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, 2001 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) <TABLE> <S> <C> DELAWARE (State or other jurisdiction of 75-2504748 incorporation or organization) (I.R.S. Employer Identification No.) </TABLE> 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 May 6, 2001 the issuer had outstanding 38,149,816 shares of common stock, $0.01 par value, its only class of voting stock. - --------------------------------------------------------------------------------
2 PATTERSON ENERGY, INC. AND SUBSIDIARIES INDEX <TABLE> <CAPTION> PAGE <S> <C> Report of Independent Accountants................................................................ 3 Part I - Financial Information Item 1. Financial Statements Unaudited condensed consolidated balance sheets............................ 4 Unaudited condensed consolidated statements of income...................... 5 Unaudited condensed consolidated statement of stockholders' equity......... 6 Unaudited condensed consolidated statements of cash flows.................. 7 Notes to unaudited condensed consolidated financial statements............. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 13 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....................................................................................... 19 </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2
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 its subsidiaries as of March 31, 2001 and the related condensed consolidated statements of income and cash flows for each of the three month periods ended March 31, 2001 and 2000 and the related condensed consolidated statement of stockholders' equity for the three month period ended March 31, 2001. 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 auditing standards generally accepted in the United States of America, 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 on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein), and in our report dated February 27, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet information as of December 31, 2000 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP Fort Worth, Texas April 19, 2001 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3
4 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE FOLLOWING UNAUDITED CONDENSED 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 (Unaudited) ASSETS <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2001 2000 ------------- ------------- (IN THOUSANDS, EXCEPT FOR SHARE DATA) <S> <C> <C> Current assets: Cash and cash equivalents ........................................... $ 60,514 $ 59,355 Accounts receivable: Trade, less allowance for doubtful accounts of $1,903 at March 31, 2001 and $1,503 at December 31, 2000 .................. 96,066 78,364 Oil and natural gas sales ........................................ 1,482 1,255 Federal income taxes receivable ..................................... -- 2,447 Inventories ......................................................... 11,861 12,186 Deferred income taxes ............................................... 6,346 9,133 Other ............................................................... 3,930 3,343 ------------- ------------- Total current assets ............................................ 180,199 166,083 Property and equipment, at cost, net .................................... 256,878 204,272 Intangible assets, net .................................................. 37,995 38,641 Other ................................................................... 4,432 1,590 ------------- ------------- Total assets .................................................... $ 479,504 $ 410,586 ============= ============= </TABLE> LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ (IN THOUSANDS, EXCEPT FOR SHARE DATA) <S> <C> <C> Current liabilities: Current maturities of notes payable ................................. $ 5,697 $ 4,477 Accounts payable: Trade ............................................................ 34,264 28,484 Revenue distribution ............................................. 3,624 3,896 Other ............................................................ 8,720 10,119 Federal income taxes payable ........................................ 4,514 -- Accrued Expenses .................................................... 14,931 9,902 ------------ ------------ Total current liabilities ....................................... 71,750 56,878 Deferred income taxes, net .............................................. 42,258 30,083 Other ................................................................... 735 880 Notes payable, net of current maturities ................................ 17,499 19,939 ------------ ------------ Total liabilities ............................................... 