UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): April 20, 2017

 

 

PATTERSON-UTI ENERGY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   0-22664   75-2504748

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

10713 West Sam Houston Pkwy N.,

Suite 800

Houston, Texas

  77064
(Address of principal executive offices)   (Zip Code)

(281) 765-7100

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

Introductory Note

On April 20, 2017, Seventy Seven Energy Inc., a Delaware corporation (“ SSE ”), became a wholly-owned subsidiary of Patterson-UTI Energy, Inc., a Delaware corporation (“ Patterson-UTI ”), as a result of the merger of Pyramid Merger Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Patterson-UTI (“ Merger Sub ”), with and into SSE (the “ Merger ”). The Merger was effected pursuant to an Agreement and Plan of Merger, dated as of December 12, 2016, by and among Patterson-UTI, SSE, and Merger Sub (the “ Merger Agreement ”).

 

Item 1.02 Termination of a Material Definitive Agreement

On April 20, 2017, concurrently with, and in connection with, the Merger, (i) Nomac Drilling, L.L.C., Performance Technologies, L.L.C. and Great Plains Oilfield Rental, L.L.C. (each a wholly-owned subsidiary of Patterson-UTI as a result of the Merger) repaid all outstanding amounts under, and terminated their revolving credit facility evidenced by, that certain Amended and Restated Credit Agreement, dated as of August 1, 2016 (as amended, the “ SSE Credit Facility ”), by and among the borrowers and guarantors party thereto, Wells Fargo Bank, N.A., as administrative agent, and the lenders from time to time party thereto and (ii) Seventy Seven Operating LLC (a wholly-owned subsidiary of Patterson-UTI as a result of the Merger) repaid all outstanding amounts under, and terminated, its seven-year term loan (the “ Term Loan ”) and incremental term loan (the “ Incremental Term Loan ”) evidenced by that certain Term Loan Credit Agreement, dated as of June 25, 2014, by and among Seventy Seven Operating LLC, as borrower, SSE, and the other guarantors from time to time party thereto, Wilmington Trust, National Association as successor administrative agent, and the lenders party thereto, which was supplemented by that certain Incremental Term Supplement (Tranche A), dated as of May 13, 2015. At the closing of the Merger, outstanding letters of credit under the SSE Credit Facility were deemed to be incurred under the Patterson-UTI Credit Facility (as defined below). No early termination or prepayment penalties were incurred as a result of the termination of the SSE Credit Facility, the Term Loan or the Incremental Term Loan or the repayment of outstanding amounts thereunder. In connection with the termination of the SSE Credit Facility, Term Loan and Incremental Term Loan, all guaranties and liens securing the obligations thereunder were released.

 

Item 2.01. Completion of Acquisition or Disposition of Assets.

On April 20, 2017, pursuant to the Merger Agreement, Patterson-UTI completed its Merger with SSE, which was accomplished through the merger of Merger Sub with and into SSE, with SSE surviving the Merger as a wholly-owned subsidiary of Patterson-UTI.

At the effective time of the Merger (the “ Effective Time ”) each issued and outstanding share of SSE common stock, par value $0.01 per share, other than shares owned by SSE and its wholly owned subsidiaries, shares owned by Patterson-UTI or Merger Sub and shares for which appraisal rights held by SSE stockholders have been perfected in compliance with Section 262 of the General Corporation Law of the State of Delaware, was converted into the right to receive 1.7851 shares (the “ Exchange Ratio ”) of newly issued Patterson-UTI common stock, par value $0.01 per share, rounded down to the nearest whole share. Instead of issuing fractional shares, each SSE stockholder who otherwise would have been entitled to receive a fraction of a share of Patterson-UTI common stock will receive cash (without interest) in lieu thereof, upon surrender of his or her shares of SSE common stock. The exchange agent will aggregate and sell all fractional shares issuable as part of the merger consideration at the prevailing price on the Nasdaq Global Select Market. An SSE stockholder who would otherwise have received a fraction of a share of Patterson-UTI common stock will receive an amount of cash generated from such sales attributable to the stockholder’s proportionate interest in the net proceeds of such sales, less expenses and without interest. The newly issued shares of Patterson-UTI common stock and the cash paid in lieu of fractional shares are collectively referred to as the “ Merger Consideration .”

Shares of Patterson-UTI common stock outstanding before the Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the Merger. Based on the number of shares of SSE common stock issued and outstanding or deemed outstanding immediately prior to the Effective Time, a total of 47,538,488 shares of Patterson-UTI common stock were issued to the former holders of SSE common stock pursuant to the Merger Agreement.

 

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Immediately prior to the Effective Time, each SSE restricted stock unit award granted prior to December 12, 2016 that was outstanding as of immediately prior to the Effective Time (the “ Incentive Awards ”) immediately vested, any forfeiture restrictions applicable to such Incentive Awards immediately lapsed, the Incentive Awards were deemed settled, and each share of SSE common stock subject to such Incentive Awards was treated as a share of SSE common stock. At the Effective Time, each such share of SSE common stock that was distributed in settlement of the Incentive Awards entitled the holder thereof to receive the Merger Consideration. In addition, at the Effective Time, each SSE restricted stock unit award granted on or following December 12, 2016 was assumed by Patterson-UTI and converted into a restricted stock unit award, with the same terms and conditions as in effect immediately prior to the Effective Time, covering a number of shares of Patterson-UTI common stock equal to (i) the number of shares of SSE common stock subject to the award immediately prior to the Effective Time, multiplied by (ii) the Exchange Ratio, rounded to the nearest whole share. None of SSE’s directors or executive officers held SSE restricted stock unit awards granted on or following December 12, 2016.

The foregoing description of the Merger Agreement and the Merger is only a summary, does not purport to be complete, and is subject to, and qualified in its entirety by reference to, the Merger Agreement, which was filed as Exhibit 2.1 to Patterson-UTI’s Current Report on Form 8-K filed with the Securities Exchange Commission (the “ SEC ”) on December 13, 2016 and is incorporated herein by reference.

 

Item 5.07. Submission of Matters to a Vote of Security Holders.

On April 20, 2017, Patterson-UTI held a special meeting of stockholders (the “ Special Meeting ”). The proposals are described in detail in Patterson-UTI’s and SSE’s definitive joint proxy statement filed with the SEC on March 22, 2017. The final results regarding each proposal are set forth below.

 

  1. The proposal to approve the issuance of shares of Patterson-UTI common stock to SSE stockholders in connection with the Merger contemplated by the Merger Agreement:

 

For

 

Against

 

Abstain

 

Broker Non-Votes

148,485,755   112,325   590,925   —

 

  2. The proposal to approve the adjournment of the Patterson-UTI Special Meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies in the event there are not sufficient votes at the time of the Special Meeting to approve the first proposal listed above:

 

For

 

Against

 

Abstain

 

Broker Non-Votes

140,749,676   7,875,904   563,425   —

Each proposal was approved by Patterson-UTI’s stockholders at the Special Meeting. Stockholders owning a total of 149,189,005 shares voted at the Special Meeting, representing approximately 89.7% of the shares of Patterson-UTI’s common stock outstanding as of the record date for the Special Meeting.

 

Item 8.01. Other Events.

On April 20, 2017, Patterson-UTI issued a press release announcing the Merger. A copy of such press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

In order to correct an inadvertent omission, the Consent of Independent Registered Public Accounting Firm, which is Exhibit 23.1 to the Annual Report on Form 10-K of Patterson-UTI for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on February 13, 2017, has been amended to include a reference to Patterson-UTI’s Registration Statement on Form S-3 (File No. 333-215678). The amended consent is attached to this Current Report on Form 8-K as Exhibit 23.1.

Amendment to Credit Facility

On April 20, 2017, Patterson-UTI entered into Amendment No. 4 to Credit Agreement (the “ Amendment ”), which amends the Credit Agreement, dated as of September 27, 2012, as amended, among Patterson-UTI, Wells Fargo Bank, N.A., as administrative agent (in such capacity, the “ Revolving Agent ”), the issuer of letters of credit and swing line lender and each other lender party thereto governing Patterson-UTI’s revolving credit facility (the

 

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“ Patterson-UTI Credit Facility ”). The Amendment, among other things, (i) permits outstanding letters of credit under the SSE Credit Facility to be deemed to be incurred under the Patterson-UTI Credit Facility and (ii) increases the amount of the accordion feature of the Patterson-UTI Credit Facility to permit aggregate commitments under the Patterson-UTI Credit Facility to be increased up to $700.0 million (subject to the satisfaction of certain conditions and the procurement of additional commitments from new or existing lenders).

Credit Facility Commitment Increase

On April 20, 2017, the commitment increase contemplated by that certain Commitment Increase Agreement, dated as of January 24, 2017 (the “ January Increase Agreement ”), by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, the Revolving Agent and the other lenders party thereto (a copy of which is filed as Exhibit 10.1 to the Current Report on Form 8-K filed by Patterson-UTI on January 24, 2017 and is incorporated herein by reference) became effective. In addition, on April 20, 2017, Patterson-UTI entered into a commitment increase agreement with certain of its lenders pursuant to which the total commitments available under the Patterson-UTI Credit Facility (after giving effect to the January Increase Agreement) increased to $630 million through September 2017 and to $490 million through March 2019. The terms of the Patterson-UTI Credit Facility allow Patterson to further increase total commitments to an amount not to exceed $700 million, subject to the satisfaction of certain conditions precedent, including procurement of additional commitments from new or existing lenders.

On April 20, 2017, in connection with the Merger, SSE and its material subsidiaries became guarantors under the Patterson-UTI Credit Facility and Patterson-UTI’s Series A note purchase agreement, Series B note purchase agreement and reimbursement agreement.

The foregoing is qualified in its entirety by reference to (i) Amendment No. 4 to Credit Agreement, dated as of April 20, 2017, by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, the Revolving Agent and the other lenders party thereto, a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated herein by reference and (ii) the Commitment Increase Agreement, dated as of April 20, 2017, by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, the Revolving Agent and the other lenders party thereto, a copy of which is filed as Exhibit 10.2 to this Current Report on Form 8-K and is incorporated herein by reference.

 

Item 9.01 Financial Statements and Exhibits.

(a)     Financial Statements of Business Acquired

The audited consolidated financial statements of SSE (Successor) as of December 31, 2016 and for the five months ended December 31, 2016 and the audited consolidated financial statements of SSE (Predecessor) as of December 31, 2015 and for the seven months ended July 31, 2016 and for each of the two years in the period ended December 31, 2015, and the related notes to the consolidated financial statements, are attached hereto as Exhibit 99.2.

(b)     Pro Forma Financial Information

The unaudited pro forma condensed combined financial information of Patterson-UTI as of and for the year ended December 31, 2016, together with the notes thereto, are attached hereto as Exhibit 99.3.

 

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(d)     Exhibits

 

Exhibit
No.

  

Description

10.1    Amendment No. 4 to Credit Agreement, dated as of April 20, 2017, by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, Wells Fargo Bank, N.A., as administrative agent, issuer of letter of credit and swing line lender and the other lenders party thereto.
10.2    Commitment Increase Agreement, dated as of April 20, 2017, by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, Wells Fargo Bank, N.A., as administrative agent, issuer of letter of credit and swing line lender and the other lenders party thereto.
23.1    Consent of PricewaterhouseCoopers LLP.
23.2    Consent of PricewaterhouseCoopers LLP.
99.1    Press Release issued by Patterson-UTI Energy, Inc. dated April 20, 2017.
99.2    The audited consolidated financial statements of SSE (Successor) as of December 31, 2016 and for the five months ended December 31, 2016 and the audited consolidated financial statements of SSE (Predecessor) as of December 31, 2015 and for the seven months ended July 31, 2016 and for each of the two years in the period ended December 31, 2015, and the related notes to the consolidated financial statements.
99.3    The unaudited pro forma condensed combined financial information of Patterson-UTI as of and for the year ended December 31, 2016, together with the notes thereto.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: April 21, 2017

 

PATTERSON-UTI ENERGY, INC.
By:  

/s/ John E. Vollmer III

Name:   John E. Vollmer III
Title:   Senior Vice President - Corporate Development, CFO and Treasurer

 

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EXHIBIT INDEX

 

Exhibit
No.

  

Description

10.1    Amendment No. 4 to Credit Agreement, dated as of April 20, 2017, by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, Wells Fargo Bank, N.A., as administrative agent, issuer of letter of credit and swing line lender and the other lenders party thereto.
10.2    Commitment Increase Agreement, dated as of April 20, 2017, by and among Patterson-UTI, certain subsidiaries of Patterson-UTI party thereto, Wells Fargo Bank, N.A., as administrative agent, issuer of letter of credit and swing line lender and the other lenders party thereto.
23.1    Consent of PricewaterhouseCoopers LLP.
23.2    Consent of PricewaterhouseCoopers LLP.
99.1    Press Release issued by Patterson-UTI Energy, Inc. dated April 20, 2017.
99.2    The audited consolidated financial statements of SSE (Successor) as of December 31, 2016 and for the five months ended December 31, 2016 and the audited consolidated financial statements of SSE (Predecessor) as of December 31, 2015 and for the seven months ended July 31, 2016 and for each of the two years in the period ended December 31, 2015, and the related notes to the consolidated financial statements.
99.3    The unaudited pro forma condensed combined financial information of Patterson-UTI as of and for the year ended December 31, 2016, together with the notes thereto.

