PATTERSON ENERGY INC, 10-Q, 1997-11-13

PATTERSON ENERGY INC
10-Q, 1997-11-13
DRILLING OIL & GAS WELLS

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<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 September 30, 1997

[ ] 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 Identification No.)

P. O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS, 79550
(Address of principal executive offices) (Zip Code)

(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 November 12, 1997 the issuer had outstanding 14,847,382 shares of common
stock, $0.01 par value, its only class of voting stock.

- -------------------------------------------------------------------------------
<PAGE> 2

PATTERSON ENERGY, INC. AND SUBSIDIARIES

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 condensed consolidated balance sheets........................ 4

Unaudited condensed consolidated statements of operations.............. 6

Unaudited condensed consolidated statement of stockholders' equity..... 7

Unaudited condensed consolidated statements of cash flows.............. 8

Notes to unaudited condensed consolidated financial statements......... 10

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 16

Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995................. 21

Part II - Other Information

Item 4. Submission of Matters to a Vote of Security
Holders................................................................ 22

Item 6. Exhibits and Reports on Form 8-K....................................... 23

Signatures............................................................................... 28
</TABLE>

<PAGE> 3

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
of Patterson Energy, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of
Patterson Energy, Inc. and Subsidiaries as of September 30, 1997, the related
condensed consolidated statements of operations for the three and nine months
ended September 30, 1997 and 1996, cash flows for the nine months ended
September 30, 1997 and 1996 and the related condensed consolidated statement of
stockholders' equity for the nine months ended September 30, 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 condensed 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.

/s/ COOPERS & LYBRAND L.L.P.

Dallas, Texas
October 28, 1997

<PAGE> 4

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE FOLLOWING UNAUDITED 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
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------- --------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 3,494 $ 17,255
Marketable securities ............................................. 544 559
Accounts receivable:
Trade .......................................................... 23,743 40,853
Oil and natural gas sales ...................................... 999 1,200
Costs of uncompleted drilling contracts in excess of
related billings ............................................... 274 --
Deferred income taxes ............................................. 1,483 1,483
Undeveloped oil and natural gas properties held for resale ........ 4,670 5,206
Other current assets .............................................. 274 1,085
-------- --------
Total current assets ........................................ 35,481 67,641
Property and equipment, at cost, net ................................. 51,308 86,692
Intangible assets, net ............................................... -- 19,316
Deposits on workers' compensation insurance policy ................... 412 412
Other assets ......................................................... 712 854
-------- --------
Total assets ................................................ $ 87,913 $174,915
======== ========
</TABLE>

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

(continued)

<PAGE> 5

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED

LIABILITIES AND STOCKHOLDERS' EQUITY

(Unaudited)

<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------- --------
(in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of notes payable ............................... $ 117 $ 837
Accounts payable:
Trade ........................................................... 12,129 18,404
Revenue distribution ............................................ 2,432 4,273
Other ........................................................... 965 1,288
Accrued expenses .................................................. 2,246 4,552
Accrued federal income taxes payable .............................. -- 5,180
-------- --------
Total current liabilities ............................... 17,889 34,534
Deferred income taxes ................................................ 96 1,273
Deferred liabilities ................................................. 714 694
Notes payable, less current maturities ............................... 25,732 9,413
-------- --------
Total liabilities ....................................... 44,431 45,914
-------- --------

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 at December 31, 1996 and 18,000,000 shares at
September 30, 1997 with 4,943,591 and 14,783,282
(affected by a two-for-one stock split, see Note 5)
issued and outstanding at December 31, 1996 and
September 30, 1997, respectively ............................... 49 148
Additional paid-in capital ........................................ 21,359 92,982
Retained earnings ................................................. 22,074 35,871
-------- --------
Total stockholders' equity .............................. 43,482 129,001
-------- --------
Total liabilities and stockholders' equity .............. $ 87,913 $174,915
======== ========
</TABLE>

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

<PAGE> 6

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenues:
Drilling ............................................... $ 17,517 $ 55,051 $ 47,725 $ 120,207
Oil and natural gas sales .............................. 2,296 2,678 5,940 8,013
Well operation fees .................................... 340 429 1,111 1,255
Other .................................................. 110 -- 280 16
--------- --------- --------- ---------
20,263 58,158 55,056 129,491
--------- --------- --------- ---------
Operating costs and expenses:
Direct drilling costs .................................. 14,077 38,663 38,818 89,049
Lease operating and production ......................... 472 502 1,468 1,564
Impairment of oil and natural gas
properties .......................................... -- 300 159 750
Exploration costs ...................................... 111 153 344 478
Dry holes and abandonments ............................. 258 237 612 830
Depreciation, depletion and amortization ............... 2,966 4,988 7,753 12,188
General and administrative expense ..................... 1,298 1,828 3,944 4,459
--------- --------- --------- ---------
19,182 46,671 53,098 109,318
--------- --------- --------- ---------
Operating income ........................................... 1,081 11,487 1,958 20,173
--------- --------- --------- ---------
Other income (expense):
Net gain on sale of assets ............................. 133 1,036 533 1,354
Interest income ........................................ 128 159 377 799
Interest expense ....................................... (340) (186) (985) (695)
Non-recurring acquisition costs ........................ (1,763) -- (2,268) --
Other .................................................. 23 29 96 169
--------- --------- --------- ---------
(1,819) 1,038 (2,247) 1,627
--------- --------- --------- ---------
Income (loss) before income taxes .......................... (738) 12,525 (289) 21,800
--------- --------- --------- ---------
Income tax expense (benefit):
Current ................................................ 20 4,228 112 6,702
Deferred ............................................... (146) 418 (2,531) 1,301
--------- --------- --------- ---------
(126) 4,646 (2,419) 8,003
--------- --------- --------- ---------
Net income (loss) .......................................... $ (612) $ 7,879 $ 2,130 $ 13,797
========= ========= ========= =========
Net income (loss) per common share:
Primary ................................................ $ (.06) $ .51 $ .22 $ .95
========= ========= ========= =========
Fully diluted .......................................... $ (.06) $ .50 $ .21 $ .95
========= ========= ========= =========

