Patterson-UTI Energy owns and operates one of the largest fleets of land-based drilling rigs in the United States. The Company was formed in 1978 and reincorporated in 1993 as a Delaware corporation. Our contract drilling business operates primarily in Texas, New Mexico, Oklahoma, Arkansas, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, Pennsylvania, West Virginia and western Canada.
As of December 31, 2009, we had a drilling fleet that consisted of 341 marketable land-based drilling rigs. A drilling rig includes the structure, power source and machinery necessary to cause a drill bit to penetrate the earth to a depth desired by the customer. A drilling rig is considered marketable at a point in time if it is operating or can be made ready to operate without significant capital expenditures. We also have a substantial inventory of drill pipe and drilling rig components.
We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. These services consist primarily of well stimulation and cementing for completion of new wells and remedial work on existing wells. We also own and invest in oil and natural gas assets as a working interest owner. Our oil and natural gas interests are located primarily in Texas and New Mexico.
Prior to January 20, 2010, we provided drilling fluids, completion fluids and related services to oil and natural gas operators offshore in the Gulf of Mexico and on land in Texas, New Mexico, Oklahoma and Louisiana. We exited the drilling and completion fluids services business on January 20, 2010 and sold substantially all of the assets, other than billed accounts receivable, of that business.
Our revenues, operating profits and identifiable assets have been primarily attributable to four industry segments:
contract drilling services, pressure pumping services, oil and natural gas exploration and production, and drilling and completion fluids services.
On January 20, 2010, we exited the drilling and completion fluids services business and ceased operations in that segment. As a result of the sale of this business, the historical results of operations for this segment have been reclassified and are presented as discontinued operations in this Report.
All of our industry segments had operating profits in 2007. In 2008, except for our drilling and completion fluids services segment, all of our industry segments had operating profits. In 2009, our pressure pumping services and oil and natural gas exploration and production segments had operating profits and our contract drilling services segment had an operating loss.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 of Notes to Consolidated Financial Statements included as a part of Items 7 and 8, respectively, of this Report for financial information pertaining to these industry segments.
Contract Drilling Operations
General — We market our contract drilling services to major and independent oil and natural gas operators. As of December 31, 2009, we had 341 marketable land-based drilling rigs based in the following regions: 73 in west Texas and southeastern New Mexico, 100 in north central and east Texas, northern Louisiana and Mississippi, 56 in the Rocky Mountain region (Colorado, Utah, Wyoming, Montana and North Dakota), 49 in south Texas and southern Louisiana.
Our marketable drilling rigs have rated maximum depth capabilities ranging from 5,000 feet to 30,000 feet. Of these drilling rigs, 107 are electric rigs and 234 are mechanical rigs. An electric rig differs from a mechanical rig in that the electric rig converts the diesel power (the sole energy source for a mechanical rig) into electricity to power the rig. We also have a substantial inventory of drill pipe and drilling rig components, which may be used in the activation of additional drilling rigs or as replacement parts for marketable rigs.
Drilling rigs are typically equipped with engines, drawworks, masts, pumps to circulate the drilling fluid, blowout preventers, drill pipe and other related equipment. Over time, components on a drilling rig are replaced or rebuilt. We spend significant funds each year as part of a program to modify, upgrade and maintain our drilling rigs to ensure that our drilling equipment is competitive. We have spent $1.3 billion during the last three years on capital expenditures to (1) build new land drilling rigs and (2) modify, upgrade and maintain our drilling fleet. During fiscal years 2009, 2008 and 2007, we spent approximately $395 million, $361 million and $540 million, respectively, on these capital expenditures.
Depth and complexity of the well and drill site conditions are the principal factors in determining the specifications of the rig selected for a particular job.
Our contract drilling operations depend on the availability of drill pipe, drill bits, replacement parts and other related rig equipment, fuel and qualified personnel. Some of these have been in short supply from time to time.
Drilling Contracts — Most of our drilling contracts are with established customers on a competitive bid or negotiated basis. Our drilling contracts are either on a well-to-well basis or a term basis. Well-to-well contracts are generally short-term in nature and cover the drilling of a single well or a series of wells. Term contracts are entered into for a specified period of time (frequently one to three years) and provide for the use of the drilling rig to drill multiple wells. During 2009, our average number of days to drill a well (which includes moving to the drill site, rigging up and rigging down) was approximately 20 days.
Our drilling contracts obligate us to provide and operate a drilling rig and to pay certain operating expenses, including wages of drilling personnel and necessary maintenance expenses. Most drilling contracts are subject to termination by the customer on short notice and may or may not contain provisions for the payment of an early termination fee to us in the event that the contract is terminated by the customer. Generally, we indemnify our customers against claims by our employees and claims that might arise from surface pollution caused by spills of fuel, lubricants and other solvents within our control. Generally, the customers indemnify us against claims that might arise from other surface and subsurface pollution. Each drilling contract contains the actual terms setting forth our rights and obligations and those of the customer, any of which rights and obligations may deviate from what is customary due to industry conditions or other factors.