 

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Exhibit 10.1

Execution Version

AMENDMENT NO. 4 TO CREDIT AGREEMENT

This AMENDMENT NO. 4 TO CREDIT AGREEMENT (“ Agreement ”) dated as of April 20, 2017 (“ Effective Date ”) is by and among Patterson-UTI Energy, Inc., a Delaware corporation (“ Borrower ”), the subsidiaries of the Borrower party hereto (together with the Borrower, the “ Loan Parties ”), the Lenders party hereto (as defined below), and Wells Fargo Bank, N.A., as administrative agent (in such capacity, the “ Administrative Agent ”) for the Lenders, as the issuer of letters of credit under the Credit Agreement referred to below (in such capacity, an “ L/C Issuer ”), and as the swing line lender under the Credit Agreement referred to below (in such capacity, the “ Swing Line Lender ”).

RECITALS

A.     Reference is hereby made to that certain Credit Agreement dated as of September 27, 2012 among the Borrower, the Administrative Agent, each L/C Issuer, the Swing Line Lender and the financial institutions party thereto from time to time, as lenders (the “ Lenders ”), as amended, supplemented or otherwise modified by that certain Amendment No. 1 to Credit Agreement dated as of January 9, 2015, Amendment No. 2 to Credit Agreement dated as of July 8, 2016, Amendment No. 3 to Credit Agreement dated as of January 17, 2017, Commitment Increase Agreement dated as of January 24, 2017 and Commitment Increase Agreement dated as of and after giving effect to the Effective Date (the “ April Commitment Increase Agreement ”), each among the Borrower, subsidiaries of the Borrower party thereto, the Administrative Agent, each L/C Issuer, the Swing Line Lender and the financial institutions party thereto (as so amended, the “ Credit Agreement ”).

B.     The Borrower has requested that the Lenders and L/C Issuer make certain amendments to the Credit Agreement, subject to the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the premises and the mutual covenants, representations and warranties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1.     Defined Terms; Interpretation and Provisions . As used in this Agreement, each of the terms defined in the opening paragraph and the Recitals above shall have the meanings assigned to such terms therein. Each term defined in the Credit Agreement, as amended hereby, and used herein without definition shall have the meaning assigned to such term in the Credit Agreement, as amended hereby, unless expressly provided to the contrary. Article, Section, Schedule, and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. The words “hereof”, “herein”, and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term “including” means “including, without limitation”. Paragraph headings have been inserted in this Agreement as a matter of convenience for reference only and it is agreed that such paragraph headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement.

Section 2.     Amendments to Credit Agreement .

(a)    Section 1.01 of the Credit Agreement is hereby amended by adding the following definitions in the appropriate alphabetical order:

“ Amendment No.  4 Effective Date ” means April 20, 2017.

“ Existing Seventy Seven Letters of Credit ” means those certain letters of credit outstanding on the Amendment No. 4 Effective Date and issued by Wells Fargo or Bank of America, N.A. under that certain Amended and Restated Credit Agreement among Seventy Seven Energy Inc., certain of its subsidiaries and affiliates, the lenders party thereto, Wells Fargo as administrative agent, joint lead arranger, joint lead book runner and co-documentation agent, and Bank of America, N.A. as joint lead arranger, joint lead book runner and co-documentation agent dated as of August 1, 2016, as it may have been amended and including those that are listed on Schedule 1.01(b) .

(b)    Section 1.01 of the Credit Agreement is hereby amended by restating the definition of “Letter of Credit” with the following:

“ Letter of Credit ” means any letter of credit issued or deemed issued hereunder and shall include the Existing Letters of Credit and the Existing Seventy Seven Letters of Credit. A Letter of Credit may be a standby letter of credit or a commercial letter of credit .

(c)    Section 2.03(a)(i) is hereby amended by adding the following sentence to the end thereof as follows:

All Existing Seventy Seven Letters of Credit shall be deemed to have been issued pursuant hereto, and from and after the Amendment No. 4 Effective Date shall be “Letters of Credit” hereunder and shall be subject to and governed by the terms and conditions hereof .

(d)    Section 2.03(b)(ii) is hereby amended by replacing the last sentence therein with the following:

Immediately upon the issuance of each Letter of Credit (including, for the avoidance of doubt, the deemed issuance of any Existing Letter of Credit and any Existing Seventy Seven Letter of Credit), each Revolving Credit Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from such L/C Issuer a risk participation in such Letter of Credit in an amount equal to the product of such Revolving Credit Lender’s Applicable Revolving Credit Percentage times the amount of such Letter of Credit.

(e)    Section 2.14(a) of the Credit Agreement is hereby amended by replacing the reference to “$600,000,000” therein with “$700,000,000”.

(f)     Schedule 1.01(b) attached hereto is hereby added to the Credit Agreement as Schedule 1.01(b) thereto.

Section 3.     Loan Parties’ Representations and Warranties . The Borrower acknowledges, represents, warrants and agrees as to itself and all other Loan Parties, and each other Loan Party acknowledges, represents, warrants and agrees as to itself, that: (a) after giving effect to this Agreement, the representations and warranties contained in the Credit Agreement, as amended hereby, and the representations and warranties contained in the other Loan Documents are true and correct in all material respects on and as of the Effective Date and on the date hereof as if made on as and as of such date except to the extent that any such representation or warranty expressly relates solely to an earlier date, in which case such representation or warranty is true and correct in all material respects as of such earlier date;

 

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(b) the execution, delivery and performance of this Agreement are within the limited liability company or corporate power and authority of such Loan Party and have been duly authorized by appropriate limited liability company and corporate action and proceedings; (c) this Agreement constitutes the legal, valid, and binding obligation of such Loan Party enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity, and no portion of the Obligations are subject to avoidance, subordination, recharacterization, recovery, attack, offset, counterclaim, or defense of any kind; (d) there are no governmental or other third party consents, licenses and approvals required to be made or obtained by it in connection with its execution, delivery, performance, validity and enforceability of this Agreement; (e) no Defaults or Events of Default shall have occurred and be continuing; and (f) since the date of the financial statements most recently delivered pursuant to Section 6.01(a) of the Credit Agreement, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.

Section 4.     Conditions to Effectiveness . This Agreement shall become effective on the Effective Date and enforceable against the parties hereto upon the occurrence of the following conditions precedent:

(a)    the receipt by the Administrative Agent of multiple original counterparts of this Agreement executed and delivered by duly authorized officers of the Borrower, the Guarantors, the Administrative Agent, and the Required Lenders;

(b)    evidence satisfactory to the Administrative Agent of the payment in full by the Borrower of all the fees and expenses required to be paid as of or on the Effective Date by Section 10.04 of the Credit Agreement or any other provision of a Loan Document to the extent invoiced prior to the Effective Date; and

(c)    (i) the Commitment Increase Date under, and as defined in, that certain Commitment Increase Agreement dated as of January 24, 2017 among the Borrower, the increasing Lenders therein, and Wells Fargo as Administrative Agent, L/C Issuer and Swing Line Lender and (ii) the Commitment Increase Date under the April Commitment Increase Agreement, shall each have occurred or shall have occurred substantially concurrently with the effectiveness of this Agreement.

Section 5.     Acknowledgments and Agreements .

(a)    Each Loan Party acknowledges that on the date hereof all outstanding Obligations are payable in accordance with their terms and each Loan Party waives any defense, offset, counterclaim or recoupment with respect thereto. The Administrative Agent, each L/C Issuer, the Swing Line Lender and the Lenders hereby expressly reserve all of their rights, remedies, and claims under the Loan Documents. Nothing in this Agreement shall constitute a waiver or relinquishment of (i) any Default or Event of Default under any of the Loan Documents, (ii) any of the agreements, terms or conditions contained in any of the Loan Documents, (iii) any rights or remedies of the Administrative Agent, each L/C Issuer, the Collateral Agent or any Lender with respect to the Loan Documents, or (iv) the rights of the Administrative Agent, each L/C Issuer, the Swing Line Lender or any Lender to collect the full amounts owing to them under the Loan Documents.

(b)    The Borrower, each Guarantor, Administrative Agent, each L/C Issuer, Swing Line Lender and each Lender does hereby adopt, ratify, and confirm the Credit Agreement, as amended hereby, and acknowledges and agrees that the Credit Agreement, as amended hereby, is and remains in full force and effect, and the Borrower and the Guarantors acknowledge and agree that their respective liabilities and obligations under the Credit Agreement, as amended hereby, and the Guaranty, are not impaired in any respect by this Agreement.

 

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(c)    From and after the Effective Date, all references to the Credit Agreement and the Loan Documents shall mean the Credit Agreement and such Loan Documents as amended by this Agreement.

(d)    This Agreement is a Loan Document for the purposes of the provisions of the other Loan Documents.

Section 6.     Reaffirmation of the Guaranty . Each Guarantor party hereto hereby ratifies, confirms, acknowledges and agrees that its obligations under the Guaranty are in full force and effect and that such Guarantor continues to unconditionally and irrevocably guarantee the full and punctual payment, when due, whether at stated maturity or earlier by acceleration or otherwise, all of the Guaranteed Obligations (as defined in the Guaranty), and its execution and delivery of this Agreement does not indicate or establish an approval or consent requirement by such Guarantor under the Guaranty, in connection with the execution and delivery of amendments, consents or waivers to the Credit Agreement or any of the other Loan Documents.

Section 7.     Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original and all of which, taken together, constitute a single instrument. This Agreement may be executed by facsimile signature or other electronic imaging means, and all such signatures shall be effective as originals.

Section 8.     Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted pursuant to the Credit Agreement.

Section 9.     Severability . In case one or more provisions of this Agreement or the other Loan Documents shall be invalid, illegal or unenforceable in any respect under any applicable Legal Requirement, the validity, legality, and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby.

Section 10.     Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York; provided that, the Administrative Agent, each L/C Issuer, the Swing Line Lender and each Lender shall retain all rights arising under applicable federal law.

Section 11.     ENTIRE AGREEMENT . THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

[Signature pages follow.]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized effective as of the Effective Date.

 

BORROWER:

PATTERSON-UTI ENERGY, INC.

By:

 

/s/ John E. Vollmer III

 

John E. Vollmer III

  Senior Vice President—Corporate Development, Chief Financial Officer and Treasurer
GUARANTORS :
PATTERSON PETROLEUM LLC
PATTERSON-UTI DRILLING COMPANY LLC
PATTERSON-UTI MANAGEMENT SERVICES, LLC
UNIVERSAL WELL SERVICES, INC.
UNIVERSAL PRESSURE PUMPING, INC.
DRILLING TECHNOLOGIES 1 LLC
DRILLING TECHNOLOGIES 2 LLC
WARRIOR RIG TECHNOLOGIES US LLC
Each by:  

/s/ John E. Vollmer III

  John E. Vollmer III
  Senior Vice President—Corporate Development, Chief Financial Officer and Treasurer

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

ADMINISTRATIVE AGENT/LENDER/L/C ISSUER/SWING LINE LENDER/LENDERS:
WELLS FARGO BANK, N.A.,
as the Administrative Agent, an L/C Issuer, the Swing Line Lender and a Lender
By:  

/s/ Shannon Cunningham

Name:   Shannon Cunningham
Title:   Vice President

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., as a Lender
By:  

/s/ Stephen W. Warfel

Name:  

Stephen W. Warfel

Title:  

Managing Director

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

REGIONS BANK,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

COMERICA BANK,

as a Lender

By:  

/s/ S John Castellano

Name:  

S John Castellano

Title:  

SVP

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

U.S. BANK, NATIONAL ASSOCIATION,

as a Lender

By:  

/s/ Patrick Jeffrey

Name:   Patrick Jeffrey
Title:   Vice President

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

BANK OF AMERICA, N.A.,

as a Lender and an L/C Issuer

By:  

/s/ Tyler Ellis

Name:   Tyler Ellis
Title:   Director

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

HSBC BANK USA, N.A.,

as a Lender

By:  

/s/ Michael Bustios

Name:  

Michael Bustios

Title:  

Vice President, 20556

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

SUMITOMO MITSUI BANKING CORPORATION,

as a Lender

By:   /s/ Katsuyuki Kubo
Name:   Katsuyuki Kubo
Title:   Managing Director

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

THE BANK OF NOVA SCOTIA,

as a Lender

By:  

/s/ John Frazell

Name:  

John Frazell

Title:  

Director

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

ZB, N.A. dba AMEGY BANK,

as a Lender

By:  

/s/ Michael Threadgill

Name:  

Michael Threadgill

Title:  

Assistant Vice President

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

BOKF, NA dba BANK OF TEXAS,

as a Lender

By:  

/s/ Marian Livingston

Name:   Marian Livingston
Title:   SVP, Commercial Relationship Manager

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

MERCANTIL COMMERCEBANK N.A.,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

UMB BANK, N.A.,

as a Lender

By:  

/s/ J ESS M. A DAMS

Name:  

J ESS M. A DAMS

Title:  

V ICE P RESIDENT

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

BANK OF TAIWAN, LOS ANGELES BRANCH,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

CHANG HWA COMMERCIAL BANK LTD., LOS ANGELES BRANCH,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

E.SUN COMMERCIAL BANK, LTD.,

LOS ANGELES BRANCH,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

MEGA INTERNATIONAL COMMERCIAL BANK CO., LTD. NEW YORK BRANCH,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

MEGA INTERNATIONAL COMMERCIAL BANK, CO., LTD. SILICON VALLEY BRANCH,

as a Lender

By:  

 

Name:  

 

Title:  

 

Signature page to Amendment No. 4 to Credit Agreement

(Patterson-UTI Energy, Inc.)