Weighted average number of common shares outstanding:
Primary ................................................ 10,033 15,524 9,899 14,470
========= ========= ========= =========
Fully diluted .......................................... 10,033 15,642 9,959 14,596
========= ========= ========= =========
</TABLE>

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

<PAGE> 7

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED 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 ......... 2,346 23 68,292 -- 68,315
Issuance of stock purchase
warrant ....................... -- -- 1,248 -- 1,248
Exercise of stock options ......... 124 2 853 -- 855
Tax benefit related to
exercise of stock options ....... -- -- 1,304 -- 1,304
Net income ........................ -- -- -- 13,797 13,797
Effect of 2-for-1 stock split
(See Note 5) .................. 7,369 74 (74) -- --
-------- -------- -------- -------- --------
Balance, September 30, 1997 ....... 14,783 $ 148 $ 92,982 $ 35,871 $129,001
======== ======== ======== ======== ========
</TABLE>

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

<PAGE> 8

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------
1996 1997
--------- ---------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 2,130 $ 13,797
Adjustments to reconcile net income to net cash from
operating activities:
Abandonment of oil and natural gas properties ................... 119 658
Depreciation, depletion and amortization ........................ 7,753 12,188
Impairment of oil and natural gas properties .................... 159 750
Net gain on sale of assets ...................................... (533) (1,354)
Deferred income tax expense (benefit) ........................... (2,531) 1,301
Tax benefit related to exercise of stock options ................ -- 1,304
Decrease in deferred compensation liabilities................... -- (20)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable ........... 569 (17,110)
Increase in oil and natural gas sales receivables .......... (333) (201)
Increase in undeveloped oil and natural gas
properties held for resale ............................. (428) (536)
Increase in other current assets ........................... (780) (537)
Increase in trade accounts payable ......................... 779 6,275
Increase in revenue distribution payable ................... 623 1,841
Increase in accrued expenses ............................... 358 7,486
Increase (decrease) in other current payables .............. (195) 322
--------- ---------
Net cash provided by operating activities .............. 7,690 26,164
--------- ---------
Cash flows from investing activities:
Purchases of investment securities .............................. (524) (559)
Sales of investment securities .................................. 2,471 544
Acquisitions .................................................... -- (34,937)
Purchases of property and equipment ............................. (10,554) (26,027)
Sale of property and equipment .................................. 1,137 4,061
Change in other assets .......................................... (57) (142)
--------- ---------
Net cash used in investing activities .................. (7,527) (57,060)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable ..................................... 3,170 10,250
Payments of notes payable ....................................... (1,332) (25,849)
Issuance of common stock ........................................ -- 59,401
Proceeds from exercise of stock options ......................... 240 855
--------- ---------
Net cash provided by financing activities .............. 2,078 44,657
--------- ---------
Net increase in cash and cash equivalents .............. 2,241 13,761
--------- ---------
Cash and cash equivalents at beginning of period ..................... 7,209 3,494
--------- ---------
Cash and cash equivalents at end of period ........................... $ 9,450 $ 17,255
========= =========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 984 $ 695
Income taxes .................................................... 155 745
</TABLE>

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

(continued)

<PAGE> 9

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)

Supplemental disclosure of cash flow information - continued:

During the nine months ended September 30, 1997, the Company acquired the
drilling assets of Ziadril, Inc., Wes-Tex Drilling Company and McGee
Drilling Company, Inc. for an aggregate purchase price of
approximately $45,100,000 of which, $34,937,000 was paid in cash as follows
(See Note 2):

<TABLE>
(in thousands)
<S> <C>
Fair value of assets acquired.................... $ 45,100
Less non-cash items:
Common stock issued........................... (8,915)
Three-year stock purchase warrant............. (1,248)
---------
Total cash paid.......................... $ 34,937
=========
</TABLE>

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

9
<PAGE> 10

PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF CONSOLIDATION AND PRESENTATION

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 condensed consolidated financial statements have been
prepared by 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 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 1996 financial information presented herein
has been restated to reflect the July 30, 1996 merger with Tucker Drilling
Company, Inc. under the pooling of interests method of accounting. 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 and nine months ended September
30, 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.

The Company's earnings per share and weighted average number of common
shares outstanding for all periods presented and, as otherwise indicated herein,
reflect a two-for-one split of Patterson's common stock effected on July 25,
1997.

2. RECENT ACQUISITIONS

On April 22, 1997, the Company acquired certain assets of Ziadril, Inc.
("Ziadril"), a privately-owned, non-affiliated contract drilling company based
in Hobbs, New Mexico for a purchase price of $5.5 million. The assets acquired
consisted of five contract drilling rigs, two rig hauling trucks, an office,
shop and a yard. The acquisition was treated as a purchase for purposes of
financial accounting. The acquisition was funded with cash on hand at the date
of the transaction. As such, fair market values of the acquired assets were
determined and the purchase price, as of the date of the acquisition, was
allocated based on estimated fair values as follows:

<TABLE>
(in thousands)
<S> <C>
Contract drilling assets ............... $ 3,652
Goodwill ............................... 1,648
Covenants not to compete ............... 200
--------
Total purchase price ............... $ 5,500
========
</TABLE>

(continued)

<PAGE> 11

PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

2. RECENT ACQUISITIONS-CONTINUED

On June 12, 1997, the Company consummated an acquisition to purchase
the contract drilling assets of Wes-Tex Drilling Company ("Wes-Tex"), a
privately-held, non-affiliated company based in Abilene, Texas, for a purchase
price of approximately $35.4 million; consisting of $25 million in cash, 283,000
shares of Patterson common stock valued at $31.50 per share, which represented
the approximate fair market value on the date the terms of the acquisition were
agreed to and announced, a three-year stock purchase warrant (valued at $6.24
per share) to purchase 200,000 additional shares of Patterson common stock at an
exercise price of $32.00 per share and approximately $190,000 of other direct
costs incurred relative to the transaction. The acquisition was funded using
$19.0 million of the Company's cash on hand and $6.0 million provided by the
Company's $30.0 million line of credit (discussed below in Note 4). The assets
acquired consisted of 21 contract drilling rigs, all related rolling stock and a
shop and yard. The purchase price, as of the date of acquisition, was allocated
based on estimated fair values as follows:

