<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-22664
PATTERSON ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 75-2504748
incorporation or organization) (I.R.S. Employer
P. O. DRAWER 1416, Identification No.)
4510 LAMESA HIGHWAY,
SNYDER, TEXAS 79550
(Address of principal executive (Zip Code)
offices)
(915) 573-1104
(Registrant's telephone number, including area code)
No change
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 12, 1997 the issuer had outstanding 7,070,657 shares of common stock,
$0.01 par value, its only class of voting stock.
===============================================================================
<PAGE> 2
PATTERSON ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants, Coopers & Lybrand L.L.P. ........................................3
Part I - Financial Information
Item 1. Financial statements
Unaudited consolidated balance sheets.............................................4
Unaudited consolidated statements of income.......................................6
Unaudited consolidated statement of stockholders' equity..........................7
Unaudited consolidated statements of cash flows...................................8
Notes to unaudited consolidated financial
statements.....................................................................9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..............................11
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995............................14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................................15
Signatures.........................................................................................16
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Patterson Energy, Inc.:
We have reviewed the accompanying consolidated balance sheet of Patterson
Energy, Inc. and Subsidiaries as of March 31, 1997, the related consolidated
statements of income and cash flows for the three months ended March 31, 1997
and 1996 and the related consolidated statement of stockholders' equity for the
three months ended March 31, 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based upon our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of income and cash flows for the year then ended
(not presented herein); and in our report dated March 10, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1996, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 30, 1997
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS INCLUDE ALL
ADJUSTMENTS WHICH IN THE OPINION OF MANAGEMENT ARE NECESSARY IN ORDER TO MAKE
SUCH FINANCIAL STATEMENTS NOT MISLEADING.
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 3,494 $ 35,415
Marketable securities ............................................. 544 543
Accounts receivable:
Trade .......................................................... 23,743 23,802
Oil and natural gas sales ...................................... 999 973
Costs of uncompleted drilling contracts in excess of related
billings ....................................................... 274 6
Deferred income taxes ............................................. 1,483 1,483
Undeveloped oil and natural gas properties held for resale ........ 4,670 4,907
Other current assets .............................................. 274 303
------------ ------------
Total current assets ........................................ 35,481 67,432
Property and equipment, at cost, net ................................. 51,308 55,733
Deposits on workers' compensation insurance policy ................... 412 412
Other assets ......................................................... 712 720
------------ ------------
Total assets ................................................ $ 87,913 $ 124,297
============ ============
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
(continued)
4
<PAGE> 5
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of notes payable ............................... $ 117 $ --
Accounts payable:
Trade ........................................................... 12,129 9,890
Revenue distribution ............................................ 2,432 3,246
Other ........................................................... 965 1,523
Accrued expenses .................................................. 2,246 2,534
------------ ------------
Total current liabilities ............................... 17,889 17,193
Deferred income taxes ................................................ 96 513
Deferred liabilities ................................................. 714 707
Notes payable, less current maturities ............................... 25,732 --
------------ ------------
Total liabilities ....................................... 44,431 18,413
------------ ------------
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Preferred stock - par value $.01; authorized
1,000,000 shares, no shares issued .............................. -- --
Common stock - par value $.01; authorized 9,000,000 shares
with 4,943,591 and 7,070,657 issued and outstanding at
December 31, 1996 and March 31, 1997, respectively .............. 49 71
Additional paid-in capital ........................................ 21,359 82,099
Retained earnings ................................................. 22,074 23,714
------------ ------------
Total stockholders' equity .............................. 43,482 105,884
------------ ------------
Total liabilities and stockholders' equity .............. $ 87,913 $ 124,297
============ ============
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
<PAGE> 6
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
------------ ------------
(in thousands, except
per share data)
<S> <C> <C>
Operating revenues:
Drilling .................................................... $ 14,096 $ 27,564
Oil and natural gas sales ................................... 1,690 2,633
Well operation fees ......................................... 386 407
Other ....................................................... 74 37
------------ ------------
16,246 30,641
------------ ------------
Operating costs and expenses:
Direct drilling costs ....................................... 11,423 22,320
Lease operating and production .............................. 481 517
Impairment of oil and natural gas properties ................ 159 150
Exploration costs ........................................... 118 159