SCHEDULE 1.01(B)

EXISTING SEVENTY SEVEN

LETTERS OF CREDIT

 

Issuer

 

Beneficiary

 

L/C Number

 

Expiry Date

 

Balance

Bank of America,

N.A.

 

CHIPPEWA

COUNTY DEPARTMENT

OF LAND

  3119159  

1/27/18

Evergreen

with annual

auto-renew

  $81,000

Wells Fargo Bank,

N.A.

 

STARR

INDEMNITY &

LIABILITY CO

  IS0205609U  

8/15/17

(annual auto-

renew)

  $10,933,003

Wells Fargo Bank,

N.A.

 

LIBERTY

MUTUAL

INSURANCE COMPANY

  IS0383283U  

2/11/18

Evergreen

with annual

auto-renew

  $4,500,000

Wells Fargo Bank,

N.A.

  WEX BANK   IS0428294U   5/31/17   $450,000

Wells Fargo Bank,

N.A.

 

CAPITOL

INDEMNITY

CORP AND/OR PLATTE RIVER INSURANCE COMPANY

  IS0442430U-A  

7/21/17

Evergreen

with annual

auto-renew

  $37,453

Schedule 1.01(b)

Exhibit 10.2

Execution Version

COMMITMENT INCREASE AGREEMENT

This COMMITMENT INCREASE AGREEMENT (“ Agreement ”) dated as of April 20, 2017 (“ Effective Date ”), is by and among Patterson-UTI Energy, Inc., a Delaware corporation (“ Borrower ”), the subsidiaries of the Borrower party hereto (together with the Borrower, the “ Loan Parties ”), the undersigned Lenders party hereto (the “ Increasing Lenders ”), and Wells Fargo Bank, N.A., as administrative agent (in such capacity, the “ Administrative Agent ”) for the Lenders, as the issuer of letters of credit under the Credit Agreement referred to below (in such capacity, an “ L/C Issuer ”), and as the swing line lender under the Credit Agreement referred to below (in such capacity, the “ Swing Line Lender ”).

RECITALS

A.     Reference is hereby made to that certain Credit Agreement dated as of September 27, 2012 among the Borrower, the Administrative Agent, each L/C Issuer, the Swing Line Lender and the financial institutions party thereto from time to time, as lenders (the “ Lenders ”), as amended, supplemented or otherwise modified by that certain Amendment No. 1 to Credit Agreement dated as of January 9, 2015, Amendment No. 2 to Credit Agreement dated as of July 8, 2016, Amendment No. 3 to Credit Agreement dated as of January 17, 2017, Amendment No. 4 to Credit Agreement dated as of April 20, 2017 and the Commitment Increase Agreement dated as of January 24, 2017 (the “ January 2017 Increase Agreement ”), each among the Borrower, subsidiaries of the Borrower party thereto, the Administrative Agent, each L/C Issuer, the Swing Line Lender and the financial institutions party thereto (as so amended, the “ Credit Agreement ”).

B.     The Borrower has requested that certain Lenders increase their respective Revolving Credit Commitments pursuant to Section 2.14 of the Credit Agreement, subject to the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the premises and the mutual covenants, representations and warranties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1.     Defined Terms; Interpretation and Provisions . As used in this Agreement, each of the terms defined in the opening paragraph and the Recitals above shall have the meanings assigned to such terms therein. Each term defined in the Credit Agreement, as amended hereby, and used herein without definition shall have the meaning assigned to such term in the Credit Agreement, as amended hereby, unless expressly provided to the contrary. Article, Section, Schedule, and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. The words “hereof”, “herein”, and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term “including” means “including, without limitation”. Paragraph headings have been inserted in this Agreement as a matter of convenience for reference only and it is agreed that such paragraph headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement.

Section 2.     Increase in Revolving Credit Commitments .

(a)    Pursuant to Section 2.14 of the Credit Agreement, each Increasing Lender hereby agrees and acknowledges that its respective Revolving Credit Commitment shall, automatically and without any further action, upon satisfaction of the conditions precedent set forth in Section 2(b) , be increased on the Commitment Increase Date (as defined below), and on the Commitment Increase Date,

after giving effect to this Section 2(a) , its Revolving Credit Commitment shall be the amount set forth next to its respective name under the caption “Revolving Credit Commitment” on Schedule 2.01 attached hereto. Additionally, on the Commitment Increase Date, after giving effect to each of this Section 2(a) and the January 2017 Increase Agreement, Schedule 2.01 of the Credit Agreement (Commitments and Applicable Percentages) shall be replaced in its entirety with Schedule  2.01 attached hereto. The parties hereto agree and acknowledge that the increase in Revolving Credit Commitments effected hereby are in addition to, and not in lieu of, the increase in Revolving Credit Commitments effected under the January 2017 Increase Agreement.

(b)    The increase to the Revolving Credit Commitments of the Increasing Lenders pursuant to Section 2(a) shall become effective and enforceable against the parties hereto upon the occurrence of the following conditions precedent (the date such conditions are satisfied, “ Commitment Increase Date ”):

(1)    the receipt by the Administrative Agent of a new Revolving Credit Note executed by a duly authorized officer of the Borrower payable to each Increasing Lender and reflecting such Increasing Lender’s revised Revolving Credit Commitment as set forth on Schedule 2.01 attached hereto;

(2)    evidence satisfactory to the Administrative Agent that the Borrower has effected an issuance of common Equity Interests after January 24, 2017 but on or prior to May 31, 2017 and that the Borrower has received gross equity issuance proceeds of not less than $300,000,000 from such issuance (the “ Equity Raise ”);

(3)    evidence satisfactory to the Administrative Agent that (A) the merger of a wholly-owned subsidiary of Borrower with and into Seventy Seven Energy Inc. (“ Seventy Seven ”), with Seventy Seven continuing as the surviving entity and a wholly-owned subsidiary of Borrower, pursuant to that certain Agreement and Plan of Merger, dated December 12, 2016, by and among Borrower, Pyramid Merger Sub, Inc. and Seventy Seven (the “ Seventy Seven Merge r”), has been consummated, (b) the credit facility evidenced by that certain Amended and Restated Credit Agreement among Seventy Seven, certain of its subsidiaries and affiliates, the lenders party thereto, Wells Fargo Bank, National Association as administrative agent, joint lead arranger, joint lead book runner and co-documentation agent, and Bank of America, N.A. as joint lead arranger, joint lead book runner and co-documentation agent dated as of August 1, 2016, as it may have been amended (the “ Seventy Seven Facility ”) and all obligations to extend credit thereunder have been terminated and all obligations of the obligors (other than (i) obligations with respect to letters of credit so long as such obligations have been cash collateralized in a manner and subject to documentation satisfactory to the issuers of such letters of credit or such letters of credit have been deemed or otherwise constitute Letters of Credit issued under the Credit Agreement pursuant to documentation satisfactory to the issuers of such letters of credit and the Administrative Agent and (ii) contingent indemnification obligations and other contingent obligations not then due) with respect thereto have been paid in full, and (c) arrangements have been made for the release of the liens and security interests granted under the Seventy Seven Facility;

(4)    the receipt by the Administrative Agent of a certificate of each Loan Party dated as of the Commitment Increase Date signed by a Responsible Officer of such Loan Party (i) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to this Agreement and the increase in the Revolving Credit Facility pursuant to Section 2(a) above, and (ii) in the case of the Borrower, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article V of the Credit Agreement and the other Loan Documents are true and correct on and as of the Commitment Increase Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct

 

2

as of such earlier date, and except that for purposes of Section 2.14 of the Credit Agreement, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 of the Credit Agreement, and (B) no Default exists; provided, that if one certificate that meets the requirements of this Section 2(b)(4) and Section 2(b)(4) of the January 2017 Increase Agreement is delivered to the Administrative Agent, such certificate shall satisfy the requirements of this Section 2(b)(4);

(5)    the receipt by the Administrative Agent of a certificate dated as of the Commitment Increase Date, signed by a Responsible Officer of the Borrower certifying that (A) the Equity Raise has occurred and noting the date such Equity Raise occurred (which date must be no earlier than January 24, 2017 and no later than May 31, 2017) and certifying that the Borrower has received at least $300,000,000 of gross equity issuance proceeds therefrom, (B) the Seventy Seven Merger has been consummated and (C) the Seventy Seven Facility and all obligations to extend credit thereunder have been terminated and all obligations of the obligors (other than (i) obligations with respect to letters of credit so long as such obligations have been cash collateralized in a manner and subject to documentation satisfactory to the issuers of such letters of credit or such letters of credit have been deemed or otherwise constitute Letters of Credit issued under the Credit Agreement pursuant to documentation satisfactory to the issuers of such letters of credit and the Administrative Agent and (ii) contingent indemnification obligations and other contingent obligations not then due) with respect thereto have been paid in full; provided, that if one certificate that meets the requirements of this Section 2(b)(5) and Section 2(b)(5) of the January 2017 Increase Agreement is delivered to the Administrative Agent, such certificate shall satisfy the requirements of this Section 2(b)(5);

(6)    the receipt by the Administrative Agent of an opinion of counsel to the Borrower as to the corporate (or partnership or limited liability company) authorization of the Borrower and the Guarantors of the increase in the Revolving Credit Facility, which such opinion as to corporate authorization will be substantively in the form delivered on the Closing Date and otherwise in form and substance reasonably acceptable to the Administrative Agent; provided, that if one opinion of counsel that meets the requirements of this Section 2(b)(6) and Section 2(b)(6) of the January 2017 Increase Agreement is delivered to the Administrative Agent, such opinion shall satisfy the requirements of this Section 2(b)(6); and

(7)    evidence satisfactory to the Administrative Agent of the payment in full by the Borrower of the upfront fees required to be paid under Section 5(b) below.

Notwithstanding anything herein to the contrary, if all of the conditions set forth in this Section  2(b) are not satisfied by 5:00 p.m. (Houston, Texas time) on May 31, 2017, then Section 2(b) and the increase in the Aggregate Revolving Credit Commitments contemplated thereby shall be null and void and of no force and effect.

Section 3.     Loan Parties’ Representations and Warranties . The Borrower acknowledges, represents, warrants and agrees as to itself and all other Loan Parties, and each other Loan Party acknowledges, represents, warrants and agrees as to itself, that: (a) after giving effect to this Agreement, the representations and warranties contained in the Credit Agreement, as amended hereby, and the representations and warranties contained in the other Loan Documents are true and correct in all material respects on and as of the Effective Date and on the date hereof as if made on as and as of such date except to the extent that any such representation or warranty expressly relates solely to an earlier date, in which case such representation or warranty is true and correct in all material respects as of such earlier date; (b) the execution, delivery and performance of this Agreement are within the limited liability company or corporate power and authority of such Loan Party and have been duly authorized by appropriate limited

 

3

liability company and corporate action and proceedings; (c) this Agreement constitutes the legal, valid, and binding obligation of such Loan Party enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity, and no portion of the Obligations are subject to avoidance, subordination, recharacterization, recovery, attack, offset, counterclaim, or defense of any kind; (d) there are no governmental or other third party consents, licenses and approvals required to be made or obtained by it in connection with its execution, delivery, performance, validity and enforceability of this Agreement; (e) no Defaults or Events of Default shall have occurred and be continuing; and (f) since the date of the financial statements most recently delivered pursuant to Section 6.01(a) of the Credit Agreement, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.

Section 4.     Conditions to Effectiveness . This Agreement shall become effective on the Effective Date and enforceable against the parties hereto upon the occurrence of the following conditions precedent:

(a)    the receipt by the Administrative Agent of multiple original counterparts of this Agreement executed and delivered by duly authorized officers of the Borrower, the Guarantors, the Administrative Agent, and the Increasing Lenders; and

(b)    evidence satisfactory to the Administrative Agent of the payment in full by the Borrower of all the fees and expenses required to be paid as of or on the Effective Date by Section 10.04 of the Credit Agreement or any other provision of a Loan Document to the extent invoiced prior to the Effective Date.

Section 5.     Acknowledgments and Agreements .

(a)    Each Loan Party acknowledges that on the date hereof all outstanding Obligations are payable in accordance with their terms and each Loan Party waives any defense, offset, counterclaim or recoupment with respect thereto. The Administrative Agent, each L/C Issuer, the Swing Line Lender and the Increasing Lenders hereby expressly reserve all of their rights, remedies, and claims under the Loan Documents. Nothing in this Agreement shall constitute a waiver or relinquishment of (i) any Default or Event of Default under any of the Loan Documents, (ii) any of the agreements, terms or conditions contained in any of the Loan Documents, (iii) any rights or remedies of the Administrative Agent, each L/C Issuer, or any Lender with respect to the Loan Documents, or (iv) the rights of the Administrative Agent, each L/C Issuer, the Swing Line Lender or any Lender to collect the full amounts owing to them under the Loan Documents.

