to improve in 2016, resulting in improved activity levels for both the contract drilling and pressure pumping businesses.  During the second quarter of 2015 as oil prices increased, the Company received requests from customers to reactivate drilling rigs to resume operations in the third quarter of 2015.  The Company believed this was an indication that future activity levels would be improving for both the contract drilling and pressure pumping businesses.  During the third quarter of 2015, however, oil prices declined and averaged $46.42 per barrel and reached a new low for 2015 of $38.22 per barrel on August 24, 2015.  With lower oil prices in August, the Company lowered its expectations with respect to future activity levels in both the contract drilling and pressure pumping businesses.  In light of the Company’s revised expectations of the duration of the lower oil and natural gas commodity price environment and the related deterioration of the markets for contract drilling and pressure pumping services during the third quarter of 2015, the Company performed a goodwill impairment test as of September 30, 2015.  In completing the first step of the analysis, the fair value of each reporting unit was estimated using both the income and market valuation methods. The estimate of the fair value of each reporting unit required the use of significant unobservable inputs, representative of a Level 3 fair value measurement.  The inputs included assumptions related to the future performance of the Company’s contract drilling and pressure pumping reporting units, such as future oil and natural gas prices and projected demand for the Company’s services, and assumptions related to discount rates, long-term growth rates and control premiums.

 

Based on the results of the first step of the goodwill impairment test as of September 30, 2015, management concluded that no impairment was indicated in its contract drilling reporting unit; however, impairment was indicated in its pressure pumping reporting unit.  In the three months ended September 30, 2015, the Company recognized an impairment charge of $125 million associated with the impairment of the goodwill of the pressure pumping reporting unit.   The implied fair value of goodwill was estimated using a variety of valuation methods, including the income and market approaches.  The estimate of fair value required the use of significant unobservable inputs, representative of a Level 3 fair value measurement. The inputs included assumptions related to the future performance of the Company’s pressure pumping reporting unit, such as future oil and natural gas prices and projected demand for the Company’s services, and assumptions related to discount rates, long-term growth rates and control premiums.  

Intangible Assets — Intangible assets were recorded in the pressure pumping operating segment in connection with the fourth quarter 2010 acquisition of the assets of a pressure pumping business. As a result of the purchase price allocation, the Company

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recorded an intangible asset related to the customer relationships acquired. The intangible asset was recorded at fair value on the date of acquisition.

The value of the customer relationships was estimated using a multi-period excess earnings model to determine the present value of the projected cash flows associated with the customers in place at the time of the acquisition and taking into account a contributory asset charge. The resulting intangible asset is being amortized on a straight-line basis over seven years. Amortization expense of approximately $911,000 was recorded in the three months ended September 30, 2015 and 2014, and amortization expense of approximately $2.7 million was recorded in the nine months ended September 30, 2015 and 2014 associated with customer relationships.  The assessment of the recoverability of the pressure pumping asset group included the customer relationship intangible asset and no impairment was indicated.

The following table presents the gross carrying amount and accumulated amortization of the customer relationships as of September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

6. Accrued Expenses

Accrued expenses consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

7. Asset Retirement Obligation

The Company records a liability for the estimated costs to be incurred in connection with the abandonment of oil and natural gas properties in the future. This liability is included in the caption “other” in the liabilities section of the condensed consolidated balance sheet. The following table describes the changes to the Company’s asset retirement obligations during the nine months ended September 30, 2015 and 2014 (in thousands):

 

 

 

8. Long Term Debt

2012 Credit Agreement — On September 27, 2012, the Company entered into a Credit Agreement (as amended, the “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 Credit Agreement is a committed senior unsecured credit facility that includes a revolving credit facility and a term loan facility.

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The revolving credit facility permits aggregate borrowings of up to $500 million outstanding at any time. The revolving credit facility contains a letter of credit facility that is limited to $150 million and a swing line facility that is limited to $40 million, in each case outstanding at any time.

The term loan facility provides for a loan of $100 million, which was drawn on December 24, 2012. The term loan facility is payable in quarterly principal installments, which commenced December 27, 2012. The installment amounts vary from 1.25% of the original principal amount for each of the first four quarterly installments, 2.50% of the original principal amount for each of the subsequent eight quarterly installments, 5.00% of the original principal amount for the subsequent four quarterly installments and 13.75% of the original principal amount for the final four quarterly installments.

Subject to customary conditions, the Company may request that the lenders’ aggregate commitments with respect to the revolving credit facility and/or the term loan facility be increased by up to $100 million, not to exceed total commitments of $700 million. The maturity date under the Credit Agreement is September 27, 2017 for both the revolving facility and the term facility.

 

Loans under the Credit Agreement bear interest by reference, at the Company’s election, to the LIBOR rate or base rate, provided, that swing line loans bear interest by reference only to the base rate. The applicable margin on LIBOR rate loans varies from 2.25% to 3.25% and the applicable margin on base rate loans varies from 1.25% to 2.25%, in each case determined based upon the Company’s debt to capitalization ratio. As of September 30, 2015 the applicable margin on LIBOR rate loans was 2.25% and the applicable margin on base rate loans was 1.25%. Based on the Company’s debt to capitalization ratio at June 30, 2015, the applicable margin on LIBOR loans is 2.25% and the applicable margin on base rate loans is 1.25% as of October 1, 2015.  Based on the Company’s debt to capitalization ratio at September 30, 2015, the applicable margin on LIBOR loans will be 2.25% and the applicable margin on base rate loans will be 1.25% as of January 1, 2016.  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 credit facility is 0.50%.

Each domestic subsidiary of the Company will unconditionally guarantee 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 45%. 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 the 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, 2015. 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, 2015, the Company had $75.0 million principal amount outstanding under the term loan facility at an interest rate of 2.625% and no amounts outstanding under the revolving credit facility. The Company currently has available borrowing capacity of $500 million under the revolving credit facility.

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, 2015, the Company had $41.3 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

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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 “Continuing Guaranty”), 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.

2015 Term Loan Agreement — On March 18, 2015, the Company entered into a Term Loan Agreement (the “2015 Term Loan Agreement”) with Wells Fargo Bank, N.A., as administrative agent and lender, each of the other lenders party thereto, Wells Fargo Securities, LLC, as Lead Arranger and Sole Book Runner, and Bank of America, N.A. and The Bank Of Tokyo-Mitsubishi UFJ, LTD., as Co-Syndication Agents.

The 2015 Term Loan Agreement is a senior unsecured single-advance term loan facility pursuant to which the Company made a term loan borrowing of $200 million on March 18, 2015 (the “Term Loan Borrowing”).  The Term Loan Borrowing is payable in quarterly principal installments, together with accrued interest, on each June 30, September 30, December 31 and March 31, commencing on June 30, 2015.  Each of the first four principal installments is in an amount equal to 2.5% of the Term Loan Borrowing and each successive quarterly installment, until and including June 30, 2017, is in an amount equal to 5.0% of the Term Loan Borrowing, with the outstanding principal balance of the Term Loan Borrowing due on the maturity date under the 2015 Term Loan Agreement.  The maturity date under the 2015 Term Loan Agreement is September 27, 2017.  Loans under the 2015 Term Loan Agreement bear interest, at the Company’s election, at the per annum rate of LIBOR rate plus 3.25% or base rate plus 2.25%.

Each domestic subsidiary of the Company will unconditionally guarantee all existing and future indebtedness and liabilities of the other guarantors and the Company arising under the 2015 Term Loan Agreement and other Loan Documents (as defined in the 2015 Term Loan 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.

The 2015 Term Loan Agreement requires quarterly compliance with two financial covenants.  The Company must not permit its debt to capitalization ratio to exceed 45%.  The 2015 Term Loan 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 most recently ended fiscal quarter.  The Company also must not permit the interest coverage ratio as of the last day of a fiscal quarter to be less than 3.00 to 1.00.  The 2015 Term Loan Agreement generally defines the interest coverage ratio as the ratio of 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, 2015.

The 2015 Term Loan Agreement further provides that neither the Company nor its subsidiaries is permitted to make restricted payments unless, after giving effect to such restricted payment, its pro forma ratio of debt to EBITDA for the four prior fiscal quarters, determined as of the preceding ending quarterly period, does not exceed 2.50 to 1.00.  Restricted payments are generally defined as (a) dividends and distributions made on account of equity interests of the Company or its subsidiaries and (b) payments made to redeem, repurchase or otherwise retire equity interests of the Company or its subsidiaries.  Payments made solely in the form of common equity interests, made to the Company and its subsidiaries, or made in connection with the Company’s long term incentive plans are not restricted payments under the 2015 Term Loan Agreement.

The 2015 Term Loan Agreement also contains customary representations, warranties, affirmative and negative covenants, and events of default.  Events of default under the 2015 Term Loan 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 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).

As of September 30, 2015, the Company had $190 million principal amount outstanding under the 2015 Term Loan Agreement at a rate of 3.625%.

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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 will pay 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 will pay 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 domestic subsidiaries of the Company other than subsidiaries that are not required to be guarantors under the Credit Agreement.

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

The respective note purchase agreements require compliance with two financial covenants. The Company must not permit its debt to capitalization ratio to exceed 50% at any time. The note purchase agreements generally define the debt to capitalization ratio as the ratio of (a) total borrowed money indebtedness to (b) the sum of such indebtedness plus consolidated net worth, with consolidated net worth determined as of the last day of the most recently ended fiscal quarter. The Company also must not permit the 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 that same period. The Company was in compliance with these covenants at September 30, 2015.

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.

The Company incurred approximately $2.0 million in debt issuance costs during 2015 in connection with the Reimbursement Agreement and the 2015 Term Loan Agreement. 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 $746,000 for the three months ended September 30, 2015 and $547,000 for the three months ended September 30, 2014.  Interest expense related to the amortization of debt issuance costs was approximately $2.0 million for the nine months ended September 30, 2015 and $1.6 million for the nine months ended September 30, 2014.

Presented below is a schedule of the principal repayment requirements of long-term debt by fiscal year as of September 30, 2015 (in thousands):

 

 

 

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9. Commitments, Contingencies and Other Matters     

As of September 30, 2015, the Company maintained letters of credit in the aggregate amount of $41.3 million 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, 2015, no amounts had been drawn under the letters of credit.

As of September 30, 2015, the Company had commitments to purchase approximately $114 million of major equipment for its drilling and pressure pumping 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 2016, 2017 and 2018. As of September 30, 2015, the remaining obligation under these agreements was approximately $55.4 million, of which materials with a total purchase price of approximately $1.8 million were required to be purchased during the remainder of 2015. In the event that the required minimum quantities are not purchased during any contract year, the Company could be required to make a liquidated damages payment to the respective vendor for any shortfall.

In November 2011, the Company’s pressure pumping business entered into an agreement with a proppant vendor to advance up to $12.0 million to such vendor to finance the construction of certain processing facilities. This advance is secured by the underlying processing facilities and bears interest at an annual rate of 5.0%. Repayment of the advance is to be made through discounts applied to purchases from the vendor and repayment of all amounts advanced must be made no later than October 1, 2017. As of September 30, 2015, advances of approximately $11.8 million had been made under this agreement and principal repayments of approximately $10.5 million had been received, resulting in a balance outstanding of approximately $1.3 million.

A $12.3 million charge related to the previously disclosed settlement of a lawsuit filed by the U.S. Equal Employment Opportunity Commission against the Company’s U.S. contract drilling subsidiary was recorded in the first quarter of 2015.

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

 

 

10. Stockholders’ Equity

Cash Dividends — The Company paid cash dividends during the nine months ended September 30, 2014 and 2015 as follows:

 

 

 

On October 21, 2015, the Company’s Board of Directors approved a cash dividend on its common stock in the amount of $0.10 per share to be paid on December 24, 2015 to holders of record as of December 10, 2015. 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 credit facilities and other 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, 2015, 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.

Treasury stock acquisitions during the nine months ended September 30, 2015 were as follows (dollars in thousands):

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11. Income Taxes

 

The Company’s effective income tax rate was 33.8% for the nine months ended September 30, 2015, compared to 32.4% for the nine months ended September 30, 2014. The Domestic Production Activities Deduction was enacted as part of the American Jobs Creation Act of 2004 (as revised by the Emergency Economic Stabilization Act of 2008), and allows a deduction of 9% on the lesser of qualified production activities income or taxable income. For financial statement purposes, the Company expects a loss before income taxes for the year ending December 31, 2015; however, the Company currently expects to have taxable income for the year ending December 31, 2015, and the Domestic Production Activities Deduction is expected to provide a permanent tax benefit for 2015.  The permanent tax benefit for 2015 is expected to be lower in 2015 due to lower expected taxable income in 2015 than in 2014.  The interplay between the expected loss before income taxes for financial statement purposes and the permanent tax benefit expected to be provided by the Domestic Production Activities Deduction resulted in a higher effective income tax rate for the nine months ended September 30, 2015.

