# Patterson Uti Energy Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Patterson Uti Energy Inc](/companies/pten.md) (CIK 889900)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 09:10 ET
- Period: 2023-09-30
- Accession: 0000950170-23-061582
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/889900/000095017023061582/pten-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/889900/000095017023061582/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $1.01bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.56bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $45.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $108.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $9.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $240.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $15.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $34.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $29.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $50.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $184.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.79 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.79 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 281,984,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 234,488,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $553.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $160.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $410.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $66.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $124.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $67.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $1.42bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $7.42bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $1.04bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $2.56bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $1.23bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $12.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $4.85bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 60,409 characters.

*Management Overview —* We are a Houston, Texas-based leading provider of drilling and completion services to oil and natural gas exploration and production companies in the United States and other select countries, including contract drilling services, integrated well completions services and directional drilling services in the United States, and specialized drill bit solutions in the United States, Middle East and many other regions around the world. We operate under three reportable business segments: (i) drilling services, (ii) completion services, and (iii) drilling products.

### Drilling Services

Our contract drilling business operates in the continental United States and internationally in Colombia and, from time to time, we pursue contract drilling opportunities in other select markets. We also provide a comprehensive suite of directional drilling services in most major producing onshore oil and gas basins in the United States, and we provide services that improve the statistical accuracy of wellbore placement for directional and horizontal wells. We also service equipment for drilling contractors, and we provide electrical controls and automation to the energy, marine and mining industries, in North America and other select markets.

We have addressed our customers’ needs for drilling horizontal wells in shale and other unconventional resource plays by improving the capabilities of our drilling fleet. The U.S. land rig industry has in recent years referred to certain high specification rigs as “super-spec” rigs, which we consider to be at least a 1,500 horsepower, AC-powered rig that has at least a 750,000-pound hookload, a 7,500-psi circulating system, and is pad-capable. Due to evolving customer preferences, we refer to certain premium rigs as “Tier-1, super spec” rigs, which we consider as being a super-spec rig that also has a third mud pump and raised drawworks that allow for more clearance underneath the rig floor. As of September 30, 2023, our rig fleet included 173 super-spec rigs, of which 131 were Tier-1, super-spec rigs.

We maintain a backlog of commitments for contract drilling under term contracts, which we define as contracts with a duration of six months or more. Our contract drilling backlog in the United States as of September 30, 2023 was approximately $760 million. Approximately 24% of the total contract drilling backlog in the United States at September 30, 2023 is reasonably expected to remain at September 30, 2024. See Note 3 of Notes to unaudited condensed consolidated financial statements for additional information on backlog.

### Completion Services

Our well completion services business consists of services for hydraulic fracturing, wireline and pumping, completion support, and cementing. It also includes our power solutions natural gas fueling business, our proppant last mile logistics and storage business and our research and technology department. Our completion services business operates in several of the most active basins in the continental United States including the Permian, the Marcellus Shale/Utica, the Eagle Ford, Mid-Continental, Haynesville, and the Bakken/Rockies. The high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.

### Drilling Products

We serve the energy and mining markets by manufacturing and distributing drill bits through North America and internationally in over 30 countries. Our drilling equipment is used in oil and gas exploration and production and in mining operations. We have manufacturing facilities located in Fort Worth, Texas, Leduc, Alberta and Saudi Arabia and repair facilities located in Argentina, Colombia, Oman and Saudi Arabia.

### Other

Other consists of our oilfield rentals business, with a fleet of premium oilfield rental tools, along with the results of our ownership, as a non-operating working interest owner, in oil and gas assets located in Texas and New Mexico.

*Recent Developments in Market Conditions and Outlook —* Crude oil prices and demand for drilling and completions equipment and services increased in 2022, and industry supply of Tier-1, super-spec rigs became constrained. Commodity price volatility in the second quarter of 2023 resulted in a decline in industry activity; however, commodity prices increased during the third quarter. The current demand for equipment and services remains dependent on macro conditions, including commodity prices, geopolitical environment, inflationary pressures, economic conditions in the United States and elsewhere and continued customer consolidation and focus by exploration and production companies and service companies on capital discipline. Oil prices reached a low of $69.71 per barrel and averaged $82.25 per barrel in the third quarter of 2023, as compared to $73.54 per barrel in the second quarter of 2023. Natural gas prices (based on the Henry Hub Spot Market Price) averaged $2.59 per MMBtu in the third quarter of 2023 as compared to an average of $2.16 per MMBtu in the second quarter of 2023.

Our average active rig count in the United States for the third quarter of 2023 was 120 rigs. This was a decrease from our average active rig count for the second quarter of 2023 of 128. We expect our rig count in the United States will average approximately 118 rigs during the fourth quarter. Based on contracts in place in the United States as of November 7, 2023, we expect an average of 74 rigs operating under term contracts during the fourth quarter of 2023 and an average of 52 rigs operating under term contracts during the four quarters ending September 30, 2024.

Our completion services business was impacted by calendar inefficiencies during the third quarter of 2023, with customer activity slowing more towards the end of the quarter. Completion services activity has stabilized in the fourth quarter, relative to levels late in the third quarter. Outside the typical holiday and seasonal slowdowns, we believe activity will remain relatively steady with current levels through the rest of this year, with activity likely to modestly recover starting in the first quarter of 2024.

Drilling products demand has begun to increase from levels late in the third quarter as the North American rig count has moderately increased in the fourth quarter.

For the fourth quarter, we expect total capital expenditures of approximately $190 million.

*Recent Developments in Business Combinations and Financial Matters —* On September 1, 2023 we completed our merger (the “NexTier merger”) with NexTier Oilfield Solutions Inc. (“NexTier”). Each share of common stock of NexTier issued and outstanding immediately prior to the effective time (including outstanding restricted shares) was converted into the right to receive 0.752 shares of our common stock, which based on the closing price of our common stock of $14.91 on September 1, 2023, valued the transaction at approximately $2.8 billion, including the assumption of debt. NexTier is a predominately U.S. land-focused oilfield service company, with a diverse set of well completion and production services across a variety of active basins.

On August 14, 2023, we completed our acquisition (the “Ulterra acquisition”) of Ulterra Drilling Technologies, L.P. (“Ulterra”). Total consideration for the acquisition included the issuance of 34.9 million shares of our common stock and payment of approximately $376 million cash, which based on the closing price of our common stock of $14.94 on August 14, 2023, valued the transaction at closing at approximately $897 million. Ulterra is a global provider of specialized drill bit solutions.

On September 13, 2023, we completed the offering of $400 million in aggregate principal amount of our 7.15% Senior Notes due 2033 (the “2033 Notes”). The net proceeds before offering expenses were approximately $396 million, which we used to repay amounts outstanding under our revolving credit facility.