Dry holes and abandonments .................................. 152 223
Depreciation, depletion and amortization .................... 2,293 3,295
General and administrative expense .......................... 1,376 1,337
------------ ------------
16,002 28,001
------------ ------------
Operating income ................................................ 244 2,640
------------ ------------
Other income (expense):
Net gain on sale of assets .................................. 50 135
Interest income ............................................. 121 284
Interest expense ............................................ (329) (483)
Other ....................................................... 61 19
------------ ------------
(97) (45)
------------ ------------
Income before income taxes ...................................... 147 2,595
------------ ------------
Income tax expense (benefit):
Current ..................................................... 62 497
Deferred .................................................... (2,402) 458
------------ ------------
(2,340) 955
------------ ------------
Net income ...................................................... $ 2,487 $ 1,640
============ ============
Net income per common share:
Primary ..................................................... $ .51 $ .25
============ ============
Fully diluted ............................................... $ .51 $ .25
============ ============
Weighted average number of common shares outstanding:
Primary ..................................................... 4,877 6,604
============ ============
Fully diluted ............................................... 4,883 6,604
============ ============
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
6
<PAGE> 7
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional
Number paid-in Retained
of shares Amount capital earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ............. 4,944 $ 49 $ 21,359 $ 22,074 $ 43,482
Issuances of common stock .............. 2,063 21 59,380 -- 59,401
Exercise of stock options ............. 64 1 482 -- 483
Tax benefit related to stock
options ............................ -- -- 878 -- 878
Net income ............................. -- -- -- 1,640 1,640
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 ................ 7,071 $ 71 $ 82,099 $ 23,714 $ 105,884
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
7
<PAGE> 8
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
------------ ------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 2,487 $ 1,640
Adjustments to reconcile net income to net cash from
operating activities:
Abandonment of oil and natural gas properties .................... 84 --
Depreciation, depletion and amortization ......................... 2,293 3,295
Impairment of oil and natural gas properties ..................... 159 150
Net gain on sale of assets ....................................... (50) (135)
Deferred income tax expense (benefit) ............................ (2,402) 458
Tax benefit related to stock options.............................. -- 878
Increase (decrease) in deferred compensation liabilities ......... 11 (6)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable ............ 1,851 (60)
Decrease in oil and natural gas sales receivable ............ 73 26
Increase in undeveloped oil and natural gas properties
for resale .............................................. (663) (237)
Decrease in other current assets ............................ 23 240
Decrease in trade accounts payable .......................... (427) (2,238)
Increase (decrease) in revenue distribution payable ......... (114) 814
Increase (decrease) in other current liabilities ............ (530) 847
------------ ------------
Net cash provided by operating activities .............. 2,795 5,672
------------ ------------
Cash flows from investing activities:
Net sales of investment securities ............................... 1,946 --
Purchases of property and equipment .............................. (2,810) (7,912)
Sale of property and equipment ................................... 128 135
(Increase) decrease in other assets .............................. 27 (9)
------------ ------------
Net cash used in investing activities .................. (709) (7,786)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable ...................................... 1,140 --
Payments on notes payable ........................................ (157) (25,849)
Issuance of common stock ......................................... -- 59,401
Proceeds from exercise of stock options .......................... 31 483
------------ ------------
Net cash provided by financing activities .............. 1,014 34,035
------------ ------------
Net increase in cash and cash equivalents .............. 3,100 31,921
Cash and cash equivalents at beginning of period ..................... 2,274 3,494
------------ ------------
Cash and cash equivalents at end of period ........................... $ 5,374 $ 35,415
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 329 $ 483
Income taxes ................................................... -- --
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
8
<PAGE> 9
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include the accounts of Patterson
Energy, Inc., ("Patterson") and its wholly-owned subsidiaries, Patterson
Drilling Company, Patterson Petroleum, Inc., Patterson Petroleum Trading
Company, Inc. and Patterson Drilling Programs, Inc. (collectively referred to
hereafter as the "Company"). All significant intercompany accounts and
transactions have been eliminated.
The interim consolidated financial statements have been prepared by the
management of the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations, although the Company believes that the disclosures
included herein are adequate to make the information presented not misleading.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for presentation of the information
have been included. The interim consolidated financial statements have been
subjected to a review by Coopers & Lybrand L.L.P., the registrant's independent
accountants, whose report is included as an exhibit to this filing. The balance
sheet as of December 31, 1996, as presented herein, was derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the 1996 consolidated
financial statements in order for them to conform with the 1997 presentation.