 

 

12. 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 (including current portion) as of September 30, 2015 and December 31, 2014 is set forth below (in thousands):

 

 

The carrying values of the balances outstanding under the Credit Agreement and the 2015 Term Loan Agreement approximate their fair values as these instruments have a floating interest rate. The fair value of the Series A Notes and the Series B Notes at September 30, 2015 and December 31, 2014 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 4.86% at September 30, 2015 and 5.77% at December 31, 2014.  For the Series B Notes, the current market rates used in measuring this fair value were 5.18% at September 30, 2015 and 6.00% at December 31, 2014. 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.

 

 

13. Recently Issued Accounting Standards

In May 2014, the 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

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arising from contracts with customers. The requirements in this update are effective during interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

In June 2014, the FASB issued an accounting standards update to provide guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The requirements in this update are effective during interim and annual periods beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued an accounting standards update to provide guidance for the presentation of debt issuance costs.  Under this guidance, debt issuance costs shall be presented in the balance sheet as a direct deduction from the carrying amount of the related debt and shall not be classified as a deferred charge. Amortization of debt issuance costs shall continue to be reported as interest expense.  The requirements in this update are effective during interim and annual periods beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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; source and sufficiency of funds required for building new equipment and additional acquisitions (if further opportunities arise); impact of inflation; demand for our services; competition; equipment availability; government regulation; 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 “anticipates,” “believes,” “budgeted,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “project,” “strategy,” 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. 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. Forward-looking statements may be made orally or in writing, including, but not limited to, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report and other sections of our filings with the United States Securities and Exchange Commission (the “SEC”) under the Exchange Act and the Securities Act.

Forward-looking statements are not guarantees of future performance and a variety of factors could cause actual results to differ materially from the anticipated or expected results expressed in or suggested by these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, 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, global economic conditions, excess availability of land drilling rigs and pressure pumping equipment, including as a result of reactivation or construction, equipment specialization and new technologies, adverse industry conditions, adverse credit and equity market conditions, difficulty in building and deploying new equipment and integrating acquisitions, shortages, delays in delivery and interruptions in supply of equipment, supplies and materials, weather, loss of key customers, liabilities from operations for which we do not have and receive full indemnification or insurance, ability to effectively identify and enter new markets, governmental regulation, ability to realize backlog, ability to retain management and field personnel and other factors. Refer to “Risk Factors” contained in Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2014 for a more complete discussion of factors that might affect our performance and financial results. You are cautioned not to place undue reliance on any of our forward-looking statements. These forward-looking statements are intended to relay our expectations about the future, and speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, changes in internal estimates or otherwise, except as required by law.

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Recent Developments — Oil prices declined significantly during the second half of 2014 and continued to decline in the first quarter of 2015.  The closing price of oil was as high as $105.68 per barrel during the third quarter of 2014 and during the first quarter of 2015 reached a low of $43.39 on March 17, 2015.  Oil prices improved somewhat during the second quarter reaching $61.36 on June 10, 2015.  However, oil prices declined during the third quarter to a low of $38.22 on August 24, 2015 and the closing price of oil was $43.19 on October 26, 2015.  As a result of the prolonged decline in oil prices, our industry continues to experience a severe downturn.  Although the magnitude as well as the duration of this downturn are not yet known, we believe that industry activity in both contract drilling and pressure pumping will fall further into year end and continue to fall into 2016, absent a recovery in oil prices.  

Low commodity prices are negatively impacting spending by exploration and production companies.  The impact of these spending reductions is evidenced by the published rig counts, which have declined by over 55% in the United States since the recent peak in October 2014.  

Our rig count has also declined.  During October 2014, the number of our drilling rigs operating in the United States was as high as 214, and as of September 30, 2015 we had 96 drilling rigs operating in the United States.   We are continuing to receive indications of customers’ intent to early terminate term contracts and some of our drilling customers are continuing to seek price reductions. 

Our pressure pumping business is continuing to experience the effects of reduced spending by customers and downward pressure on pricing.  We believe that pricing in the pressure pumping industry has deteriorated to levels that are not sustainable.  Due to market conditions, we have stacked approximately 38% of our fracturing horsepower.  

In anticipation of this downturn, we began reducing our cost structure in the fourth quarter of 2014.  In 2015, we have continued to reduce our cost structure and, to date, we have reduced our drilling headcount at a rate generally proportionate with the reduction in our rig count.  In pressure pumping, we have reduced our headcount and obtained lower prices on many products and services that we use.  We have also reduced our capital expenditure plans for the remainder of 2015, and although we have not completed our 2016 budget, we expect our capital expenditures to primarily consist of maintenance capital, as we do not expect to build any new rigs or purchase any new fracturing horsepower in 2016.  We plan to continue to adjust our cost structure in line with our level of operating activity.  

We expect that our term contract coverage in contract drilling and scalability with respect to labor and other operating costs in contract drilling and pressure pumping should position us to weather this downturn.  Nevertheless, we expect to experience further declines in both activity and pricing in the contract drilling and pressure pumping businesses.  In the event oil prices remain depressed for a sustained period, or decline further, these declines could have a material adverse effect on our business, financial condition and results of operations.

Management Overview — We are a leading provider of services to the North American oil and natural gas industry. Our services primarily involve the drilling, on a contract basis, of land-based oil and natural gas wells and pressure pumping services. In addition to these services, we also invest, on a non-operating working interest basis, in oil and natural gas properties.

We operate land-based drilling rigs in oil and natural gas producing regions of the continental United States and western Canada. There continues to be uncertainty with respect to the global economic environment, and oil and natural gas prices are depressed. During the third quarter of 2015, our average number of rigs operating in the United States was 105 compared to an average of 209 drilling rigs operating during the same period in 2014. During the third quarter of 2015, our average number of rigs operating in Canada was 4 compared to an average of 10 drilling rigs operating during the third quarter of 2014.

We have addressed our customers’ needs for drilling horizontal wells in shale and other unconventional resource plays by expanding our areas of operation and improving the capabilities of our drilling fleet during the last several years.  As of September 30, 2015, our rig fleet included 160 APEX^® rigs. We expect to add one additional new APEX^® rig under contract to our fleet during the fourth quarter of 2015.

In connection with the development of horizontal shale and other unconventional resource plays, we added equipment to perform service intensive fracturing jobs. As of September 30, 2015, we had approximately 1.1 million hydraulic horsepower in our pressure pumping fleet. We have increased the horsepower of our pressure pumping fleet by more than eight-fold since the beginning of 2009, although we have not ordered or committed to purchase any new horsepower since October 2014 and there is currently no new horsepower on order. In recent years, low natural gas prices and the industry-wide addition of new pressure pumping equipment to the marketplace led to an excess supply of pressure pumping equipment in North America.

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We maintain a backlog of commitments for contract drilling revenues under term contracts, which we define as contracts with a fixed term of six months or more. Our backlog as of September 30, 2015 was approximately $801 million. We generally calculate our backlog by multiplying the dayrate under our term drilling contracts by the number of days remaining under the contract. The calculation does not include any revenues related to other fees such as for mobilization, demobilization and customer reimbursables, nor does it include potential reductions in rates for unscheduled standby or during periods in which the rig is moving or incurring maintenance and repair time in excess of what is permitted under the drilling contract. In addition, generally our term drilling contracts are subject to termination by the customer on short notice and provide for an early termination payment to us in the event that the contract is terminated by the customer. For contracts that we have received an early termination notice, our backlog calculation includes the early termination rate, instead of the dayrate, for the period we expect to receive the lower rate.

For the nine months ended September 30, 2015 and 2014, our operating revenues consisted of the following (in thousands):

 

Generally, the profitability of our business is impacted most by two primary factors in our contract drilling segment: our average number of rigs operating and our average revenue per operating day.  During the third quarter of 2015, our average number of rigs operating was 105 in the United States and four in Canada compared to 209 in the United States and 10 in Canada in the third quarter of 2014. Our average revenue per operating day was $26,010 in the third quarter of 2015, including $28.9 million of early termination revenue, compared to $24,010 in the third quarter of 2014.  Consolidated net loss for the third quarter of 2015 was $226 million compared to consolidated net income of $16.0 million for the third quarter of 2014. The financial results for the three months ended September 30, 2015 include pretax non-cash charges totaling $280 million.  These charges include $125 million from the impairment of all goodwill associated with our pressure pumping business, $131 million from the write-down of drilling equipment primarily related to mechanical rigs and spare mechanical rig components, $22.0 million from the write-down of pressure pumping equipment and closed facilities and $1.9 million related to the impairment of certain oil and natural gas properties.  

For the three months ended September 30, 2014, the financial results include a pretax non-cash charge of $77.9 million related to the retirement of mechanical rigs and the write-off of excess spare components.

Our revenues, profitability and cash flows are highly dependent upon prevailing prices for oil and natural gas. During periods of improved commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which generally results in increased demand for our services. Conversely, in periods when these commodity prices deteriorate, the demand for our services generally weakens, and we experience downward pressure on pricing for our services.  In September 2015, our average number of rigs operating was 99 in the United States and four in Canada. We are also highly impacted by operational risks, competition, the availability of excess equipment, labor issues, weather and various other factors that could materially adversely affect our business, financial condition, cash flows and results of operations. Please see “Risk Factors” included in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Our liquidity as of September 30, 2015 included approximately $110 million in working capital and $500 million available under our revolving credit facility.  We believe our current liquidity, together with cash expected to be generated from operations, should provide us with sufficient ability to fund our current plans to maintain our existing equipment, service our debt and pay cash dividends.  If we pursue opportunities for growth that require capital, we believe we would be able to satisfy the needs through a combination of working capital, cash flows from operating activities, borrowing capacity under our revolving credit facility, debt financing and equity financing. However, there can be no assurance that such capital will be available on reasonable terms, if at all.

Commitments and Contingencies — As of September 30, 2015, we maintained letters of credit in the aggregate amount of $41.3 million 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, 2015, no amounts had been drawn under the letters of credit.

As of September 30, 2015, we had commitments to purchase approximately $114 million of major equipment for our drilling and pressure pumping businesses.

Our pressure pumping business has entered into agreements to purchase minimum quantities of proppants and chemicals from certain vendors. These agreements expire in 2016, 2017 and 2018. As of September 30, 2015, the remaining obligation under these agreements was approximately $55.4 million, of which materials with a total purchase price of approximately $1.8 million were

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required to be purchased during the remainder of 2015. In the event that the required minimum quantities are not purchased during any contract year, we could be required to make a liquidated damages payment to the respective vendor for any shortfall.

In November 2011, our pressure pumping business entered into an agreement with a proppant vendor to advance up to $12.0 million to such vendor to finance its construction of certain processing facilities. This advance is secured by the underlying processing facilities and bears interest at an annual rate of 5.0%. Repayment of the advance is to be made through discounts applied to purchases from the vendor and repayment of all amounts advanced must be made no later than October 1, 2017. As of September 30, 2015, advances of approximately $11.8 million had been made under this agreement and repayments of approximately $10.5 million had been received resulting in a balance outstanding of approximately $1.3 million.

A $12.3 million charge related to the previously disclosed settlement of a lawsuit filed by the U.S. Equal Employment Opportunity Commission against our U.S. contract drilling subsidiary was recorded in the first quarter of 2015.

Trading and Investing — We have not engaged in trading activities that include high-risk securities, such as derivatives and non-exchange traded contracts. We invest cash primarily in highly liquid, short-term investments such as overnight deposits and money market accounts.

Description of Business — We conduct our contract drilling operations primarily in the continental United States and western Canada. We provide pressure pumping services to oil and natural gas operators primarily in Texas and the Appalachian region. Pressure pumping services are primarily well stimulation and cementing for completion of new wells and remedial work on existing wells. We also invest in oil and natural gas assets as a non-operating working interest owner. Our oil and natural gas working interests are located primarily in Texas and New Mexico.

The North American oil and natural gas services industry is cyclical and at times experiences downturns in demand. During these periods, there have been substantially more drilling rigs and pressure pumping equipment available than necessary to meet demand. As a result, drilling and pressure pumping contractors have had difficulty sustaining profit margins and, at times, have incurred losses during the downturn periods.  The North American oil and natural gas services industry is currently experiencing a severe downturn.

Construction of new technology drilling rigs has increased in recent years. The addition of new technology drilling rigs to the market, combined with a reduction in the drilling of vertical wells, has resulted in excess capacity of older technology drilling rigs. Similarly, the substantial increase in unconventional resource plays led to higher demand for pressure pumping services, and there has been a significant increase in the construction of new pressure pumping equipment across the industry. As a result of the decline in oil and natural gas prices and the construction of new equipment, there is an excess of new technology drilling rigs and pressure pumping equipment available. In circumstances of excess capacity, providers of drilling and pressure pumping services have difficulty sustaining profit margins and may sustain losses during downturn periods. We cannot predict either the future level of demand for our contract drilling or pressure pumping services or future conditions in the oil and natural gas contract drilling or pressure pumping businesses.