On August 29, 2023, we entered into Amendment No. 4 to Amended and Restated Credit Agreement (the “Credit Agreement Amendment”), which amends our Amended and Restated Credit Agreement, dated as of March 27, 2018 (as amended, the “Credit Agreement”), by and among us, as borrower, Wells Fargo Bank, National Association, as administrative agent, letter of credit issuer, swing line lender and a lender and each of the other letter of credit issuers and lenders party thereto.

The Credit Agreement Amendment, among other things, (i) deemed certain outstanding letters of credit issued for the account of BEP Diamond Holdings Corp. (the entity we acquired in the Ulterra acquisition) with a face amount of $2.5 million to have been issued under the Credit Agreement, and (ii) extended the maturity date for $85 million of revolving credit commitments of certain lenders under the Credit Agreement from March 27, 2025 to March 27, 2026. As a result, of the $600 million of revolving credit commitments under the Credit Agreement, the maturity date for $501.7 million of such commitments is March 27, 2026; the maturity date for $48.3 million of such commitments is March 27, 2025; and the maturity date for the remaining $50 million of such commitments is March 27, 2024.

During the first quarter of 2023, we elected to repurchase portions of our 3.95% Senior Notes due 2028 (the “2028 Notes”) and our 5.15% Senior Notes due 2029 (the “2029 Notes”) in the open market. The principal amounts retired through these transactions totaled $6.0 million of our 2028 Notes and $3.0 million of our 2029 Notes, plus accrued interest. We recorded corresponding gains on the extinguishment of these amounts totaling $0.8 million and $0.3 million, respectively, net of the proportional write-off of associated deferred financing costs and original issuance discounts. These gains are included in “Interest expense, net of amount capitalized” in our unaudited condensed consolidated statements of operations.

*Impact on our Business from Oil and Natural Gas Prices and Other Factors —* Our revenues, profitability and cash flows are highly dependent upon prevailing prices for oil and natural gas and upon our customers’ ability to access, and willingness to deploy, capital to fund their operating and capital expenditures. During periods of improved oil and natural gas 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 oil and natural gas prices are relatively low or when our customers have a reduced ability to access capital, the demand for our services generally weakens, and we experience downward pressure on pricing for our services. Even during periods of historically moderate or 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 services. We may also be impacted by delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies.

The North American oil and natural gas services industry is cyclical and at times experiences downturns in demand. During these periods, there has been substantially more oil and natural gas service equipment available than necessary to meet demand. As a result, oil and natural gas service contractors have had difficulty sustaining profit margins and, at times, have incurred losses during the downturn periods. We cannot predict either the future level of demand for our oil and natural gas services or future conditions in the oil and natural gas service businesses.

In addition to the dependence on oil and natural gas prices and demand for our services, we are highly impacted by operational risks, competition, labor issues, weather, the availability, from time to time, of products used in our businesses, supplier delays and various other factors that could materially adversely affect our business, financial condition, cash flows and results of operations. Please see Item 1A of this Report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

For the three months ended September 30, 2023 and June 30, 2023 and nine months ended September 30, 2023 and 2022, our operating revenues consisted of the following (dollars in thousands):

|  | Three Months Ended September 30, 2023 |  | June 30, 2023 |  | Nine Months Ended September 30 2023 |  | September 30 2022 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Drilling Services | $488,775 | 48.3% | $489,659 | 64.5% | $1,456,161 | 56.8% | $1,083,329 | 58.3% |
| Completion Services | 459,574 | 45.4% | 250,241 | 33.0% | 1,003,083 | 39.2% | 715,630 | 38.5% |
| Drilling Products | 46,570 | 4.6% | — | 0.0% | 46,570 | 1.8% | — | 0.0% |
| Other | 16,533 | 1.7% | 18,985 | 2.5% | 56,325 | 2.2% | 60,157 | 3.2% |
|  | $1,011,452 | 100.0% | $758,885 | 100.0% | $2,562,139 | 100.0% | $1,859,116 | 100.0% |

34

### Results of Operations

#### The following tables summarize results of operations by business segment for the three months ended September 30, 2023 and June 30, 2023:

*(dollars in thousands)*

| Drilling Services (1) | Three Months Ended September 30, 2023 | June 30, 2023 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $488,775 | $489,659 | (0.2)% |
| Direct operating costs | 279,927 | 281,573 | (0.6)% |
| Adjusted gross margin (2) | 208,848 | 208,086 | 0.4% |
| Selling, general and administrative | 3,570 | 4,395 | (18.8)% |
| Depreciation, amortization and impairment | 90,668 | 90,400 | 0.3% |
| Other operating (income) expenses, net | (127) | 12 | NA |
| Operating income | $114,737 | $113,279 | 1.3% |
| Capital expenditures | $89,242 | $82,634 | 8.0% |
| Operating days - U.S. (3) | 11,009 | 11,669 | (5.7)% |
| Average revenue per operating day - U.S. (3) | $38.11 | $35.94 | 6.0% |
| Average direct operating costs per operating day - U.S. (3) | $19.87 | $19.04 | 4.4% |
| Average adjusted gross margin per operating day - U.S. (3) | $18.24 | $16.91 | 7.9% |

(1) Drilling services segment represents our contract drilling, directional drilling, oilfield technology and electrical controls and automation businesses.

(2) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

(3) Operational data relates to our contract drilling business. A rig is considered to be operating if it is earning revenue pursuant to a contract on a given day.

Revenues were flat between sequential quarters. However, our contract drilling business recorded approximately $29 million of previously deferred revenue from a customer prepayment during the three months ended September 30, 2023, which became recognizable after the customer changed its drilling schedule. Without this incremental revenue, our drilling services revenues would have decreased 6% over the comparable periods, which reflects the reduction in average contract drilling rig count in the United States from 128 rigs to 120 rigs.

Direct operating costs decreased approximately 1% between sequential quarters primarily due to the reduction in average rig count in our contract drilling business. The decrease in average rig count was partially offset by inflationary pressure on labor and supplies.

The increase in capital expenditures was primarily due to the timing of order placement and spending on committed deliveries that more heavily impacted the third quarter of 2023.

*(dollars in thousands)*

| Completion Services (1) | Three Months Ended September 30, 2023 | June 30, 2023 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $459,574 | $250,241 | 83.7% |
| Direct operating costs | 368,869 | 196,473 | 87.7% |
| Adjusted gross margin (2) | 90,705 | 53,768 | 68.7% |
| Selling, general and administrative | 7,205 | 2,488 | 189.6% |
| Depreciation, amortization and impairment | 83,338 | 25,976 | 220.8% |
| Operating income | $162 | $25,304 | (99.4)% |
| Capital expenditures | $56,464 | $29,640 | 90.5% |

(1) Completion services represents the combination of well completion business from the NexTier merger and our legacy pressure pumping business.

(2) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

The changes for the three months ended September 30, 2023 as compared to June 30, 2023 can be primarily attributed to the NexTier merger, which closed on September 1, 2023. The NexTier merger had a material impact on our reported results of operations. In order to provide a more meaningful basis for comparison, the discussion below is focused on changes between comparable periods excluding the effects of the NexTier merger.