132,242 107,780 ------------ ------------ Commitments and contingencies ........................................... -- -- Stockholders' equity: Preferred stock, par value $.01; authorized 1,000,000 shares, no shares issued ............................................... -- -- Common stock, par value $.01; authorized 50,000,000 shares with 38,445,816 and 37,477,276 issued and 38,145,816 and 38,177,276 outstanding at March 31, 2001 and December 31, 2000, respectively ................................ 384 375 Additional paid-in capital .......................................... 269,365 245,462 Retained earnings ................................................... 79,163 58,619 Treasury stock, at cost, 300,000 shares ............................. (1,650) (1,650) ------------ ------------ Total stockholders' equity ...................................... 347,262 302,806 ------------ ------------ Total liabilities and stockholders' equity ...................... $ 479,504 $ 410,586 ============ ============ </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4
5 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> Operating revenues: Drilling ............................................... $ 104,803 $ 51,157 Drilling and completion fluids ......................... 19,670 4,365 Oil and natural gas .................................... 4,910 2,484 Well operation fees .................................... 553 560 ------------ ------------ 129,936 58,566 ------------ ------------ Operating costs and expenses: Drilling costs ......................................... 63,478 41,835 Drilling and completion fluids ......................... 16,365 3,547 Lease operating and production ......................... 1,005 632 Exploration cost, dry holes and abandonments ........... 212 168 Depreciation, depletion and amortization ............... 11,341 7,717 General and administrative ............................. 4,846 2,196 ------------ ------------ 97,247 56,095 ------------ ------------ Operating income ........................................... 32,689 2,471 ------------ ------------ Other income (expense): Net gain on sale of assets ............................. 13 43 Interest income ........................................ 796 113 Interest expense ....................................... (567) (1,193) Other .................................................. 35 (20) ------------ ------------ 277 (1,057) ------------ ------------ Income before income taxes ................................. 32,966 1,414 ------------ ------------ Income tax expense (benefit): Current ................................................ 5,135 731 Deferred ............................................... 7,287 (228) ------------ ------------ 12,422 503 ------------ ------------ Net income ................................................. $ 20,544 $ 911 ============ ============ Net income per common share: Basic .................................................. $ 0.54 $ 0.03 ============ ============ Diluted ................................................ $ 0.52 $ 0.03 ============ ============ Weighted average number of common shares outstanding: Basic .................................................. 38,295 32,553 ============ ============ Diluted ................................................ 39,514 33,972 ============ ============ </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5
6 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (in thousands) <TABLE> <CAPTION> Common Stock --------------------------- Number of Additional Retained Treasury Shares Amount paid-in capital earnings Stock Total ------------ ------------ --------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000 ........... 37,477 $ 375 $ 245,462 $ 58,619 $ (1,650) $ 302,806 Issuance of common stock ............. 810 8 21,712 -- -- 21,720 Exercise of stock options ............ 159 1 1,224 -- -- 1,225 Tax benefit related to exercise of stock options .................... -- -- 967 -- -- 967 Net income ........................... -- -- -- 20,544 -- 20,544 ------------ ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2001 .............. 38,446 $ 384 $ 269,365 $ 79,163 $ (1,650) $ 347,262 ============ ============ ============ ============ ============ ============ </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6