Our drilling contracts provide for payment on a daywork, footage, or turnkey basis, or a combination thereof. In each case, we provide the rig and crews. Except for two wells drilled under footage contracts in 2009, all of the wells drilled during the years ended December 31, 2009, 2008 and 2007 were drilled under daywork contracts. Our bid for each job depends upon location, depth and anticipated complexity of the well, on-site drilling conditions, equipment to be used, estimated risks involved, estimated duration of the job, availability of drilling rigs and other factors particular to each proposed well.
Under daywork contracts, we provide the drilling rig and crew to the customer. The customer supervises the drilling of the well. Our compensation is based on a contracted rate per day during the period the drilling rig is utilized. We often receive a lower rate when the drilling rig is moving or when drilling operations are interrupted or restricted by adverse weather conditions or other conditions beyond our control. Daywork contracts typically provide separately for mobilization of the drilling rig. Except for two wells drilled under footage contracts in 2009, all of the wells we drilled in 2009, 2008 and 2007 were under daywork contracts.
Under footage contracts, we contract to drill a well to a certain depth under specified conditions for a fixed price per foot. The customer provides drilling fluids, casing, cementing and well design expertise. These contracts require us to bear the cost of services and supplies that we provide until the well has been drilled to the agreed depth. If we drill the well in less time than estimated, we have the opportunity to improve our profits over those that would be attainable under a daywork contract. Profits are reduced and losses may be incurred if the well requires more days to drill to the contracted depth than estimated. Footage contracts generally contain greater risks for a drilling contractor than daywork contracts. Under footage contracts, the drilling contractor typically assumes certain risks associated with loss of the well from fire, blowouts and other risks. We drilled two wells under footage contracts in 2009, and we did not drill any wells under footage contracts in 2008 or 2007.
Under turnkey contracts, we contract to drill a well to a certain depth under specified conditions for a fixed fee. In a turnkey arrangement, we are required to bear the costs of services, supplies and equipment beyond those typically provided under a footage contract. In addition to the drilling rig and crew, we are required to provide the drilling and completion fluids, casing, cementing, and the technical well design and engineering services during the drilling process. We also typically assume certain risks associated with drilling the well such as fires, blowouts, cratering of the well bore and other such risks. Compensation occurs only when the agreed scope of the work has been completed, which requires us to make larger up-front working capital commitments prior to receiving payments under a turnkey drilling contract. Under a turnkey contract, we have the opportunity to improve our profits if the drilling process goes as expected and there are no complications or time delays. Given the increased exposure we have under a turnkey contract, however, profits can be significantly reduced and losses can be incurred if complications or delays occur during the drilling process. Turnkey contracts generally involve the highest degree of risk among the three different types of drilling contracts. Although we have entered into turnkey contracts in the past, we did not enter into any turnkey contracts in the past three years.
At December 31, 2009, we owned and operated 323 trucks and 417 trailers used to rig down, transport and rig up our drilling rigs. Our ownership of trucks and trailers reduces our dependency upon third parties for these services and generally enhances the efficiency of our contract drilling operations, particularly in periods of high drilling rig utilization.
Most repair and overhaul work to our drilling rig equipment is performed at our yard facilities located in Texas, Oklahoma, Wyoming, Utah, Pennsylvania and western Canada.
Pressure Pumping Operations
General — We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. Pressure pumping services are primarily well stimulation and cementing for the completion of new wells and remedial work on existing wells. Most wells drilled in the Appalachian Basin require some form of fracturing or other stimulation to enhance the flow of oil and natural gas by pumping fluids under pressure into the well bore. Appalachian Basin wells typically require cementing services. The cementing process inserts material between the wall of the well bore and the casing to center and stabilize the casing.
Equipment — Our pressure pumping equipment at December 31, 2009 includes equipment used in providing hydraulic and nitrogen fracturing services as well as cementing services as follows:
the development, exploration, acquisition and production of oil and natural gas. Effective November 1, 2007, we sold the related operations portion of our exploration and production business, which was the portion of our business that actively managed the development, exploration, acquisition and production of oil and natural gas. We continue to own and invest in oil and natural gas assets as a working interest owner. Our oil and natural gas interests are located primarily in producing regions of Texas and New Mexico.
Drilling and Completion Fluids Operations
Prior to exiting the business in January 2010, we provided drilling fluids, completion fluids and related services to oil and natural gas operators offshore in the Gulf of Mexico and on land in Texas, New Mexico, Oklahoma and Louisiana.
The customers of each of our oil and natural gas service business segments are oil and natural gas operators. Our customer base includes both major and independent oil and natural gas operators. During 2009, no single customer accounted for 10% or more of our consolidated operating revenues.