Completion services revenues, excluding the effects of the NexTier merger, decreased $62.8 million, or 25%. The decrease was due to lower pricing, which accounted for approximately 40% of the change in revenue, with the remainder being driven by lower utilization.

Direct operating costs, excluding the effects of the NexTier merger, decreased $35.6 million, or 18%. The decrease was primarily due to lower utilization.

Selling, general and administrative expense, excluding the effects of the NexTier merger, was flat over the comparable periods.

Depreciation, amortization and impairment, excluding the effects of the NexTier merger, increased $26.5 million, or 102%. The increase was primarily attributable to the change in the estimated useful lives of certain components to reflect recent trends in increased intensity and pumping hours per day in servicing larger jobs. We expect the impact of this change to result in approximately $5 million of incremental depreciation expense in excess of our historic run rate in each subsequent three-month period. See Note 1 of Notes to unaudited condensed consolidated financial statements for additional information on this change in accounting estimate.

Capital expenditures, excluding the effects of the NexTier merger, increased $8.5 million, or 29%. The increase was primarily due to spending related to maintenance capital and the timing of order placement that more heavily impacted the third quarter of 2023.

*(dollars in thousands)*

| Drilling Products | Three Months Ended September 30, 2023 | June 30, 2023 | % Change |
| --- | ---: | ---: | --- |
| Revenues | $46,570 | $— | NA |
| Direct operating costs | 32,071 | — | NA |
| Adjusted gross margin (1) | 14,499 | — | NA |
| Selling, general and administrative | 3,664 | — | NA |
| Depreciation, amortization and impairment | 17,075 | — | NA |
| Operating loss | $(6,240) | $— | NA |
| Capital expenditures | $7,940 | $— | NA |

(1) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

The results of our drilling products segment reflect the operations of our Ulterra acquisition, from the closing date of August 14, 2023 until September 30, 2023. As such, there were no comparable results for the three months ended June 30, 2023.

Direct operating costs and depreciation, amortization and impairment were approximately $6.4 million and $7.4 million higher than they would have otherwise been, respectively, as a result of the step up to fair value of our drill bits in accordance with purchase accounting.

*(dollars in thousands)*

| Other | Three Months Ended September 30, 2023 | June 30, 2023 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $16,533 | $18,985 | (12.9)% |
| Direct operating costs | 10,591 | 10,039 | 5.5% |
| Adjusted gross margin (1) | 5,942 | 8,946 | (33.6)% |
| Selling, general and administrative | 188 | 233 | (19.3)% |
| Depreciation, depletion, amortization and impairment | 5,319 | 9,304 | (42.8)% |
| Operating income (loss) | $435 | $(591) | NA |
| Capital expenditures | $5,972 | $7,192 | (17.0)% |

(1) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, depletion, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

Revenue decreased due to a lower volume of services provided by our oilfield rentals business.

Depreciation, depletion, amortization and impairment decreased primarily due to a $3.8 million impairment recorded in our oil and natural gas properties business in the second quarter of 2023.

*(dollars in thousands)*

| Corporate | Three Months Ended September 30, 2023 | June 30, 2023 | % Change |
| --- | ---: | ---: | ---: |
| Selling, general and administrative | $30,475 | $26,141 | 16.6% |
| Merger and integration expense | $70,188 | $7,940 | 784.0% |
| Depreciation | $1,235 | $1,134 | 8.9% |
| Other operating income, net | $(2,508) | $(1,805) | 38.9% |
| Interest income | $2,131 | $1,212 | 75.8% |
| Interest expense | $15,625 | $9,738 | 60.5% |
| Other (expense) income | $(618) | $2,323 | NA |
| Capital expenditures | $804 | $12,928 | (93.8)% |

Selling, general and administrative expense increased due to incremental headcount for corporate functions as a result of the NexTier merger, which closed on September 1, 2023. Selling, general and administrative expense, excluding the effects of the NexTier merger, was relatively flat over the comparable periods.

Merger and integration expense increased due to the NexTier merger and the Ulterra acquisition during the three months ended September 30, 2023. The increase was primarily attributable to $39.1 million of accelerated stock-based compensation expense and additional cash compensation associated with severance payments as well as certain legal, financial advisory, and other professional fees in order to consummate the transactions.

Interest expense increased primarily due to borrowings on our revolving credit facility throughout the quarter and the offering of 2033 Notes. See Note 9 of Notes to unaudited condensed consolidated financial statements for additional information on our long-term debt.

The decrease in capital expenditures was primarily due to the purchase of an aircraft in the second quarter of 2023.

#### The following tables summarize results of operations by business segment for the nine months ended September 30, 2023, and September 30, 2022:

*(dollars in thousands)*

| Drilling Services (1) | Nine Months Ended September 30, 2023 | September 30, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $1,456,161 | $1,083,329 | 34.4% |
| Direct operating costs | 842,761 | 741,317 | 13.7% |
| Adjusted gross margin (2) | 613,400 | 342,012 | 79.4% |
| Selling, general and administrative | 11,810 | 10,432 | 13.2% |
| Depreciation, amortization and impairment | 272,361 | 262,955 | 3.6% |
| Other operating income, net | (93) | (4) | 2,225.0% |
| Operating income | $329,322 | $68,629 | 379.9% |
| Capital expenditures | $261,155 | $181,754 | 43.7% |
| Operating days - U.S. (3) | 34,429 | 33,144 | 3.9% |
| Average revenue per operating day - U.S. (3) | $36.23 | $26.02 | 39.3% |
| Average direct operating costs per operating day - U.S. (3) | $19.25 | $16.93 | 13.7% |
| Average adjusted gross margin per operating day - U.S. (3) | $16.98 | $9.08 | 86.9% |

(1) Drilling services segment represents our contract drilling, directional drilling, oilfield technology and electrical controls and automation businesses.

(2) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

(3) Operational data relates to our contract drilling business. A rig is considered to be operating if it is earning revenue pursuant to a contract on a given day.

Revenues increased primarily due to improved pricing and an increase in operating days in our contract drilling business within the United States.

Direct operating costs increased primarily due to an increase in operating days in our contract drilling business within the United States in addition to inflationary pressure on labor and supplies.

The increase in capital expenditures was primarily due to higher maintenance capital expenditures related to increased rig activity and upgrading of certain rig components.

*(dollars in thousands)*

| Completion Services (1) | Nine Months Ended September 30, 2023 | September 30, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $1,003,083 | $715,630 | 40.2% |
| Direct operating costs | 785,458 | 560,627 | 40.1% |
| Adjusted gross margin (2) | 217,625 | 155,003 | 40.4% |
| Selling, general and administrative | 12,388 | 6,298 | 96.7% |
| Depreciation, amortization and impairment | 135,339 | 73,244 | 84.8% |
| Operating income | $69,898 | $75,461 | (7.4)% |
| Capital expenditures | $107,529 | $114,669 | (6.2)% |

(1) Completion services represents the combination of well completion business from the NexTier merger and our legacy pressure pumping business.