<TABLE>
(in thousands)
<S> <C>
Contract drilling assets ............... $ 17,450
Goodwill ............................... 16,629
Covenants not to compete ............... 1,273
--------
Total purchase price ............... $ 35,352
========
</TABLE>

The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if Wes-Tex had been acquired on January 1,
1996, after including the impact of certain adjustments, such as restatement of
depreciation using the fair values instead of the book values of the assets
acquired, the increased interest expense on the acquisition debt, increased
amortization expense on intangible assets, conforming accounting treatment of
wells in progress and the related income tax effects.

<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1996 1997
------------- ------------------
(in thousands, except per share data)
<S> <C> <C>
Revenues............................ $77,652 $ 152,577
Net income.......................... 1,874 13,876
Net income per fully diluted share.. 0.19 0.95
</TABLE>

The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.

On August 1, 1997, the Company completed the acquisition of the
contract drilling assets of McGee Drilling Company ("McGee Drilling"), a
privately-held, non-affiliated company based in Midland, Texas for a purchase
price of $4.25 million. The purchase price was funded with proceeds provided by
the Company's $30.0 million line of credit (discussed below in Note 4). The
assets acquired consisted of three contract drilling rigs and a vehicle. The
purchase price as of the date of the acquisition was allocated based on
estimated fair values as follows:

(continued)

<PAGE> 12

PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED

2. RECENT ACQUISITIONS - CONTINUED

<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Contract drilling assets ............... $ 4,050
Covenants not to compete ............... 200
--------
Total purchase price ............ $ 4,250
========
</TABLE>

The aforementioned acquisitions have been accounted for as purchases
and the results of operations and cash flows of the acquired entities have been
included in the unaudited condensed consolidated financial statements since the
date of acquisition. The purchase price allocations as detailed above are
preliminary in nature and subject to change.

3. INTANGIBLE ASSETS

Intangible assets as of the balance sheet date consist of covenants not
to compete and goodwill arising from the Company's acquisitions described in
Note 2. The covenants are being amortized on a straight line basis over their
contractual lives of five years. Goodwill, representing the excess of the
purchase price over the estimated fair value of the assets acquired, is being
amortized on a straight line basis over fifteen years.

<TABLE>
<CAPTION>
Balance at
September 30,
1997
--------
(in thousands)
<S> <C>
Covenants not to compete ............... $ 1,673
Goodwill ............................... 18,277
--------
19,950
Less accumulated amortization .......... 634
--------
$ 19,316
</TABLE>

Management continually reviews the carrying amounts of goodwill for
recoverability based on the anticipated undiscounted cash flows of the assets to
which it relates. The Company considers operating results, trends and prospects
of the Company, as well as competitive comparisons. The Company also takes into
consideration competition within the industry and any other events or
circumstances which might indicate potential impairment. If goodwill is
determined to not be recoverable an impairment charge will be recognized to the
extent that the carrying value of the related assets, including goodwill,
exceeds the estimated fair value.

4. NOTE PAYABLE

During June 1997, the Company entered into a line of credit agreement
with Norwest Bank Texas, N.A.

(continued)

<PAGE> 13

PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

4. NOTE PAYABLE-CONTINUED

(the "Norwest Line") providing a $30.0 million credit facility. The Norwest Line
allows for advances under the facility until December 31, 1997, at which time
the outstanding principal balance would be converted to a term loan with a
maturity date of January 1, 2000, and a seven-year amortization. The credit
facility is payable interest only until December 31, 1997 at the LIBOR 90-day
rate plus 2.50% (8.2188% at September 30, 1997). The Norwest Line is unsecured,
but does not permit any liens to exist on assets of the Company. The credit
agreement governing the Norwest Line requires the Company to, among other
things, maintain a ratio of cash flows to current maturities of long-term debt
plus capital lease payments of 2.0 to 1.0 on a rolling four month basis, a
debt-to-tangible net worth ratio of not more than 0.60 to 1.0 at the end of each
quarter, a current ratio of at least 1.75 to 1.0 at the end of each quarter and
a positive net income on a rolling four quarter basis. The credit agreement
prohibits the Company from having any other indebtedness for borrowed money,
secured or unsecured, with the exception of normal trade payables and prohibits
the Company from paying any dividends without the consent of the bank.

The Company paid an origination fee of $75,000 which is being amortized
over the term of the loan and borrowed $10.25 million under the Norwest Line
during the nine months ended September 30, 1997 for the Wes-Tex and McGee
Drilling acquisitions (as described in Note 2). The Company is currently
renegotiating the terms of the Norwest Line to provide for an increased credit
facility of $60.0 million (see Note 7).

5. STOCKHOLDERS' EQUITY

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 thereon 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. These expenses are not being reflected
as an extraordinary item because management does not expect the amount to be
material for fiscal year 1997.

On July 1, 1997, Patterson's Board of Directors authorized a
two-for-one stock split in the form of a 100% stock dividend payable on July 25,
1997 to stockholders of record on July 11, 1997. The stockholders of Patterson,
at the July 1, 1997 Annual Meeting of Stockholders, approved an amendment to
Patterson's Certificate of Incorporation increasing the number of authorized
shares of common stock from 9,000,000 to 18,000,000. Par value of the Company's
common stock remained at $0.01 per common share. The stock split resulted in the
transfer of $73,692 at June 30, 1997 from additional paid-in capital to common
stock, representing the par value of the shares then outstanding. Accordingly,
earnings per share and weighted average number of common shares outstanding
for all periods presented reflect the effects of the stock split.