In addition, unconventional resource plays have substantially increased and some drilling rigs are not capable of drilling these wells efficiently. Accordingly, the utilization of some older technology drilling rigs has been hampered by their lack of capability to efficiently compete for this work. Other ongoing factors which could continue to adversely affect utilization rates and pricing, even in an environment of high oil and natural gas prices and increased drilling activity, include:

Critical Accounting Policies

In addition to established accounting policies, our condensed consolidated financial statements are impacted by certain estimates and assumptions made by management. No changes in our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Liquidity and Capital Resources

Our liquidity as of September 30, 2015 included approximately $110 million in working capital and $500 million available under our revolving credit facility.  We believe our current liquidity, together with cash expected to be generated from operations, should provide us with sufficient ability to fund our current plans to maintain our existing equipment, service our debt and pay cash dividends.  If we pursue opportunities for growth that require capital, we believe we would be able to satisfy these needs through a

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combination of working capital, cash flows from operating activities, borrowing capacity under our revolving credit facility, debt financing and equity financing. However, there can be no assurance that such capital will be available on reasonable terms, if at all.

During the nine months ended September 30, 2015, our sources of cash flow included:

During the nine months ended September 30, 2015, we used a net of $303 million to pay off our revolving credit facility, $44.1 million to pay dividends on our common stock, $17.5 million to repay long-term debt, $8.0 million to acquire shares of our common stock, $2.0 million to pay debt issuance costs and $608 million:

We paid cash dividends during the nine months ended September 30, 2015 as follows:

 

On October 21, 2015, our Board of Directors approved a cash dividend on our common stock in the amount of $0.10 per share to be paid on December 24, 2015 to holders of record as of December 10, 2015. The amount and timing of all future dividend payments, if any, is subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial condition, terms of our credit facilities and other debt agreements and other factors.

On September 6, 2013, our Board of Directors approved a stock buyback program that authorizes purchase of up to $200 million of our common stock in open market or privately negotiated transactions. As of September 30, 2015, we had remaining authorization to purchase approximately $187 million of our outstanding common stock under the stock buyback program. Shares purchased under a buyback program are accounted for as treasury stock.

Treasury stock acquisitions during the nine months ended September 30, 2015 were as follows (dollars in thousands):

 

2012 Credit Agreement —  On September 27, 2012, we entered into a Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement is a committed senior unsecured credit facility that includes a revolving credit facility and a term loan facility.

The revolving credit facility permits aggregate borrowings of up to $500 million outstanding at any time. The revolving credit facility contains a letter of credit facility that is limited to $150 million and a swing line facility that is limited to $40 million, in each case outstanding at any time.

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The term loan facility provides for a loan of $100 million, which was drawn on December 24, 2012. The term loan facility is payable in quarterly principal installments, which commenced December 27, 2012. The installment amounts vary from 1.25% of the original principal amount for each of the first four quarterly installments, 2.50% of the original principal amount for each of the subsequent eight quarterly installments, 5.00% of the original principal amount for the subsequent four quarterly installments and 13.75% of the original principal amount for the final four quarterly installments.

Subject to customary conditions, we may request that the lenders’ aggregate commitments with respect to the revolving credit facility and/or the term loan facility be increased by up to $100 million, not to exceed total commitments of $700 million. The maturity date under the Credit Agreement is September 27, 2017 for both the revolving facility and the term facility.

Loans under the Credit Agreement bear interest by reference, at our election, to the LIBOR rate or base rate, provided, that swing line loans bear interest by reference only to the base rate. The applicable margin on LIBOR rate loans varies from 2.25% to 3.25% and the applicable margin on base rate loans varies from 1.25% to 2.25%, in each case determined based upon our debt to capitalization ratio. As of September 30, 2015, the applicable margin on LIBOR rate loans was 2.25% and the applicable margin on base rate loans was 1.25%. Based on our debt to capitalization ratio at June 30, 2015, the applicable margin on LIBOR loans is 2.25% and the applicable margin on base rate loans is 1.25% as of October 1, 2015.  Based on our debt to capitalization ratio at September 30, 2015, the applicable margin on LIBOR loans will be 2.25% and the applicable margin on base rate loans will be 1.25% as of January 1, 2016.  A letter of credit fee is payable by us 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 credit facility is 0.50%.

Each of our domestic subsidiaries will unconditionally guarantee all existing and future indebtedness and liabilities of the other guarantors and us 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 our obligations and those of any of our subsidiaries 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. We must not permit our debt to capitalization ratio to exceed 45%. 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. We also must not permit the 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 EBITDA of the four prior fiscal quarters to interest charges for the same period. We were in compliance with these financial covenants as of September 30, 2015. The Credit Agreement also contains customary representations, warranties and affirmative and negative covenants. We do not expect that the restrictions and covenants will impair, in any material respect, our ability to operate or react to opportunities that might arise.

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 us to repay all the outstanding amounts owed under any loan document (provided that in limited circumstances with respect to insolvency and bankruptcy, such acceleration is automatic), and (iii) require us to cash collateralize any outstanding letters of credit.

As of September 30, 2015, we had $75.0 million principal amount outstanding under the term loan facility at an interest rate of 2.625% and no amounts outstanding under the revolving credit facility.  We currently have available borrowing capacity of $500 million under the revolving credit facility.

2015 Reimbursement Agreement — On March 16, 2015, we entered into a Reimbursement Agreement (the “Reimbursement Agreement”) with The Bank of Nova Scotia (“Scotiabank”), pursuant to which we may from time to time request that Scotiabank issue an unspecified amount of letters of credit.  As of September 30, 2015, we had $41.3 million in letters of credit outstanding under the Reimbursement Agreement.

Under the terms of the Reimbursement Agreement, we 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 us at the time of issuance at such rates and amounts as are in accordance with Scotiabank’s prevailing practice.  We are obligated to pay to Scotiabank interest on all amounts not paid 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.

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We have also agreed that if obligations under the Credit Agreement are secured by liens on any of our subsidiaries’ property, then our 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 “Continuing Guaranty”), our payment obligations under the Reimbursement Agreement are jointly and severally guaranteed as to payment and not as to collection by our subsidiaries that from time to time guarantee payment under the Credit Agreement.

2015 Term Loan Agreement — On March 18, 2015, we entered into a Term Loan Agreement (the “2015 Term Loan Agreement”) with Wells Fargo Bank, N.A., as administrative agent and lender, each of the other lenders party thereto, Wells Fargo Securities, LLC, as Lead Arranger and Sole Book Runner, and Bank of America, N.A. and The Bank Of Tokyo-Mitsubishi UFJ, LTD., as Co-Syndication Agents.

The 2015 Term Loan Agreement is a senior unsecured single-advance term loan facility pursuant to which we made a term loan borrowing of $200 million on March 18, 2015 (the “Term Loan Borrowing”).  The Term Loan Borrowing is payable in quarterly principal installments, together with accrued interest, on each June 30, September 30, December 31 and March 31, commencing on June 30, 2015.  Each of the first four principal installments is in an amount equal to 2.5% of the Term Loan Borrowing and each successive quarterly installment, until and including June 30, 2017, is in an amount equal to 5.0% of the Term Loan Borrowing, with the outstanding principal balance of the Term Loan Borrowing due on the maturity date under the 2015 Term Loan Agreement.  The maturity date under the 2015 Term Loan Agreement is September 27, 2017.  Loans under the 2015 Term Loan Agreement bear interest, at our election, at the per annum rate of LIBOR rate plus 3.25% or base rate plus 2.25%.

Each of our domestic subsidiaries will unconditionally guarantee all existing and future indebtedness and liabilities of the other guarantors and us arising under the 2015 Term Loan Agreement and other Loan Documents (as defined in the 2015 Term Loan 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.

The 2015 Term Loan Agreement requires quarterly compliance with two financial covenants.  We must not permit our debt to capitalization ratio to exceed 45%.  The 2015 Term Loan 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 most recently ended fiscal quarter.  We also must not permit the interest coverage ratio as of the last day of a fiscal quarter to be less than 3.00 to 1.00.  The 2015 Term Loan Agreement generally defines the interest coverage ratio as the ratio of EBITDA of the four prior fiscal quarters to interest charges for the same period.  We were in compliance with these financial covenants as of September 30, 2015.

The 2015 Term Loan Agreement further provides that neither we nor our subsidiaries are permitted to make restricted payments unless, after giving effect to such restricted payment, its pro forma ratio of debt to EBITDA for the four prior fiscal quarters, determined as of the preceding ending quarterly period, does not exceed 2.50 to 1.00.  Restricted payments are generally defined as (a) dividends and distributions made on account of our equity interests or our subsidiaries and (b) payments made to redeem, repurchase or otherwise retire our equity interests or our subsidiaries.  Payments made solely in the form of common equity interests, made to us and our subsidiaries, or made in connection with the our long term incentive plans are not restricted payments under the 2015 Term Loan Agreement.

The 2015 Term Loan Agreement also contains customary representations, warranties, affirmative and negative covenants, and events of default.  Events of default under the 2015 Term Loan 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 accelerate and require us to repay all the outstanding amounts owed under any Loan Document (provided that in limited circumstances with respect to insolvency and bankruptcy, such acceleration is automatic).

As of September 30, 2015, we had $190 million principal amount outstanding under the 2015 Term Loan Agreement at an interest rate of 3.625%.

On October 5, 2010, we completed the issuance and sale of $300 million in aggregate principal amount of our 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. We pay 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.

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On June 14, 2012, we completed the issuance and sale of $300 million in aggregate principal amount of our 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. We pay 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 which rank equally in right of payment with all of our other unsubordinated indebtedness. The Series A Notes and Series B Notes are guaranteed on a senior unsecured basis by each of our domestic subsidiaries other than subsidiaries that are not required to be guarantors under the Credit Agreement.

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

The respective note purchase agreements require compliance with two financial covenants. We must not permit our 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. We also must not permit the 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. We were in compliance with these financial covenants as of September 30, 2015. We do not expect that the restrictions and covenants will impair, in any material respect, our ability to operate or react to opportunities that might arise.

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 we default 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.

Our liquidity as of September 30, 2015 included approximately $110 million in working capital and $500 million available under our revolving credit facility.  We believe our current liquidity together with cash expected to be generated from operations, should provide us with sufficient ability to fund our current plans to maintain our existing equipment, service our debt and pay cash dividends.  If we pursue opportunities for growth that require capital, we believe we would be able to satisfy these needs through a combination of working capital, cash flows from operating activities, borrowing capacity under our revolving credit facility, debt financing and equity financing. However, there can be no assurance that such capital will be available on reasonable terms, if at all.

Results of Operations

The following tables summarize operations by business segment for the three months ended September 30, 2015 and 2014:

 

 

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The decreases in revenues and direct operating costs primarily result from the decrease in the number of rigs operating. Average revenue per operating day and average margin per operating day were higher in 2015 due to early termination revenues of approximately $28.9 million.  Depreciation, amortization and impairment expense for 2015 includes a charge of $131 million related to the write-down of drilling equipment primarily related to mechanical rigs and spare mechanical rig components.  Depreciation, amortization and impairment expense for 2014 includes a charge of $77.9 million related to the retirement of mechanical drilling rigs and the write-off of excess spare mechanical rig components.  The increase in depreciation expense also reflects significant capital expenditures incurred in recent years to build new drilling rigs, to modify and upgrade existing drilling rigs and to acquire additional related equipment such as top drives, drill pipe, drill collars, engines, fluid circulating systems, rig hoisting systems and safety enhancement equipment.

 

 

Revenues and direct operating costs decreased primarily due to a decrease in the number of jobs, although the average size of the fracturing jobs has increased.  Average revenue per fracturing job and average direct operating costs per total job increased as a result of the increased size of the jobs in 2015 as compared to 2014.  However, the total number of jobs decreased as a result of the downturn in the oil and natural gas industry. Depreciation, amortization and impairment expense for 2015 includes a charge of $22.0 million related to the write-down of pressure pumping equipment and closed facilities.  There were no similar charges in 2014.  Depreciation expense also increased due to capital expenditures and acquisitions.  All of the goodwill associated with our pressure pumping business was impaired during 2015.

 

 

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Revenues decreased as a result of lower commodity prices and lower oil production. Direct operating costs include a reduction in taxes due to lower revenues.  Depletion and impairment expense in 2015 includes approximately $1.9 million of oil and natural gas property impairments compared to approximately $2.2 million of oil and natural gas property impairments in 2014.  Depletion decreased due primarily to increased reserve estimates in certain fields.