2. On January 27, 1997, on a Form S-3 Registration Statement, the Company
completed a public offering of 1.763 million shares of common stock at a price
of $30.75 per share. In February 1997, the underwriters of the Company's public
offering exercised their overallotment option to purchase 300,000 additional
shares of common stock. Net proceeds from the offering totaled approximately
$59.4 million to the Company. Certain of the proceeds were used to pay, prior
to maturity, notes payable and accrued interest of approximately $25.8 million
and prepayment penalties of approximately $191,000. Additionally, approximately
$74,000 in deferred financing costs were written off in connection with the
prepayment of the notes payable. The expenses are not being reflected as an
extraordinary item because management does not expect the amount to be material
for fiscal year 1997.
3. During the fiscal quarter ended March 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" (Statement 129). Statement 129 establishes certain
standards for disclosing information about an entity's capital structure. The
Company does not anticipate a change in its disclosures as a result of its
adoption of Statement 129.
4. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128") which is effective for financial statements of the Company
for periods ending after December 15, 1997. Statement 128 specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS"). Some of the changes made to current EPS standards
(continued)
9
<PAGE> 10
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
include: (i) eliminating the presentation of Primary EPS and replacing it with
Basic EPS, with the principal difference being that common stock equivalents
are not considered in computing Basic EPS, (ii) eliminating the modified
treasury stock method and the three present materiality provisions, and (iii)
revising the contingent share provisions and the supplemental EPS data
requirements. Statement 128 also requires dual presentation of Basic and
Diluted EPS on the face of the income statement, as well as a reconciliation of
the numerator and denominator used in the two computations of EPS. Basic EPS is
defined by Statement 128 as net income from continuing operations divided by
the average number of common shares outstanding without the consideration of
common stock equivalents which may be dilutive to EPS. The Company's current
methodology for computing Diluted EPS will not change in future periods as a
result of its adoption of Statement 128. Had the Company implemented Statement
128 at March 31, 1997, it would have reported Basic EPS of $0.26 per common
share on 6,396,159 shares of common stock (weighted average).
5. On April 22, 1997, the Company acquired certain assets of a
privately-owned, non-affiliated contract drilling company based in Hobbs, New
Mexico. The purchase price was $5.5 million, which included five contract
drilling rigs, two rig hauling trucks, an office, shop and yard. The
acquisition will be treated as a purchase for purposes of financial accounting.
Fair market values of the acquired assets will be determined and the purchase
price will be allocated accordingly. The acquisition was funded with cash on
hand at the date of the transaction.
6. During May 1997, the Company entered into an agreement in principle to
purchase all of the contract drilling assets of Wes-Tex Drilling Company, a
privately-held, non-affiliated company based in Abilene, Texas, for a purchase
price of approximately $32.5 million, consisting of $25 million in cash,
283,000 shares of Patterson common stock and three-year warrants to purchase
200,000 shares of Patterson common stock at an exercise price of $32 per share.
The assets consist of 21 fully operable drilling rigs, all related rolling
stock and a shop and yard. The Company plans to fund the acquisition through
approximately $15 million of the Company's cash on hand and $10 million from a
line of credit to be negotiated by management during May 1997. Consummation of
this transaction is subject to, among other matters, execution of a mutually
agreeable definitive agreement.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had working capital of approximately
$50.2 million and cash and cash equivalents of approximately $35.4 million as
compared to a working capital of approximately $17.6 million and cash and cash
equivalents of approximately $3.5 million as of December 31, 1996. For the
three months ended March 31, 1997, the Company generated net cash from
operations of approximately $5.7 million, received proceeds of approximately
$483,000 from the exercise of stock options and raised through an equity
offering an additional $59.4 million. These funds were used primarily to
acquire drilling and other related equipment of approximately $6.5 million, to
fund leasehold acquisition, exploration and development of approximately $1.4
million, to reduce certain notes payable by approximately $25.8 million and to
increase cash by approximately $31.9 million.