6. RECENT ACCOUNTING STANDARDS

(continued)

<PAGE> 14

PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

6. RECENT ACCOUNTING STANDARDS-CONTINUED

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 percent 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
September 30, 1997, it would have reported Basic EPS for the nine months then
ended of $0.99 per common share on 13,950,472 shares of common stock and $0.53
per common share on 14,769,156 shares of common stock for the quarter ended
September 30, 1997 (giving effect to the two-for-one stock split).
Implementation of Statement 128 would not have an effect on earnings per share
for the respective periods ending September 30, 1996.

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.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement 130")
which establishes standards for reporting and presentation of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. Statement 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 requires that
an enterprise (i) classify items of other comprehensive income by their nature
in a financial statement (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Statement
130 is effective for fiscal years beginning after December 15, 1997. The Company
does not anticipate any significant changes in its current reporting disclosures
as a result of the implementation of Statement 130 during fiscal year 1998.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("Statement 131"). Statement 131 establishes revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. Statement 131 is effective for fiscal
years beginning after December 15, 1997. The Company does not anticipate any
significant changes in its current reporting disclosures as a result of the
implementation of Statement 131 during fiscal year 1998.

(continued)

<PAGE> 15

PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

7. SUBSEQUENT EVENTS

On October 31, 1997, the Company entered into an agreement in principle
to acquire all of the outstanding capital stock of Lone Star Mud, Inc. ("Lone
Star") for a purchase price of $12.8 million consisting of $1.43 million in cash
and an equivalent number of shares of Patterson's common stock to total $11.37
million. Lone Star is a privately-held, non-affiliated company based in Midland,
Texas providing contract services to the oil and natural gas industry.
Consummation of the acquisition is subject to, among other matters, execution of
a mutually agreeable definitive purchase agreement.

The Company is currently renegotiating the terms of the Norwest Line to
provide for an increased credit facility of $60.0 million. If successfully
renegotiated, the Norwest Line will allow for advances under the facility until
May 31, 1998, at which time the outstanding principal balance would be converted
to a term loan with a maturity date of January 1, 2001, and a seven-year
amortization. The credit facility is payable interest only until May 31, 1998 at
the LIBOR 30-day rate plus 2.375%. The revised credit agreement requires the
Company to, among other things, maintain a ratio of cash flows to current
maturities of long-term debt plus capital lease payments of 2.0 to 1.0 on a
rolling four month basis, a debt-to-tangible net worth ratio of not more than
120% at the end of each quarter, a current ratio of at least 125% at the end of
each quarter, and a positive net income on a rolling four quarter basis. The
credit agreement prohibits the Company from having any other indebtedness for
borrowed money, secured or unsecured, with the exception of normal trade
payables and prohibits the Company from paying any dividends without the consent
of the bank. A commitment fee equal to 1/4% of the outstanding balance under the
line of credit will be incurred and applied to the then outstanding balance
under the new credit facility. An unused commitment fee of 1/4% will be incurred
for any portion of the facility that has not been drawn by the end of the
advancing period. In addition to payment in full of the Company's amount
outstanding under the Norwest Line, proceeds of the credit facility will be used
by the Company for acquisitions, capital expenditures and working capital
purposes.

<PAGE> 16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1997, the Company had working capital of
approximately $33.1 million and cash and cash equivalents of approximately $17.3
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.
Included in the change in the Company's working capital from December 31, 1996
to September 30, 1997 is a $17.1 million increase in accounts receivable-trade
as well an aggregate $15.9 million increase in current liabilities. The increase
in accounts receivable-trade and current liabilities was largely attributable to
the increased level of contract drilling activity provided by the Company's
expanded contract drilling fleet (further described below). For the nine months
ended September 30, 1997, the Company generated net cash from operations of
approximately $26.2 million, received proceeds of approximately $855,000 from
the exercise of stock options, sold property and equipment for proceeds of
approximately $4.1 million, borrowed $10.25 million under an existing credit
facility and raised through an equity offering an additional $59.4 million.
These funds were used primarily to acquire drilling and other related equipment
and associated intangible assets of approximately $55.0 million, to fund
leasehold acquisition, exploration and development of approximately $6.0
million, to reduce certain notes payable by approximately $25.8 million and to
increase cash by approximately $13.8 million.

During June 1997, the Company negotiated a $30.0 million credit
facility with Norwest Bank Texas, N.A. Terms of the credit facility provide for
an advancing line of credit until December 31, 1997, at which time the
outstanding principal balance of the line will be converted to a term loan with
a maturity date of January 1, 2000, ad a seven-year amortization. The credit
facility is payable, interest only at the LIBOR 90-day rate plus 2.50% at
(8.2188% at September 30, 1997) until December 31, 1997. Proceeds of the credit
facility will be used by the Company for acquisitions, capital expenditures and
working capital purposes. As of September 30, 1997, the Company had borrowed
$10.25 million under the credit facility to fund its acquisitions of the
contract drilling operations of Wes-Tex Drilling Company and McGee Drilling
Company. The Company is currently renegotiating the terms of its line of credit
with Norwest to provide for an increased credit facility of $60.0 million.

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. On June 12, 1997, the Company consummated
the acquisition of the contract drilling operations of Wes-Tex Drilling Company
("Wes-Tex"), a non-affiliated, privately-owned company based in Abilene, Texas.
Pursuant to this transaction, the Company acquired 21 fully operable contract
drilling rigs, rig hauling trucks and trailers, and a yard and shop located in
Abilene, in consideration for $25.0 million in cash, 283,000 shares of the
Company's common stock valued at $31.50 per share and a stock purchase warrant,
exercisable at $32.00 per share, to purchase an additional 200,000 shares of the
Company's common stock. Of the $25.0 million cash, $19.0 million was provided
from the Company's equity offering and $6.0 million was borrowed by the Company
under its existing credit facility. On August 1, 1997, the Company completed the
acquisition of the contract drilling assets of a privately-held, non-affiliated
company based in Midland, Texas for a purchase price of $4.25 million. The
purchase price was funded with proceeds provided by the Company's line of
credit. The acquisition included three fully operable contract drilling rigs, a
vehicle and other related equipment.