(b)    In consideration of the agreements of the Increasing Lenders, the Borrower agrees to pay to the Administrative Agent, for the account of each Increasing Lender, upfront fees in an amount equal to 0.50% of the positive difference between (a) such Increasing Lender’s Revolving Credit Commitment immediately after giving effect to Section 2(a) and the increase in Revolving Credit Commitments contemplated therein and (b) such Increasing Lender’s Revolving Credit Commitment after giving effect to the January 2017 Increase Agreement and the increase in Revolving Credit Commitments contemplated therein and immediately prior to giving effect to Section 2(a) and the increase in Revolving Credit Commitments contemplated therein; provided , that such upfront fees shall only be due and payable on the Commitment Increase Date.

(c)    The Borrower, each Guarantor, Administrative Agent, each L/C Issuer, Swing Line Lender and each Increasing Lender does hereby adopt, ratify, and confirm the Credit Agreement, as amended hereby, and acknowledges and agrees that the Credit Agreement, as amended hereby, is and

 

4

remains in full force and effect, and the Borrower and the Guarantors acknowledge and agree that their respective liabilities and obligations under the Credit Agreement, as amended hereby, and the Guaranty, are not impaired in any respect by this Agreement.

(d)    From and after the Effective Date, all references to the Credit Agreement and the Loan Documents shall mean the Credit Agreement and such Loan Documents as amended by this Agreement.

(e)    This Agreement is a Loan Document for the purposes of the provisions of the other Loan Documents.

(f)    Effective as of the Commitment Increase Date, the Borrower hereby names The Bank of Nova Scotia as a Joint Lead Arranger and Co-Syndication Agent with respect to the facility evidenced by the Credit Agreement. Notwithstanding foregoing and notwithstanding anything herein or in the Credit Agreement to the contrary, The Bank of Nova Scotia as Joint Lead Arranger and Co-Syndication Agent shall not have any powers, duties or responsibilities under this Agreement, the Credit Agreement or any of the other Loan Documents, except in its capacity as a Lender.

Section 6.     Reaffirmation of the Guaranty . Each Guarantor party hereto hereby ratifies, confirms, acknowledges and agrees that its obligations under the Guaranty are in full force and effect and that such Guarantor continues to unconditionally and irrevocably guarantee the full and punctual payment, when due, whether at stated maturity or earlier by acceleration or otherwise, all of the Guaranteed Obligations (as defined in the Guaranty), and its execution and delivery of this Agreement does not indicate or establish an approval or consent requirement by such Guarantor under the Guaranty, in connection with the execution and delivery of amendments, consents or waivers to the Credit Agreement or any of the other Loan Documents.

Section 7.     Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original and all of which, taken together, constitute a single instrument. This Agreement may be executed by facsimile signature or other electronic imaging means, and all such signatures shall be effective as originals.

Section 8.     Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted pursuant to the Credit Agreement.

Section 9.     Severability . In case one or more provisions of this Agreement or the other Loan Documents shall be invalid, illegal or unenforceable in any respect under any applicable Legal Requirement, the validity, legality, and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby.

Section 10.     Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York; provided that, the Administrative Agent, each L/C Issuer, the Swing Line Lender and each Lender shall retain all rights arising under applicable federal law.

Section 11.     ENTIRE AGREEMENT . THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

5

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

[Signature pages follow.]

 

6

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized effective as of the Effective Date.

 

BORROWER:

PATTERSON-UTI ENERGY, INC.

By:

 

/s/ John E. Vollmer III

 

John E. Vollmer III

  Senior Vice President—Corporate Development, Chief Financial Officer and Treasurer
GUARANTORS :
PATTERSON PETROLEUM LLC
PATTERSON-UTI DRILLING COMPANY LLC
PATTERSON-UTI MANAGEMENT SERVICES, LLC
UNIVERSAL WELL SERVICES, INC.
UNIVERSAL PRESSURE PUMPING, INC.
DRILLING TECHNOLOGIES 1 LLC
DRILLING TECHNOLOGIES 2 LLC
WARRIOR RIG TECHNOLOGIES US LLC

Each by:

 

/s/ John E. Vollmer III

 

John E. Vollmer III

  Senior Vice President—Corporate Development, Chief Financial Officer and Treasurer

Signature page to Commitment Increase Agreement

(Patterson-UTI Energy, Inc.)

ADMINISTRATIVE AGENT/LENDER/L/C ISSUER/SWING LINE LENDER/LENDERS:
WELLS FARGO BANK, N.A.,
as the Administrative Agent, an L/C Issuer, and the Swing Line Lender
By:  

/s/ Robert Corder

Name:   Robert Corder
Title:   Director

Signature page to Commitment Increase Agreement

(Patterson-UTI Energy, Inc.)

U.S. BANK NATIONAL ASSOCIATION,

as an Increasing Lender

By:  

/s/ Patrick Jeffrey

Name:   Patrick Jeffrey
Title:   Vice President

Signature page to Commitment Increase Agreement

(Patterson-UTI Energy, Inc.)

BOKF, NA DBA BANK OF TEXAS,

as an Increasing Lender

By:  

/s/ Marian Livingston

Name:   Marian Livingston
Title:   SVP, Commercial Relationship Manager

Signature page to Commitment Increase Agreement

(Patterson-UTI Energy, Inc.)

SCHEDULE 2.01

COMMITMENTS

AND APPLICABLE PERCENTAGES

 

Lender

   Revolving Credit
Commitment 		   Initial Applicable
Percentage (Revolving
Credit Facility) 		  Extending Lender
Wells Fargo Bank, National Association    $100,000,000.00    15.815485997%   YES
Bank of America, N.A.    $75,000,000.00    11.861614497%   YES
The Bank of Nova Scotia    $65,000,000.00    10.280065898%   YES
The Bank of Tokyo-Mitsubishi UFJ, Ltd.    $64,583,333.33    10.214168039%   YES
Regions Bank    $64,583,333.33    10.214168039%   NO
U.S. Bank National Association    $50,000,000.00    7.907742998%   YES
Comerica Bank    $36,041,666.67    5.700164745%   YES
BOKF, NA dba Bank of Texas    $35,000,000.00    5.535420099%   YES
HSBC Bank USA, N.A.    $29,166,666.67    4.612850083%   YES
Sumitomo Mitsui Banking Corporation    $29,166,666.67    4.612850083%   NO
ZB, N.A. dba Amegy Bank    $22,916,666.67    3.624382208%   YES
Mercantil Commercebank N.A.    $12,500,000.00    1.976935750%   NO
UMB Bank, N.A.    $12,500,000.00    1.976935750%   YES
Bank of Taiwan, Los Angeles Branch    $8,333,333.33    1.317957166%   NO
Chang Hwa Commercial Bank Ltd., Los Angeles Branch    $8,333,333.33    1.317957166%   NO
E.Sun Commercial Bank, Ltd., Los Angeles Branch    $8,333,333.33    1.317957166%   NO
Mega International Commercial Bank Co., Ltd. New York Branch    $6,666,666.67    1.054365734%   NO
Mega International Commercial Bank Co., Ltd. Silicon Valley Branch    $4,166,666.67    0.658978584%   NO
Total    $632,291,666.67    100%   77.53%

Schedule 2.01

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-215678) and Form S-8 (Nos. 333-166434, 333-126016, 333-152705 and 333-195410) of Patterson-UTI Energy, Inc. of our report dated February 13, 2017 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

April 21, 2017

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-166434, 333-126016, 333-152705, 333-195410 and 333-217414) and Form S-3 (No. 333-215678) of Patterson-UTI Energy, Inc. of our reports dated February 13, 2017 relating to the financial statements of Seventy Seven Energy Inc., which appear in this Current Report on Form 8-K of Patterson-UTI Energy, Inc.

/s/ PricewaterhouseCoopers LLP

Oklahoma City, Oklahoma

April 21, 2017

Exhibit 99.1

 

  Contact:    Mike Drickamer
         Vice President, Investor Relations
         (281) 765-7170

Patterson-UTI Energy Completes Merger with Seventy Seven Energy

HOUSTON, Texas – April  20, 2017 – PATTERSON-UTI ENERGY, INC. (NASDAQ: PTEN) announced today that it has closed its merger with Seventy Seven Energy Inc. Stockholders of Seventy Seven Energy are entitled to receive 1.7851 shares of newly issued Patterson-UTI common stock in exchange for each share of Seventy Seven Energy. Patterson-UTI issued approximately 47.5 million shares pursuant to the merger.

Concurrent with the closing of the merger, Patterson-UTI repaid all of the outstanding debt of Seventy Seven Energy totaling $472 million ($403 million net of cash from Seventy Seven Energy). Additionally, Patterson-UTI has entered into an agreement with its lenders by which the available commitment under its revolving credit facility was increased to $632 million through September 2017, and to $490 million through March 2019.

Mark S. Siegel, Chairman of Patterson-UTI, stated, “I would like to welcome the employees, customers, and shareholders of Seventy Seven Energy to Patterson-UTI. We have always held the people and equipment at Seventy Seven Energy in high regard, and I am pleased for us to combine as one team. For Patterson-UTI, this is the most significant transaction since the merger of Patterson and UTI, and further solidifies our position as a leading high-spec drilling company and gives us one of the largest and most modern pressure pumping fleets in the industry.”

Andy Hendricks, Patterson-UTI’s Chief Executive Officer, commented, “This merger combines two highly complementary companies and further enhances our position as a leader in both drilling and pressure pumping. We are beginning the merger integration process, and I am pleased with the plan that we and Seventy Seven Energy have developed. While implementing this plan, our focus will continue to be on the safety and quality of our field operations.”

Jerry Winchester, former Chief Executive Officer of Seventy Seven Energy, added, “With this merger, we bring together two strategically aligned companies into a financially well-positioned leader in U.S. land. We are excited to align ourselves with a company that shares a similar commitment to safety and service quality.”

About Patterson-UTI

Patterson-UTI is an oilfield services company that primarily owns and operates in the United States one of the largest fleets of land-based drilling rigs and a large fleet of pressure pumping equipment. Our contract drilling business operates in the continental United States and western Canada, and our pressure pumping and oilfield rental tools businesses operate primarily in Texas and the Mid-Continent and Appalachian regions.

We also provide drilling rig pipe handling technology to drilling contractors in North America and other select markets. In addition, we own and invest as a non-operating working interest owner in oil and natural gas assets that are primarily located in Texas and New Mexico.

Location information about the Company’s drilling rigs and their individual inventories is available through the Company’s website at www.patenergy.com .

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements which are protected as forward-looking statements under the Private Securities Litigation Reform Act of 1995 that are not limited to historical facts, but reflect Patterson-UTI’s current beliefs, expectations or intentions regarding future events. Words such as “anticipate,” “believe,” “budgeted,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “potential,” “project,” “pursue,” “should,” “strategy,” “target,” or “will,” and similar expressions are intended to identify such forward-looking statements. The statements in this press release that are not historical statements, including statements regarding Patterson-UTI’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts, are forward-looking statements within the meaning of the federal securities laws. These statements are subject to numerous risks and uncertainties, many of which are beyond Patterson-UTI’s control, which could cause actual results to differ materially from the results expressed or implied by the statements. These risks and uncertainties include, but are not limited to: volatility in customer spending and in oil and natural gas prices, which could adversely affect demand for Patterson-UTI’s services and their associated effect on rates, utilization, margins and planned capital expenditures; global economic conditions; excess availability of land drilling rigs and pressure pumping equipment, including as a result of low commodity prices, reactivation or construction; liabilities from operations; weather; decline in, and ability to realize, backlog; equipment specialization and new technologies; shortages, delays in delivery and interruptions of supply of equipment and materials; ability to hire and retain personnel; loss of, or reduction in business with, key customers; difficulty with growth and in integrating acquisitions; governmental regulation; product liability; legal proceedings; political, economic and social instability risk; ability to effectively identify and enter new markets; cybersecurity risk; dependence on our subsidiaries to meet our long-term debt obligations; variable rate indebtedness risk; and anti-takeover measures in our charter documents.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in Patterson-UTI’s SEC filings. Patterson-UTI’s filings may be obtained by contacting Patterson-UTI or the SEC or through Patterson-UTI’s website at http://www.patenergy.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval System (EDGAR) at http://www.sec.gov. Patterson-UTI undertakes no obligation to publicly update or revise any forward-looking statement.

Exhibit 99.2

INDEX TO FINANCIAL STATEMENTS

SEVENTY SEVEN ENERGY INC.