 

Gains and losses on the disposal of assets are treated as part of our corporate activities because such transactions relate to corporate strategy decisions of our executive management group. Interest expense increased primarily due to borrowings under the 2015 Term Loan Agreement.

The following tables summarize operations by business segment for the nine months ended September 30, 2015 and 2014:

 

 

 

The decreases in revenues and direct operating costs primarily result from the decrease in the number of rigs operating.  Average revenue per operating day and average margin per operating day were higher in 2015 due to higher average dayrates and the early termination revenues of approximately $60.3 million.  Selling, general and administrative expenses for 2015 includes a $12.3 million charge related to a previously disclosed legal settlement.  Depreciation, amortization and impairment expense for 2015 includes a charge of $131 million related to the write-down of drilling equipment primarily related to mechanical rigs and spare mechanical rig components.  Depreciation, amortization and impairment expense for 2014 includes a charge of $77.9 million related to the retirement of mechanical drilling rigs and the write-off of excess spare mechanical rig components.  The increase in depreciation expense also reflects significant capital expenditures incurred in recent years to build new drilling rigs, to modify and upgrade existing drilling rigs and to acquire additional related equipment such as top drives, drill pipe, drill collars, engines, fluid circulating systems, rig hoisting systems and safety enhancement equipment.

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Revenues and direct operating costs decreased primarily due to a decrease in the number of jobs, although the average size of the fracturing jobs has increased.  Average revenue per fracturing job and average direct operating costs per total job increased as a result of the increased size of the jobs in 2015 as compared to 2014.  However, the total number of jobs decreased as a result of the downturn in the oil and natural gas industry.  Depreciation, amortization and impairment expense for 2015 includes a charge of $22.0 million related to the write-down of pressure pumping equipment and closed facilities.  There were no similar charges in 2014.  Depreciation expense also increased due to capital expenditures and acquisitions.  All of the goodwill associated with our pressure pumping business was impaired during 2015.

 

 

 

Oil and natural gas and liquids revenues decreased as a result of lower commodity prices partially offset by higher oil and natural gas and liquids production.  Direct operating costs include a reduction in taxes due to lower revenues.  Depletion and impairment expense in 2015 includes approximately $9.3 million of oil and natural gas property impairments compared to approximately $4.1 million of oil and natural gas property impairments in 2014.

 

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Gains and losses on the disposal of assets are treated as part of our corporate activities because such transactions relate to corporate strategy decisions of our executive management group.  Interest expense increased primarily due to borrowings under the 2015 Term Loan Agreement.

Adjusted EBITDA

Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is not defined by accounting principles generally accepted in the United States of America (“U.S. GAAP”).  We define Adjusted EBITDA as net income (loss) plus net interest expense, income tax expense (benefit) and depreciation, depletion, amortization and impairment expense.  We present Adjusted EBITDA (a non-U.S. GAAP measure) because we believe it provides to both management and investors additional information with respect to both the performance of our fundamental business activities and our ability to meet our capital expenditures and working capital requirements.  Adjusted EBITDA should not be construed as an alternative to the U.S. GAAP measures of net income (loss) or operating cash flow.

 

Income Taxes

Our effective income tax rate was 33.8% for the nine months ended September 30, 2015, compared to 32.4% for the nine months ended September 30, 2014.  The Domestic Production Activities Deduction was enacted as part of the American Jobs Creation Act of 2004 (as revised by the Emergency Economic Stabilization Act of 2008), and allows a deduction of 9% on the lesser of qualified production activities income or taxable income.  For financial statement purposes, we expect a loss before income taxes for the year ending December 31, 2015; however, we currently expect to have taxable income for the year ending December 31, 2015, and the Domestic Production Activities Deduction is expected to provide a permanent tax benefit for 2015.  The permanent tax benefit for 2015 is expected to be lower in 2015 due to lower expected taxable income in 2015 than in 2014.  The interplay between the expected loss before income taxes for financial statement purposes and the permanent tax benefit expected to be provided by the Domestic Production Activities Deduction resulted in a higher effective income tax rate for the nine months ended September 30, 2015.

Recently Issued Accounting Standards

In May 2014, the 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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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In June 2014, the FASB issued an accounting standards update to provide guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The requirements in this update are effective during interim and annual periods beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued an accounting standards update to provide guidance for the presentation of debt issuance costs.  Under this guidance, debt issuance costs shall be presented in the balance sheet as a direct deduction from the carrying amount of the related debt and shall not be classified as a deferred charge. Amortization of debt issuance costs shall continue to be reported as interest expense.  The requirements in this update are effective during interim and annual periods beginning after December 15, 2015.  The adoption of this update is not expected to have a material impact on our consolidated financial statements.

Volatility of Oil and Natural Gas Prices and its Impact on Operations and Financial Condition

Our revenue, profitability and cash flows are highly dependent upon prevailing prices for oil and natural gas and expectations about future prices.  For many years, oil and natural gas prices and markets have been extremely volatile.  Prices are affected by many factors beyond our control. During the nine months ended September 30, 2014, oil prices averaged $99.96 per barrel, natural gas prices averaged $4.59 per Mcf and demand for drilling and pressure pumping activities increased.  During the three months ended December 31, 2014, drilling activity slowed as oil prices averaged $73.16 per barrel and natural gas prices averaged $3.80 per Mcf.  During the first quarter of 2015, oil prices averaged $48.54 per barrel and natural gas prices averaged $2.90 per Mcf.  During the second quarter of 2015, oil prices averaged $57.85 per barrel and natural gas prices averaged $2.75 per Mcf.  During the third quarter of 2015, oil prices averaged $46.42 per barrel and natural gas prices averaged $2.76 per Mcf.  As a result, drilling and pressure pumping activity has significantly decreased since December 31, 2014.  Our average number of rigs operating remains well below the number of our available rigs and a significant amount of our pressure pumping equipment is stacked.  Given current oil and natural gas pricing and existing market trends, we expect our average number of rigs operating and the number of pressure pumping jobs to continue to decline during the fourth quarter of 2015.

We expect oil and natural gas prices to continue to be volatile and to affect our financial condition, operations and ability to access sources of capital. Continued low market prices for oil and natural gas will likely result in further decreased demand for our drilling rigs and pressure pumping services and adversely affect our operating results, financial condition and cash flows.  Even during periods of high prices for oil and natural gas, companies exploring for oil and natural gas may cancel or curtail programs, or reduce their levels of capital expenditures for exploration and production for a variety of reasons, which could reduce demand for our drilling rigs and pressure pumping services.

 

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ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

We currently have exposure to interest rate market risk associated with any borrowings that we have under the Credit Agreement, the 2015 Term Loan Agreement and the Reimbursement Agreement.

Under the Credit Agreement, interest is paid on the outstanding principal amount of borrowings at a floating rate based on, at our election, LIBOR or a base rate.  The margin on LIBOR loans ranges from 2.25% to 3.25% and the margin on base rate loans ranges from 1.25% to 2.25%, based on our debt to capitalization ratio. At September 30, 2015, the margin on LIBOR loans was 2.25% and the margin on base rate loans was 1.25%. Based on our debt to capitalization ratio at June 30, 2015, the applicable margin on LIBOR loans is 2.25% and the applicable margin on base rate loans is 1.25% as of October 1, 2015.  Based on our debt to capitalization ratio at September 30, 2015, the applicable margin on LIBOR loans will be 2.25% and the applicable margin on base rate loans will be 1.25% as of January 1, 2016.  As of September 30, 2015, we had no amounts outstanding under our revolving credit facility and $75.0 million outstanding under our term loan facility at an interest rate of 2.625%. The interest rate on the borrowings outstanding under our revolving credit and term loan facilities is variable and adjusts at each interest payment date based on our election of LIBOR or the base rate.

Loans under the 2015 Term Loan Agreement bear interest, at our election, at the per annum rate of LIBOR plus 3.25% or base rate plus 2.25%.  As of September 30, 2015, we had $190 million principal amount outstanding under the 2015 Term Loan Agreement at an interest rate of 3.625%.

Under the Reimbursement Agreement, we will reimburse Scotiabank on demand for any amounts that Scotiabank has disbursed under any letters of credit.  We are obligated to pay to Scotiabank interest on all amounts not paid by us on the date of demand or when otherwise due at the LIBOR rate plus 2.25% per annum.  As of September 30, 2015, no amounts had been disbursed under any letters of credit.

We conduct a portion of our business in Canadian dollars through our Canadian land-based drilling operations. The exchange rate between Canadian dollars and U.S. dollars has fluctuated during the last several years. If the value of the Canadian dollar against the U.S. dollar weakens, revenues and earnings of our Canadian operations will be reduced and the value of our Canadian net assets will decline when they are translated to U.S. dollars. This currency risk is not material to our results of operations or financial condition.

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.

 

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures — We maintain disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), designed to ensure that the information required to be disclosed in the reports that we file with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2015.

Changes in Internal Control Over Financial Reporting —There were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

 

 

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PART II — OTHER INFORMATION

 

ITEM 1. Legal Proceedings

We are party to various legal proceedings arising in the normal course of our business; we do not believe that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.  See Note 9 to our unaudited condensed consolidated financial statements in Item 1 of Part I – Financial Information.  

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases of our common stock made by us during the quarter ended September 30, 2015.

 

 

 

 

ITEM 5. Other Information

 

On October 21, 2015, we amended our note purchase agreements for both the Series A Notes and Series B Notes to, among other things, conform certain provisions of these agreements with Amendment No. 1 to the Credit Agreement, which we entered into on January 9, 2015. These conforming changes in the note purchase agreements (i) replace the definition of a change of control, (ii) exempt from the requirement to become additional guarantors certain subsidiaries that are not required to become additional guarantors under the Credit Agreement and (iii) release Patterson-UTI Drilling International, Inc., one of our subsidiaries, from its obligations under each guaranty related to the note purchase agreements. The above description is qualified in its entirety by reference to the complete text of the amendments to the note purchase agreements filed as Exhibits 10.1 and 10.2 hereto, which is incorporated herein by reference.

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ITEM 6. Exhibits

The following exhibits are filed herewith or incorporated by reference, as indicated:

 

 

 

 

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: October 28, 2015

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Exhibit 10.1                                                                                                        Execution Version

AMENDMENT NO. 1 TO Note Purchase Agreement

 

This Amendment No. 1 to Note Purchase Agreement (“Amendment”), dated as of October 22, 2015, is by and among Patterson – UTI Energy, Inc., a Delaware corporation (“Company”), the subsidiaries of the Company party hereto (together with the Company, the “Credit Parties”), and the Noteholders (as defined below) party hereto.

RECITALS

A.Reference is hereby made to that certain (i) Note Purchase Agreement dated as of October 5, 2010 (the “Agreement”), among the Company and each of the holders of Notes (as defined therein) issued thereunder (the “Noteholders”), and (ii) Guaranty Agreement dated as of October 5, 2010, and delivered by the Guarantors signatory thereto (the “Guaranty Agreement”).

B.By amendment dated January 9, 2015 (the “2015 Bank Amendment”), the Company has amended its Credit Agreement, dated as of September 27, 2012, with Wells Fargo Bank, N.A., as administrative agent, and the other lenders party thereto (as amended, the “2012 Credit Agreement”) for purposes of revising such facility’s (i) “Change of Control” definition, (ii) provisions related to guarantors under the 2012 Credit Agreement and (iii) certain other definitions, and in connection with the 2015 Bank Amendment, the Guarantors reaffirmed their respective guarantee obligations with respect to the 2012 Credit Agreement.  The 2012 Credit Agreement is a “Principal Credit Facility” under and as defined in the Agreement.

C.Pursuant to Section 17 of the Agreement, the Company requests that the Noteholders make certain amendments to the Agreement as set forth below in order to conform certain provisions of the Agreement to the 2015 Bank Amendment, and otherwise as provided herein.

D.The Company further requests that the Noteholders acknowledge the release of Patterson-UTI Drilling International, Inc., a Delaware corporation (“Patterson International”), from its obligations under the Guaranty Agreement since it has been released and discharged of its obligations under the guarantee for the 2012 Credit Agreement, and it has no other obligations, direct or indirect, as a co-borrower, guarantor or otherwise, of any Indebtedness of the Company or its Subsidiaries under any Principal Credit Facility.