On October 24, 1997, the Company executed an agreement in principle to
purchase the contract drilling operations of V&B Drilling, Inc. ("V&B"), a
privately-held, non-affiliated company based in Odessa, Texas, for a purchase
price of $13.0 million. The assets to be acquired consist of eight drilling rigs
(five of which are currently operable), four yards and a shop located in Odessa
and other related equipment and rolling stock. On October 31, 1997, the Company
entered into an agreement in principle to acquire all of the outstanding capital
stock of Lone Star Mud, Inc. ("Lone Star") for a purchase price of $12.8 million
consisting of $1.43 million cash and an equivalent number of shares of
Patterson's common stock to total $11.37 million. Lone Star is a privately-held,
non-affiliated company based in Midland, Texas providing contract services to
the oil and natural gas industry. Consummation of the aforementioned
acquisitions is subject to, among other matters, execution of a mutually
agreeable definitive purchase

<PAGE> 17

agreement. The Company expects to fund the acquisitions using proceeds provided
by its line of credit.

The Company believes it must continually upgrade and maintain its
contract drilling fleet and has expended approximately $20.0 million for capital
expenditures in fiscal year 1997 for this purpose with respect to its existing
contract drilling rig fleet, including approximately $8.3 million for
modifications and upgrades of the nine inoperable drilling rigs purchased during
November and December 1996. As a result of the latter expenditure, four of the
Company's nine inoperable rigs were placed into operation during the nine months
ended September 30, 1997, increasing the number of operable drilling rigs at the
end of the quarter to 85. The remaining inoperable rigs are expected to be
placed into operation during the fourth quarter of 1997 and the first six months
of fiscal year 1998. Preparation of the remaining inoperable drilling rigs has
been delayed as a result of the shortage and prolonged delivery time of
necessary equipment (eg. Caterpillar engines, drill pipe, etc.) to fully equip
the rigs for operation.

During the nine months ended September 30, 1997, the Company expended
approximately $6.0 million for leasehold acquisition, exploration and
development of oil and natural gas properties. Capital expenditures of the oil
and natural gas segment have exceeded management's initial annual estimate of
$5.0 million as a result of the Company's continued development of its interests
in Robertson County. Currently, the Company has 8 producing wells in this area
contributing approximately 3,700 barrels of oil per day.

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 excluding acquisitions. From time to time, the Company reviews
acquisition opportunities relating to its business segments. 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

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

For the nine months ended September 30, 1997, contract drilling
revenues were approximately $120.0 million as compared to $47.7 million for the
same period in 1996; an increase of 152%. Average rig utilization was 90% for
the nine months ended September 30, 1997, as compared to 70% for the same period
in 1996. Direct contract drilling expenses for the nine months ended September
30, 1997 were approximately $89 million, or 74% of the contract drilling
revenues, as compared to approximately $38.8 million, or 81% of the contract
drilling revenues, for the same period in 1996. The increase in contract
drilling revenues and direct contract drilling expenses is largely attributable
to an increase, primarily through a series of acquisitions since the third
quarter of 1996, in the number of operable drilling rigs. 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 at September 30, 1996 to
85 as of September 30, 1997. Additionally, the Company experienced rate
increases for its contract drilling services contributing to the increased gross
margins realized during the nine months ended September 30, 1997. General and
administrative expense for the contract drilling segment was approximately $3.4
million for the nine months ended September 30, 1997 as compared to $2.8 million
for the same period in 1996. Depreciation and amortization expense was
approximately $8.7 million for the nine months ended September 30, 1997 as
compared to $4.9 million for the same period in 1996. The increase in
depreciation expense was primarily due to the addition of 45 drilling rigs to
the Company's operable drilling fleet, as discussed above. For the nine months
ended September 30, 1997, operating income from this segment was approximately
$19.7 million as compared to approximately $1.7 million for the same period in
1996.

<PAGE> 18
Oil and natural gas revenue was approximately $9.3 million for the nine months
ended September 30, 1997, as compared to approximately $7.3 million for the nine
months ended September 30, 1996. The volume of crude oil sold increased by 70%
while the volume of natural gas sold decreased by 17% for the nine months ended
September 30, 1997, as compared to the same period in 1996. The average price
per barrel of crude oil was $19.17 in the first nine months of 1997 as compared
to $20.23 for the same period in 1996, and the average price per mcf of natural
gas was $2.30 in the first nine months of 1997 as compared to $1.96 for the
first nine months of fiscal year 1996. Lease operating and production costs were
$3.36 per barrel of oil equivalent for the nine months ended September 30, 1997
as compared to $3.86 per barrel of oil equivalent for the same period in 1996.
Depreciation and depletion expense was approximately $3.5 million for the nine
months ended September 30, 1997 as compared to approximately $2.8 million for
the same nine months ended in 1996. The increase in depreciation and depletion
expense was due primarily to the segment's growth through leasehold acquisition
and continued development of existing properties resulting in significant
increases in the segment's production of crude oil (as indicated above). General
and administrative expense for the oil and natural gas segment was approximately
$1.1 million for the first nine months of 1997 and 1996. For the nine months
ended September 30, 1997, operating income from the oil and natural gas segment
was approximately $1.9 million as compared to approximately $885,000 for the
same period in 1996. The increase in operating income for this segment was
largely attributable to an approximate $813,000 gain realized on the sale of one
of the Company's producing properties.

For the nine months ended September 30, 1997, interest expense was
approximately $695,000 as compared to $985,000 for the same period in 1996. The
1997 interest expense amount includes approximately $265,000 of prepayment
penalties and fees incurred as a result of the Company's payment in full of its
notes payable prior to their respective maturities. Interest income for the
first nine months of 1997 increased 112% to approximately $799,000 as a result
of cash provided by the Company's equity offering in January 1997.