The Company believes it must continually upgrade and maintain its
contract drilling fleet, and has budgeted approximately $15 million for capital
expenditures in fiscal year 1997 for this purpose with respect to its existing
contract drilling rig fleet, including $7.5 million for modifications and
upgrades of the nine inoperable drilling rigs purchased during November and
December 1996. During the three months ended March 31, 1997, the Company had
expended approximately $6.5 million of this budget including $3.8 million in
connection with the inoperable rigs. As a result of the latter expenditure, two
of the Company's nine inoperable rigs were placed into operation during the
quarter ended March 31, 1997, increasing the number of operable drilling rigs
at the end of the quarter to 54. The remaining inoperable rigs are expected to
be placed into operation during the second and third quarters of 1997.
During April 1997, using $5.5 million of proceeds provided by its
equity offering, the Company acquired five fully operable contract drilling
rigs and other related property and equipment from a privately-held,
non-affiliated company based in Hobbs, New Mexico. During May 1997, the Company
entered into an agreement in principle to purchase all of the contract drilling
assets of Wes-Tex Drilling Company, a privately-held, non-affiliated company
based in Abilene, Texas, for a purchase price of approximately $32.5 million,
consisting of $25 million in cash, 283,000 shares of Patterson common stock and
three-year warrants to purchase 200,000 shares of Patterson common stock at an
exercise price of $32 per share. The assets consist of 21 fully operable
drilling rigs, all related rolling stock and a shop and yard. The Company plans
to fund the acquisition through approximately $15 million of the Company's cash
on hand and $10 million from the credit facility referenced below. Consummation
of this transaction is subject to, among other matters, execution of a mutually
agreeable definitive agreement.
The Company has budgeted approximately $5 million for capital
expenditures in its oil and natural gas segment. The Company intends to use
these funds for leasehold acquisition, exploration and development of oil and
natural gas properties. During the three months ended March 31, 1997,
approximately $1.4 million had been expended for this purpose.
The Company is currently negotiating with a commercial bank for a $30
million credit facility. As currently proposed, the facility would be an
advancing line of credit until December 31, 1997, at which time the outstanding
principal balance of the line would be converted to a term loan with a maturity
date of January 1, 2000, and a seven-year amortization. The credit facility
would be payable, interest only (LIBOR 90-day rate plus 2.50%), until December
31, 1997. Proceeds of the credit facility would be used by the Company for
acquisitions, capital expenditures and working capital purposes. The Company
believes that the credit facility will be finalized during the latter part of
May 1997.
11
<PAGE> 12
Management believes that the current level of cash and short-term
investments, together with cash generated from operations and the credit
facility discussed above, should be sufficient to meet the Company's immediate
capital needs. From time to time, the Company reviews acquisition opportunities
relating to its business segments. As discussed above, the Company has an
agreement in principle to acquire 21 additional contract drilling rigs; other
suitable opportunities may arise in the future. The timing, size or success of
any acquisition and the associated capital commitments are unpredictable.
Should further opportunities for growth requiring additional capital arise, the
Company believes it would be able to satisfy these needs through a combination
of working capital, cash generated from operations, and either debt or equity
financing. However, there can be no assurance that such capital would be
available.
RESULTS OF OPERATIONS
THE RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 1996, ARE
BASED SOLELY ON HISTORICAL FINANCIAL INFORMATION THAT HAS BEEN RESTATED TO
REFLECT THE MERGER OF THE COMPANY AND TUCKER DRILLING COMPANY, INC. ON JULY 30,
1996, UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING.
Comparison of the fiscal quarters ended March 31, 1997 and 1996
For the fiscal quarter ended March 31, 1997, contract drilling
revenues were approximately $27.6 million as compared to $14.1 million for the
same fiscal quarter in 1996, an increase of 96%. Average rig utilization was
86% for the fiscal quarter ended March 31, 1997, as compared to 67%, for the
same fiscal quarter in 1996. Direct contract drilling costs for the fiscal
quarters ended March 31, 1997 and 1996 were approximately $22.3 million and
$11.4 million, respectively, or $81% of contract drilling revenues. The
increase in contract drilling revenues and related drilling costs was largely
attributable to an increase, through a series of acquisitions, in the number of
operable drilling rigs during the third and fourth quarters of 1996 and an
increase in rig utilization rates during the three months ended March 31, 1997.