7 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 ------------ ------------ <S> <C> <C> Cash flows from operating activities: (IN THOUSANDS) Net income ................................................................. $ 20,544 $ 911 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization .................................. 11,341 7,717 Net gain on sale of assets ................................................ (13) (43) Deferred income tax expense (benefit) ..................................... 7,287 (228) Change in operating assets and liabilities: Increase in trade accounts receivable ........................ (11,783) (7,440) Increase in oil and natural gas sales receivable ............. (227) (76) Decrease in inventories ...................................... 325 225 Decrease in accrued federal income taxes receivable .......................................... 2,447 -- Decrease in other current assets ............................. 281 656 Increase (decrease) in trade accounts payable ................ (1,074) 4,984 Increase (decrease) in revenue distribution payable ............................................. (272) 651 Increase in accrued expenses ................................. 6,521 1,488 Increase in federal income taxes payable ..................... 4,514 700 Increase (decrease) in other current payables ................ (1,399) 419 Decrease in other liabilities ................................ (145) (6) ------------ ------------ Net cash provided by operating activities ................ 38,347 9,958 ------------ ------------ Cash flows from investing activities: Acquisitions .............................................................. (11,370) (5,261) Purchases of property and equipment ....................................... (23,059) (12,009) Proceeds from sales of property and equipment ............................. 78 55 Change in other assets .................................................... (2,842) (234) ------------ ------------ Net cash used in investing activities .................... (37,193) (17,449) ------------ ------------ Cash flows from financing activities: Purchase of treasury stock ................................................ -- (1,650) Proceeds from notes payable ............................................... -- 9,908 Payments of notes payable ................................................. (1,220) -- Proceeds from exercise of stock options ................................... 1,225 896 ------------ ------------ Net cash provided by financing activities ................ 5 9,154 ------------ ------------ Net increase in cash and cash equivalents ................ 1,159 1,663 Cash and cash equivalents at beginning of period ............................... 59,355 8,792 ------------ ------------ Cash and cash equivalents at end of period ..................................... $ 60,514 $ 10,455 ============ ============ Supplemental disclosure of cash flow information: Cash received (paid) during the period for: Interest ................................................................ $ (567) $ (1,193) Income taxes ............................................................ $ 1,850 $ -- </TABLE> On January 5, 2001, the Company issued 810,070 shares of its common stock valued at $26.8125 per share and paid approximately $11.5 million cash as consideration for Jones Drilling Corporation and certain assets of three other entities affiliated with Jones Drilling Corporation. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7
8 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, (collectively referred to herein as "Patterson" or 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 unaudited condensed consolidated balance sheet as of December 31, 2000, as presented herein, was derived from the audited balance sheet, but does not include all disclosures required by generally accepted accounting principles. The Company provides a dual presentation of its earnings per share; Basic Earnings per Share ("Basic EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS is based on the weighted average number of shares outstanding during the periods presented. Diluted EPS includes common stock equivalents, which are dilutive to earnings per share. For the three months ended March 31, 2001, the dilutive securities, consisting of certain stock options and warrants, were approximately 1.2 million, compared to dilutive securities of approximately 1.4 million for the three months ended March 31, 2000. The results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the 2000 consolidated financial statements in order for them to conform with the 2001 presentation. Our independent accountants have performed a review of these interim financial statements in accordance with standards established by the American Institute of Certified Public Accountants. Pursuant to Rule 436(c) of the Securities and Exchange Commission Act of 1933, their report of that review should not be considered as part of any registration prepared or certified by them within the meaning of Sections 7 and 11 of that Act. 2. RECENT ACQUISITION AND PENDING MERGER On January 5, 2001, the Company consummated the transactions contemplated by a merger agreement among Patterson Energy, Inc., Patterson Drilling Company LP, LLLP ("Patterson Drilling") and Jones Drilling Corporation and asset purchase agreements between Patterson Drilling and Henderson Welding, Inc., L.E.J. Truck and Crane, Inc., and L.E. Jones Drilling Company. The acquired assets consisted of 21 drilling rigs (of which 14 were marketable when acquired) and related equipment and approximately $2.3 million of net working