COMPARISON OF THE FISCAL QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996

For the fiscal quarter ended September 30, 1997, contract drilling
revenues were approximately $55.1 million as compared to $17.5 million for the
same fiscal quarter in 1996; an increase of 215%. Average rig utilization was
91.5% for the fiscal quarter ended September 30, 1997, as compared to 73% for
the same fiscal quarter in 1996. Direct contract drilling costs for the fiscal
quarter ended September 30, 1997 were approximately $38.7 million, or 70% of
contract drilling revenues, as compared to approximately $14.1 million, or 81%
of contract drilling revenues, for the same fiscal quarter in 1996. The increase
in contract drilling revenues and direct contract drilling costs was due largely
to the addition, primarily through a series of strategic acquisitions (as
discussed previously), of 45 operable drilling rigs since the second quarter of
1996. General and administrative expense for the contract drilling segment was
approximately $1.4 million for the fiscal quarter ended September 30, 1997 as
compared to approximately $884,000 for the same fiscal quarter in 1996.
Depreciation and amortization expense was approximately $3.7 million for the
fiscal quarter ended September 30, 1997 as compared to $1.8 million for the same
fiscal quarter in 1996. The increase in depreciation expense was due primarily
to the aforementioned 45 drilling rigs added to the Company's operable drilling
fleet. For the fiscal quarter ended September 30, 1997, operating income from
this segment was approximately $11.5 million as compared to approximately
$845,000 for the same fiscal quarter in 1996.

Oil and natural gas revenue was approximately $3.1 million for the
fiscal quarter ended September 30, 1997, as compared to approximately $2.7
million for the same fiscal quarter in 1996. The volume of crude oil sold
increased by 111%, while the volume of natural gas sold decreased by 36% for the
quarter ended September 30, 1997, as compared to the same period in 1996. The
average price per barrel of crude oil was $17.59 for the three

<PAGE> 19

months ended September 30, 1997 as compared to $22.23 for the same period in
1996, and the average price per mcf of natural gas was $1.76 for the three
months ended September 30, 1997 as compared to $2.26 for the same period in
1996. Lease operating and production costs were $2.95 per barrel of oil
equivalent in the fiscal quarter ended September 30, 1997, as compared to $3.58
per barrel of oil equivalent for the same period in 1996. Depreciation and
depletion expense was approximately $1.3 million for the three months ended
September 30, 1997 as compared to approximately $1.2 million for the same three
months ended in 1996. General and administrative expense for the oil and natural
gas segment was approximately $400,000 for the third quarter ended 1997 as
compared to $414,000 for the same period in 1996. In the fiscal quarter ended
September 30, 1997, operating income from the oil and natural gas segment was
approximately $1 million as compared to approximately $392,000 for the fiscal
quarter ended September 30, 1996. The increase in operating income for this
segment was largely attributable to an approximate $813,000 gain realized on the
sale of one of the Company's producing properties.

For the fiscal quarter ended September 30, 1997, interest expense was
approximately $186,000 as compared to $340,000 for the same period in 1996. The
decrease in interest expense is attributable to the Company's payment in full of
its notes payable during the first quarter of 1997. Interest income for the
three months ended September 30, 1997 was $159,000 as compared to $128,000 for
the same three month period in 1996.

INCOME TAXES

During the nine months ended September 30, 1997, the Company incurred
income tax expense of approximately $8.0 million ($6.7 million current and $1.3
million deferred) as compared to a net income tax benefit of approximately $2.4
million for the same period ended September 30, 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 of $2.4 million. 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.

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 gas, both with
respect to its contract drilling and its oil and gas segments. Historically, oil
and 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 gas prices could have a material adverse effect on the Company's
financial condition and results of operations.

<PAGE> 20

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
percent 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 September 30, 1997, it would have
reported Basic EPS for the nine months then ended of $0.99 per common share on
13,950,472 shares of common stock and $0.53 per common share on 14,769,156
shares of common stock for the quarter ended September 30, 1997 (giving effect
for a two-for-one stock split). Implementation of Statement 128 would not have
an effect on earnings per share for the respective periods ending September 30,
1996.

<PAGE> 21

--------------------

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); 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 severe
drill-pipe shortage; operational risks (such as blow outs, fires and loss of
production); labor shortage, primarily qualified 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; no assurance of additional growth through
acquisitions; risk associated with recent rapid 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 explanation 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.

--------------------

<PAGE> 22

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company held a special meeting of stockholders on July 1, 1997. The
following table sets forth certain information relating to each of the matters
voted upon at the meeting.

<TABLE>
<CAPTION>
Votes(1)
---------------------------------------------------
Withheld/ Broker
Matters Voted Upon(1) For Against Abstain Non-Votes
--------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1. Amended the Certificate of
Incorporation of the Company to
increase the authorized common stock
from 9,000,000 to 18,000,000 shares. 6,073,261 87,009 10,713 --

2. Amend the Patterson Energy, Inc. 1993
Stock Incentive Plan increasing the
number of shares of the Company's
common stock reserved for issuance
under the plan from 175,000 shares to
350,000 shares. 5,949,644 202,005 19,334 --

3. Elected Coopers & Lybrand L.L.P. as
the independent auditors of the
Company for the fiscal year ended
December 31, 1997. 6,160,961 6,304 3,718 --

4. Elected Cloyce A. Talbott, A. Glenn
Patterson, Robert C. Gist, Kenneth E.
Davis and Vincent A. Rossi, Jr. to the
Company's Board of Directors. 6,022,129 -- 148,854 --
</TABLE>

(1) The number of shares, as presented herein, reflect the two for one stock
split effective on July 25, 1997.

<PAGE> 23

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS.

