Patterson-UTI Energy, Inc.
Patterson-UTI Energy, Inc.
Incorporated: 1978 as Patterson Drilling Company, Inc.
Sales: $528 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: PTEN
NAIC: 213111 Drilling Oil and Gas Wells
Operating out of Snyder, Texas, Patterson-UTI Energy, Inc. is North America’s second largest onshore contract drilling company, offering services to major and independent oil and natural gas producers in the Permian Basin of west Texas and southeast New Mexico, south Texas, east Texas, Oklahoma, the Gulf Coast regions of Texas and Louisiana, the Gulf of Mexico, and western Canada. The company is the result of a 2001 merger of equals between Patterson Energy, Inc. and Houston-based UTI Energy Corp., with Patterson becoming the surviving entity. As of December 31, 2002, the company owns a fleet of 324 rigs, which are made up of the structure (hoists and derricks), power sources, and ancillary items such as pumps, blowout preventers, pipe, and other equipment needed to drive a drill bit into rock to depths as much as 30,000 feet. The vast majority of Patterson-UTI’s rigs, 286, are mechanical rigs, and the remaining 38 are SCR electrical rigs. In addition, Patterson-UTI offers drilling fluids and completion fluids to customers in order to control pressure while drilling for oil or natural gas wells. Pressure pumping services are provided in the Appalachian Basin to complete new wells and stimulate old ones. The company is also involved in a minor way in the development and exploration of oil and natural gas. Services are contracted in three different ways. Day work contracts, Patterson-UTI’s most common arrangement, are negotiated on a per-day rate for a drilling rig and crew, which the customer is responsible for supervising, and additional lump sums are paid for the mobilization and demobilization of the drilling rig. Under footage contracts Patterson-UTI drills a well for a customer at a fixed rate per foot. Although the risks are greater under this arrangement, if the project is completed ahead of schedule, the company realizes a higher profit than under a day work contract. A turnkey contract is the riskiest, and potentially most rewarding, contract under which Patterson does business, requiring that the company provide services, supplies, and equipment not called for in a footage contract and the assumption of such risks as blowouts, fires, and the cratering of the well bore. In addition, payment in the form of a fixed fee is only received when the work is completed, requiring Patterson to bear considerable up-front costs that it may not recoup. As a consequence, Patterson-UTI is involved in relatively few turnkey operations.
Early Years: 1970s–80s
Patterson Energy was originally Patterson Drilling Company, Inc., a business founded by Cloyce A. Talbott and A. Glenn Patterson in 1978. Patterson earned a business degree from Angelo State University in 1970. The older of the partners was Talbott, a west Texas native who earned a degree in Petroleum Engineering from Texas Tech University in 1958. Upon graduation he worked four years for Standard Oil Company of Texas before striking out on his own, forming Snyder Well Servicing, acting as both president and co-owner. The business evolved into a drilling company, ultimately becoming Texas International. Patterson Drilling started out as a small land-based drilling company, with just nine drilling rigs. In 1984 it changed its name to Patterson Energy, although it continued to do business as Patterson Drilling. During difficult times, the company managed to survive into the 1990s, when better days arrived for the energy sector. By the summer of 1992, as it prepared for an initial public offering (IPO), Patterson owned and operated just 11 drilling rigs, with two other rigs jointly owned by an affiliated entity. The company also had two wholly owned subsidiaries, Patterson Petroleum, Inc. and Patterson Petroleum Trading Company, Inc. The offering was a modest one, intended to raise just $5 million, proceeds of which were intended to pay off the company’s $3 million in long-term debt as well as support limited gas and oil exploration efforts.