As a result of the rig acquisitions and, in the case of two of the rigs,
modifications and upgrades, the number of operable drilling rigs increased from
40 as of March 31, 1996, to 54 at March 31, 1997. The Company has experienced
moderate rate increases for its contract drilling services; however, these rate
increases have been largely offset by increased labor costs incurred by the
Company. Depreciation expense was approximately $2.2 million for the drilling
segment for the fiscal quarter ended March 31, 1997, as compared to
approximately $1.5 million for the same three month period in 1996. The
increase in depreciation expense was primarily due to the addition of the
aforementioned drilling rigs during the third and fourth quarters of fiscal
1996 and significant capital expenditures for drill pipe during that same
period. The Company expended approximately $2.3 million for the purchase of
approximately 87,000 feet of new drill pipe during the second, third and fourth
quarters of fiscal 1996. General and administrative expense for the contract
drilling segment was approximately $1.0 million for the fiscal quarter ended
March 31, 1997, as compared to approximately $900,000 for the same period in
1996. In the fiscal quarter ended March 31, 1997, income from this segment was
approximately $2.157 million as compared to approximately $413,000 for the same
period in 1996.
Oil and natural gas revenue was approximately $3.1 million for the
fiscal quarter ended March 31, 1997, as compared to approximately $2.1 million
for the fiscal quarter ended March 31, 1996. The volume of oil and natural gas
sold increased by 19% and 22%, respectively, in the fiscal quarter ended March
31, 1997, as compared to the same period in 1996. The average price per barrel
of oil was $21.22 in the first quarter of 1997 as compared to $18.16 for the
same period in 1996, and the average price per mcf of natural gas was $2.94 in
the first quarter of 1997 as compared to $1.57 in the first quarter of 1996.
Depreciation and depletion expense was approximately $1.1 million for the oil
and natural gas segment for the fiscal quarter ended March 31, 1997, as
compared to approximately $831,000 for the same three month period in 1996. The
increase in depreciation and depletion expense was largely attributable to the
segment's growth through
12
<PAGE> 13
leasehold acquisition and continued development of existing properties
resulting in significant increases in the segment's production of oil and
natural gas (as indicated above). General and administrative expense for the
oil and natural gas segment was approximately $337,000 for the fiscal quarter
ended March 31, 1997, as compared to approximately $476,000 for the same period
in 1996. In the fiscal quarter ended March 31, 1997, income from the oil and
natural gas segment was approximately $637,000 as compared to a loss of
approximately $58,000 for the fiscal quarter ended March 31, 1996.
For the three months ended March 31, 1997, interest expense was
approximately $483,000 as compared to $329,000 for the same three month period
in 1996. The increase was primarily due to approximately $265,000 of prepayment
penalties and fees incurred as a result of the payment by the Company in full of
its notes payable prior to their respective maturities. Interest income for the
quarter ended March 31, 1997, was $284,000, an increase of approximately 135%
over the quarter ended March 31, 1996. This increase was attributable to cash
provided by the Company's equity offering in January 1997.
During the three months ended March 31, 1997, the Company incurred
income tax expense of approximately $955,000 ($497,000 current and $458,000
deferred) as compared to an income tax benefit of approximately $2.340 million
for the same three month period ended March 31, 1996. The increase in income
tax expense was primarily due to the Company's decision during the quarter
ended March 31, 1996, to relieve its valuation allowance fully recognizing its
deferred tax assets and approximately $2.4 million of deferred income tax
benefit. As the benefits of such deferred tax assets are utilized in fiscal
year 1997 and future periods, a corresponding charge to income tax expense will
be incurred. For the quarter ended March 31, 1997, the charge was approximately
$497,000.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices would
have a material adverse effect on the Company's financial condition and results
of operations.
RECENT ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128") which is effective for financial statements of the Company
for periods ending after December 15, 1997. Statement 128 specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS"). Some of the changes made to current EPS standards include: (i)
eliminating the presentation of Primary EPS and replacing it with Basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing Basic EPS, (ii) eliminating the modified treasury stock
method and the three present materiality provisions, and (iii) revising the
contingent share provisions and the supplemental EPS data requirements.
Statement 128 also requires dual presentation of Basic and Diluted EPS on the
face of the income statement,
13
<PAGE> 14
as well as a reconciliation of the numerator and denominator used in the two
computations of EPS. Basic EPS is defined by Statement 128 as net income from
continuing operations divided by the average number of common shares
outstanding without the consideration of common stock equivalents which may be
dilutive to EPS. The Company's current methodology for computing Diluted EPS
will not change in future periods as a result of its adoption of Statement 128.