The following exhibits are filed herewith or incorporated by reference:

2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger. (1)

2.2 Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and Tucker
Drilling Company, Inc. (11)

2.2.1 Amendment to Agreement and Plan of Merger, dated May 16, 1996
among Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc. (12)

2.3 Asset Purchase Agreement, dated April 22, 1997, among and
between Patterson Drilling Company and Ziadril, Inc. (2)

2.4 Asset Purchase Agreement, dated June 4, 1997, among Patterson
Energy Inc., Patterson Drilling Company and Wes-Tex Drilling
Company. (3)

2.4.1 Amendment to Asset Purchase Agreement, dated June 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company. (3)

2.5 Agreement, dated June 4, 1997, among Patterson Energy Inc.,
Patterson Drilling Company, Greathouse Foundation and Myrle
Greathouse, Trustee under Agreement dated June 2, 1997. (3)

2.6 Asset Purchase Agreement, dated September 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and McGee
Drilling Company. (2)

3.1 Restated Certificate of Incorporation. (4)

3.1.1 Certificate of Amendment to the Certificate of Incorporation.
(15)

3.2 Bylaws. (1)

4.1 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock. (5)

4.2 Registration Rights Agreement, dated June 12, 1997, among
Patterson Energy Inc. and Wes-Tex Drilling Company, Greathouse
Foundation and Myrle Greathouse, Trustee under Agreement dated
June 2, 1997. (6)

23
<PAGE> 24

4.3 Stock Purchase Warrant of Patterson Energy, Inc., dated June
12, 1997. (6)

5.1 Opinion of Baker & Hostetler LLP regarding legality of shares
to be offered. (2)

10.1 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Drilling Company and Ziadril, Inc..(2)

10.1.1 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Drilling Company and Joe Smith. (2)

10.1.2 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Drilling Company and Ken Bromley. (2)

10.1.3 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Drilling Company and Billy Jensen. (2)

10.1.4 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Drilling Company and Lee Roberson. (2)

10.2 Credit Agreement dated June 3, 1997 by and between Patterson
Energy, Inc., Patterson Drilling Company, Patterson Drilling
Programs, Inc., Patterson Petroleum, Inc., Patterson Trading
Company, Inc. and Norwest Bank Texas, N.A. (3)

10.2.1 Promissory Note dated June 3, 1997 among Patterson Energy,
Inc. and Norwest Bank Texas, National Association. (3)

10.2.2 Corporate Guarantees of Patterson Drilling Company, Patterson
Petroleum, Inc., Patterson Drilling Programs, Inc. and
Patterson Trading Company, Inc. (3)

10.3 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Energy, Inc., Patterson Drilling Company and
Wes-Tex Drilling Company. (6)

10.3.1 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Energy, Inc., Patterson Drilling Company and
Myrle Greathouse. (6)

10.3.2 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Energy, Inc., Patterson Drilling Company and
Charles Ezzell. (6)

10.3.3 Non-Competition Agreement, dated April 22, 1997, by and
between Patterson Energy, Inc., Patterson Drilling Company and
Danny Mullen. (6)

<PAGE> 25

10.4 Aircraft Lease, dated January 15, 1997, (effective January 1,
1997) between Talbott Aviation, Inc. and Patterson Energy,
Inc. (7)

10.5 Asset Purchase Agreement, dated May 23, 1995, between Perry E.
Esping and Patterson Energy, Inc., together with related Stock
Purchase Warrant and Registration Rights Agreement. (8)

10.6 Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT Marketing,
Inc. (8)

10.6.1 Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT Marketing,
Inc. (9)

10.7 Crude Oil Purchase Contract, dated October 19, 1994, between
Patterson Petroleum, Inc. and BHT Marketing, Inc. (10)

10.7.1 Crude Oil Purchase Contract, dated October 24, 1995, between
Patterson Petroleum, Inc. and BHT Marketing, Inc. (9)

10.8 Patterson Energy, Inc. 1993 Stock Incentive Plan. (10)

10.8.1 Patterson Energy, Inc. 1993 Stock Incentive Plan, as amended.
(14)

10.9 Patterson Energy, Inc. Non-Employee Director's Stock Option
Plan. (10)

10.10 Consulting and Stock Option Agreement, dated as of November
15, 1994, between Patterson Energy, Inc. and E. Peter Hoffman,
Jr. (9)

10.11 Consulting and Stock Option Agreement, dated as of February
15, 1995, between Patterson Energy, Inc. and E. Peter Hoffman,
Jr. (9)

10.12 Consulting and Stock Option Agreement, dated as of August 2,
1995, between Patterson Energy, Inc. and E. Peter Hoffman, Jr.
(9)

10.13.1 Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and Michael G. Sledge. (12)

10.13.2 Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and H. Gene Sledge. (12)

10.1 Model Form Operating Agreement. (13)

10.2 Form of Drilling Bid Proposal and Footage Drilling Contract.
(13)

10.3 Form of Turnkey Drilling Agreement. (13)

10.15 Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and David W. Sledge. (12)

<PAGE> 26

11.1 Statement re Computation of Per Share Earnings.

15.1 Awareness Letter of Independent Accountants, Coopers & Lybrand
L.L.P.

23.1 Consent of Independent Accountants, Coopers & Lybrand L.L.P.

27.1 Financial Data Schedule as of September 30, 1997 and for the
three and nine months ended September 30, 1997 and 1996.

- ------------------------------------------

(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment
No. 2 to Registration Statement on Form SB-2 (File No. 33-68058-FW);
filed October 28, 1993.

(2) Incorporated herein by reference to Item 16, "Exhibits" to Amendment
No. 1 to Registration Statement on Form S-3 (File No. 333-29035); filed
August 5, 1997.

(3) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11,
1997.

(4) Incorporated herein by reference to Item 6, "Exhibits and Reports on
Form 8-K" to Form 10-Q for the quarterly period ended September 30,
1996; filed August 12, 1996.

(5) Incorporated by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.

(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19,
1997.

(7) Incorporated herein by reference to Item 14, "Exhibits, Financial
Statement Schedules and Reports on Form 8-K" of the Company's 1996
Annual Report on Form 10-K.

(8) Incorporated by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
33-68058-FW).

(9) Incorporated by reference to Item 7, "Financial Statements and
Exhibits" to Form 10-KSB for the year ended December 31, 1995.

(10) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.

(11) Incorporated by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated April 22, 1996 and filed on April 30, 1996.