Consolidation of Contract Drilling Operations: 1990s
At the start of the 1990s the land-based drilling rig business was highly fragmented, stocked with numerous companies similar in size to Patterson. Houston-based Nabors Industries was especially aggressive in making acquisitions, helping to set off a wave of consolidation in the industry, which was now enjoying boom times due to rising U.S. oil and gas prices that stimulated drilling activity and resulted in high dayrates. Moreover, drillers began to enjoy the benefit of cost reductions due to advances in technology. Like Nabors, which grew into the largest provider of contract land drilling services, Patterson following its IPO pursued a strategy of growth through acquisition. Its first significant acquisition deal came in July 1994 when it bought Questor Drilling Corp. in a $6.4 million cash and stock transaction. In July 1996 Patterson used stock to acquire Tucker Drilling Company. All told, in the four years following its IPO Patterson increased the size of its drilling fleet from 13 to 46. The company picked up the pace in 1997, growing to 87 rigs by midyear. The year was highlighted by the purchase of Wes-Tex Drilling Co. and its 21 drilling rigs for $25 million in cash plus stock and warrants for a total deal worth approximately $35.4 million. In 1998 Patterson completed three more important acquisitions. Lone Star Mud, Inc. was bought for just under $13 million in cash and stock in January 1998, followed in February by the $42.2 million merger of Robertson Onshore Drilling with a Patterson subsidiary, and in September by the $3.5 million purchase of Tejas Drilling Fluids, Inc.
Acquisitions, the UTI Merger, and Plans for the Future: 2000s
A drop in oil and gas prices curtailed domestic drilling activities and the merger trend among drilling rig operators, but once the oil services market bottomed out in February 1999, Patterson renewed its quest for greater size and greater profitability. In the early months of 2000 the company was especially active on the acquisition front, picking up two competitors. In March 2000 the company bought four rigs from Wek Drilling when it paid $7.2 million in cash and stock, followed in June by the acquisition of High Valley Drilling in a stock transaction, which added eight drilling rigs. Patterson, through a subsidiary, then acquired Ambar, Inc. in October 2000 for $11.6 million in cash. At the start of 2001 the company agreed to an even larger transaction, which closed early in 2001 : a $36.2 million cash and stock purchase of Jones Drilling Corp., a Duncan, Oklahoma, outfit that had been in business since the mid-1950s. As a result of these and lesser acquisitions, Patterson now owned 152 drilling rigs (138 operable) involved in projects spread across Oklahoma, Texas, New Mexico, Utah, and Louisiana. It was the second largest land-based oil and gas contract driller, trailing only Nabors Industries, which had 373 operable rigs. Because of the disparity in size, Patterson was a weak second, but in February 2001 the company took a bold step to challenge Nabors when it reached a deal, one that was three years in the making, to merge with the third largest oil and gas contract driller, UTI Energy, with its 150 drilling rigs, of which 144 were operable.
UTI, which also went public in 1993, was a diversified onshore oilfield services company whose chairman, Mark Siegel, also headed Los Angeles-based REMY Capital Partners III, UTI’s largest shareholder. The company had been formed in 1986 and commenced business after acquiring operating subsidiaries from UGI Corporation, drawing on their initials to form its name: Universal Well Services, Union Supply Company, Triad Drilling Company, and International Petroleum Services Company. The oldest, Union, had been in the business of providing oilfield supplies and repair services since 1939. The oldest subsidiary devoted to contract drilling was Triad, commencing operations in 1947. Starting in 1995 UTI decided to focus on expanding its share of the consolidating land drilling industry. As a consequence, in September 1995 the company sold off its oilfield distribution business and began to acquire small independent drilling contractors, with a mind toward gaining access to new markets and establishing regional bases of operation. After one year, UTI’s fleet consisted of 27 rigs, but by September 1997 the company had grown to 82 rigs, highlighted by the acquisition of Quarles Drilling. As was the case with Patterson, UTI was especially aggressive in 1999. In April of that year, the company paid $13 million for Norton Drilling Services, and in the same week, in conjunction with REMY Capital, UTI acquired Fracmaster Ltd., a former highflying Canadian oil service company that had fallen on difficult times, due in large part to Russian joint ventures that went sour when that country’s finances collapsed. Once boasting a market capitalization of $700 million, Fracmaster was now only able to command a valuation of $95 million. UTI continued to expand its fleet even as it was finishing the final touches on its merger with Patterson Drilling. In January 2001 it paid $13.6 million for six more rigs, the result of three separate transactions.