capital. The net purchase price of $33.2 million consisted of 810,070 shares of Patterson's common stock valued at $26.8125 per share and $11.5 million cash including approximately $240,000 in transaction costs. The pro forma results of combining the consolidated results of operations as if Jones Drilling Corporation and its related entities had been acquired on January 1, 2000, are considered immaterial and have no effect on earnings per share On February 5, 2001, the Company announced that its Board of Directors along with the Board of Directors of UTI Energy Corp. (UTI), approved a merger of the two companies, with Patterson as the surviving entity. According to the terms of the merger agreement, shareholders of UTI will receive one share of Patterson common stock for each share of UTI common stock and Patterson will assume UTI's outstanding options and warrants. The 8
9 PATTERSON ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 2. RECENT ACQUISITION AND PENDING MERGER (CONTINUED) Board of Directors of the combined company will consist of eleven directors, six to be selected by Patterson and five to be selected by UTI. Although the merger agreement does not specify who will be the officers of the combined company, management of the Company understands that Mark S. Siegel, UTI's Chairman of the Board, would be the Chairman of the Board and Cloyce A. Talbott, Patterson's Chairman of the Board and Chief Executive Officer, would be Chief Executive Officer. Patterson's and UTI's special meeting of shareholders to approve the merger proposal will be held on May 8, 2001. A Joint Proxy Statement/Prospectus was mailed to shareholders on or about March 16, 2001. 3. STOCKHOLDERS' EQUITY On January 5, 2001, the Company issued 810,070 shares of its common stock as partial consideration for the acquisition of Jones Drilling Corporation and its related entities (see Note 2). The common stock was recorded at $26.8125 per share, its fair market value on the date of the announcement of the transaction. 4. BUSINESS SEGMENTS The Company conducts its business through three distinct operating activities: contract drilling of oil and natural gas wells, oil and natural gas exploration, development, acquisition and production and providing drilling and completion fluids services to operators in the oil and natural gas industry. Separate financial data for each of the Company's three business segments is provided below. <TABLE> <CAPTION> MARCH 31, MARCH 31, 2001 2000 ------------ ------------ <S> <C> <C> Revenues: (IN 000's) Drilling ..................................... $ 104,803 $ 51,157 Drilling and completion fluids ............... 19,670 4,365 Oil and natural gas .......................... 5,463 3,044 ------------ ------------ Total operating revenues ......................... $ 129,936 $ 58,566 ============ ============ Income (loss) from operations: Drilling ..................................... $ 29,906 $ 2,011 Drilling and completion fluids ............... 854 (310) Oil and natural gas .......................... 1,964 750 ------------ ------------ 32,724 2,451 Net gain on sale of assets ....................... 13 43 Interest income .................................. 796 113 Interest expense ................................. (567) (1,193) ------------ ------------ Income before income taxes ....................... $ 32,966 $ 1,414 ============ ============ </TABLE> 9
10 PATTERSON ENERGY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 5. RECENTLY ISSUED ACCOUNTING STANDARD The Company adopted Statement of Financial Accounting Standards No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivatives or instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company was not required to record any transitional adjustment upon the adoption of SFAS No. 133. 10
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, we had working capital of approximately $108.4 million including cash and cash equivalents of $60.5 million as compared to working capital of $109.2 million including cash and cash equivalents of $59.4 million at December 31, 2000. For the three months ended March 31, 2001, our various sources and uses of cash flow were: Sources: o $38.3 million derived from operations primarily attributable to the following factors: <-- Net income of $20.5 million, <-- Increase in average dayrates from $8,912 per day in the fourth quarter of 2000 to $9,903 per day in the first quarter of 2001, <-- Increase in average cash margin from $3,131 per day in the fourth quarter of 2000 to $3,905 per day in the first quarter of 2001, <-- Improved utilization rates as indicated in "Results of Operations" on page 12, and <-- Increase in marketable drilling rigs from 124 at December 31, 2000 to 141 at March 31, 2001, primarily due to the addition of 21 drilling rigs (of which 14 were marketable when acquired) in January of 2001 with the purchase of Jones Drilling Corporation. o $1.2 million from