Now Therefore, in consideration of the premises and the mutual covenants, representations and warranties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1.Defined Terms; Interpretation and Provisions.  As used in this Amendment, each of the terms defined in the opening paragraph and the Recitals above shall have the meanings assigned to such terms therein.  Each term defined in the Agreement, as amended hereby, and used herein without definition shall have the meaning assigned to such term in the Agreement, as amended hereby, unless expressly provided to the contrary. Article, Section, Schedule, and Exhibit references are to Articles and Sections of, and Schedules and

 

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Exhibits to, this Amendment, unless otherwise specified.  The words “hereof”, “herein”, and “hereunder” and words of similar import when used in this Amendment shall refer to this Amendment as a whole and not to any particular provision of this Amendment.  The term “including” means “including, without limitation”.  Paragraph headings have been inserted in this Amendment as a matter of convenience for reference only and it is agreed that such paragraph headings are not a part of this Amendment and shall not be used in the interpretation of any provision of this Agreement. 

Section 2.Amendments to Agreement.  

§ 2.1Section 7.1(a) (Financial and Business Information – Quarterly Statements) of the Agreement is hereby amended by deleting its concluding proviso, which proviso is set forth as follows:

“, provided, further, that the Company shall be deemed to have made such delivery of such Form 10‑Q if it shall have timely made such Form 10‑Q available on “EDGAR” and on its applicable website page as linked from its home page on the worldwide web (at the date of this Agreement located at:  http//www.patenergy.com) and shall have given each Purchaser prior notice of such availability on EDGAR and through its home page in connection with each delivery (such availability and notice thereof being referred to as “Electronic Delivery”)”

§ 2.2Section 7.1(b) (Financial and Business Information – Annual Statements) of the Agreement is hereby amended by deleting its concluding proviso, which proviso is set forth as follows:

“, provided, further, that the Company shall be deemed to have made such delivery of such Form 10‑K if it shall have timely made Electronic Delivery thereof, in which event the Company shall separately deliver, concurrently with such Electronic Delivery, the Accountant’s Certificate”

§ 2.3Section 7.1(c) (Financial and Business Information – SEC and Other Reports) of the Agreement is hereby amended by deleting its concluding proviso, which proviso is set forth as follows:

“, provided that the Company shall be deemed to have made such delivery of the items provided for by this clause (c) if it shall have timely made Electronic Delivery (without regard to the notice requirement provided in such defined term) thereof”

§ 2.4Section 7.2 (Officer’s Certificate) of the Agreement is hereby amended by deleting, from its introductory clause, the parenthetical phrase as follows:

“(which, in the case of Electronic Delivery of any such financial statements, shall be by separate concurrent delivery of such certificate to each holder of Notes)”

§ 2.5Section 7 (Information as to Company) of the Agreement is hereby amended by inserting the following new Section 7.5 (Electronic Delivery):

“Section 7.5Electronic Delivery.Financial statements, opinions of independent certified public accountants, other information and Officer’s Certificates that

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are required to be delivered by the Company pursuant to Sections 7.1(a), (b) or (c) and Section 7.2 shall be deemed to have been delivered if the Company satisfies any of the following requirements with respect thereto: 

(i)such financial statements satisfying the requirements of Section 7.1(a) or Section 7.1(b) (together with the related Accountant’s Certificate in the case of Section 7.1(b)) and the related Officer’s Certificate satisfying the requirements of Section 7.2 are delivered to each holder of a Note at the e-mail address set forth in Schedule A for such holder or as communicated from time to time in a separate writing delivered to the Company;

(ii)the Company shall have timely filed such Form 10–Q or Form 10–K, satisfying the requirements of Section 7.1(a) or Section 7.1(b), as the case may be, with the SEC on EDGAR and shall have made such form (together with the related Accountant’s Certificate in the case of Form 10-K) and the related Officer’s Certificate satisfying the requirements of Section 7.2 available via its home page on the internet (at the date of this Agreement located at:  http://www.patenergy.com);

(iii)such financial statements satisfying the requirements of Section 7.1(a) or Section 7.1(b) (together with the related Accountant’s Certificate in the case of Section 7.1(b)) and related Officer’s Certificate(s) satisfying the requirements of Section 7.2 are timely posted by or on behalf of the Company on IntraLinks or on any other similar website to which each holder of Notes has free access; or

(iv)the Company shall have filed any of the items referred to in Section 7.1(c) with the SEC on EDGAR and shall have made such items available via its home page on the internet or on IntraLinks or on any other similar website to which each holder of Notes has free access;

provided however, that in no case shall access to such financial statements (or Form 10-Q or Form 10-K), other information, Accountant’s Certificates and Officer’s Certificates be conditioned upon any waiver or other agreement or consent (other than confidentiality provisions consistent with Section 20 of this Agreement); provided further, however, that in the case of any of clauses (ii), (iii) or (iv), the Company shall have given each holder of a Note prior written notice, which may be by e-mail or in accordance with Section 18, of such posting or filing in connection with each delivery, provided further, that upon request of any holder to receive paper copies of any of the materials described in this Section 7.5 or to receive them by e-mail, the Company will promptly e-mail them or deliver such paper copies, as the case may be, to such holder.”

§ 2.6Section 9.8 (Additional Guarantors) of the Agreement is hereby amended by replacing in its entirety with the following:

“Section 9.8Additional Guarantors.

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(a)The Company will cause each Subsidiary or other entity that guarantees or becomes obligated with respect to the Indebtedness of the Company or any Subsidiary under any Principal Credit Facility to promptly (and in any event contemporaneously with such entity becoming a party to or obligated under a Principal Credit Facility (or such longer period of time as agreed to by the Required Holders in their reasonable discretion)) become a Guarantor hereunder by way of execution of a Guarantor Supplement in the form of Exhibit A to the Guaranty Agreement (each a “Guaranty Joinder Agreement”).  The Company shall give notice to each holder of Notes not less than 10 days prior to any such Subsidiary or other entity becoming party to or obligated under a Principal Credit Facility. 

(b)In connection with clause (a) of this Section 9.8, the Company shall deliver to each holder of Notes, with respect to each new Guarantor to the extent applicable, proof of corporate or similar action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the Credit Parties pursuant to Section 4 on the date of Closing and such other documents or agreements as the Required Holders may reasonably request.

(c)The holders of the Notes agree that a Guarantor shall be automatically released and discharged from its obligations under the Guaranty Agreement effective at the time the obligations of such Guarantor, whether direct or indirect, as a co-borrower, guarantor or otherwise, in respect of any Indebtedness of the Company or its Subsidiaries under all Principal Credit Facilities shall, at any time after the date of the Closing, be released and discharged by the holders of such Indebtedness, provided that:

(i)no Default or Event of Default is then continuing;

(ii)if in connection with the release and discharge of such Guarantor from its obligations with respect to the Indebtedness of the Company or any Subsidiary under any Principal Credit Facility, the Company, any Subsidiary or any other entity pays any consideration to the holders of such Indebtedness in consideration of such release and discharge, then the holders of Notes shall receive consideration on the same basis as (and substantially concurrently with) such other holders for such release and discharge; and

(iii)each holder of Notes shall have received a certificate of a Responsible Officer certifying that (A) the obligations of such Guarantor, whether direct or indirect, as a co-borrower, guarantor or otherwise, in respect of any Indebtedness of the Company or its Subsidiaries under all Principal Credit Facilities have been released and discharged (or will be released and discharged concurrently with the release and discharge of such Guarantor from the Guaranty Agreement), (B) immediately after giving effect to such release and discharge, no Default or Event of Default shall be continuing, (C) no amount is then due and payable by such

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Guarantor under the Guaranty Agreement and (D) the Company has met the condition described in clause (ii) of this proviso. 

If any Person released and discharged as a Guarantor pursuant to this Section 9.8(c) shall at any time after such release and discharge become directly or indirectly liable for (whether by way of becoming a co-borrower, guarantor or otherwise), all or any part of the Indebtedness of the Company or its Subsidiaries under any Principal Credit Facility, the Company will cause such Person contemporaneously with entering into any such Guarantee or incurring such liability to execute and deliver to the holders of the Notes, (1) a Guaranty Joinder Agreement, and (2) proof of corporate or similar action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the Credit Parties pursuant to Section 4 on the date of Closing and such other documents or agreements as the Required Holders may reasonably request.

(d)In connection with the release and discharge contemplated by clause (c) of this Section 9.8, and in each such instance, the holders of the Notes shall, within 30 days of receipt of a written request of the Company, take such action and execute such documents as the Company, such Subsidiary or entity shall reasonably request to evidence such release and discharge of such Subsidiary’s or entity’s obligations under the Guaranty Agreement, all at the expense of the Company.”

§ 2.7Section 10.2 (Merger, Consolidation, Etc.) of the Agreement is hereby amended by deleting the phrase “except as permitted by clause (i) of Section 9.8(c)”, which phrase appears as the concluding phrase of the concluding paragraph of such Section 10.2, and inserting, in lieu thereof, the phrase as follows:

“unless, in the case of the conveyance, transfer,  sale or lease of all or substantially all of the assets of a Guarantor, such Guarantor is released and discharged from its obligations under the Guaranty Agreement in accordance with Section 9.8(c) in connection with, or immediately following, such conveyance, transfer, sale or lease.”

§ 2.8Section 18 (Notices) of the Agreement is hereby amended by inserting, as the opening phrase of its introductory clause, the phrase as follows:

“Except to the extent otherwise provided in Section 7.5,”

§ 2.9Section 20 (Confidential Information) of the Agreement is hereby amended by inserting the following new paragraph at the end of such Section:

“In the event that as a condition to receiving access to information relating to the Company or its Subsidiaries in connection with the transactions contemplated by or otherwise pursuant to this Agreement, any Purchaser or holder of a Note is required to agree to a confidentiality undertaking (whether through IntraLinks, another secure website, a secure virtual workspace or otherwise) which is different from this Section 20, this Section 20 shall not be

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amended thereby and, as between such Purchaser or such holder and the Company, this Section 20 shall supersede any such other confidentiality undertaking.”

§ 2.10Schedule A (Information Relating to Purchasers) of the Agreement is hereby amended and restated in its entirety as set forth on Schedule A hereto.

§ 2.11Schedule B, (Defined Terms) of the Agreement is hereby amended by replacing the defined term for “Change of Control” in its entirety with the following:

"Change of Control" means an event or series of events by which:

(a)any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all securities that such person or group has the right to acquire (such right, an "option right"), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 25% or more of the equity securities of the Company entitled to vote for members of the board of directors or equivalent governing body of the Company on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right);

(b)during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Company cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body; or

(c)any Person or two or more Persons acting in concert shall have acquired, by contract or otherwise, the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Company.

§ 2.12Schedule B, (Defined Terms) of the Agreement is hereby amended by deleting the defined term for “Electronic Delivery”.

Section 3.Credit Parties’ Representations and Warranties.  The Company acknowledges, represents, warrants and agrees as to itself and all other Credit Parties, and each other Credit Party acknowledges, represents, warrants and agrees as to itself, that: (i) the execution, delivery and performance of this Amendment are within the corporate or limited

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liability company power and authority of such Credit Party, as the case may be, and have been duly authorized by appropriate corporate and limited liability company action and proceedings; (ii) this Amendment constitutes the legal, valid, and binding obligation of such Credit Party enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity; (iii) there are no governmental consents, licenses and approvals required to be made or obtained by it in connection with its execution, delivery, performance, validity and enforceability of this Amendment; (iv) no Defaults or Events of Default exist; (v) no Credit Party and no Subsidiary of any Credit Party has paid or has agreed to pay (directly or indirectly) any fee, remuneration or other consideration in favor of or for the benefit of any agent or lender under any Principal Credit Facility in connection with any amendments thereto substantially similar to those being made to the Agreement hereunder and (vi) Patterson International has been released from all of its obligations under and in respect of the 2012 Credit Agreement, and (as of the date hereof) has no obligations, whether direct or indirect, as a co-borrower, guarantor or otherwise, with respect to any Indebtedness of the Company or any Subsidiary under any Principal Credit Facility, and (A) at the time Patterson International was released from such obligations under and in respect of the 2012 Credit Agreement, no Default or Event of Default was continuing and (B) no consideration was paid in exchange for such release. 

Section 4.Conditions to Effectiveness.  The amendments provided in Section 2 and the acknowledgment of the release of Patterson International under Section 7 shall become effective only upon the date of the satisfaction in full of the following conditions precedent (the “Effective Date”):

(a)the Credit Parties and the Required Holders shall have executed and delivered this Amendment;

(b)the representations and warranties set forth in Section 3 shall be true and correct on such date in all respects;

(c)the Company shall have delivered to the Noteholders a fully executed copy of that certain Amendment No. 1 to Note Purchase Agreement, dated as of the date hereof, by and among the Credit Parties and each of the Persons signatory thereto with respect to that certain Note Purchase Agreement, dated as of June 14, 2012, and such amendment to be in form and substance satisfactory to the Required Holders, and the conditions to the effectiveness thereof shall have been satisfied or waived; and

(d)the Company shall have paid the fees, costs and expenses of Morgan, Lewis & Bockius LLP, special counsel to the Noteholders, in accordance with the terms of Section 8 of this Amendment, to the extent provided with an invoice therefor.