 

     Page  

Consolidated Financial Statements:

  

Reports of Independent Registered Public Accounting Firm

     2  

Consolidated Balance Sheets at December 31, 2016 and 2015

     4  

Consolidated Statements of Operations for the Five Months Ended December 31, 2016 (Successor), Seven Months Ended July 31, 2016 (Predecessor), and Years Ended December 31, 2015 and 2014 (Predecessor)

     5  

Consolidated Statements of Changes in Equity for the Five Months Ended December 31, 2016 (Successor), Seven Months Ended July 31, 2016 (Predecessor), and Years Ended December 31, 2015 and 2014 (Predecessor)

     6  

Consolidated Statements of Cash Flows for the Five Months Ended December 31, 2016 (Successor), Seven Months Ended July 31, 2016 (Predecessor), and Years Ended December 31, 2015 and 2014 (Predecessor)

     7  

Notes to Consolidated Financial Statements

     9  

 

1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Seventy Seven Energy Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Seventy Seven Energy Inc. and its subsidiaries (Successor) as of December 31, 2016 and the results of their operations and their cash flows for the five months ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, the United States Bankruptcy Court for the district of Delaware confirmed the Company’s Joint Pre-packaged Plan of Reorganization (the “Plan”) on July 14, 2016. Confirmation of the Plan resulted in the discharge of certain debt of the Company and substantially altered rights and interests of debt and equity security holders as provided for in the Plan. The Plan was substantially consummated on August 1, 2016 and the Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh-start accounting as of August 1, 2016.

/s/ PricewaterhouseCoopers LLP

Oklahoma City, Oklahoma

February 13, 2017

 

2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Seventy Seven Energy Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Seventy Seven Energy Inc. and its subsidiaries (Predecessor) as of December 31, 2015 and the results of their operations and their cash flows for the seven months ended July 31, 2016, and for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, the Company filed a petition on June 7, 2016 with the United States Bankruptcy Court for the district of Delaware for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. The Company’s Joint Pre-packaged Plan of Reorganization was substantially consummated on August 1, 2016 and the Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh-start accounting.

/s/ PricewaterhouseCoopers LLP

Oklahoma City, Oklahoma

February 13, 2017

 

3

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Consolidated Balance Sheets

(in thousands, except share amounts)

 

    Successor           Predecessor  
    December 31,
2016 		          December 31,
2015 		 

Assets:

     

Current Assets:

     

Cash

  $ 48,654       $ 130,648  

Accounts receivable, net of allowance of $59 and $3,680 at December 31, 2016 and December 31, 2015, respectively

    99,530         164,721  

Inventory

    12,935         18,553  

Deferred income tax asset

    —           1,499  

Prepaid expenses and other

    14,414         17,141  
 

 

 

     

 

 

 

Total Current Assets

    175,533         332,562  
 

 

 

     

 

 

 

Property and Equipment:

     

Property and equipment, at cost

    813,291         2,646,446  

Less: accumulated depreciation

    (71,977 )        (1,116,026 ) 

Property and equipment held for sale, net

    8,226         —    
 

 

 

     

 

 

 

Total Property and Equipment, Net

    749,540         1,530,420  
 

 

 

     

 

 

 

Other Assets:

     

Deferred financing costs

    1,132         1,238  

Other long-term assets

    22,345         38,398  
 

 

 

     

 

 

 

Total Other Assets

    23,477         39,636  
 

 

 

     

 

 

 

Total Assets

  $ 948,550       $ 1,902,618  
 

 

 

     

 

 

 

Liabilities and Stockholders’ Equity:

     

Current Liabilities:

     

Accounts payable

  $ 15,590       $ 53,767  

Current portion of long-term debt

    5,000         5,000  

Other current liabilities

    49,776         98,318  
 

 

 

     

 

 

 

Total Current Liabilities

    70,366         157,085  
 

 

 

     

 

 

 

Long-Term Liabilities:

     

Deferred income tax liabilities

    —           60,623  

Long-term debt, less current maturities

    425,212         1,564,592  

Other long-term liabilities

    1,724         1,478  
 

 

 

     

 

 

 

Total Long-Term Liabilities

    426,936         1,626,693  
 

 

 

     

 

 

 

Commitments and Contingencies (Note 13)

     

Stockholders’ Equity:

     

Predecessor common stock, $0.01 par value: authorized 250,000,000 shares; issued and outstanding 59,397,831 shares at December 31, 2015

    —           594  

Predecessor paid-in capital

    —           350,770  

Successor preferred stock, $0.01 par value: authorized 10,000,000 shares; zero outstanding at December 31, 2016

    —           —    

Successor common stock, $0.01 par value: authorized 90,000,000 shares; issued and outstanding 22,353,536 shares at December 31, 2016

    224         —    

Successor paid-in capital

    514,583         —    

Accumulated deficit

    (63,559 )        (232,524 ) 
 

 

 

     

 

 

 

Total Stockholders’ Equity

    451,248         118,840  
 

 

 

     

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 948,550       $ 1,902,618  
 

 

 

     

 

 

 

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

 

4

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Consolidated Statements of Operations

(in thousands, except share amounts)

 

     Successor              
     Five Months
Ended
December 31,
2016 		          Predecessor  
             Seven Months
Ended
July 31, 2016 		    Years Ended December 31,  
           2015     2014  

Revenues:

          

Revenues

   $ 222,378       $ 333,919     $ 1,131,244     $ 2,080,892  

Operating Expenses:

          

Operating costs

     166,726         237,014       855,870       1,580,353  

Depreciation and amortization

     73,898         162,425       295,421       292,912  

General and administrative

     31,808         66,667       112,141       108,139  

Loss on sale of a business

     —           —         35,027       —    

(Gains) losses on sales of property and equipment, net

     (1,748 )        848       14,656       (6,272 ) 

Impairment of goodwill

     —           —         27,434       —    

Impairments and other

     —           6,116       18,632       30,764  
  

 

 

     

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     270,684         473,070       1,359,181       2,005,896  
  

 

 

     

 

 

   

 

 

   

 

 

 

Operating (Loss) Income

     (48,306 )        (139,151 )      (227,937 )      74,996  
  

 

 

     

 

 

   

 

 

   

 

 

 

Other (Expense) Income:

          

Interest expense

     (15,497 )        (48,116 )      (99,267 )      (79,734 ) 

Gains on early extinguishment of debt

     —           —         18,061       —    

Loss and impairment from equity investees

     —           —         (7,928 )      (6,094 ) 

Other income

     2,112         2,318       3,052       664  

Reorganization items, net (Note 5)

     (1,868 )        (29,892 )      —         —    
  

 

 

     

 

 

   

 

 

   

 

 

 

Total Other Expense

     (15,253 )        (75,690 )      (86,082 )      (85,164 ) 
  

 

 

     

 

 

   

 

 

   

 

 

 

Loss Before Income Taxes

     (63,559 )        (214,841 )      (314,019 )      (10,168 ) 

Income Tax Benefit

     —           (59,131 )      (92,628 )      (2,189 ) 
  

 

 

     

 

 

   

 

 

   

 

 

 

Net Loss

   $ (63,559 )      $ (155,710 )    $ (221,391 )    $ (7,979 ) 
  

 

 

     

 

 

   

 

 

   

 

 

 

Loss Per Common Share (Note 7)

          

Basic

   $ (2.86 )      $ (2.84 )    $ (4.42 )    $ (0.17 ) 

Diluted

   $ (2.86 )      $ (2.84 )    $ (4.42 )    $ (0.17 ) 

Weighted Average Common Shares Outstanding (Note 7)

          

Basic

     22,186         54,832       50,096       47,236  

Diluted

     22,186         54,832       50,096       47,236  

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

 

5

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Consolidated Statements of Changes in Equity

 

     Common
Stock 		    Common
Stock 		    Paid-in
Capital 		    Owner’s
Equity 		    Accumulated
Deficit 		    Total
Stockholders’/
Owner’s
Equity 		 
     (Shares)                 (in thousands)              

Balance at December 31, 2013 (Predecessor)

     —       $ —       $ —       $ 547,192     $ —       $ 547,192  

Net income (loss)

     —         —         —         3,154       (11,133 )      (7,979 ) 

Contributions from Chesapeake

     —         —         —         190,297       —         190,297  

Distributions to Chesapeake

     —         —         —         (482,001 )      —         (482,001 ) 

Reclassification of owner’s equity to paid-in capital

     —         —         258,642       (258,642 )      —         —    

Issuance of common stock at spin-off

     46,932       469       (469 )      —         —         —    

Share-based compensation

     4,227       43       43,471       —         —         43,514  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014 (Predecessor)

     51,159     $ 512     $ 301,644     $ —       $ (11,133 )    $ 291,023  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         (221,391 )      (221,391 )   

Share-based compensation

     8,239       82       49,126         —         49,208  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015 (Predecessor)

     59,398     $ 594     $ 350,770     $ —       $ (232,524 )    $ 118,840  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         —         (155,710 )      (155,710 ) 

Share-based compensation

     (1,930 )      (19 )      36,889       —         —         36,870  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 31, 2016 (Predecessor)

     57,468     $ 575     $ 387,659     $ —       $ (388,234 )    $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cancellation of Predecessor equity

     (57,468 )      (575 )      (387,659 )      —         388,234       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 1, 2016 (Predecessor)

     —       $ —       $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of Successor common stock and warrants

     22,000       220       510,010       —         —         510,230  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 1, 2016 (Successor)

     22,000     $ 220     $ 510,010     $ —       $ —       $ 510,230  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     —         —         —         —         (63,559 )      (63,559 ) 

Share-based compensation

     353       4       4,571       —         —         4,575  

Shares issued for warrants exercised

     1       —         2       —         —         2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016 (Successor)

     22,354     $ 224     $ 514,583     $ —       $ (63,559 )    $ 451,248  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Consolidated Statements of Cash Flows

(in thousands)

 

    Successor              
    Five Months
Ended
December 31,
2016 		          Predecessor  
            Seven Months
Ended
July 31, 2016 		    Years Ended December 31,  
                  2015                     2014          

Cash Flows from Operating Activities:

         

Net Loss

  $ (63,559 )      $ (155,710 )    $ (221,391 )    $ (7,979 ) 

Adjustments to Reconcile Net Loss to Cash Provided by Operating Activities:

         

Depreciation and amortization

    73,898         162,425       295,421       292,912  

Amortization of sale/leaseback gains

    —           —         —         (5,414 ) 

Accretion of discount on term loans

    5,192         —         —         —    

Accretion of discount on note receivable

    (694 )        —         —         —    

Amortization of deferred financing costs

    103         2,455       4,623       6,122  

Gains on early extinguishment of debt

    —           —         (18,061 )      —    

Loss on sale of a business

    —           —         35,027       —    

(Gains) losses on sales of property and equipment

    (1,748 )        848       14,656       (6,272 ) 

Impairment of goodwill

    —           —         27,434       —    

Impairments of long-lived assets

    —           6,116       18,632       21,063  

Loss and impairment from equity investees

    —           —         7,928       6,094  

Non-cash reorganization items, net

    —           9,185       —         —    

Provision for doubtful accounts

    16         1,406       1,375       2,887  

Non-cash compensation

    10,577         12,635       48,509       47,184  

Deferred income tax benefit

    —           (59,124 )      (92,686 )      (2,863 ) 

Other

    68         (10 )      (717 )      150  

Changes in operating assets and liabilities,

         

Accounts receivable

    (5,250 )        69,291       236,977       (81,001 ) 

Inventory

    487         5,131       7,099       (6,543 ) 

Accounts payable

    (5,828 )        (32,349 )      9,109       (11,954 ) 

Other current liabilities

    8,418         (17,872 )      (89,650 )      9,949  

Other

    210         2,042       (179 )      961  
 

 

 

     

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    21,890         6,469       284,106       265,296  
 

 

 

     

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

         

Additions to property and equipment

    (12,502 )        (82,787 )      (205,706 )      (457,618 ) 

Purchases of short-term investments

    —           (6,242 )      —         —    

Proceeds from sales of assets

    9,985         2,638       27,695       88,556  

Proceeds from sale of a business

    —           —         15,000       —    

Proceeds from sales of short-term investments

    —           6,236       —         —    

Additions to investments

    —           —         (113 )      (675 ) 

Other

    35         29       3,457       2,091  
 

 

 

     

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (2,482 )        (80,126 )      (159,667 )      (367,646 ) 
 

 

 

     

 

 

   

 

 

   

 

 

 

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

 

7

SEVENTY SEVEN ENERGY INC.