the exercise of stock options, and o $78,000 from the sale of certain property and equipment. Uses: o $11.5 million as partial consideration in the acquisition of Jones Drilling Corporation and its related entities, o $1.2 million in payments on our credit facility with Transamerica Equipment Financial Services, o $2.8 million of expenses related to the merger with UTI Energy Corp., and o $23.1 million for capital maintenance expenditures for the betterment and refurbishment of both the marketable and non-marketable drilling rigs, as well as the acquisition and procurement of drilling equipment, to fund leasehold acquisition, exploration and development of oil and natural gas properties and to fund capital expenditures for our drilling and completion fluids segment. On January 5, 2001, we consummated the transactions contemplated by a merger agreement among Patterson Energy, Inc., Patterson Drilling Company LP, LLLP ("Patterson Drilling") and Jones Drilling Corporation and asset purchase agreements between Patterson Drilling and Henderson Welding, Inc., L.E.J. Truck and Crane, Inc., and L.E. Jones Drilling Company. The acquired assets consisted of 21 drilling rigs (of which 14 were marketable when acquired) and related equipment. In addition to the $11.5 million paid in cash, we issued 810,070 shares of our common stock valued at $26.8125 per share, for a total purchase price of $33.2 million. We believe that the current level of cash and cash equivalents, together with cash generated from operations should be sufficient to meet our immediate capital needs. From time to time, acquisition opportunities are reviewed relating to our business. The timing, size or success of any acquisition and the associated capital commitments are unpredictable. Should further opportunities for growth requiring capital arise, we believe we 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. 11
12 RESULTS OF OPERATIONS The following tables summarize the operations of the three months ended March 31, 2001 and 2000: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------------- CONTRACT DRILLING 2001 2000 % CHANGE - ----------------- ---------- ---------- ---------- (DOLLARS IN 000'S) <S> <C> <C> <C> Revenues ...................................................... $ 104,803 $ 51,157 104.9% Drilling cost ................................................. 63,478 41,835 51.7% General and administrative expense ............................ 2,141 1,032 107.5% Depreciation and amortization ................................. 9,101 6,279 44.9% Operating income .............................................. 29,906 2,011 1,387.1% Rig utilization rate .......................................... 84% 65% 29.2% Average # of marketable rigs .................................. 140 114 22.8% Operating days ................................................ 10,582 6,777 56.1% Average revenue per operating day ............................. $ 9.90 $ 7.55 31.1% Average drilling cost per operating day ....................... 6.00 6.17 (2.8)% </TABLE> The significant increases shown are reflective of increased productivity in the contract drilling industry as evidenced by: o increase in utilization and in number of operating days, o addition of an average 26 marketable drilling rigs from the first quarter of 2000 to that of 2001, and o increases in oil and natural gas prices. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, -------------------------- DRILLING AND COMPLETION FLUIDS 2001 2000 % CHANGE ---------- ---------- ---------- (DOLLARS IN 000'S) <S> <C> <C> <C> Revenues ................................. $ 19,670 $ 4,365 350.6% Drilling and completion fluids cost ...... 16,365 3,547 361.4% General and administrative expense ....... 1,884 822 129.2% Depreciation and amortization ............ 586 285 105.6% Operating income (loss) .................. 854 (310) 375.5% </TABLE> The increases noted were primarily attributable to the addition of the fluids division of Ambar, Inc., during October 2000. Also contributing are improvements in the industry's economic conditions which are related to increases in oil and natural gas prices as stated below. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, -------------------------- OIL AND NATURAL GAS 2001 2000 % CHANGE ---------- ---------- ---------- (DOLLARS IN 000'S, EXCEPT PRICE DATA) <S> <C> <C> <C> Revenues ......................................... $ 5,463 $ 3,044 79.5% Exploration cost, dry holes and abandonments ..... 212 168 26.2% General and administrative expense ............... 821 342 140.1% Depletion and depreciation ....................... 1,654 1,153 43.5% Operating income ................................. 1,964 750 161.9% Volume of oil and natural gas sold (BOE) ......... 131,112 106,948 22.6% Average price per Bbl of crude oil ............... $ 29.39 $ 28.47 3.2% Average price per Mcf of natural gas ............. $ 7.65 $ 2.62 192.0% </TABLE> The increases in the oil and natural gas segment's operating results are primarily attributable to the increased commodity prices and production. 12