Section 5.Acknowledgments and Agreements.  

(a)Each Credit Party acknowledges that on the date hereof all of its outstanding obligations under the Financing Documents are payable in accordance with their terms, and each Credit Party waives any defense, offset, counterclaim or recoupment with respect thereto.  Each Noteholder hereby expressly reserves all of its rights, remedies, and claims under the Financing

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Documents.  Nothing in this Amendment shall constitute a waiver or relinquishment of (i) any Default or Event of Default under any of the Financing Documents, (ii) any of the agreements, terms or conditions contained in any of the Financing Documents, (iii) any rights or remedies of any Noteholder with respect to the Financing Documents, or (iv) the rights of any Noteholder to collect the full amounts owing to them under the Financing Documents. 

(b)The Agreement, as amended hereby, is adopted, ratified and confirmed and is and remains in full force and effect, and the Company and the Guarantors acknowledge and agree that their respective liabilities and obligations under the Agreement, as amended hereby, and the Guaranty Agreement are not impaired in any respect by this Amendment.

(c)From and after the Effective Date, all references to the Agreement and the Financing Documents shall mean the Agreement and such Financing Documents as amended by this Amendment.

(d)This Amendment is a Financing Document for the purposes of the provisions of the other Financing Documents.  

Section 6.Reaffirmation of and Amendment to the Guaranty Agreement. Each Guarantor party hereto (which, for the avoidance of doubt, excludes Patterson International) hereby ratifies, confirms, acknowledges and agrees that its obligations under the Guaranty Agreement are in full force and effect and that such Guarantor continues to unconditionally and irrevocably guarantee the full and punctual payment, when due, whether at stated maturity or earlier by acceleration or otherwise, all of the Guaranteed Obligations (as defined in the Guaranty Agreement) as such Guaranteed Obligations may have been amended by this Amendment, and its execution and delivery of this Amendment does not indicate or establish an approval or consent requirement by such Guarantor under the Guaranty Agreement, in connection with the execution and delivery of amendments, consents or waivers to the Agreement or any of the other Financing Documents.

Section 7.Release from Guaranty Agreement.  The Noteholders acknowledge the release and discharge of Patterson International from all obligations and liabilities under the Guaranty Agreement.  The foregoing is an acknowledgment of a release and discharge of Patterson International only, and nothing in this Amendment shall be construed to be a release, or an acknowledgment of a release, of any obligations of the Company, any other Guarantor or any other Person under the Agreement or any other Financing Document to, or for the any Noteholder.  Furthermore, nothing in this Amendment shall be deemed or construed to in any manner be a permanent release and discharge of Patterson International from hereafter being required timely to become, and the Company from being required to cause Patterson International hereafter timely to become, a Guarantor pursuant to the terms of the Agreement, as amended and in effect, whether for failure to qualify as an Excluded Subsidiary (as defined in Agreement, as amended hereby) or otherwise.

Section 8Fees and Expenses.  Without in any way limiting the obligations of the Company to pay the fees and expenses of the Noteholders in compliance with Section 15.1 of the Agreement, the Company agrees that it shall pay all of the Noteholders’ costs and expenses,

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including, without limitation, all attorneys’ fees incurred by the Noteholders, in connection with the preparation, negotiation, and execution of this Amendment. 

Section 9.Counterparts.  This Amendment may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument.  Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the requisite parties hereto.  This Amendment may be executed by facsimile signature or other electronic imaging means, and all such signatures shall be effective as originals.

Section 10.Successors and Assigns.  This Amendment shall be binding upon and inure to the benefit of (i) the parties hereto and their respective successors and permitted assigns (including, without limitation, any subsequent holder of any Note) and (ii) for the avoidance of doubt, all holders of Notes and each future holder of any Note, as provided in Section 17.3 of the Agreement, whether so expressed or not.

Section 11.Severability.  Any provision of this Amendment, or the Agreement as amended by this Amendment, that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

Section 12.Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant.  Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.

Section 13.Governing Law.  This Amendment shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York, excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.

 

[Signature pages follow]

 

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Exhibit 10.1                                                                                                        Execution Version

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized effective as of the Effective Date.

BORROWER:

PATTERSON-UTI ENERGY, INC.


By:   /s/ John E. Vollmer III
John E. Vollmer III
Senior Vice President—Corporate
Development, Chief Financial Officer and
Treasurer

 

 

 

GUARANTORS:

PATTERSON PETROLEUM LLC
PATTERSON-UTI DRILLING COMPANY LLC
PATTERSON-UTI MANAGEMENT SERVICES, LLC
UNIVERSAL WELL SERVICES, INC.
UNIVERSAL PRESSURE PUMPING, INC.


Each by:   /s/ John E. Vollmer III
John E. Vollmer III
Senior Vice President—Corporate
Development, Chief Financial Officer and
Treasurer

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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This Agreement is hereby

accepted and agreed to as

of the date thereof.

 

THE PRUDENTIAL INSURANCE COMPANY

  OF AMERICA

 

 

By:  /s/ Chris Halloran                   

Vice President

 

 

GIBRALTAR LIFE INSURANCE CO., LTD.

 

By:Prudential Investment Management Japan

Co., Ltd., as Investment Manager

 

By:Prudential Investment Management, Inc.,

as Sub-Adviser

 

 

By:  /s/ Chris Halloran

Vice President

 

 

THE PRUDENTIAL LIFE INSURANCE

  COMPANY, LTD.

 

By:Prudential Investment Management (Japan),

Inc., as Investment Manager

 

By:Prudential Investment Management, Inc.,

as Sub-Adviser

 

 

By:  /s/ Chris Halloran

Vice President

 

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PRUDENTIAL RETIREMENT INSURANCE

  AND ANNUITY COMPANY

 

By:Prudential Investment Management, Inc.,

as investment manager

 

 

By:  /s/ Chris Halloran

Vice President

 

 

PHYSICIANS MUTUAL INSURANCE

  COMPANY

 

By:Prudential Private Placement Investors,

L.P. (as Investment Advisor)

 

By:Prudential Private Placement Investors, Inc.

 

 

By:  /s/ Chris Halloran

Vice President

 

 

BCBSM, INC. DBA BLUE CROSS AND BLUE

  SHIELD OF MINNESOTA

 

By:Prudential Private Placement Investors,

L.P. (as Investment Advisor)

 

By:Prudential Private Placement Investors, Inc.

 

 

By:  /s/ Chris Halloran

Vice President

 

 

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Exhibit 10.1                                                                                                        Execution Version

PAR U HARTFORD LIFE & ANNUITY

  COMFORT TRUST

 

By:Prudential Arizona Reinsurance Universal

Company, as Grantor

 

By:Prudential Investment Management, Inc.,

as Investment Manager

 

By:  /s/ Chris Halloran

Vice President

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA

 

 

By: /s/ Ho Young Lee

Name: Ho Young Lee

Title:Managing Director

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY

 

By:Northwestern Mutual Investment Management Company, LLC,

Its investment advisor

 

By: /s/ Howard Stern

Its: Managing Director

 

 

 

THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY FOR ITS GROUP ANNUITY SEPARATE ACCOUNT

 

By:Northwestern Mutual Investment Management Company, LLC,

Its investment advisor

 

By: /s/ Howard Stern

Its: Authorized Representative

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

ATHENE ANNUITY AND LIFE COMPANY

(f/k/a Aviva Life and Annuity Company)

 

By:Athene Asset Management, L.P., its investment adviser

 

By:AAM GP Ltd., its general partner

 

 

By: /s/ Roger D. Fors

Name:  Roger D. Fors

Title:    Senior Vice President, Fixed Income

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

JACKSON NATIONAL LIFE INSURANCE COMPANY

 

By:PPM America, Inc., as attorney in fact,

on behalf of Jackson National Life Insurance Company

 

 

By: /s/ Brian B. Manczak

Name:  Brian B. Manczak

Title:    Managing Director

 

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA

 

 

By: /s/ Charles J. Dudley

Name:  Charles J. Dudley

Title:Assistant Treasurer

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA

 

 

By: /s/ Brian Keating

Name:Brian Keating

Title:Managing Director

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

ENSIGN PEAK ADVISORS, INC.

 

 

By: /s/ Matthew D. Dall

Name:Matthew D. Dall

Title:Head of Credit Research

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

CMFG LIFE INSURANCE COMPANY

CUMIS INSURANCE SOCIETY, INC.

By:MEMBERS Capital Advisors, Inc., acting as Investment Advisor

 

 

By: /s/ Allen R. Cantrell

Name:Allen R. Cantrell

Title:Managing Director, Investments

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

ALLSTATE LIFE INSURANCE COMPANY

 

 

By: /s/ David Puckett

Name:David Puckett

 

By: /s/ Jerry D. Zinkula

Name:Jerry D. Zinkula

 

Authorized Signatories

 

 

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

 

 

By: /s/ David Puckett

Name:David Puckett

 

By: /s/ Jerry D. Zinkula

Name:Jerry D. Zinkula

 

Authorized Signatories

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

AMERITAS LIFE INSURANCE CORP.

AMERITAS LIFE INSURANCE CORP., successor by merger

to The Union Central Life Insurance Company and Acacia Life Insurance Company

Ameritas Life Insurance Corp. of New York, successor by merger to

First Ameritas Life Insurance Corp. of New York

 

By:Ameritas Investment Partners, Inc., as Agent

 

 

By: /s/ Tina Udell

Name:Tina Udell

Title:Vice President & Managing Director

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY

 

 

By: /s/ David Divine

Name:David Divine

Title:Senior Portfolio Manager

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

MODERN WOODMEN OF AMERICA

 

 

By: /s/ Douglas A. Pannier

Name:Douglas A. Pannier

Title:Group Head - Private Placements

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.1                                                                                                        Execution Version

 

THE OHIO NATIONAL LIFE INSURANCE COMPANY

 

 

By: /s/ Annette M. Teders

Name:Annette M. Teders

Title:Vice President

 

 

OHIO NATIONAL LIFE ASSURANCE CORPORATION

 

 

By: /s/ Annette M. Teders

Name:Annette M. Teders

Title:Vice President

 

 

[Signature Page to Amendment No. 1 to 2010 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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AMERICAN NATIONAL INSURANCE COMPANY (anico)

 

 

By: /s/ Anne M. LeMire

Name:Anne M. LeMire

Title:Senior Vice President

 

 

 

Signature page to Amendment No. 1 to Note Purchase Agreement

(Patterson-UTI Energy, Inc.)

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Schedule A

 

Information Relating To Purchasers

 

 

Schedule A-1

 

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Schedule A-2

 

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Schedule A-3

 

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Schedule A-4

 

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Schedule A-5

 

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Schedule A-6

 

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Schedule A-7

 

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Schedule A-8

 

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Schedule A-9

 

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Schedule A-10

 

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Schedule A-11

 

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Schedule A-12

 

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Schedule A-13

 

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Schedule A-14

 

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Schedule A-15

 

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Schedule A-16

 

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Schedule A-17

 

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Schedule A-18

 

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Schedule A-19

 

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Schedule A-20

 

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Schedule A-21

 

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Schedule A-22

 

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Schedule A-23

 

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Schedule A-24

 

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Schedule A-25

 

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Schedule A-26

 

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Schedule A-27

 

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Schedule A-28

 

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Schedule A-29

 

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Schedule A-30

 

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Schedule A-31

 

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Schedule A-32

 

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Schedule A-33

 

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Schedule A-1

 

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Schedule A-2

 

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Schedule A-3

 

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Schedule A-4

 

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Schedule A-5

 

Exhibit 10.2    Execution Version

AMENDMENT NO. 1 TO Note Purchase Agreement

 

This Amendment No. 1 to Note Purchase Agreement (“Amendment”), dated as of October 22, 2015, is by and among Patterson – UTI Energy, Inc., a Delaware corporation (“Company”), the subsidiaries of the Company party hereto (together with the Company, the “Credit Parties”), and the Noteholders (as defined below) party hereto.

RECITALS

A.Reference is hereby made to that certain (i) Note Purchase Agreement dated as of June 14, 2012 (the “Agreement”), among the Company and each of the holders of Notes (as defined therein) issued thereunder (the “Noteholders”), and (ii) Guaranty Agreement dated as of June 14, 2012, and delivered by the Guarantors signatory thereto (the “Guaranty Agreement”).