(2) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

The changes for the nine months ended September 30, 2023 as compared to September 30, 2022 can be primarily attributed to the NexTier merger, which closed on September 1, 2023. The NexTier merger had a material impact on our reported results of operations. In order to provide a more meaningful basis for comparison, the discussion on changes below is focused on changes between comparable periods, excluding the effects of the NexTier merger.

Completion services revenues and direct operating costs, excluding the effects of the NexTier merger, increased $15.3 million and $16.8 million, or 2% and 3%, respectively. The modest increases reflect volatility over both comparable periods as we experienced pricing and activity increases during the nine months ended September 30, 2022 that reversed with recent market trends in the third quarter of 2023. Direct operating costs also increased during the nine months ended September 30, 2023, primarily due to inflationary pressure on labor and supplies.

Selling, general and administrative expense, excluding the effects of the NexTier merger, was relatively flat consistent over the comparable periods.

Depreciation, amortization and impairment, excluding the effects of the NexTier merger, increased $31.2 million, or 43%. The increase was primarily attributable to the change in estimated useful lives of certain components to reflect recent trends in increased intensity and pumping hours per day in servicing larger jobs. We expect the impact of this change to result in approximately $20 million of incremental depreciation expense in excess of our historic run rate over the next twelve months. See Note 1 of Notes to unaudited condensed consolidated financial statements for additional information on this change in accounting estimate.

The decrease in capital expenditures was primarily due to the activation of our twelfth spread in 2022, which was partially offset by incremental capital expenditures related to NexTier equipment during September 2023.

*(dollars in thousands)*

| Drilling Products | Nine Months Ended September 30, 2023 | September 30, 2022 | % Change |
| --- | ---: | ---: | --- |
| Revenues | $46,570 | $— | NA |
| Direct operating costs | 32,071 | — | NA |
| Adjusted gross margin (1) | 14,499 | — | NA |
| Selling, general and administrative | 3,664 | — | NA |
| Depreciation, amortization and impairment | 17,075 | — | NA |
| Operating loss | $(6,240) | $— | NA |
| Capital expenditures | $7,940 | $— | NA |

(1) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

The results of our drilling products segment reflect the operations of our Ulterra acquisition, from the closing date of August 14, 2023 until September 30, 2023. As such, there were no comparable results for the nine months ended September 30, 2022.

Direct operating costs and depreciation, amortization and impairment were approximately $6.4 million and $7.4 million higher than they would have otherwise been, respectively, as a result of the step up to fair value of our drill bits in accordance with purchase accounting.

*(dollars in thousands)*

| Other | Nine Months Ended September 30, 2023 | September 30, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $56,325 | $60,157 | (6.4)% |
| Direct operating costs | 31,912 | 28,789 | 10.8% |
| Adjusted gross margin (1) | 24,413 | 31,368 | (22.2)% |
| Selling, general and administrative | 656 | 576 | 13.9% |
| Depreciation, depletion, amortization and impairment | 21,946 | 20,495 | 7.1% |
| Operating income (loss) | $1,811 | $10,297 | (82.4)% |
| Capital expenditures | $18,387 | $19,654 | (6.4)% |

(1) Adjusted gross margin is defined as revenues less direct operating costs (excluding depreciation, depletion, amortization and impairment expense). See Non-GAAP Financial Measures below for a reconciliation of GAAP gross margin to adjusted gross margin by segment.

Revenue decreased moderately between comparable periods. Our oil and natural gas revenues decreased by $10.0 million as a result of lower average crude oil and natural gas market prices. Average WTI-Cushing prices for the nine months ended September 30, 2023 were $77.27 per barrel as compared to $98.96 per barrel for the nine months ended September 30, 2022. Natural gas prices (based on the Henry Hub spot market) averaged $2.46 per MMBtu for the nine months ended September 30, 2023 as compared to $6.74 per MMBtu for the nine months ended September 30, 2022. This decrease was partially offset by a $6.2 million increase in revenues from our oilfield rentals business.

*(dollars in thousands)*

| Corporate | Nine Months Ended September 30, 2023 | September 30, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Selling, general and administrative | $80,407 | $64,706 | 24.3% |
| Merger and integration expense | $78,128 | $2,069 | 3,676.1% |
| Depreciation | $5,908 | $3,947 | 49.7% |
| Other operating income, net | $(9,901) | $(10,561) | (6.2)% |
| Interest income | $4,583 | $87 | 5,167.8% |
| Interest expense | $34,189 | $32,198 | 6.2% |
| Other income (expense) | $3,191 | $(2,644) | NA |
| Capital expenditures | $15,406 | $1,476 | 943.8% |

Selling, general and administrative expense increased primarily due to increased personnel costs as a result of higher headcount, wage growth and changes in stock-based compensation. A portion of the increased personnel costs resulted from incremental headcount for corporate functions as part of the NexTier merger.

Merger and integration expense increased due to closing the Ulterra acquisition and NexTier merger during the nine months ended September 30, 2023. Merger and integration expense increased due to the NexTier merger and the Ulterra acquisition during the three months ended September 30, 2023. The increase was primarily attributable to $39.1 million of accelerated stock-based compensation expense and additional cash compensation associated with severance payments as well as certain legal, financial advisory, and other professional fees in order to consummate the transactions.

Interest income increased due to us maintaining a higher average cash balance during the nine months ended September 30, 2023.

The $5.8 million change in other income (expense) was primarily due to foreign currency adjustments related to our Colombian operations.

The increase in capital expenditures was primarily due to the purchase of an aircraft in 2023.

### Income Taxes

Our effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, the impact of U.S. state and local taxes, the realizability of deferred tax assets and other differences related to the recognition of income and expense between GAAP and tax accounting.

Our effective income tax rate for the three months ended September 30, 2023 was 93.7%, compared with 14.0% for the three months ended June 30, 2023. The difference in effective income tax rates was primarily attributable to the impact of valuation allowances on deferred tax assets between periods.

Our effective income tax rate for the nine months ended September 30, 2023 was 13.9%, compared with 8.3% for the nine months ended September 30, 2022. The difference in effective income tax rates was primarily attributable to the impact of valuation allowances on deferred tax assets between periods.

We continue to monitor income tax developments in the United States and other countries where we have legal entities. We will incorporate into our future financial statements the impacts, if any, of future regulations and additional authoritative guidance when finalized.

### Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, availability under our revolving credit facility and cash provided by operating activities. As of September 30, 2023, we had approximately $387 million in working capital, including $67.0 million of cash and cash equivalents, and $597.5 million available under our revolving credit facility.