13 VOLATILITY OF OIL AND NATURAL GAS PRICES AND ITS IMPACT ON OPERATIONS Our revenue, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and natural gas, with respect to our contract drilling, oil and natural gas and drilling and completion fluids segments. Historically, oil and natural gas prices and markets have been 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 our control. Any significant or extended decline in oil and/or natural gas prices would have a material adverse effect on our financial condition and results of operations. Low level commodity prices beginning in the fourth quarter of 1997 and continuing into mid-1999 adversely impacted our operations. Although there has been significant improvement in oil and natural gas prices since mid-1999, we expect oil and natural gas prices to continue to be volatile and therefore to affect our financial condition and operations and our ability to access capital sources. IMPACT OF INFLATION We believe that inflation will not have a significant impact on our financial position or operations. RECENTLY ISSUED ACCOUNTING STANDARD We adopted Statement of Financial Accounting Standards No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivatives or instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. We were not required to record any transitional adjustment upon the adoption of SFAS No. 133. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to market risk associated with the floating rate portion of the interest charged on the $23.2 million outstanding under our credit facility with Transamerica Equipment Financial Services Corporation. The credit facility, which matures on January 1, 2006, bears interest at LIBOR plus 3.10 % to 3.51%. Our exposure to interest rate risk due to changes in LIBOR is not expected to be material. At March 31, 2001, the fair value of the obligation approximates its related carrying value because the obligation bears interest at the current market rate. 13
14 --------------- 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; 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," "estimates" or "budgeted" and similar expressions identify forward-looking statements. The forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. We do not undertake to update, revise or correct any of the forward-looking information. Factors that could cause actual results to differ materially from our expectations expressed in the forward-looking statements include, but are not limited to, the following: intense competition in the contract drilling industry; low oil prices and/or natural gas prices; adverse market conditions for contract drilling services; drill-pipe shortages; labor shortages, primarily qualified drilling rig personnel; insurance coverage limitations and requirements; inability to acquire additional drilling rigs on terms favorable to us and the loss of key personnel, particularly Cloyce A. Talbott and A. Glenn Patterson, our Chairman and Chief Executive Officer and our President and Chief Operating Officer, respectively. For a more complete explanation of these various factors and others, see "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" included in our Annual Report on Form 10-K for the year ended December 31, 2000, beginning on page 20. --------------- 14
15 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.(2) 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.(3) 2.3 Stock Purchase Agreement, dated January 5, 1998, among Patterson Energy, Inc., Spencer D. Armour, III and Richard G. Price.(16) 2.4 Stock Purchase Agreement, dated September 17, 1998, among Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas Drilling Fluids, Inc.).(4) 2.5 Asset Purchase Agreement dated as of September 30, 2000 between Ambar Drilling Fluids LP, LLLP and Ambar, Inc.(5) 2.6 Agreement and Plan of Merger dated as of January 5, 2001 among Patterson Energy, Inc., Patterson Drilling Company LP, LLP and Jones Drilling Corporation.(6) 2.7 Asset Purchase Agreement, dated as of January 5, 2001 among Patterson Energy, Inc., Patterson Drilling Company LP, LLP and L.E. Jones Drilling Company.(6) 2.8 Agreement and Plan of Merger, dated February 4, 2001, by and between UTI Energy Corp. and Patterson Energy, Inc. Disclosure schedules for each of the parties to the merger agreement setting forth exceptions of other information relating to their respective representations and warrants in the agreement have not been filed with this exhibit. They will, however, be made available supplementally by the SEC upon request.(7) 3.1 Restated Certificate of Incorporation.(8) 3.1.1 Certificate of Amendment to the Certificate of Incorporation.(9) 3.2 Bylaws.(1) 3.3 Rights Agreement dated January 2, 1997, between Patterson Energy, Inc. and Continental Stock Transfer & Trust Company.(16) 4.1 Excerpt from Restated Certificate of Incorporation of Patterson Energy, Inc. regarding authorized Common Stock and Preferred Stock.(10) 10.1 Loan and Security Agreement dated December 21, 1999 among Patterson Drilling Company and Transamerica Equipment Financial Services Corporation.(18) 10.1.1 Promissory Note dated December 21, 1999 between Patterson Drilling Company and Transamerica Equipment Financial Services Corporation.(18) 10.1.2 Corporate guarantees of Lone Star Mud, Inc. and Patterson Energy, Inc.(18) 15