B.By amendment dated January 9, 2015 (the “2015 Bank Amendment”), the Company has amended its Credit Agreement, dated as of September 27, 2012, with Wells Fargo Bank, N.A., as administrative agent, and the other lenders party thereto (as amended, the “2012 Credit Agreement”) for purposes of revising such facility’s (i) “Change of Control” definition, (ii) provisions related to guarantors under the 2012 Credit Agreement and (iii) certain other definitions, and in connection with the 2015 Bank Amendment, the Guarantors reaffirmed their respective guarantee obligations with respect to the 2012 Credit Agreement.  The 2012 Credit Agreement is a “Principal Credit Facility” under and as defined in the Agreement.

C.Pursuant to Section 17 of the Agreement, the Company requests that the Noteholders make certain amendments to the Agreement as set forth below in order to conform certain provisions of the Agreement to the 2015 Bank Amendment, and otherwise as provided herein.

D.The Company further requests that the Noteholders acknowledge the release of Patterson-UTI Drilling International, Inc., a Delaware corporation (“Patterson International”), from its obligations under the Guaranty Agreement since it has been released and discharged of its obligations under the guarantee for the 2012 Credit Agreement, and it has no other obligations, direct or indirect, as a co-borrower, guarantor or otherwise, of any Indebtedness of the Company or its Subsidiaries under any Principal Credit Facility.

Now Therefore, in consideration of the premises and the mutual covenants, representations and warranties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1.Defined Terms; Interpretation and Provisions.  As used in this Amendment, each of the terms defined in the opening paragraph and the Recitals above shall have the meanings assigned to such terms therein.  Each term defined in the Agreement, as amended hereby, and used herein without definition shall have the meaning assigned to such term in the Agreement, as amended hereby, unless expressly provided to the contrary. Article, Section, Schedule, and Exhibit references are to Articles and Sections of, and Schedules and Exhibits to, this Amendment, unless otherwise specified.  The words “hereof”, “herein”, and

 

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“hereunder” and words of similar import when used in this Amendment shall refer to this Amendment as a whole and not to any particular provision of this Amendment.  The term “including” means “including, without limitation”.  Paragraph headings have been inserted in this Amendment as a matter of convenience for reference only and it is agreed that such paragraph headings are not a part of this Amendment and shall not be used in the interpretation of any provision of this Agreement. 

Section 2.Amendments to Agreement.  

§ 2.1Section 7.1(a) (Financial and Business Information – Quarterly Statements) of the Agreement is hereby amended by deleting its concluding proviso, which proviso is set forth as follows:

“, provided, further, that the Company shall be deemed to have made such delivery of such Form 10‑Q if it shall have timely made such Form 10‑Q available on “EDGAR” and on its applicable website page as linked from its home page on the worldwide web (at the date of this Agreement located at:  http//www.patenergy.com) and shall have given each Purchaser prior notice of such availability on EDGAR and through its home page in connection with each delivery (such availability and notice thereof being referred to as “Electronic Delivery”)”

§ 2.2Section 7.1(b) (Financial and Business Information – Annual Statements) of the Agreement is hereby amended by deleting its concluding proviso, which proviso is set forth as follows:

“, provided, further, that the Company shall be deemed to have made such delivery of such Form 10‑K if it shall have timely made Electronic Delivery thereof, in which event the Company shall separately deliver, concurrently with such Electronic Delivery, the Accountant’s Certificate”

§ 2.3Section 7.1(c) (Financial and Business Information – SEC and Other Reports) of the Agreement is hereby amended by deleting its concluding proviso, which proviso is set forth as follows:

“, provided that the Company shall be deemed to have made such delivery of the items provided for by this clause (c) if it shall have timely made Electronic Delivery (without regard to the notice requirement provided in such defined term) thereof”

§ 2.4Section 7.2 (Officer’s Certificate) of the Agreement is hereby amended by deleting, from its introductory clause, the parenthetical phrase as follows:

“(which, in the case of Electronic Delivery of any such financial statements, shall be by separate concurrent delivery of such certificate to each holder of Notes)”

§ 2.5Section 7 (Information as to Company) of the Agreement is hereby amended by inserting the following new Section 7.5 (Electronic Delivery):

“Section 7.5Electronic Delivery.Financial statements, opinions of independent certified public accountants, other information and Officer’s Certificates that are required to be delivered by the Company pursuant to Sections 7.1(a), (b) or (c) and

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Section 7.2 shall be deemed to have been delivered if the Company satisfies any of the following requirements with respect thereto: 

(i)such financial statements satisfying the requirements of Section 7.1(a) or Section 7.1(b) (together with the related Accountant’s Certificate in the case of Section 7.1(b)) and the related Officer’s Certificate satisfying the requirements of Section 7.2 are delivered to each holder of a Note at the e-mail address set forth in Schedule A for such holder or as communicated from time to time in a separate writing delivered to the Company;

(ii)the Company shall have timely filed such Form 10–Q or Form 10–K, satisfying the requirements of Section 7.1(a) or Section 7.1(b), as the case may be, with the SEC on EDGAR and shall have made such form (together with the related Accountant’s Certificate in the case of Form 10-K) and the related Officer’s Certificate satisfying the requirements of Section 7.2 available via its home page on the internet (at the date of this Agreement located at:  http://www.patenergy.com);

(iii)such financial statements satisfying the requirements of Section 7.1(a) or Section 7.1(b) (together with the related Accountant’s Certificate in the case of Section 7.1(b)) and related Officer’s Certificate(s) satisfying the requirements of Section 7.2 are timely posted by or on behalf of the Company on IntraLinks or on any other similar website to which each holder of Notes has free access; or

(iv)the Company shall have filed any of the items referred to in Section 7.1(c) with the SEC on EDGAR and shall have made such items available via its home page on the internet or on IntraLinks or on any other similar website to which each holder of Notes has free access;

provided however, that in no case shall access to such financial statements (or Form 10-Q or Form 10-K), other information, Accountant’s Certificates and Officer’s Certificates be conditioned upon any waiver or other agreement or consent (other than confidentiality provisions consistent with Section 20 of this Agreement); provided further, however, that in the case of any of clauses (ii), (iii) or (iv), the Company shall have given each holder of a Note prior written notice, which may be by e-mail or in accordance with Section 18, of such posting or filing in connection with each delivery, provided further, that upon request of any holder to receive paper copies of any of the materials described in this Section 7.5 or to receive them by e-mail, the Company will promptly e-mail them or deliver such paper copies, as the case may be, to such holder.”

§ 2.6Section 9.8 (Additional Guarantors) of the Agreement is hereby amended by replacing in its entirety with the following:

“Section 9.8Additional Guarantors.

(a)The Company will cause each Subsidiary or other entity that guarantees or becomes obligated with respect to the Indebtedness of the Company

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or any Subsidiary under any Principal Credit Facility to promptly (and in any event contemporaneously with such entity becoming a party to or obligated under a Principal Credit Facility (or such longer period of time as agreed to by the Required Holders in their reasonable discretion)) become a Guarantor hereunder by way of execution of a Guarantor Supplement in the form of Exhibit A to the Guaranty Agreement (each a “Guaranty Joinder Agreement”).  The Company shall give notice to each holder of Notes not less than 10 days prior to any such Subsidiary or other entity becoming party to or obligated under a Principal Credit Facility. 

(b)In connection with clause (a) of this Section 9.8, the Company shall deliver to each holder of Notes, with respect to each new Guarantor to the extent applicable, proof of corporate or similar action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the Credit Parties pursuant to Section 4 on the date of Closing and such other documents or agreements as the Required Holders may reasonably request.

(c)The holders of the Notes agree that a Guarantor shall be automatically released and discharged from its obligations under the Guaranty Agreement effective at the time the obligations of such Guarantor, whether direct or indirect, as a co-borrower, guarantor or otherwise, in respect of any Indebtedness of the Company or its Subsidiaries under all Principal Credit Facilities shall, at any time after the date of the Closing, be released and discharged by the holders of such Indebtedness, provided that:

(i)no Default or Event of Default is then continuing;

(ii)if in connection with the release and discharge of such Guarantor from its obligations with respect to the Indebtedness of the Company or any Subsidiary under any Principal Credit Facility, the Company, any Subsidiary or any other entity pays any consideration to the holders of such Indebtedness in consideration of such release and discharge, then the holders of Notes shall receive consideration on the same basis as (and substantially concurrently with) such other holders for such release and discharge; and

(iii)each holder of Notes shall have received a certificate of a Responsible Officer certifying that (A) the obligations of such Guarantor, whether direct or indirect, as a co-borrower, guarantor or otherwise, in respect of any Indebtedness of the Company or its Subsidiaries under all Principal Credit Facilities have been released and discharged (or will be released and discharged concurrently with the release and discharge of such Guarantor from the Guaranty Agreement), (B) immediately after giving effect to such release and discharge, no Default or Event of Default shall be continuing, (C) no amount is then due and payable by such Guarantor under the Guaranty Agreement and (D) the Company has met the condition described in clause (ii) of this proviso.

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If any Person released and discharged as a Guarantor pursuant to this Section 9.8(c) shall at any time after such release and discharge become directly or indirectly liable for (whether by way of becoming a co-borrower, guarantor or otherwise), all or any part of the Indebtedness of the Company or its Subsidiaries under any Principal Credit Facility, the Company will cause such Person contemporaneously with entering into any such Guarantee or incurring such liability to execute and deliver to the holders of the Notes, (1) a Guaranty Joinder Agreement, and (2) proof of corporate or similar action, incumbency of officers, opinions of counsel and other documents as is consistent with those delivered by the Credit Parties pursuant to Section 4 on the date of Closing and such other documents or agreements as the Required Holders may reasonably request.

(d)In connection with the release and discharge contemplated by clause (c) of this Section 9.8, and in each such instance, the holders of the Notes shall, within 30 days of receipt of a written request of the Company, take such action and execute such documents as the Company, such Subsidiary or entity shall reasonably request to evidence such release and discharge of such Subsidiary’s or entity’s obligations under the Guaranty Agreement, all at the expense of the Company.”

§ 2.7Section 10.2 (Merger, Consolidation, Etc.) of the Agreement is hereby amended by deleting the phrase “except as permitted by clause (i) of Section 9.8(c)”, which phrase appears as the concluding phrase of the concluding paragraph of such Section 10.2, and inserting, in lieu thereof, the phrase as follows:

“unless, in the case of the conveyance, transfer,  sale or lease of all or substantially all of the assets of a Guarantor, such Guarantor is released and discharged from its obligations under the Guaranty Agreement in accordance with Section 9.8(c) in connection with, or immediately following, such conveyance, transfer, sale or lease.”

§ 2.8Section 18 (Notices) of the Agreement is hereby amended by inserting, as the opening phrase of its introductory clause, the phrase as follows:

“Except to the extent otherwise provided in Section 7.5,”

§ 2.9Section 20 (Confidential Information) of the Agreement is hereby amended by inserting the following new paragraph at the end of such Section:

“In the event that as a condition to receiving access to information relating to the Company or its Subsidiaries in connection with the transactions contemplated by or otherwise pursuant to this Agreement, any Purchaser or holder of a Note is required to agree to a confidentiality undertaking (whether through IntraLinks, another secure website, a secure virtual workspace or otherwise) which is different from this Section 20, this Section 20 shall not be amended thereby and, as between such Purchaser or such holder and the Company, this Section 20 shall supersede any such other confidentiality undertaking.”

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§ 2.10Schedule A (Information Relating to Purchasers) of the Agreement is hereby amended and restated in its entirety as set forth on Schedule A hereto. 

§ 2.11Schedule B, (Defined Terms) of the Agreement is hereby amended by replacing the defined term for “Change of Control” in its entirety with the following:

"Change of Control" means an event or series of events by which:

(a)any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group shall be deemed to have "beneficial ownership" of all securities that such person or group has the right to acquire (such right, an "option right"), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 25% or more of the equity securities of the Company entitled to vote for members of the board of directors or equivalent governing body of the Company on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right);

(b)during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Company cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body; or

(c)any Person or two or more Persons acting in concert shall have acquired, by contract or otherwise, the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Company.

§ 2.12Schedule B, (Defined Terms) of the Agreement is hereby amended by deleting the defined term for “Electronic Delivery”.

Section 3.Credit Parties’ Representations and Warranties.  The Company acknowledges, represents, warrants and agrees as to itself and all other Credit Parties, and each other Credit Party acknowledges, represents, warrants and agrees as to itself, that: (i) the execution, delivery and performance of this Amendment are within the corporate or limited liability company power and authority of such Credit Party, as the case may be, and have been duly authorized by appropriate corporate and limited liability company action and proceedings;

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(ii) this Amendment constitutes the legal, valid, and binding obligation of such Credit Party enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity; (iii) there are no governmental consents, licenses and approvals required to be made or obtained by it in connection with its execution, delivery, performance, validity and enforceability of this Amendment; (iv) no Defaults or Events of Default exist; (v) no Credit Party and no Subsidiary of any Credit Party has paid or has agreed to pay (directly or indirectly) any fee, remuneration or other consideration in favor of or for the benefit of any agent or lender under any Principal Credit Facility in connection with any amendments thereto substantially similar to those being made to the Agreement hereunder and (vi) Patterson International has been released from all of its obligations under and in respect of the 2012 Credit Agreement, and (as of the date hereof) has no obligations, whether direct or indirect, as a co-borrower, guarantor or otherwise, with respect to any Indebtedness of the Company or any Subsidiary under any Principal Credit Facility, and (A) at the time Patterson International was released from such obligations under and in respect of the 2012 Credit Agreement, no Default or Event of Default was continuing and (B) no consideration was paid in exchange for such release. 