As part of the NexTier merger, we assumed the obligations of NexTier Completions Solutions Inc. (“NCS”) under a Master Loan and Security Agreement (as amended, the “Master Agreement”) with Caterpillar Financial Services Corporation. The Master

Agreement allows NCS to enter into secured equipment financing term loans from time to time (the “Equipment Loans”). The Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. The Master Agreement and the Equipment Loans contain customary affirmative and negative covenants, including limitations on further encumbrance of the collateral other than the applicable loans under the Master Agreement. The Equipment Loans bear interest at a rate of 5.25% per annum, and we pay interest on the 1st of each month. The Equipment Loans will mature on June 1, 2025. We were in compliance with these covenants at September 30, 2023.

On August 29, 2023, we entered into Amendment No. 4 to the Amended and Restated Credit Agreement (the “Credit Agreement Amendment”), which amended our Amended and Restated Credit Agreement, dated as of March 27, 2018 (as amended, the “Credit Agreement”), by and among us, as borrower, Wells Fargo Bank, National Association, as administrative agent, letter of credit issuer, swing line lender and a lender and each of the other letter of credit issuers and lenders party thereto. The Credit Agreement Amendment, among other things, (i) deemed certain outstanding letters of credit issued for the account of BEP Diamond Holdings Corp. (the entity we acquired in the Ulterra acquisition) with a face amount of $2.5 million to have been issued under the Credit Agreement and (ii) extended the maturity date for $85 million of revolving credit commitments of certain lenders under the Credit Agreement from March 27, 2025 to March 27, 2026. As a result, of the $600 million of revolving credit commitments under the Credit Agreement, the maturity date for $501.7 million of such commitments is March 27, 2026; the maturity date for $48.3 million of such commitments is March 27, 2025; and the maturity date for the remaining $50 million of such commitments is March 27, 2024.

The Credit Agreement is a committed senior unsecured revolving credit facility that permits aggregate borrowings of up to $600 million, including a letter of credit facility that, at any time outstanding, is limited to $100 million and a swing line facility that, at any time outstanding, is limited to the lesser of $50 million and the amount of the swing line provider’s unused commitment. Subject to customary conditions, we may request that the lenders’ aggregate commitments be increased by up to $300 million, not to exceed total commitments of $900 million.

Loans under the Credit Agreement bear interest by reference, at our election, to the SOFR rate (subject to a 0.10% per annum adjustment) or base rate, in each case subject to a 0% floor. The applicable margin on SOFR rate loans varies from 1.00% to 2.00% and the applicable margin on base rate loans varies from 0.00% to 1.00%, in each case determined based on our credit rating. As of September 30, 2023, the applicable margin on SOFR rate loans was 1.75% and the applicable margin on base rate loans was 0.75%. A letter of credit fee is payable by us equal to the applicable margin for SOFR rate loans times the daily amount available to be drawn under outstanding letters of credit. The commitment fee rate payable to the lenders varies from 0.10% to 0.30% based on our credit rating.

None of our subsidiaries are currently required to be a guarantor under the Credit Agreement. However, if any subsidiary guarantees or incurs debt, which does not qualify for certain limited exceptions and is otherwise, in the aggregate with all other similar debt, in excess of Priority Debt (as defined in the Credit Agreement), such subsidiary is required to become a guarantor under the Credit Agreement.

The Credit Agreement contains representations, warranties, affirmative and negative covenants and events of default and associated remedies that we believe are customary for agreements of this nature, including certain restrictions on our ability and the ability of each of our subsidiaries to grant liens and on the ability of each of our non-guarantor subsidiaries to incur debt. If our credit rating is below investment grade at both Moody’s and S&P, we will become subject to a restricted payment covenant, which would generally require us to have a Pro Forma Debt Service Coverage Ratio (as defined in the Credit Agreement) greater than or equal to 1.50 to 1.00 immediately before and immediately after making any restricted payment. Restricted payments include, among other things, dividend payments, repurchases of our common stock, distributions to holders of our common stock or any other payment or other distribution to third parties on account of our or our subsidiaries’ equity interests. Our credit rating is currently investment grade at both credit rating agencies. The Credit Agreement also requires that our total debt to capitalization ratio, expressed as a percentage, not exceed 50% as of the last day of each fiscal quarter. The Credit Agreement generally defines the total 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 end of the most recently ended fiscal quarter. We were in compliance with these covenants at September 30, 2023.

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, 2023, we had $87.7 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 by us 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. A letter of credit fee is payable by us equal to 1.50% times the amount of outstanding letters of credit.

We have also agreed that if obligations under the Credit Agreement are secured by liens on any of our or 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, 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. None of our subsidiaries are currently required to guarantee payment under the Credit Agreement.

We had $92.7 million of outstanding letters of credit at September 30, 2023, which was comprised of $87.7 million outstanding under the Reimbursement Agreement, $2.5 million outstanding under the Credit Agreement, and $2.5 million outstanding with financial institutions providing for short-term borrowing capacity, overdraft protection and bonding requirements. We maintain these letters of credit primarily for the benefit of various insurance companies as collateral for retrospective premiums and retained losses which could become payable under 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, 2023, no amounts had been drawn under the letters of credit.

Our outstanding long-term debt at September 30, 2023 was $1.2 billion and consisted of $483 million of our 2028 Notes, $345 million of our 2029 Notes, $400 million of our 2033 Notes and $21.7 million of our Equipment Loans. We were in compliance with all covenants under the associated agreements and indentures at September 30, 2023.

For a full description of the Credit Agreement, the Reimbursement Agreement, the 2028 Notes, the 2029 Notes, the 2033 Notes and the Equipment Loans, see Note 9 of Notes to unaudited condensed consolidated financial statements.

On August 29, 2023, we entered into a Term Loan Agreement with Wells Fargo Bank, National Association, as administrative agent and a lender, and the other lenders party thereto (the “Term Loan Agreement”). The Term Loan Agreement was a committed senior unsecured term loan facility (the “Term Loan Facility”) that permitted a single borrowing of up to $300 million, which could be drawn by us on or before November 27, 2023. We terminated the Term Loan Facility on September 13, 2023 and, as a result, the commitments under the Term Loan Agreement also terminated in full. We did not borrow under the Term Loan Facility.

### Cash Requirements

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 and make improvements to our existing equipment, service our debt, pay cash dividends and repurchase our common stock and senior notes for at least the next 12 months.

If we pursue other opportunities 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 or additional debt or equity financing. However, there can be no assurance that such capital will be available on reasonable terms, if at all.

A portion of our capital expenditures can be adjusted and managed by us to match market demand and activity levels. For the fourth quarter, we expect total capital expenditures of approximately $190 million.

The majority of these expenditures are expected to be used for normal, recurring items necessary to support our business.

During the nine months ended September 30, 2023, our sources of cash flow included:

- $553 million from operating activities, and
- $19.6 million in proceeds from the disposal of property and equipment, and
- $396 million in net proceeds before offering expenses from the issuance of our 2033 Notes.