(12) Incorporated by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated May 16, 1996 and filed on May 22, 1996.

(13) Incorporated by reference to Item 27, "Exhibits" to Registration
Statement filed with the Securities and Exchange Commission on August
30, 1993.

(14) Incorporated herein by reference to Item 8, "Exhibits" to Amendment No.
1 to Registration Statement on Form S-8 (File No. 33-97972); filed July
17, 1997.

(15) Incorporated herein by reference to Item 6. "Exhibits and Reports on
Form 8-K" to Form 10-Q for the quarterly period ended June 30, 1997;
filed August 14, 1997.

<PAGE> 27

(b) REPORTS ON FORM 8-K.

The following reports on Form 8-K were filed with the Securities and
Exchange Commission during the fiscal quarter ended September 30, 1997
related to:

(1)Report dated June 12, 1997 providing audited financial
statements of Wes-Tex Drilling Company and the unaudited pro
forma financial information reflecting the acquisition of the
drilling operations of Wes-Tex Drilling Company and Patterson;
filed August 12, 1997.

(2)Report dated July 1, 1997 announcing the approval by
Patterson's Board of Directors of a two-for-one stock split;
filed July 15, 1997.

(3)Report dated July 24, 1997 announcing the results of
operations for the three and six months ended June 30, 1997;
filed August 26, 1997

(4)Report dated August 5, 1997 announcing the acquisition of the
contract drilling operations of McGee Drilling Corporation,
Inc.; filed August 20, 1997.

<PAGE> 28

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: November 13, 1997

<PAGE> 29

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- ----------
<C> <S> <C>
11.1 Statement Re: Computation of Per Share Earnings............................

15.1 Awareness Letter of Independent Accountants, Coopers & Lybrand
L.L.P......................................................................

23.1 Consent of Independent Accountants, Coopers & Lybrand L.L.P. .............

27.1 Financial Data Schedule as of September 30, 1997 and for the three
and nine months ended September 30, 1997 and 1996..........................
</TABLE>

<PAGE> 1

EXHIBIT 11.1

PATTERSON ENERGY, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS

<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE

Net income (loss) .......................................... $ (612) $ 7,879 $ 2,130 $ 13,797
======== ======== ======== ========

Shares:
Weighted average number of common shares
outstanding ............................................ 9,604 14,769 9,531 13,950

Add-Dilutive effect of outstanding options and
redeemable warrants (as determined by the
application of the treasury stock method) ............. 429 755 368 520
-------- -------- -------- --------

Weighted average number of common shares
outstanding, as adjusted .............................. 10,033 15,524 9,899 14,470
======== ======== ======== ========

Net income (loss) per share:
Primary ................................................. $ (0.06) $ 0.51 $ 0.22 $ 0.95
======== ======== ======== ========

FULLY DILUTED EARNINGS PER SHARE

Net income (loss) .......................................... $ (612) $ 7,879 $ 2,130 $ 13,797
======== ======== ======== ========

Shares:
Weighted average number of common shares
outstanding ............................................. 9,604 14,769 9,531 13,950

Add-Dilutive effect of outstanding options and
redeemable warrants (as determined by the
application of the treasury stock method) ............. 429 873 428 646
-------- -------- -------- --------

Weighted average number of common shares
outstanding, as adjusted .............................. 10,033 15,642 9,959 14,596
======== ======== ======== ========

Net income (loss) per share:
Fully Diluted ........................................... $ (0.06) $ .50 $ .21 $ .95
======== ======== ======== ========
</TABLE>

<PAGE> 1

EXHIBIT 15.1

November 13, 1997

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Patterson Energy, Inc.

We are aware that our report dated October 28, 1997 on our review of interim
financial information of Patterson Energy, Inc. for the period ended September
30, 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, as amended (File No. 333-09243), Form
S-8, as amended (File No. 333-97972), Form S-8 (File No. 333-39471), Form
S-3, as amended (File No. 333-13497) and on Form S-3 (File No. 333-29035).

/s/ Coopers & Lybrand L.L.P.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statements of
Patterson Energy, Inc. on Form S-8, as amended (File No. 333-09243), Form S-8,
as amended (File No. 333-97972), Form S-8 (File No. 333-39471), Form S-3,
as amended, (File No. 333-13497) and on Form S-3 (File No. 333-29035) of our
report dated October 28, 1997, on our review of the interim consolidated
financial statements of Patterson Energy, Inc. and Subsidiaries as of September
30, 1997, and for the three and nine months then ended, which are included in
this Quarterly Report on Form 10-Q.

/s/ Coopers & Lybrand L.L.P.

Dallas, Texas
November 13, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE AND NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 AND 1996. THIS FINANCIAL INFORMATION IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO FILING OF FORM 10-Q FOR THE QUARTERLY PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996.
</LEGEND>

<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996
<PERIOD-START> JUL-01-1997 JUL-01-1996 JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996 SEP-30-1997 SEP-30-1996
<CASH> 17,255 0 0 0
<SECURITIES> 559 0 0 0
<RECEIVABLES> 42,053 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 67,641 0 0 0
<PP&E> 155,829 0 0 0
<DEPRECIATION> 69,663 0 0 0
<TOTAL-ASSETS> 174,915 0 0 0
<CURRENT-LIABILITIES> 34,534 0 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 148 0 0 0
<OTHER-SE> 128,853 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 174,915 0 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 58,158 20,263 129,491 55,056
<CGS> 0 0 0 0
<TOTAL-COSTS> 46,671 19,182 109,318 53,098
<OTHER-EXPENSES> (1,224) 1,479 (2,322) 1,262
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 186 340 695 985
<INCOME-PRETAX> 12,525 (738) 21,800 (289)
<INCOME-TAX> 4,646 (126) 8,003 (2,419)
<INCOME-CONTINUING> 7,879 (612) 13,797 2,130
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 7,879 (612) 13,797 2,130
<EPS-PRIMARY> .51 (.06) .95 .22
<EPS-DILUTED> .50 (.06) .95 .21

</TABLE>