Had the Company implemented Statement 128 at March 31, 1997, it would have
reported Basic EPS of $0.26 per common share on 6,396,159 shares of common
stock (weighted average).
-----------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 2 of this Report contains
forward-looking statements which are made pursuant to the "safe harbor"
provisions of The Private Securities Litigation Reform Act of 1995. These
statements include, without limitation, statements relating to: liquidity;
financing of operations; continued volatility of oil and natural gas prices;
estimates of, and budgets for, capital expenditures in the oil and natural gas
segment, for modifications and upgrades to certain of the drilling rigs
acquired by the Company during the fourth quarter of 1996 and for maintenance
of its contract drilling fleet during fiscal year 1997; timing of the placement
into operation of its currently inoperable drilling rigs; source and
sufficiency of funds required for immediate capital needs and additional rig
acquisitions (if further opportunities arise); finalization of new credit
facility; and such other matters. The words "believes," "plans," "intends,"
"expected" or "budgeted" and similar expressions identify forward-looking
statements. The forward-looking statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Factors that could cause actual results to differ materially from the Company's
expectations expressed in the forward-looking statements include, but are not
limited to, the following: intense competition in the contract drilling
industry; volatility of oil and natural gas prices; market conditions for
contract drilling services; continuation of drill-pipe shortage; operational
risks (such as blow outs, fires and loss of production); labor shortage,
primarily drilling rig personnel; insurance coverage limitations and
requirements; potential liability imposed by government regulation of the
contract drilling industry (including environmental regulation); the need to
develop and replace its oil and natural gas reserves; the substantial capital
expenditures required to fund its operations; risks related to exploration and
development drilling; uncertainties about oil and natural gas reserve
estimates; the ability of the Company to continue to grow through acquisitions
and to manage its growth; and the loss of key personnel, particularly Cloyce A.
Talbott and A. Glenn Patterson, the Chairman and Chief Executive Officer and
the President and Chief Operating Officer of the Company, respectively. For a
more complete explication of these various factors, see "Cautionary Statement
for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995" included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, beginning on page 13.
-----------------------
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following Exhibits are filed herewith:
2.1 Agreement in Principle, dated May 5, 1997, among the
Company and Wes-Tex Drilling Company
11.1 Statement re computation of per share earnings
23.1 Awareness Letter of Independent Accountants
23.2 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule; March 31, 1997 and 1996
(b) Reports on Form 8-K.
Current reports on Form 8-K filed during the quarter ended
March 31, 1997, related to:
(1) The announcement on January 3, 1997, of the
adoption by the Board of Directors of the Company of
the Stockholder Rights Plan.
(2) The announcement on January 7, 1997, of two
successful well completions.
(3) The announcement on January 27, 1997 of the
completion of the offering of 2 million common shares
and the exercise of the underwriters over allotment
option to purchase an additional 300,000 shares.
15
<PAGE> 16
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
By: /s/ Cloyce A. Talbott
-------------------------------------
Cloyce A. Talbott
Chairman of the Board and
Chief Executive Officer
By: /s/ James C. Brown
-------------------------------------
James C. Brown
Vice President Finance
DATED: May 12, 1997
16
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Exhibit Description Page
- ----------- ------------------- ----
2.1 Agreement in Principle, dated May 5, 1997, among
the Company and Wes-Tex Drilling Company
11.1 Statement re computation of per share earnings
23.1 Awareness Letter of Independent Accountants
23.2 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule; March 31, 1997 and 1996
<PAGE> 1
EXHIBIT 2.1
May 2, 1997
Myrle Greathouse
Wes-Tex Drilling Company
519 First National Bank West
P.O. Box 3759
Abilene, Texas 79604
Dear Myrle:
Reference is made to our discussions regarding the proposed
acquisition by Patterson Drilling Company of the assets of Wes-Tex Drilling
Company relating to its contract drilling operations. This letter sets forth
the understanding in principle of Patterson and Wes-Tex regarding the proposed
transaction:
1. At closing, Patterson will acquire the shop and yard located in Abilene,
in Jones County, Texas and all of the drilling rigs (21), related
equipment and rolling stock relating to the Wes-Tex contract drilling
operations, all automobiles (except a 1993 Cadillac driven by Myrle
Greathouse, a 1995 Cadillac driven by Charles Ezzell, and a 1995 Chevrolet
Tahoe driven by Danny Mullen) , trucks (except a Ford One Ton "Shop"
truck) and trailers (collectively, the "Assets").