16 10.2 Aircraft Lease, dated December 20, 2000, (effective January 1, 2001) between Talbott Aviation, Inc. and Patterson Energy, Inc.(19) 10.3 Participation Agreement, dated October 19, 1994, between Patterson Petroleum Trading Company, Inc. and BHT Marketing, Inc.(11) 10.3.1 Participation Agreement dated October 24, 1995, between Patterson Petroleum Trading Company, Inc. and BHT Marketing, Inc.(12) 10.4 Crude Oil Purchase Contract, dated October 19, 1994, between Patterson Petroleum, Inc. and BHT Marketing, Inc.(11) 10.4.1 Crude Oil Purchase Contract, dated October 24, 1995, between Patterson Petroleum, Inc. and BHT Marketing, Inc.(12) 10.5 Patterson Energy, Inc. 1993 Stock Incentive Plan, as amended.(13) 10.6 Patterson Energy, Inc. Non-Employee Directors' Stock Option Plan, as amended.(14) 10.7 Model Form Operating Agreement.(15) 10.8 Form of Drilling Bid Proposal and Footage Drilling Contract.(15) 10.9 Form of Turnkey Drilling Agreement.(15) 15.1 Awareness Letter of Independent Accountants - PricewaterhouseCoopers LLP 21.1 Subsidiaries of the registrant.(19) ---------- 16
17 (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 by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated April 22, 1996 and filed on April 30, 1996. (3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated May 16, 1996 and filed on May 22, 1996. (4) Incorporated herein by reference to Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K", to Form 10-K dated December 31, 1998. (5) Incorporated by reference to Item 7, "Financial Statements and Exhibits", to Form 8-K dated October 3, 2000 and filed on November 6, 2000. (6) Incorporated by reference to Item 16, "Exhibits" to Registration Statement on Form S-3 filed with the Securities Exchange Commission on January 8, 2001. (7) Incorporated herein by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated February 4, 2001 and filed February 16, 2001. (8) 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, 1996; filed August 12, 1996. (9) 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. (10) Incorporated herein by reference to Item 16, "Exhibits" to Registration Statement on Form S-3 filed with the Securities Exchange Commission on December 18, 1996. (11) Incorporated herein by reference to Item 27, "Exhibits" to Post Effective Amendment No. 1 to Registration Statement on Form SB-2 (File No. 33-68058-FW); filed on June 21, 1995. (12) Incorporated by reference to Item 13, "Exhibits and Reports on Form 8-K" to Form 10-KSB for the year ended December 31, 1995. (13) Incorporated herein by reference to Item 8, "Exhibits" to Registration Statement on Form S-8 (File No. 333-47917); filed March 13, 1998. (14) Incorporated herein by reference to Item 8, "Exhibits" to Registration Statement on Form S-8 (File No. 33-39471); filed November 4, 1997. (15) Incorporated by reference to Item 27, "Exhibits" to Registration Statement on Form SB-2 (File No. 33-68058-FW); filed on August 30, 1993. (16) Incorporated by reference to Item 2, "Exhibits" to Registration Statement on Form 8-A filed on January 14, 1997. (17) Incorporated herein by reference to Item 16, "Exhibits" to Registration Statement on Form S-3 filed January 5, 1998. (18) Incorporated by reference to Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 1999. 17
18 (19) Incorporated herein by reference to Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 2000. (b) REPORTS ON FORM 8-K. The following reports on Form 8-k were filed: (1) Report dated March 27, 2001 announcing the Company's clearance of the waiting period of Hart-Scott-Rodino Antitrust Improvements Act of 1976, related to its merger with UTI Energy Corp., filed March 27, 2001. (2) Report dated February 4, 2001 announcing the Company's Agreement and Plan of Merger with UTI Energy, Inc. filed February 16, 2001. (3) Report dated February 5, 2001 announcing the approval of the Company's Agreement and Plan of Merger with UTI Energy, Inc. by the Boards of Directors of both companies filed February 6, 2001. 18
19 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/ Jonathan D. Nelson ----------------------------------- Jonathan D. (Jody) Nelson Vice President-Finance Chief Financial Officer DATED: May 7, 2001 19
20 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------ ----------- <S> <C> 15.1 Awareness Letter of Independent Accountants, PricewaterhouseCoopers LLP </TABLE> 20