(Debtor-in-possession June 7, 2016 through July 31, 2016)

Consolidated Statements of Cash Flows—(Continued)

 

    Successor              
    Five Months
Ended
December 31,
2016 		          Predecessor  
            Seven Months
Ended
July 31, 2016 		    Years Ended December 31,  
                  2015                     2014          

Cash Flows from Financing Activities

         

Borrowings from revolving credit facility

    —           —         160,100       1,201,400  

Payments on revolving credit facility

    —           —         (210,600 )      (1,555,900 ) 

Proceeds from issuance of senior notes, net of offering costs

    —           —         —         493,825  

Payments to extinguish senior notes

    —           —         (31,305 )      —    

Proceeds from issuance of term loan, net of issuance costs

    —           —         94,481       393,879  

Payments on term loans

    (2,500 )        (17,500 )      (4,750 )      (2,000 ) 

Deferred financing costs

    —           (1,235 )      (784 )      (3,597 ) 

Distributions to CHK

    —           —         —         (422,839 ) 

Employee tax withholding on restricted stock vestings

    (6,004 )        (506 )      (1,824 )      (3,205 ) 
 

 

 

     

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (8,504 )        (19,241 )      5,318       101,563  
 

 

 

     

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

    10,904         (92,898 )      129,757       (787 ) 

Cash, beginning of period

    37,750         130,648       891       1,678  
 

 

 

     

 

 

   

 

 

   

 

 

 

Cash, end of period

  $ 48,654       $ 37,750     $ 130,648     $ 891  
 

 

 

     

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Significant Non-Cash Investing and Financing Activities:

         

(Decrease) increase in other current liabilities related to purchases of property and equipment

  $ (590 )      $ (3,351 )    $ (20,016 )    $ 18,999  

Note receivable received as consideration for sale of a business

  $ —         $ —       $ 27,000     $ —    

Property and equipment distributed to Chesapeake at spin-off

  $ —         $ —       $ —       $ (792 ) 

Property and equipment contributed from Chesapeake at spin-off

  $ —         $ —       $ —       $ 190,297  

Supplemental Disclosure of Cash Payments:

         

Interest, net of amount capitalized

  $ 8,830       $ 30,814     $ 96,730     $ 54,439  

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

 

8

SEVENTY SEVEN ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation and Spin-off

Basis of Presentation

The accompanying consolidated financial statements and related notes include the accounts of Seventy Seven Energy Inc. (“SSE”, “we”, “us”, “our”, “Company”, or “ours”) and its subsidiaries, all of which are 100% owned. SSE’s accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions within SSE have been eliminated.

On June 7, 2016 (the “Petition Date”), SSE and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, case number 16-11409. The Debtors continued to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The subsidiary Debtors in these Chapter 11 cases were Seventy Seven Operating LLC, Seventy Seven Land Company LLC, Seventy Seven Finance Inc., Performance Technologies, L.L.C., PTL Prop Solutions, L.L.C., Western Wisconsin Sand Company, LLC, Nomac Drilling, L.L.C., SSE Leasing LLC, Keystone Rock & Excavation, L.L.C. and Great Plains Oilfield Rental, L.L.C., which represent all subsidiaries of SSE. On July 14, 2016, the Bankruptcy Court issued an order confirming the Joint Pre-packaged Plan of Reorganization of the Debtors. On August 1, 2016, the Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 cases.

Upon emergence from bankruptcy, the Company adopted fresh-start accounting and became a new entity for financial reporting purposes. As a result of the application of fresh-start accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements on or after August 1, 2016 are not comparable with the financial statements prior to the Effective Date. See Note 4 for additional discussion.

Subsequent to the Petition Date, all expenses, gains and losses directly associated with the reorganization are reported within “Reorganization items, net” in the accompanying statements of operations.

References to “Successor” or “Successor Company” relate to SSE on and subsequent to August 1, 2016. References to “Predecessor” or “Predecessor Company” relate to SSE prior to August 1, 2016. References to “2016 Successor Period” and “2016 Predecessor Period” relate to the five months ended December 31, 2016 and the seven months ended July 31, 2016, respectively.

Spin-Off

On June 9, 2014, Chesapeake Energy Corporation (“CHK”) announced that its board of directors approved the spin-off of its oilfield services division through the pro rata distribution of 100% of the shares of common stock of SSE to CHK’s shareholders of record as of the close of business on June 19, 2014, the record date. On June 30, 2014, each CHK shareholder received one share of SSE common stock for every fourteen shares of CHK common stock held by such shareholder on the record date, and SSE became an independent, publicly traded company as a result of the distribution. The transactions in which SSE became an independent, publicly traded company, including the distribution, are referred to collectively as the “spin-off”. Prior to the spin-off, we conducted our business as CHK Oilfield Operating, L.L.C. (“COO”), a wholly owned subsidiary of CHK. Following the spin-off, CHK retained no ownership interest in SSE, and each company has separate public ownership, boards of directors and management. A registration statement on Form 10, as amended through the time of its effectiveness, describing the spin-off was filed by SSE with the U.S. Securities and Exchange Commission (“SEC”) and was declared effective on June 17, 2014. See Note 19 for further discussion of

 

9

agreements entered into as part of the spin-off, including a master separation agreement, a transition services agreement, an employee matters agreement and a tax sharing agreement, among others. As part of the spin-off, we completed the following transactions, among others:

 

  •   we entered into a new $275.0 million senior secured revolving credit facility (the “Pre-Petition Credit Facility”) and a $400.0 million secured term loan (the “Term Loan”). We used the proceeds from borrowings under these new facilities to repay in full and terminate our $500.0 million senior secured revolving credit facility (the “Old Credit Facility”).

 

  •   we issued new 6.50% senior unsecured notes due 2022 (the “2022 Notes”) and used the net proceeds of approximately $493.8 million to make a cash distribution of approximately $391.0 million to CHK, to repay a portion of outstanding indebtedness under the Pre-Petition Credit Facility, and for general corporate purposes.

 

  •   we distributed our compression unit manufacturing and geosteering businesses to CHK.

 

  •   we sold our crude hauling assets to a third party and used a portion of the net proceeds received to make a $30.9 million cash distribution to CHK.

 

  •   CHK transferred to us buildings and real estate used in our business, including property and equipment, at cost of approximately $212.5 million and accumulated depreciation of $22.2 million as of the date of the spin-off.

 

  •   COO transferred all of its existing assets, operations and liabilities, including our 6.625% senior unsecured notes due 2019 (the “2019 Notes”), to Seventy Seven Operating LLC (“SSO”), an Oklahoma limited liability company, our direct wholly-owned subsidiary and the owner of all our operating subsidiaries.

 

  •   COO was renamed SSE and converted from a limited liability company to a corporation.

 

2. Patterson-UTI Merger Agreement

On December 12, 2016, SSE entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Patterson-UTI Energy, Inc., a Delaware corporation (“Patterson-UTI”), and Pyramid Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Patterson-UTI (“Merger Sub”), pursuant to which Patterson-UTI will acquire SSE in exchange for newly issued shares of Patterson-UTI common stock, par value $0.01 per share (“Patterson-UTI Common Stock”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into SSE, with SSE continuing as the surviving entity and a wholly owned subsidiary of Patterson-UTI (the “Merger”).

Under the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of SSE common stock, par value $0.01 per share (“SSE Common Stock”), will be converted into the right to receive a number of shares of Patterson-UTI Common Stock equal to the exchange ratio, as described in the next sentence. The exchange ratio will be equal to 49,559,000 shares of Patterson-UTI Common Stock, divided by the total number of shares of SSE outstanding or deemed outstanding immediately prior to the effective time (including, among other things, shares issued upon exercise of warrants to acquire SSE Common Stock and restricted stock units that are exercised or deemed exercised); provided that, in the event that any Series A warrants to acquire SSE Common Stock are forfeited or net settled, such 49,559,000 shares of Patterson-UTI Common Stock will be reduced by a number equal to (i) the aggregate exercise price for the warrants that are forfeited or net settled, divided by (ii) the volume weighted average price of a share of Patterson-UTI Common Stock for the 10 consecutive trading days immediately preceding the 3rd business day prior to the closing. In no event will Patterson-UTI issue more than 49,559,000 of its shares as merger consideration.

 

10

The value of the merger consideration that SSE stockholders receive will depend on the price per share of Patterson-UTI common stock at the effective time. In addition, the value of the merger consideration is dependent upon the exchange ratio. The exchange ratio will be 1.7731 if all outstanding Series A Warrants of SSE are exercised for cash, no other warrants are exercised, no other shares of SSE are issued prior to closing and certain other assumptions set forth in the joint proxy statement/prospectus occur. The exchange ratio will be reduced if holders of Series A Warrants of SSE fail to exercise their warrants by tendering the cash exercise price, either by forfeiting the warrants or by net share settling such warrants. The exchange ratio will also be reduced if Series B or Series C Warrants of SSE—all of which are presently “out-of-the-money”—nevertheless exercise their warrants. The exchange ratio will further be reduced by any additional restricted stock unit awards granted by SSE for retention purposes, which will not exceed 300,000 restricted stock units in the aggregate.

In connection with the Merger, each SSE restricted stock unit award granted prior to December 12, 2016 that is outstanding as of the Effective Time will fully vest immediately prior to the closing of the Merger, and such awards will be treated as shares of SSE Common Stock and receive the merger consideration in respect of each share of SSE Common Stock subject to the award. In addition, at the Effective Time, each SSE restricted stock unit award granted on or following December 12, 2016 will be assumed by Patterson-UTI and converted into a restricted stock unit award covering a number of shares of Patterson-UTI Common Stock equal to (i) the number of shares of SSE Common Stock subject to the award immediately prior to the Effective Time, multiplied by (ii) the exchange ratio (discussed above), rounded to the nearest whole share.

SSE and Patterson-UTI have agreed, subject to certain exceptions, not to directly or indirectly solicit, initiate, facilitate, knowingly encourage or induce or take any other action that could be reasonably expected to lead to the making, submission, or announcement of competing acquisition proposals. With respect to competing acquisition proposals, subject to certain exceptions, both parties are also prohibited from furnishing any nonpublic information, engaging in discussions or negotiations, entering into a letter of intent or similar document, or otherwise approving, endorsing or recommending a competing proposal. SSE and Patterson-UTI have also agreed to cease all existing discussions with third parties regarding any competing acquisition proposals.

Notwithstanding the prior paragraph, either party may, subject to the terms and conditions set forth in the Merger Agreement, furnish information to, and engage in discussions and negotiations with, a third party that makes an unsolicited competing acquisition proposal if the board of directors of such party determines in good faith, after consultation with its outside counsel and its outside financial advisor, that such competing acquisition proposal is or is reasonably likely to result in a superior proposal, and that the failure to take such action would be inconsistent with its fiduciary duties under applicable law. Prior to the time that the relevant stockholders approve the Merger Agreement (in the case of SSE) or the issuance of Patterson-UTI Common Stock as merger consideration (the “Patterson-UTI Stock Issuance”) (in the case of Patterson-UTI), the board of directors of each of SSE and Patterson-UTI may change its recommendation with respect to the adoption of the Merger Agreement (in the case of SSE) or the Patterson-UTI Stock Issuance (in the case of Patterson-UTI), in each case, in response to a superior proposal or an intervening event if the board of directors determines in good faith, after consultation with its outside counsel, that, among other things, the failure to do so would be inconsistent with its fiduciary duties under applicable law and complies with certain other specified conditions.

The Merger Agreement contains representations and warranties from both Patterson-UTI and SSE, and each party has agreed to covenants, including, among others, covenants relating to (i) the conduct of its business during the interim period between the execution of the Merger Agreement and the Effective Time, (ii) the obligation to use reasonable best efforts to cause the Merger to be consummated and to obtain expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), (iii) the obligation of SSE to call a meeting of its stockholders to approve the Merger Agreement and (iv) the obligation of Patterson-UTI to call a meeting of its stockholders to approve the Patterson-UTI Stock Issuance.

 

11

The completion of the Merger is subject to satisfaction or waiver of certain closing conditions, including but not limited to: (i) adoption of the Merger Agreement by SSE’s stockholders and approval of the Patterson-UTI Stock Issuance by Patterson-UTI’s stockholders, (ii) the expiration or termination of any waiting period under the HSR Act, (iii) the absence of any law, order, decree or injunction prohibiting the consummation of the Merger, (iv) the effectiveness of the registration statement on Form S-4 pursuant to which the shares of Patterson-UTI Common Stock to be issued as merger consideration will be registered, (v) approval for listing on the Nasdaq Global Select Market of the shares of Patterson-UTI Common Stock to be issued in connection with the Merger subject to official notice of issuance, (vi) subject to specified materiality standards, the accuracy of the representations and warranties of each party, (vii) compliance by each party in all material respects with its covenants under the Merger Agreement, (viii) receipt of a tax opinion from each party’s counsel, dated as of the closing date, to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, (ix) the absence of material losses (as defined in the Merger Agreement) during the interim period between the date of execution of the Merger Agreement and the Effective Time that exceed, or would reasonably be expected to exceed, individually or in the aggregate, $100 million with respect to SSE and its subsidiaries, and $300 million with respect to Patterson-UTI and its subsidiaries, in each case, net of certain insurance or indemnification proceeds and certain other deductions, and (x) an amount of net debt (as defined in the Merger Agreement) as of the closing date not exceeding $500 million with respect to SSE and its subsidiaries, and $725 million (not including debt incurred to refinance SSE’s debt or pay for the expenses of the transaction) with respect to Patterson-UTI and its subsidiaries.

Upon termination of the Merger Agreement, if the stockholders of either party do not provide the requisite approval, such party must reimburse the expenses of the other party, capped at $7,500,000. In certain circumstances, including if the board of directors of SSE changes its recommendation or if the Merger Agreement is terminated in certain circumstances and SSE enters into an alternative acquisition transaction within 12 months of termination, SSE may be required to pay Patterson-UTI a termination fee of $40,000,000. Patterson-UTI may be required to pay SSE a termination fee of $100,000,000 in certain circumstances, including if the board of directors of Patterson-UTI changes its recommendation as a result of a Superior Parent Proposal or if the Merger Agreement is terminated in certain circumstances and Patterson-UTI enters into certain types of alternative acquisition transactions within 12 months of termination. In certain other circumstances, Patterson-UTI may be required to pay SSE a termination fee of $40,000,000. In no event will either party be entitled to receive more than one expense reimbursement payment or more than one termination fee payment to which either party is entitled.