During the nine months ended September 30, 2023, our uses of cash flow and borrowings under our revolving credit facility included:

- $410 million to make capital expenditures for the betterment and refurbishment of drilling services and completion services equipment and, to a much lesser extent, equipment for our other businesses, to acquire and procure equipment to support our drilling services, completion services, drilling products, oilfield rentals and manufacturing operations, to acquire an aircraft and to fund investments in oil and natural gas properties on a non-operating working interest basis,
- $357 million, net of acquired cash, for the Ulterra acquisition,
- $65.2 million, net of acquired cash, for the NexTier merger,
- $124.3 million for repurchases of our common stock,
- $66.7 million to pay dividends on our common stock,
- $5.2 million for repurchases of our 2028 Notes, and
- $2.6 million for repurchases of our 2029 Notes.

We paid cash dividends during the nine months ended September 30, 2023 as follows:

*(in thousands)*

|  | Per Share | Total |
| --- | ---: | ---: |
| Paid on March 16, 2023 | $0.08 | $16,916 |
| Paid on June 15, 2023 | $0.08 | $16,591 |
| Paid on September 21, 2023 | $0.08 | $33,217 |
|  | $0.24 | $66,724 |

On November 7, 2023, our Board of Directors approved a cash dividend on our common stock in the amount of $0.08 per share to be paid on December 15, 2023 to holders of record as of December 1, 2023. 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 our debt agreements and other factors. Our Board of Directors may, without advance notice, reduce or suspend our dividend in order to improve our financial flexibility and position our company for long-term success. There can be no assurance that we will pay a dividend in the future.

We may, at any time and from time to time, seek to retire or purchase our outstanding debt for cash through open-market purchases, privately negotiated transactions, redemptions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

In September 2013, our Board of Directors approved a stock buyback program. In April 2023, our Board of Directors approved an increase of the authorization under the stock buyback program to allow for an aggregate of $300 million of future share repurchases. All purchases executed to date have been through open market transactions. Purchases under the buyback program are made at management’s discretion, at prevailing prices, subject to market conditions and other factors. Purchases may be made at any time without prior notice. There is no expiration date associated with the buyback program. As of September 30, 2023, we had remaining authorization to purchase approximately $281 million of our outstanding common stock under the stock buyback program. Shares of stock purchased under the buyback program are held as treasury shares.

Treasury stock acquisitions during the nine months ended September 30, 2023 were as follows (dollars in thousands):

|  | Shares | Cost |
| --- | ---: | ---: |
| Treasury shares at beginning of period | 88,758,722 | $1,453,079 |
| Purchases pursuant to stock buyback program | 7,426,044 | 93,276 |
| Acquisitions pursuant to long-term incentive plans (1) | 2,356,845 | 31,722 |
| Treasury shares at end of period | 98,541,611 | $1,578,077 |

(1) We withheld 2,356,845 shares during the first three quarters of 2023 with respect to employees’ tax withholding obligations upon the settlement of performance unit awards and the vesting of restricted stock units. These shares were acquired at fair market value. These acquisitions were made pursuant to the terms of the Patterson-UTI Energy, Inc. Amended and Restated 2014 Long-Term Incentive Plan, as amended, the Patterson-UTI Energy, Inc. 2021 Long-Term Incentive Plan, as amended, the NexTier Oilfield

Solutions Inc. Equity and Incentive Award Plan and the NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan and not pursuant to the stock buyback program.

*Commitments —* As of September 30, 2023, we had commitments to purchase major equipment totaling approximately $197 million. Our completion services segment has entered into agreements to purchase minimum quantities of proppants and chemicals from certain vendors. As of September 30, 2023, the remaining minimum obligation under these agreements was approximately $34.5 million, of which approximately $14.2 million, $16.3 million, and $4.0 million relate to the remainder of 2023, 2024 and 2025, respectively.

See Note 10 of Notes to unaudited condensed consolidated financial statements for additional information on our current commitments and contingencies as of September 30, 2023.

As part of the Ulterra acquisition and NexTier merger, we acquired additional operating and finance leases. Operating lease liabilities totaled $51.5 million and finance lease liabilities totaled $55.8 million as of September 30, 2023.

*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.

### Non-GAAP Financial Measures

### 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 (“GAAP”). We define Adjusted EBITDA as net income (loss) plus income tax expense (benefit), net interest expense, depreciation, depletion, amortization and impairment expense and merger and integration expense. We present Adjusted EBITDA as a supplemental disclosure because we believe it provides to both management and investors additional information with respect to the performance of our fundamental business activities and a comparison of the results of our operations from period to period and against our peers without regard to our financing methods or capital structure. We exclude the items listed above from net income in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be construed as an alternative to the GAAP measure of net income. Our computations of Adjusted EBITDA may not be the same as similarly titled measures of other companies. Set forth below is a reconciliation of the non-GAAP financial measure of Adjusted EBITDA to the GAAP financial measure of net income.

*(in thousands)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(278) | $84,614 | $184,014 | $54,561 |
| Income tax expense (benefit) | (4,130) | 13,765 | 29,820 | 4,910 |
| Net interest expense | 13,494 | 8,526 | 29,606 | 32,111 |
| Depreciation, depletion, amortization and impairment | 197,635 | 126,814 | 452,629 | 360,641 |
| Merger and integration expense | 70,188 | 7,940 | 78,128 | 2,069 |
| Adjusted EBITDA | $276,909 | $241,659 | $774,197 | $454,292 |

44

### Adjusted Gross Margin

We define “Adjusted gross margin” as revenues less direct operating costs (excluding depreciation, depletion, amortization and impairment expense). Adjusted gross margin is included as a supplemental disclosure because it is a useful indicator of our operating performance.

*(in thousands)*

| For the three months ended September 30, 2023 | Drilling Services | Completion Services | Drilling Products | Other |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $488,775 | $459,574 | $46,570 | $16,533 |
| Less direct operating costs | (279,927) | (368,869) | (32,071) | (10,591) |
| Less depreciation, depletion, amortization and impairment | (90,668) | (83,338) | (17,075) | (5,319) |
| GAAP gross margin | 118,180 | 7,367 | (2,576) | 623 |
| Depreciation, depletion, amortization and impairment | 90,668 | 83,338 | 17,075 | 5,319 |
| Adjusted gross margin | $208,848 | $90,705 | $14,499 | $5,942 |
| **For the three months ended June 30, 2023** |  |  |  |  |
| Revenues | $489,659 | $250,241 | $— | $18,985 |
| Less direct operating costs | (281,573) | (196,473) | — | (10,039) |
| Less depreciation, depletion, amortization and impairment | (90,400) | (25,976) | — | (9,304) |
| GAAP gross margin | 117,686 | 27,792 | — | (358) |
| Depreciation, depletion, amortization and impairment | 90,400 | 25,976 | — | 9,304 |
| Adjusted gross margin | $208,086 | $53,768 | $— | $8,946 |
| **For the nine months ended September 30, 2023** |  |  |  |  |
| Revenues | $1,456,161 | $1,003,083 | $46,570 | $56,325 |
| Less direct operating costs | (842,761) | (785,458) | (32,071) | (31,912) |
| Less depreciation, depletion, amortization and impairment | (272,361) | (135,339) | (17,075) | (21,946) |
| GAAP gross margin | 341,039 | 82,286 | (2,576) | 2,467 |
| Depreciation, depletion, amortization and impairment | 272,361 | 135,339 | 17,075 | 21,946 |
| Adjusted gross margin | $613,400 | $217,625 | $14,499 | $24,413 |
| **For the nine months ended September 30, 2022** |  |  |  |  |
| Revenues | $1,083,329 | $715,630 | $— | $60,157 |
| Less direct operating costs | (741,317) | (560,627) | — | (28,789) |
| Less depreciation, depletion, amortization and impairment | (262,955) | (73,244) | — | (20,495) |
| GAAP gross margin | 79,057 | 81,759 | — | 10,873 |
| Depreciation, depletion, amortization and impairment | 262,955 | 73,244 | — | 20,495 |
| Adjusted gross margin | $342,012 | $155,003 | $— | $31,368 |

### Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates. Accounting estimates and assumptions discussed in this section are those considered to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. There have been no material changes to our critical accounting estimates previously disclosed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, except as follows:

Fair values of assets acquired and liabilities assumed in acquisitions — Assets acquired and liabilities assumed in a business combination are recorded at their estimated fair values on the date of acquisition. The difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. We apply significant judgment in estimating the fair value of assets acquired and liabilities assumed, which involves the use of significant estimates and assumptions with respect to rig counts, estimated economic useful lives, operating and capital cost estimates, and weighted average discount rates reflecting the cost of capital for market participants. Changes in these judgments or estimates can have a material impact on the valuation of the respective assets and liabilities acquired and our results of operations in periods after acquisition, such as through depreciation and amortization expense. The allocation of the purchase price may be modified up to one year after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. See Note 2 of Notes to unaudited condensed consolidated financial statements for additional information on the fair values of assets acquired and liabilities assumed in recent business combinations.

### Recently Issued Accounting Standards

See Note 1 of Notes to unaudited condensed consolidated financial statements for a discussion of the impact of recently issued accounting standards.

### 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. Crude oil prices and demand for drilling and completions equipment and services increased in 2022, and industry supply of Tier-1, super-spec rigs became constrained. Commodity price volatility in the second quarter of 2023 resulted in a decline in industry activity; however, commodity prices increased during the third quarter. The current demand for equipment and services remains dependent on macro conditions, including commodity prices, geopolitical environment, inflationary pressures, economic conditions in the United States and elsewhere and continued customer consolidation and focus by exploration and production companies and service companies on capital discipline. Oil prices reached a low of $69.71 per barrel and averaged $82.25 per barrel in the third quarter of 2023, as compared to $73.54 per barrel in the second quarter of 2023. Natural gas prices (based on the Henry Hub Spot Market Price) averaged $2.59 per MMBtu in the third quarter of 2023 as compared to an average of $2.16 per MMBtu in the second quarter of 2023.

In light of these and other factors, 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. Higher oil and natural gas prices do not necessarily result in increased activity because demand for our services is generally driven by our customers’ expectations of future oil and natural gas prices, as well as our customers’ ability to access sources of capital to fund their operating and capital expenditures. A decline in demand for oil and natural gas, prolonged low oil or natural gas prices, expectations of decreases in oil and natural gas prices or a reduction in the ability of our customers to access capital would likely result in reduced capital expenditures by our customers and decreased demand for our services, which could have a material adverse effect on our operating results, financial condition and cash flows. Even during periods of historically moderate or 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 services.

## Market risk

As filed, 2,503 characters.

We may be exposed to certain market risks arising from the use of financial instruments in the ordinary course of business. For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in our exposure to market risk.

As of September 30, 2023, we would have had exposure to interest rate market risk associated with any outstanding borrowings that we had under the Credit Agreement and amounts owed under the Reimbursement Agreement.

Loans under the Credit Agreement bear interest by reference, at our election, to the SOFR rate or base rate. The applicable margin on SOFR rate loans varies from 1.00% to 2.00% and the applicable margin on base rate loans varies from 0.00% to 1.00%, in each case determined based on our credit rating. As of September 30, 2023, the applicable margin on SOFR rate loans was 1.75% and the applicable margin on base rate loans was 0.75%. A letter of credit fee is payable by us equal to the applicable margin for SOFR rate loans times the daily amount available to be drawn under outstanding letters of credit. The commitment fee rate payable to the lenders varies from 0.10% to 0.30% based on our credit rating. As of September 30, 2023, we had $2.5 million in letters of credit outstanding and, as a result, had available borrowing capacity of $597.5 million at that date.

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. We are obligated to pay 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, 2023, no amounts had been disbursed under any letters of credit.

Some of our revenues in foreign countries are denominated in U.S. dollars, and therefore, changes in foreign currency exchange rates impact our earnings to the extent that costs associated with those U.S. dollar revenues are denominated in the local currency. Similarly, some of our revenues are denominated in foreign currencies, but have associated U.S. dollar costs, which also give rise to foreign currency exchange rate exposure.

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.

## Controls and procedures

As filed, 2,635 characters.

*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, 2023.

As disclosed in Note 2 *Business Combinations* in the Notes to Consolidated Financial Statements, we completed the Ulterra acquisition on August 14, 2023 and the NexTier merger on September 1, 2023. We excluded Ulterra’s and NexTier’s disclosure controls and procedures that are subsumed by their internal control over financial reporting from the scope of management’s assessment of the effectiveness of our disclosure controls and procedures. This exclusion is in accordance with the guidance issued by the Staff of the Securities and Exchange Commission that an assessment of recent business combinations may be omitted from management's assessment of internal control over financial reporting for one year following the acquisition. As a result of our integration of the Ulterra and NexTier disclosure controls and procedures, certain controls will be evaluated and may be changed. Ulterra and NexTier’s total revenues constituted approximately 5% and 27% of our consolidated revenues, respectively, for the three months ended September 30, 2023. Ulterra’s and NexTier’s total assets constituted approximately 14% and 47% of our consolidated total assets, respectively, as of September 30, 2023.

*Changes in Internal Control Over Financial Reporting —* Except as noted above, 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.

## Risk factors

As filed, 12,601 characters.

There have been no material changes to the risk factors previously disclosed in Item 1A., “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 other than those listed in Part II, Item 1A., “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 and this section.

***Our business relationships may be subject to disruption due to uncertainty associated with the NexTier merger or the Ulterra acquisition, which could have a material adverse effect on our results of operations, cash flows and financial position pending and following the NexTier merger and the Ulterra acquisition.***

Parties with which we do business may experience uncertainty associated with the NexTier merger and the Ulterra acquisition, including with respect to current or future business relationships with us. Our business relationships may be subject to disruption as customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners may attempt to delay or defer entering into new business relationships, negotiate changes in existing business relationships or consider entering into business relationships with parties other than us, NexTier or Ulterra. These disruptions could have a material adverse effect on our results of operations, cash flows and financial position, as well as a material adverse effect on our ability to realize the expected cost savings and other benefits of the applicable transaction.