2. Each of the following persons will enter into a five-year non-competition
agreement with Patterson at closing. The cash consideration for each
non-competition agreement shall be $2,000,000 and shall be in addition to
the purchase price referenced in paragraph 3.
Myrle Greathouse
Charles Ezzell
Danny Mullen
The purchase price or consideration (the "Purchase Price") to be paid by
Patterson for the Assets referenced in paragraph 1 shall consist of (i)
$19 million in cash (ii) 283,000 "restricted" shares of Patterson Energy,
Inc. common stock and (iii) warrants to purchase 200,000 shares of
<PAGE> 2
Patterson Energy, Inc. common stock at an exercise price of $32.00 per
share, which cash, shares and warrants shall be paid and issued at closing
of the transaction. At closing, Patterson Energy will grant registration
rights to Wes-Tex relating to resale of the shares under federal and state
securities laws.
4. A condition to closing is execution and delivery by Patterson and Wes-Tex
of a mutually agreeable definitive agreement relative to the transaction
with warranties, covenants, indemnifications, conditions and other
provisions customarily included in agreements relating to transactions of
this nature;
5. If deemed necessary by Patterson, a Phase I environmental study relating
to the Wes-Tex yard shall have been completed, at Patterson's expense,
prior to closing with conclusions satisfactory to Patterson. If Patterson
elects in its discretion not to purchase the yard as a result of the Phase
I report, the Purchase Price will be reduced by an amount mutually agreed
to by the parties at that time.
6. If required by law, a so-called "Hart-Scott-Rodino" filing shall be made
with the Federal Trade Commission at Patterson's expense and the
applicable waiting period shall have expired or terminated prior to
closing;
7. The audited Wes-Tex balance sheet as of December 31, 1995 and 1996, and
the Wes-Tex audited statements of income and statements of cash flows as
of and for each of the years ended December 31, 1994, 1995 and 1996, each
of which was prepared by Davis, Kinard & Company, are in substantial
compliance with the financial statement requirements of the federal
securities laws, and Wes-Tex and Davis, Kinard & Company will make such
financial statements available to Patterson without charge for inclusion
in Patterson's filings with the Securities and Exchange Commission.
8. All real and personal property taxes shall be prorated between Wes-Tex and
Patterson at closing;
9. Delivery at closing of a warranty deed and a bill of sale relating to the
respective Assets; and
10. Patterson and Wes-Tex will each pay its own expenses relating to the
transaction.
11. Patterson and Wes-Tex agree that they will negotiate in good faith the
terms of the definitive agreement referenced in paragraph 4 and will use
their reasonable best efforts to enter into such definitive agreement.
<PAGE> 3
It is understood between Patterson and Wes-Tex that this
letter constitutes an expression of interest and (except for paragraphs 10 and
11 above and as hereinafter provided in the last sentence of this paragraph) is
not legally binding. It does not contain all matters upon which agreement must
be reached in order for the proposed transaction to be consummated. If the
definitive agreement referenced in paragraph 4 above is not agreed to and
executed by Patterson and Wes-Tex on or before June 1, 1997, the proposal
contained in this letter shall terminate. Notwithstanding the foregoing,
Wes-Tex hereby agrees that pending the first to occur of execution of the
definitive agreement referenced in paragraph 4 or June 1, 1997, neither Wes-Tex
nor any officers or directors or agents thereof will directly or indirectly
solicit, entertain or encourage inquiries or proposals or enter into an
agreement or negotiate with any other party, to sell, or enter into any merger
or consolidation with respect to the contract drilling business or assets of
Wes-Tex or any of its capital stock.