In connection with the execution of the Merger Agreement, certain affiliates of Axar Capital Management, LLC, BlueMountain Capital Management, LLC and Mudrick Capital Management, L.P. entered into voting and support agreements with Patterson-UTI, pursuant to which each such stockholder agreed to vote all of its shares of SSE common stock in favor of the adoption of the merger agreement and against, among other things, alternative transactions. As of February 9, 2017, those stockholders held and are entitled to vote in the aggregate approximately 59% of the issued and outstanding shares of SSE common stock entitled to vote at the SSE special meeting. In the event that SSE’s board of directors changes its recommendation that SSE stockholders adopt the merger agreement, such stockholders, taken together, will be required to vote shares that, in the aggregate, represent 39.99% of the issued and outstanding shares of SSE common stock on such proposal, with each such stockholder being able to vote the balance of its shares of SSE common stock on such proposal in such stockholder’s sole discretion.

The description of the Merger Agreement and related voting and support agreements above does not purport to be complete and is qualified in its entirety by the full text of the Merger Agreement and related voting and support agreements, which were filed with the SEC on December 13, 2016 as Exhibits 2.1, 99.2, 99.3 and 99.4 to our Current Report on Form 8-K.

 

12

The transaction is expected to close late in the first quarter or early in the second quarter of 2017. However, SSE cannot predict with certainty when, or if, the pending merger will be completed because completion of the transaction is subject to conditions beyond the control of the Company.

 

3. Emergence from Voluntary Reorganization under Chapter 11 Proceedings and Related Events

On May 12, 2016, the Company and all of its wholly owned subsidiaries entered into a Second Amended and Restated Restructuring Support Agreement (the “Restructuring Support Agreement”) with (i) certain holders of the 2019 Notes, (ii) certain lenders under the Company’s Incremental Term Supplement (Tranche A) loan (the “Incremental Term Loan”), (iii) certain lenders under the Company’s $400.0 million Term Loan Credit Agreement dated June 25, 2014 (the “Term Loan”), and (iv) certain holders 2022 Notes.

On June 7, 2016, the Debtors filed the Bankruptcy Petitions for reorganization under Chapter 11 in the Bankruptcy Court. The filings of the Bankruptcy Petitions constituted an event of default with respect to the 2019 Notes, the 2022 Notes, the Term Loan (see Note 11) and the Incremental Term Loan (see Note 11) (collectively, the “Outstanding Debt”) and constituted an event of default under our Pre-Petition Credit Facility. Pursuant to Chapter 11, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the filing of the Bankruptcy Petitions or to exercise control over the Debtor’s property. Accordingly, although the Bankruptcy Petitions triggered defaults under the Outstanding Debt, creditors were generally stayed from taking action as a result of these defaults. These defaults were deemed waived or cured upon the Effective Date of the Plan. The Debtors also filed the Plan and a related solicitation and disclosure statement on June 7, 2016.

On July 14, 2016, the Bankruptcy Court entered the Confirmation Order. The Debtors satisfied the remaining conditions to effectiveness contemplated under the Plan and emerged from Chapter 11 on August 1, 2016.

The Plan contemplated that we continue our day-to-day operations substantially as previously conducted and that all of our commercial and operational contracts remained in effect in accordance with their terms preserving the rights of all parties. The significant elements of the Plan included:

 

  •   payment in full of all trade creditors and other general unsecured creditors in the ordinary course of business;

 

  •   the exchange of the full $650.0 million of the 2019 Notes into 96.75% of new common stock issued in the reorganization (the “New Common Stock”);

 

  •   the exchange of the full $450.0 million of the 2022 Notes for 3.25% of the New Common Stock as well as warrants exercisable for 15% of the New Common Stock at predetermined equity values;

 

  •   the issuance to our existing common stockholders of two series of warrants exercisable for an aggregate of 20% of the New Common Stock at predetermined equity values;

 

  •   the maintenance of our $400.0 million existing secured Term Loan while the lenders holding Term Loans (i) received (a) payment of an amount equal to 2% of the Term Loans; and (b) as further security for the Term Loans, second-priority liens and security interests in the collateral securing the company’s New ABL Credit Facility (as defined herein), which collateral, together with the existing collateral securing the Term Loans and Tranche A Incremental Term Loans, is governed by an inter-creditor agreement among the applicable secured parties; and (ii) continued to hold Term Loans under the Term Loan Credit Agreement, as amended to reflect, among other modifications, the reduction of the maturity date of the Term Loans by one year and an affirmative covenant by the Company to use commercially reasonably efforts to maintain credit ratings for the Term Loans; and

 

13

  •   the payment of a consent fee equal to 2% of the Incremental Term Loan plus $15.0 million of the outstanding Incremental Term Loan balance, together with the maintenance of the remaining $84.0 million balance of the Incremental Term Loan on identical terms other than the suspension of any prepayment premium for a period of 18 months.

The Plan effectuated, among other things, a substantial reduction in our debt, including $1.1 billion in the aggregate of the face amount of the 2019 Notes and 2022 Notes.

In accordance with the Plan, on the Effective Date, we issued an aggregate of 22,000,000 shares of New Common Stock to the holders of the 2019 and 2022 Notes.

In accordance with the Plan, on the Effective Date, we entered into a warrant agreement with Computershare Inc. and Computershare Trust Company, N.A., as the warrant agent, (the “Warrant Agreement”) and issued three series of warrants to holders of 2022 Notes and to our existing common stockholders as follows:

 

  •   We issued Series A Warrants (“Series A Warrants”), which are exercisable until August 1, 2021, to purchase up to an aggregate of 3,882,353 shares of New Common Stock, at an exercise price of $23.82 per share, to holders of the 2022 Notes.

 

  •   We issued Series B Warrants (“Series B Warrants”), which are exercisable until August 1, 2021, to purchase up to an aggregate of 2,875,817 shares of New Common Stock, at an exercise price of $69.08 per share, to our existing common stockholders.

 

  •   We issued Series C Warrants (“Series C Warrants,” and, together with the Series A Warrants and Series B Warrants, the “Warrants”), which are exercisable until August 1, 2023, to purchase up to an aggregate of 3,195,352 shares of New Common Stock at an exercise price of $86.93 per share, to our existing common stockholders.

All unexercised Warrants will expire and the rights of the holders of such warrants (the “Warrant Holders”) to purchase shares of New Common Stock will terminate on the first to occur of (i) the close of business on their respective expiration dates or (ii) the date of completion of (A) any Affiliated Asset Sale (as defined in the Warrant Agreement), or (B) a Change of Control (as defined in the Warrant Agreement). Following the Effective Date, there are 3,882,353 Series A Warrants, 2,875,817 Series B Warrants and 3,195,352 Series C Warrants outstanding.

In the event of a merger or consolidation where (i) the acquirer is not an affiliate of the Company and (ii) all of the equity held by equity holders of the Company outstanding immediately prior thereto is extinguished or replaced by equity in a different entity (except in cases where the equity holders of the Company represent more than 50% of the total equity of such surviving entity) (a “Non-Affiliate Combination”), holders of Warrants shall be solely entitled to receive the consideration per Warrant that is payable per share of common stock of the Company, less the applicable exercise price of the Warrant, paid in the same form and in the same proportion as is payable to holders of common stock. If the consideration is any form other than cash, the holders of the Warrants shall have ten business days prior to the consummation of the Non-Affiliate Combination to exercise their respective Warrants, and any Warrants not exercised will terminate.

In accordance with the Plan, on September 20, 2016, the Company adopted the Seventy Seven Energy Inc. 2016 Omnibus Incentive Plan (the “2016 Omnibus Incentive Plan”) (see Note 14).

Successor Issuer

Pursuant to Rule 12g-3(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Series B Warrants and Series C Warrants were deemed to be registered under Section 12(b) of the Exchange Act, and the Company was deemed to be the successor registrant to the Company in its state before the Effective

 

14

Date. Such registration expired on September 6, 2016, and we filed a Registration Statement on Form 8-A to effect the registration of the Series B Warrants and Series C Warrants under Section 12(g) of the Exchange Act. As a result, the Company remained subject to the reporting requirements of the Exchange Act following the Effective Date.

Trading of New Common Stock

The New Common Stock is not traded on a national securities exchange. The Company can provide no assurance that the New Common Stock will trade on a nationally recognized market or an over-the-counter market, whether broker-dealers will provide public quotes of the reorganized Company’s common stock on an over-the-counter market, whether the trading volume on an over-the-counter market of the Company’s common stock will be sufficient to provide for an efficient trading market, or whether quotes for the Company’s common stock may be blocked by the OTC Markets Group in the future. Since August 17, 2016, SSE’s common stock has traded on the OTC Grey market under the symbol “SVNT.” If we complete the merger with Patterson-UTI, shares of SSE common stock will cease to be traded on the OTC Grey market.

Registration Rights Agreement

On the Effective Date, by operation of the Plan, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with certain funds affiliated with and/or managed by each of BlueMountain Capital Management, LLC, Axar Capital Management, LLC and Mudrick Capital Management, L.P. (collectively, the “Registration Rights Holders”).

The Registration Rights Agreement provides certain demand registration rights to the Registration Rights Holders at any time following the six-month anniversary of the Effective Date. The Company will not be required to effect more than (i) four demand registrations delivered by each Registration Rights Holder, or (ii) one demand registration delivered by any holder in any 180-day period.

If, following the six-month anniversary of the Effective date, the Company qualifies for the use of Form S-3, the Registration Rights Holders may require the Company, subject to restrictions set forth in the Registration Rights Agreement, to file a shelf registration statement on Form S-3 covering the resale of such holder’s registrable securities.

In addition, if the Company proposes to register shares of its New Common Stock in certain circumstances, the Registration Rights Holders will have certain “piggyback” registration rights, subject to restrictions set forth in the Registration Rights Agreement, to include their shares of New Common Stock in the registration statement.

Senior Secured Debtor-In-Possession Credit Agreement; New ABL Credit Facility

On June 8, 2016, in connection with the filings of the Bankruptcy Petitions, the Company, with certain of our subsidiaries as borrowers, entered into a senior secured debtor-in-possession credit facility (the “DIP Facility”) with total commitments of $100.0 million. See Note 11 for additional discussion related to the DIP Facility.

On the Effective Date, by operation of the Plan, the DIP Facility was amended and restated, and the outstanding obligations pursuant thereto were converted to obligations under a senior secured revolving credit facility in an aggregate principal amount of up to $100.0 million (the “New ABL Credit Facility”).

 

15

New Directors

On the Effective Date, in accordance with the Plan and pursuant to the Stockholders Agreement that we entered into with certain stockholders on the Effective Date, Jerry Winchester and Edward J. DiPaolo, who were existing directors of the Company, and Andrew Axelrod, Victor Danh, Steven Hinchman, David King and Doug Wall became members of the Board until the first annual meeting of the Company’s stockholders to be held in 2017, and their respective successors are duly elected and qualified or until their earlier death, resignation or removal.

Conversion to Delaware Corporation

Effective July 22, 2016, in accordance with the Plan and with the laws of the State of Delaware and the State of Oklahoma, we converted our form of organization from an Oklahoma corporation (the “Oklahoma Predecessor Corporation”) to a Delaware limited liability company and, immediately thereafter, to a Delaware corporation (the “Delaware Successor Corporation”). As a result of the conversions, the equity holders of the Oklahoma Predecessor Corporation became the equity holders of the Delaware Successor Corporation. The name of the Company remains “Seventy Seven Energy Inc.”

For purposes of Delaware law, the Delaware Successor Corporation is deemed to be the same entity as the Company before the conversions, and its existence is deemed to have commenced on the date of original incorporation of the Company. Furthermore, under Delaware law, the rights, assets, operations, liabilities and obligations that comprised the going business of the Company before the conversions remain the rights, assets, operations, liabilities and obligations of the Company after the conversions.

 

4. Fresh-Start Accounting

In connection with the Company’s emergence from Chapter 11, the Company applied the provisions of fresh-start accounting, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, (“ASC 852”), to its consolidated financial statements. The Company qualified for fresh-start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company, and (ii) the reorganization value of the Company’s assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. The Company applied fresh-start accounting as of August 1, 2016, which was the date of emergence from Chapter 11. Adopting fresh-start reporting results in a new reporting entity with no beginning retained earnings or accumulated deficit. The cancellation of all existing common shares outstanding on the Effective Date and issuance of new shares of the reorganized entity caused a related change of control of the Company under ASC 852, as the holders of existing voting shares immediately before confirmation received less than 50% of the voting shares of the Successor Company.

Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values.

Reorganization Value

In support of the Plan, the enterprise value of the Successor Company was estimated and approved by the Bankruptcy Court to be in the range of $700 million to $900 million. The Company used the high end of the Bankruptcy Court approved enterprise value of the Successor Company of $900 million as its estimated enterprise value.