***Our ability to utilize our historic U.S. net operating loss carryforwards is expected to be limited as a result of the completion of the NexTier merger.***

As of December 31, 2022, we had approximately $1.4 billion of gross U.S. federal NOLs, approximately $48.3 million of gross Canadian NOLs, approximately $18.8 million of gross Colombian NOLs and approximately $1.0 billion of post-apportionment U.S. state NOLs, before valuation allowances. The majority of our U.S. federal NOLs will expire in varying amounts, if unused, between 2030 and 2037. U.S. federal NOLs generated after 2017 can be carried forward indefinitely. Our Canadian NOLs will expire in varying amounts, if unused, between 2037 and 2042. Our Colombian NOLs will expire in varying amounts, if unused, between 2028 and 2032. Our U.S. state NOLs will expire in varying amounts, if unused, between 2023 and 2042.

Section 382 of the Code (“Section 382”) generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone an “ownership change” (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least 5% of such corporation’s stock has increased their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. In the event that an ownership change occurs, utilization of the relevant corporation’s NOLs would be subject to an annual limitation under Section 382, generally determined, subject to certain adjustments, by multiplying (i) the fair market value of such corporation’s stock at the time of the ownership change by (ii) a percentage approximately equivalent to the yield on long-term tax-exempt bonds during the month in which the ownership change occurs. Any unused annual limitation may be carried over to later years.

We experienced an ownership change (under Section 382) as a result of the closing of the NexTier merger. Our ability to utilize our available NOLs and other tax attributes to reduce future taxable income following this “ownership change” depends on many factors, including our future income, which cannot be assured. Based on information currently available, we expect this ownership change could cause some of our NOLs incurred prior to January 1, 2018 to expire before we would be able to utilize them to reduce taxable income in future periods, and may also require NOLs to be utilized later than they otherwise would be able to be utilized, increasing cash taxes payable in earlier years.

***Uncertainties associated with the NexTier merger and the Ulterra acquisition may cause a loss of management personnel and other key employees, which could adversely affect our future business and operations.***

We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Our success after the transactions will depend in part upon our ability to retain key management personnel and other key employees. Current and prospective employees may experience uncertainty about their roles within the combined company or other concerns regarding the operations of the combined company following the transactions, any of which may have an adverse effect on our ability to retain or attract key management and other key personnel. In addition, the loss of key personnel could diminish the anticipated benefits of the transactions and the integration of the companies may be more difficult. Furthermore, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent relating to the business of each of the companies. No assurance can be given that we will be able to retain or attract key management personnel and other key employees of NexTier or Ulterra to the same extent that we have previously been able to retain or attract our own employees.

***We have incurred and are expected to continue incurring significant transaction costs in connection with the NexTier merger and the Ulterra acquisition, which may be in excess of those we anticipated.***

We have incurred and are expected to continue to incur significant non-recurring costs associated with completing the NexTier merger and the Ulterra acquisition, combining the operations of the three companies and achieving desired synergies. These costs have been, and will continue to be, substantial. A substantial majority of non-recurring expenses consist of transaction costs and include, among others, fees paid to financial, legal, accounting and other advisors, employee retention, severance and benefit costs and filing fees. We have incurred and will continue to incur costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and other employment-related costs. We will continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the integration of the companies’ businesses. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the expenses. The elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may not offset integration-related costs and achieve a net benefit in the near term, or at all. The costs described above and any unanticipated costs and expenses could have an adverse effect on our financial condition and operating results.

***We may be unable to integrate the businesses of NexTier and Ulterra successfully or realize the anticipated benefits of the NexTier merger and the Ulterra acquisition.***

The NexTier merger and the Ulterra acquisition involve the combination of companies that operated as independent companies. The combination of independent businesses is complex, costly and time consuming, and we have devoted, and will continue to devote, significant management attention and resources to integrating the respective business practices and operations of the companies. Potential difficulties that the companies may encounter as part of the integration process include the following:

- our inability to successfully combine our business with the businesses of NexTier and Ulterra in a manner that permits us to achieve, on a timely basis or at all, the enhanced revenue opportunities and cost savings and other benefits anticipated to result from the NexTier merger and the Ulterra acquisition;
- complexities associated with managing the combined businesses, including difficulty addressing possible differences in operational philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;
- the assumption of contractual obligations with less favorable or more restrictive terms; and
- potential unknown liabilities and unforeseen increased expenses or delays associated with the transactions.

In addition, because we, NexTier and Ulterra previously operated independently, it is possible that the integration process could result in:

- diversion of the attention of our management; and
- the disruption of, or the loss of momentum in, our ongoing businesses or inconsistencies in standards, controls, procedures and policies.

Any of these issues could adversely affect the combined company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or achieve the anticipated benefits of the transactions, or could reduce the combined company’s earnings or otherwise adversely affect our business and financial results.

***The benefits and synergies attributable to the NexTier merger and the Ulterra acquisition may vary from expectations.***

We may fail to realize the anticipated benefits and synergies expected from the NexTier merger and the Ulterra acquisition, which could adversely affect our business, financial condition and operating results. The success of the transactions will depend, in significant part, on our ability to successfully integrate the acquired businesses and realize the anticipated strategic benefits and synergies from the transactions. The anticipated benefits of the transactions may not be realized fully or at all, or may take longer to realize than expected. Actual operating, technological, strategic and revenue opportunities, if achieved at all, may be less significant than expected or may take longer to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated benefits and synergies expected from the NexTier merger and the Ulterra acquisition within the anticipated timing or at all, our business, financial condition and operating results may be adversely affected.

***Our future results following the NexTier merger and the Ulterra acquisition will suffer if we do not effectively manage our expanded operations.***

Following the NexTier merger and the Ulterra acquisition, the size and geographic footprint of our business has increased. Our future success will depend, in part, upon our ability to manage this expanded business, which may pose substantial challenges for management, including challenges related to the management and monitoring of new operations and geographies and associated increased costs and complexity. We may also face increased scrutiny from governmental authorities as a result of the increase in the size of our business. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the NexTier merger and the Ulterra acquisition.

***The NexTier merger and the Ulterra acquisition may result in a loss of customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners and may result in the modification or termination of existing contracts.***

Following the NexTier merger and the Ulterra acquisition, some of our, NexTier’s or Ulterra’s customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners may modify, terminate or scale back their current or prospective business relationships with us. Some customers may not wish to source a larger percentage of their needs from a single company or may feel that we are too closely allied with one of their competitors. If relationships with customers, distributors, suppliers, vendors, landlords, joint venture partners and other business partners are adversely affected by the NexTier merger or the Ulterra acquisition, or if we lose the benefits of our contracts or those of NexTier or Ulterra, our business and financial performance following the transactions could suffer.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-061582. Last ingested by Listed: Nov 2, 2026, 18:44 ET. No prices; not investment advice.