Very truly yours,
PATTERSON DRILLING COMPANY
By: /s/ James C. Brown
----------------------------------
James C. Brown
Vice President Finance/
Chief Financial Officer
AGREED TO AND ACCEPTED AS OF THIS
5th DAY OF MAY, 1997:
WES-TEX DRILLING COMPANY
By: /s/ Myrle Greathouse
-----------------------------
Myrle Greathouse
Chairman of the Board
<PAGE> 4
THE UNDERSIGNED, CONSTITUTING ALL OF THE STOCKHOLDERS OF WES-TEX, HEREBY
AGREE THAT IF PATTERSON AND WES-TEX ENTER INTO THE DEFINITIVE AGREEMENT
REFERRED TO IN PARAGRAPH 4 ABOVE, THE UNDERSIGNED WILL VOTE THEIR SHARES OF
WES-TEX CAPITAL STOCK IN FAVOR OF THE TRANSACTION REFERENCED IN THIS LETTER.
/s/ Myrle Greathouse
- ------------------------------
Myrle Greathouse
<PAGE> 1
EXHIBIT 11.1
PATTERSON ENERGY, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
PRIMARY EARNINGS PER SHARE 1996 1997
------------- ----------
<S> <C> <C>
Net income ...................................................... $ 2,486,670 $1,639,497
============= ==========
Shares:
Weighted average number of common shares outstanding ......... 4,737,795 6,396,159
Add-Dilutive effect of outstanding options and redeemable
warrants (as determined by the application of the treasury
stock method) .............................................. 139,082 207,469
------------- ----------
Weighted average number of common shares outstanding,
as adjusted .............................................. 4,876,877 6,603,628
============= ==========
Net income per common share: Primary ........................... $ 0.51 $ 0.25
============= ==========
FULLY DILUTED EARNINGS PER SHARE
Net income ...................................................... $ 2,486,670 $1,639,497
============= ==========
Shares:
Weighted average number of common shares outstanding ......... 4,737,795 6,396,159
Add-Dilutive effect of outstanding options and redeemable
warrants (as determined by the application of the treasury
stock method) .............................................. 145,644 207,469
------------- ----------
Weighted average number of common shares outstanding,
as adjusted .............................................. 4,883,439 6,603,628
============= ==========
Net income per common share: Fully diluted ..................... $ 0.51 $ 0.25
============= ==========
</TABLE>
<PAGE> 1
Exhibit 23.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Patterson Energy, Inc.
We are aware that our report dated April 30, 1997 on our review of interim
financial information of Patterson Energy, Inc. for the period ended March 31,
1997 and included in the Company's Quarterly report on Form 10-Q for the
quarter then ended is incorporated by reference in the Registration Statements
of Patterson Energy, Inc. on Form S-8 (File No. 333-09243) and on Form S-3, as
amended (File No. 333-13497).
Coopers & Lybrand L.L.P.
April 30, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF COOPERS & LYBRAND L.L.P.
We consent to the incorporation by reference in the Registration Statements of
Patterson Energy, Inc. on Form S-8 (File No. 333-09243) and on Form S-3, as
amended, (File No. 333-13497) of our report dated April 30, 1997, on our review
of the interim consolidated financial statements of Patterson Energy, Inc. and
Subsidiaries as of March 31, 1997, and for the three months then ended, which
are included in this Quarterly Report on Form 10-Q.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND RELATED
STATEMENTS OF INCOME AND CASH FLOWS THE PERIOD ENDING MARCH 31, 1996 AND
THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997, AND RELATED
STATEMENTS OF INCOME AND CASH FLOWS THE PERIOD ENDING MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FILING ON FORM 10-Q FOR THE
QUARTERLY PERIODS ENDING MARCH 31, 1996 AND MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 0 35,415
<SECURITIES> 0 543
<RECEIVABLES> 0 24,775
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 67,432
<PP&E> 0 117,480
<DEPRECIATION> 0 61,747
<TOTAL-ASSETS> 0 124,297
<CURRENT-LIABILITIES> 0 17,135
<BONDS> 0 0
0 0
0 0
<COMMON> 0 71
<OTHER-SE> 0 105,871
<TOTAL-LIABILITY-AND-EQUITY> 0 124,297
<SALES> 0 0
<TOTAL-REVENUES> 16,246 30,641
<CGS> 0 0
<TOTAL-COSTS> 16,002 28,001
<OTHER-EXPENSES> (232) (438)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 329 483
<INCOME-PRETAX> 147 2,595
<INCOME-TAX> (2,340) 955
<INCOME-CONTINUING> 2,487 1,640
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,487 1,640
<EPS-PRIMARY> .51 .25
<EPS-DILUTED> .51 .25
</TABLE>