For both Patterson Drilling and UTI, a merger of equals made a great deal of sense. Talbott and Siegel became acquainted in 1995, often competed over the same deals, and on several occasions discussed the possibility of merging their companies. By the time they agreed to a $1.34 billion stock swap, Paterson and UTI had reached a point where small acquisitions no longer provided enough value to shareholders and both executives believed that their companies were undervalued. According to industry analyst Jim Wicklund of the Dallas firm of Dain Rauscher Wessels, “The combined company now stands out as a strong No. 2, with significant operating leverage, whereas before there were three companies slugging it out for the same spot in investors’ portfolios.” With a market capitalization of $2.6 billion, Patterson-UTI controlled about 20 percent of the U.S. market of land-based drilling rigs.
Patterson-UTI Energy, Inc. is the second-largest provider of onshore contract drilling services to exploration and production companies in North America.
Siegel assumed the chairmanship of Patterson-UTI with Talbott serving as chief executive officer. Because of low oil prices in 2001 and a slowdown in drilling activity, demand for drilling rigs fell, forcing the company to layoff between 500 and 1,000 workers, according to published reports. While 80 percent of its rigs had been in operation, now just 65 were under contract. Nevertheless, Patterson-UTI remained optimistic that the dip in activity was just another cycle in the oil and gas business, and in December 2001 the company made its first post-merger acquisition, paying $13.5 million in cash plus stock and warrants for Cleere Drilling Company and its 17 drilling rigs. Explaining the move in light of a difficult business environment, Siegel publicly commented, “With our strong cash position and $100 million line of credit, we have positioned Patterson-UTI to be able to respond quickly and selectively to unique situations that may arise in the marketplace. We believe that the Cleere assets represent such an opportunity, and are a good fit with out current operations and market coverage.” In addition, the acquisition brought with it 28 rig-moving trucks and other equipment as well as executive talent in the form of Kirk Cleere, longtime head of Cleere Drilling. Despite a dropoff in business, Patterson-UTI completed its first year posting excellent results. Consolidated income for fiscal 2001 totaled nearly $990 million, compared to $513 million the year before. Net income grew from $37.2 million in 2000 to more than $164 million in 2001. However, the effects of a downturn in the economy and a decrease in drilling activity was felt in 2002. Day rates for a rig, which had peaked in July 2001 at $15,000 a day, fell to a breakeven level of $6,500. As a result, revenues in 2002 dropped to $528 million and net income to less than $2.2 million. Nonetheless, investors bid up the company’s stock in recognition of Patterson-UTI’s underlying strength. In a June 2002 analysis of the company, Business Week wrote, “Sure, the fate of the Snyder (Tex.) company … is pegged to an economic recovery, but even if natural gas prices don’t budge from here, the company’s profits could balloon.” Once the drilling cycle ran its course and commodity prices rose, Patterson-UTI was well positioned to once again thrive in what Talbott described as “a pretty good environment.” In a Wall Street Transcript interview he went on to say, “The market has consolidated down to fewer rig owners. It’s better than it used to be. We have more sanity in pricing now than there used to be because of less competitors.” The number of competitors was likely to decline even further in the coming years, with Patterson-UTI hoping to add 30 to 40 rigs per year.
Ambar Drilling Fluids LP; International Petroleum Service Company; Patterson Petroleum Trading Company; Suits Drilling Company; Universal Well Services; UTI Drilling Canada Inc.; UTICO, Inc.
Grey Wolf, Inc.; Helmerich & Payne, Inc.; Nabors Industries, Inc.
- Patterson Drilling Company is formed.
- Patterson Drilling changes its name to Patterson Energy.
- Patterson Energy and UTI Energy both go public.
- UTI elects to focus on contract drilling field.
- Patterson and UTI merge to form second largest contract drilling firm in North America.
Antosh, Nelson, “Texas Firms Set to Form No. 2 Driller,” Houston Chronicle, February 6, 2001, p. 1.
Coghlan, Keely, “Patterson, UTI to Merge in $1.34 Billion Deal,” Oil Daily, February 6, 2001, p. 1.
Hovanesian, Mara Der, “An Oil Patch Darling,” Business Week, June 3, 2002, p. 97.
Robinson, Rick, “Snyder, Texas-Based Drilling Company to Acquire Houston Firm,” Daily Oklahoman, February 14, 2001.
Snow, Nick, “Patterson and UTI Will Combine to Become the Nation’s Second Largest Land Driller,” Petroleum Finance Week, February 12, 2001.