Section 4.Conditions to Effectiveness.  The amendments provided in Section 2 and the acknowledgment of the release of Patterson International under Section 7 shall become effective only upon the date of the satisfaction in full of the following conditions precedent (the “Effective Date”):

(a)the Credit Parties and the Required Holders shall have executed and delivered this Amendment;

(b)the representations and warranties set forth in Section 3 shall be true and correct on such date in all respects;

(c)the Company shall have delivered to the Noteholders a fully executed copy of that certain Amendment No. 1 to Note Purchase Agreement, dated as of the date hereof, by and among the Credit Parties and each of the Persons signatory thereto with respect to that certain Note Purchase Agreement, dated as of October 5, 2010, and such amendment to be in form and substance satisfactory to the Required Holders, and the conditions to the effectiveness thereof shall have been satisfied or waived; and

(d)the Company shall have paid the fees, costs and expenses of Morgan, Lewis & Bockius LLP, special counsel to the Noteholders, in accordance with the terms of Section 8 of this Amendment, to the extent provided with an invoice therefor.

Section 5.Acknowledgments and Agreements.  

(a)Each Credit Party acknowledges that on the date hereof all of its outstanding obligations under the Financing Documents are payable in accordance with their terms, and each Credit Party waives any defense, offset, counterclaim or recoupment with respect thereto.  Each Noteholder hereby expressly reserves all of its rights, remedies, and claims under the Financing Documents.  Nothing in this Amendment shall constitute a waiver or relinquishment of (i) any Default or Event of Default under any of the Financing Documents, (ii) any of the agreements,

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terms or conditions contained in any of the Financing Documents, (iii) any rights or remedies of any Noteholder with respect to the Financing Documents, or (iv) the rights of any Noteholder to collect the full amounts owing to them under the Financing Documents. 

(b)The Agreement, as amended hereby, is adopted, ratified and confirmed and is and remains in full force and effect, and the Company and the Guarantors acknowledge and agree that their respective liabilities and obligations under the Agreement, as amended hereby, and the Guaranty Agreement are not impaired in any respect by this Amendment.

(c)From and after the Effective Date, all references to the Agreement and the Financing Documents shall mean the Agreement and such Financing Documents as amended by this Amendment.

(d)This Amendment is a Financing Document for the purposes of the provisions of the other Financing Documents.  

Section 6.Reaffirmation of and Amendment to the Guaranty Agreement. Each Guarantor party hereto (which, for the avoidance of doubt, excludes Patterson International) hereby ratifies, confirms, acknowledges and agrees that its obligations under the Guaranty Agreement are in full force and effect and that such Guarantor continues to unconditionally and irrevocably guarantee the full and punctual payment, when due, whether at stated maturity or earlier by acceleration or otherwise, all of the Guaranteed Obligations (as defined in the Guaranty Agreement) as such Guaranteed Obligations may have been amended by this Amendment, and its execution and delivery of this Amendment does not indicate or establish an approval or consent requirement by such Guarantor under the Guaranty Agreement, in connection with the execution and delivery of amendments, consents or waivers to the Agreement or any of the other Financing Documents.

Section 7.Release from Guaranty Agreement.  The Noteholders acknowledge the release and discharge of Patterson International from all obligations and liabilities under the Guaranty Agreement.  The foregoing is an acknowledgment of a release and discharge of Patterson International only, and nothing in this Amendment shall be construed to be a release, or an acknowledgment of a release, of any obligations of the Company, any other Guarantor or any other Person under the Agreement or any other Financing Document to, or for the any Noteholder.  Furthermore, nothing in this Amendment shall be deemed or construed to in any manner be a permanent release and discharge of Patterson International from hereafter being required timely to become, and the Company from being required to cause Patterson International hereafter timely to become, a Guarantor pursuant to the terms of the Agreement, as amended and in effect, whether for failure to qualify as an Excluded Subsidiary (as defined in Agreement, as amended hereby) or otherwise.

Section 8Fees and Expenses.  Without in any way limiting the obligations of the Company to pay the fees and expenses of the Noteholders in compliance with Section 15.1 of the Agreement, the Company agrees that it shall pay all of the Noteholders’ costs and expenses, including, without limitation, all attorneys’ fees incurred by the Noteholders, in connection with the preparation, negotiation, and execution of this Amendment.

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Section 9.Counterparts.  This Amendment may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument.  Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the requisite parties hereto.  This Amendment may be executed by facsimile signature or other electronic imaging means, and all such signatures shall be effective as originals. 

Section 10.Successors and Assigns.  This Amendment shall be binding upon and inure to the benefit of (i) the parties hereto and their respective successors and permitted assigns (including, without limitation, any subsequent holder of any Note) and (ii) for the avoidance of doubt, all holders of Notes and each future holder of any Note, as provided in Section 17.3 of the Agreement, whether so expressed or not.

Section 11.Severability.  Any provision of this Amendment, or the Agreement as amended by this Amendment, that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

Section 12.Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant.  Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.

Section 13.Governing Law.  This Amendment shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York, excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.

 

[Signature pages follow]

 

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Exhibit 10.2    Execution Version

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized effective as of the Effective Date.

BORROWER:

PATTERSON-UTI ENERGY, INC.


By: /s/ John E. Vollmer III

John E. Vollmer III
Senior Vice President—Corporate
Development, Chief Financial Officer and
Treasurer

 

 

 

GUARANTORS:

PATTERSON PETROLEUM LLC
PATTERSON-UTI DRILLING COMPANY LLC
PATTERSON-UTI MANAGEMENT SERVICES, LLC
UNIVERSAL WELL SERVICES, INC.
UNIVERSAL PRESSURE PUMPING, INC.


Each by:/s/ John E. Vollmer III
John E. Vollmer III
Senior Vice President—Corporate
Development, Chief Financial Officer and
Treasurer

 

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.2    Execution Version

This Agreement is hereby

accepted and agreed to as

of the date thereof.

 

THE PRUDENTIAL INSURANCE COMPANY

  OF AMERICA

 

 

By:  /s/ Chris Halloran

Vice President

 

 

PRUDENTIAL ARIZONA REINSURANCE

  UNIVERSAL COMPANY

 

By:Prudential Investment Management, Inc.,

as investment manager

 

 

By: /s/ Chris Halloran

Vice President

 

 

THE GIBRALTAR LIFE INSURANCE CO.,

  LTD.

 

By:Prudential Investment Management Japan

Co., Ltd., as Investment Manager

 

By:Prudential Investment Management, Inc.,

as Sub-Adviser

 

 

By:  /s/ Chris Halloran

Vice President

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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zurich american insurance company

 

By:Prudential Private Placement Investors,

L.P. (as Investment Advisor)

 

By:Prudential Private Placement Investors, Inc.

(as its General Partner)

 

 

By:  /s/ Chris Halloran

Vice President

 

 

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.2    Execution Version

NEW YORK LIFE INSURANCE COMPANY

 

 

By: /s/ A. Post Howland

Name:A. Post Howland

Title:Vice President

 

NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION

By:NYL Investors LLC, its Investment Manager

 

 

By: /s/ A. Post Howland

Name:A. Post Howland

Title:Managing Director

 

NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION INSTITUTIONALLY OWNED LIFE INSURANCE SEPARATE ACCOUNT (BOLI 30C)

By:NYL Investors LLC, its Investment Manager

 

 

By: /s/ A. Post Howland

Name:A. Post Howland

Title:Managing Director

 

NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION INSTITUTIONALLY OWNED LIFE INSURANCE SEPARATE ACCOUNT (BOLI 3-2)

By:NYL Investors LLC, its Investment Manager

 

 

By: /s/ A. Post Howland

Name:A. Post Howland

Title:Managing Director

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.2    Execution Version

AXA EQUITABLE LIFE INSURANCE COMPANY

 

 

By: /s/ Amy Judd

Name:Amy Judd

Title: Investment Officer

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.2    Execution Version

CUDD & CO.

(as nominee for HORIZON BLUE CROSS AND BLUE SHIELD OF NEW JERSEY)

 

By:AllianceBernstein LP, its Investment Advisor

 

 

By: /s/ Andrew J. Michaels

Name:  Andrew J. Michaels

Title:Vice President

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY

 

By:Northwestern Mutual Investment Management Company, LLC,

Its investment advisor

 

By: /s/ Howard Stern

Its:  Managing Director

 

 

 

THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY FOR ITS GROUP ANNUITY SEPARATE ACCOUNT

 

By: /s/ Howard Stern

Its:  Authorized Representative

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

By: /s/ Eve Hampton
Name:Eve Hampton

Title:Vice President, Investments

 

By: /s/ Ward Argust
Name:Ward Argust

Title:Manager, Investments

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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LONDON LIFE INSURANCE COMPANY

By: /s/ W.J. Sharman
Name:W.J. Sharman

Title:Authorized Signatory

 

By: /s/ D.B.E. Ayers
Name:D.B.E. Ayers

Title:Authorized Signatory

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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THE LINCOLN NATIONAL LIFE

INSURANCE COMPANY

 

By:Delaware Investment Advisers,

a series of Delaware Management

Business Trust, Attorney in Fact

 

 

By: /s/ Nicole Tullo

Name:Nicole Tullo

Title:Vice President

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA

 

 

By: /s/ Charles J. Dudley

Name:Charles J. Dudley

Title:Assistant Treasurer

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA

 

 

By: /s/ Ho Young Lee

Name:Ho Young Lee

Title:Managing Director

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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KNIGHTS OF COLUMBUS

 

 

By: /s/ Gilles Marchand

Name:Gilles Marchand

Title:Vice President

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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MODERN WOODMEN OF AMERICA

 

 

By: /s/ Douglas A. Pannier

Name:Douglas A. Pannier

Title:Group Head - Private Placements

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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life insurance company of the southwest

 

 

By: /s/ R. Scott Higgins

Name:R. Scott Higgins

Title:Senior Vice President, Sentinel Asset Management

 

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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ATHENE ANNUITY AND LIFE COMPANY

(f/k/a Aviva Life and Annuity Company)

 

By:Athene Asset Management, L.P., its investment adviser

 

By:AAM GP Ltd., its general partner

 

 

By: /s/ Roger D. Fors

Name:Roger D. Fors

Title:Senior Vice President, Fixed Income

 

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.2    Execution Version

Cmfg life INSURANCE company

CUMIS INSURANCE SOCIETY, INC.

By:MEMBERS Capital Advisors, Inc., acting as Investment Advisor

 

 

By: /s/ Allen R. Cantrell

Name:Allen R. Cantrell

Title:Managing Director, Investments

 

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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Exhibit 10.2    Execution Version

THE OHIO NATIONAL LIFE INSURANCE COMPANY

 

 

By: /s/ Annette M. Teders

Name:Annette M. Teders

Title:Vice President

 

 

 

 

[Signature Page to Amendment No. 1 to 2012 Note Purchase Agreement - Patterson-UTI Energy, Inc.]

 

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SENIOR HEALTH INSURANCE COMPANY OF PENNSYLVANIA

By:Conning, Inc., as Investment Manager

 

 

By: /s/ Samuel Otchere

Name:Samuel Otchere

Title:Director

 

 

PRIMERICA LIFE INSURANCE COMPANY

By:Conning, Inc., as Investment Manager

 

 

By: /s/ Samuel Otchere

Name:Samuel Otchere

Title:Director

 

 

 

 

Signature page to Amendment No. 1 to Note Purchase Agreement

(Patterson-UTI Energy, Inc.)

 

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Schedule A

 

Information Relating To Purchasers

 

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Schedule A-42

 

EXHIBIT 31.1

CERTIFICATIONS

I, William Andrew Hendricks, Jr., certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Patterson-UTI Energy, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 28, 2015

EXHIBIT 31.2

CERTIFICATIONS

I, John E. Vollmer III, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Patterson-UTI Energy, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 28, 2015

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934

In connection with the quarterly report of Patterson-UTI Energy, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), William Andrew Hendricks, Jr., Chief Executive Officer, and John E. Vollmer III, Chief Financial Officer, of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request. The foregoing is being furnished solely pursuant to said Section 906 and Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and is not being filed as part of the Report or as a separate disclosure document.