 

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The following table reconciles the enterprise value to the estimated fair value of Successor common stock as of the Effective Date (in thousands, except per share value):

 

Enterprise value

   $ 900,000  

Plus: Cash and cash equivalents

     37,750  

Less: Fair value of debt

     (427,520 ) 

Less: Fair value of warrants

     (24,733 ) 
  

 

 

 

Fair value of Successor common stock

   $ 485,497  
  

 

 

 

Shares outstanding at August 1, 2016

     22,000  

Per share value

   $ 22.07  

In connection with fresh-start accounting, the Company’s debt was recorded at fair value of $427.5 million as determined using a market approach. The difference between the $475.8 million face amount and the fair value recorded in fresh-start accounting is being amortized over the life of the debt. The fair value of the Company’s debt was estimated using Level 2 inputs.

The fair values of the Series A, Series B and Series C Warrants were estimated to be $4.62, $1.03 and $1.20, respectively. The fair values of the Warrants were estimated using a Black-Scholes pricing model with the following assumptions:

 

     Series A     Series B     Series C  

Stock price

   $ 16.27     $ 13.83     $ 12.45  

Strike price

   $ 23.82     $ 69.08     $ 86.93  

Expected volatility

     50 %      50 %      50 % 

Expected dividend rate

     0 %      0 %      0 % 

Risk free interest rate

     1.26 %      1.26 %      1.57 % 

Expiration date

     5 years       5 years       7 years  

The fair value of these warrants were estimated using Level 2 inputs.

The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (in thousands):

 

Enterprise value

   $ 900,000  

Plus: Cash and cash equivalents

     37,750  

Plus: Fair value of non-debt working capital liabilities

     63,365  

Plus: Fair value of non-debt long-term liabilities

     1,933  
  

 

 

 

Reorganization value of Successor assets

   $ 1,003,048  
  

 

 

 

In determining reorganization value, the Company estimated fair value for property and equipment using significant unobservable inputs (Level 3) based on market and income approaches. SSE commissioned third-party appraisal services to estimate the fair value of its revenue-generating fixed assets and considered current market conditions and management’s judgment to estimate the fair value of non-revenue-generating assets. Additionally, the Company utilized a discounted cash flow method to fair value certain assets. SSE estimated future cash flows for the period from August 1, 2016 to July 31, 2026 and discounted such estimated future cash flows to present value using its weighted average cost of capital.

Reorganization value and enterprise value were estimated using various projections and assumptions that are inherently subject to significant uncertainties beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumptions will be realized.

 

17

Consolidated Balance Sheet

The adjustments set forth in the following consolidated balance sheet reflect the effects of (i) the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”), and (ii) estimated fair value adjustments resulting from the adoption of fresh-start accounting (reflected in the column “Fresh-Start Adjustments”). The explanatory notes highlight methods used to determine estimated fair values or other amounts of assets and liabilities, as well as significant assumptions.

 

     July 31, 2016
Predecessor
Company 		    Reorganization
Adjustments 		    Fresh-Start
Adjustments 		    August 1, 2016
Successor
Company 		 
     (in thousands, except share amounts)  

Assets:

        

Current Assets:

        

Cash and cash equivalents

   $ 71,376     $ (33,626 )(1)    $ —       $ 37,750  

Accounts receivable, net

     94,024       —         —         94,024  

Inventory

     13,422       —         —         13,422  

Deferred income tax asset

     20,773       (20,773 )(2)      —         —    

Prepaid expenses and other

     15,309       —       —         15,309  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Assets

     214,904       (54,399 )      —         160,505  
  

 

 

   

 

 

   

 

 

   

 

 

 

Property and Equipment:

        

Property and equipment, at cost

     2,681,896       —         (1,862,505 )(10)      819,391  

Less: accumulated depreciation

     (1,244,536 )      —         1,244,536 (10)      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Property and Equipment, Net

     1,437,360       —         (617,969 )      819,391  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Assets:

        

Deferred financing costs

     —         1,235 (3)      —         1,235  

Other long-term assets

     39,098       —         (17,181 )(11)      21,917  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Assets

     39,098       1,235       (17,181 )      23,152  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,691,362     $ (53,164 )    $ (635,150 )    $ 1,003,048  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

        

Current Liabilities:

        

Accounts Payable

   $ 21,418     $ —       $ —       $ 21,418  

Current portion of long-term debt

     5,000       —         —         5,000  

Other current liabilities

     59,338       (17,391 )(4)      —         41,947  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Liabilities

     85,756       (17,391 )      —         68,365  
  

 

 

   

 

 

   

 

 

   

 

 

 

Long-Term Liabilities:

        

Deferred income tax liabilities

     47,868       (46,638 )(2)      (1,230 )(12)      —    

Long-term debt, excluding current maturities

     475,852       (14,226 )(5)      (39,106 )(13)      422,520  

Other long-term liabilities

     1,933       —         —         1,933  

Liabilities subject to compromise

     1,135,493       (1,135,493 )(6)      —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Long-Term Liabilities

     1,661,146       (1,196,357 )      (40,336 )      424,453  
  

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and Contingencies

        

Stockholders’ Equity:

        

Predecessor common stock, $0.01 par value: authorized 250,000,000 shares; issued and outstanding 57,467,915

     575       (575 )(7)      —         —    

Predecessor paid-in capital

     387,659       (387,659 )(7)      —         —    

Successor common stock, $0.01 par value: authorized 90,000,000 shares; issued and outstanding 22,000,000

     —         220 (8)      —         220  

Successor paid-in capital

     —         510,010 (8)      —         510,010  

Retained earnings (accumulated deficit)

     (443,774 )      1,038,588 (9)      (594,814 )(14)      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Stockholders’ Equity (Deficit)

     (55,540 )      1,160,584       (594,814 )      510,230  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,691,362     $ (53,164 )    $ (635,150 )    $ 1,003,048  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

18

Reorganization Adjustments

 

1. Reflects the following cash payments recorded as of the Effective Date from implementation of the Plan (in thousands):

 

Predecessor liabilities paid upon emergence

   $ 17,391  

Partial repayment of Incremental Term Loan

     15,000  

Debt issuance costs

     1,235  
  

 

 

 

Total

   $ 33,626  
  

 

 

 

 

2. Reflects the tax adjustments and corresponding change in valuation allowance as a result of the Company’s emergence from Chapter 11 bankruptcy.

 

3. Reflects the $1.2 million of debt issuance costs incurred on the New ABL Credit Facility.

 

4. Reflects the payment of $17.4 million in professional fees associated with the implementation of the Plan that were previously accrued in other current liabilities.

 

5. Reflects the payment of $15.0 million principal on the Incremental Term Loan and the write-off of related deferred issuance costs of $0.8 million.

 

6. Liabilities subject to compromise were settled as follows in accordance with the Plan (in thousands):

 

6.625% Senior Notes due 2019

   $ 650,000  

6.50% Senior Notes due 2022

     450,000  

Accrued interest

     35,493  
  

 

 

 

Liabilities subject to compromise of the Predecessor Company

     1,135,493  

Fair value of equity issued to holders of the senior notes of the Predecessor Company

     (503,434 ) 
  

 

 

 

Gain on settlement of liabilities subject to compromise

   $ 632,059  
  

 

 

 

 

7. Reflects the cancellation of the Predecessor Company equity to retained earnings.

 

8. Reflects the issuance of 22.0 million shares of common stock at a per share price of $22.07 to the holders of the Predecessor Company’s 2019 and 2022 Notes and the issuance of 9.954 million warrants to purchase up to 35% of the Successor Company’s equity valued at $24.7 million with a weighted average per unit value of $2.48.

 

9. Reflects the cumulative impact of the reorganization adjustments discussed above (in thousands):

 

Gain on settlement of liabilities subject to compromise

   $ 632,059  

Fair value of warrants issued to Predecessor stockholders

     (6,797 ) 

Cancellation of Predecessor Company equity

     388,234  

Tax impact of reorganization adjustments

     25,865  

Other reorganization adjustments

     (773 ) 
  

 

 

 

Net impact to retained earnings (accumulated deficit)

   $ 1,038,588  
  

 

 

 

The net gain on reorganization adjustments totaled $624.5 million and is included in reorganization items, net in the Predecessor Company’s statement of operations (see Note 5). The cancellation of Predecessor Company equity was recorded as a direct reduction to retained earnings and had no impact to the Predecessor Company’s statement of operations.

 

19

Fresh-Start Adjustments

 

10. Reflects a $618.0 million reduction in the net book value of property and equipment to estimated fair value.

 

  •   To estimate the fair value of drilling rigs and related equipment, hydraulic fracturing equipment and oilfield rental equipment, the Company commissioned a third-party appraisal service to value such assets using a market approach. This approach relies upon recent sales and offerings of similar assets.

 

  •   To estimate the fair value of land and buildings and other property and equipment, the Company considered recent comparable sales as well as current market conditions and demand.

 

  •   The fair value of these assets was estimated using significant unobservable inputs (Level 3) based on market and income approaches.

The following table summarizes the components of property and equipment, net of the Successor Company and the Predecessor Company (in thousands):

 

     Successor      Predecessor  

Drilling rigs and related equipment

   $ 510,902      $ 1,019,792  

Hydraulic fracturing equipment

     127,438        157,236  

Oilfield rental equipment

     34,313        52,397  

Land and buildings

     118,759        170,110  

Other

     27,979        37,825  
  

 

 

    

 

 

 

Total

   $ 819,391      $ 1,437,360  
  

 

 

    

 

 

 

For property and equipment owned at August 1, 2016, the depreciable lives were revised to reflect remaining estimated useful lives.

 

11. An adjustment of $17.2 million was recorded to decrease other long-term assets to estimated fair value based on the following:

 

  •   The Company recorded a $6.5 million adjustment to decrease the book value of the Note Receivable (as defined in Note 8) to fair value. Fair value of the Note Receivable was estimated using Level 2 inputs based on a market approach.

 

  •   Based on management’s judgment and the current economics of the industry, the Company recorded additional adjustments totaling $10.7 million to decrease other long-term assets to fair value.

 

12. Reflects the tax adjustments and corresponding change in valuation allowance as a result of the Company’s emergence from Chapter 11 bankruptcy proceedings.

 

13. Represents a $39.1 million adjustment to record the Term Loan and Incremental Term Loan at fair value using Level 2 inputs, including the write-off of the remaining balance of deferred issuance costs totaling $9.1 million.

 

14. Reflects the cumulative impact of fresh-start adjustments as discussed above (in thousands):

 

Property and equipment fair value adjustment

   $ (617,969 ) 

Other long-term assets fair value adjustments

     (17,181 ) 

Long-term debt fair value adjustment

     39,106  
  

 

 

 

Net loss on fresh-start adjustments

     (596,044 ) 

Tax impact on fresh-start adjustments

     1,230  
  

 

 

 

Net impact to retained earnings (accumulated deficit)

   $ (594,814 ) 
  

 

 

 

The $596.0 million net loss on fresh-start adjustments is included in reorganization items, net in the Predecessor Company’s statement of operations (see Note 5).

 

20

5. Reorganization Items, Net

Reorganization items represent liabilities settled, net of amounts incurred subsequent to the Chapter 11 filing as a direct result of the Plan, and such items are classified as Reorganization items, net in our condensed consolidated statement of operations. The following table summarizes reorganization items, net (in thousands):

 

     Successor      Predecessor  
     Period from
August 1, 2016 to
December 31,
2016 		     Period from
January 1, 2016
to July 31, 2016 		 

Net gain on settlement of liabilities subject to compromise

   $ —        $ (632,059 ) 

Net loss on fresh-start adjustments

     —          596,044  

Stock-based compensation acceleration expense

     —          25,086  

Professional fees

     1,868        20,228  

Write-off of debt issuance costs

     —          13,318  

Fair value of warrants issued to Predecessor stockholders

     —          6,797  

DIP credit agreement financing costs

     —          478  
  

 

 

    

 

 

 

Total

   $ 1,868      $ 29,892  
  

 

 

    

 

 

 

For the 2016 Successor Period and the 2016 Predecessor Period, cash payments for reorganization items totaled $2.5 million and $18.6 million, respectively.

 

6. Significant Accounting Policies

Accounting Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Although management believes these estimates are reasonable, actual results could differ from those estimates. Areas where critical accounting estimates are made by management include:

 

  •   estimated useful lives of assets, which impacts depreciation and amortization of property and equipment;

 

  •   impairment of long-lived assets, goodwill and intangibles;

 

  •   income taxes;

 

  •   accruals related to revenue, expenses, capital costs and contingencies; and

 

  •   cost allocations as described in Note 19.

Fresh-Start Accounting

As discussed in Note 4, the Company applied fresh-start accounting upon emergence from bankruptcy on August 1, 2016, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheet. The effects of the Plan and the application of fresh-start accounting were reflected in our consolidated financial statements as of August 1, 2016, and the related adjustments thereto were recorded in our consolidated statements of operations as reorganization items, net for the periods prior to August 1, 2016 (Predecessor Company).

 

21

As a result of our application of fresh-start accounting, our consolidated balance sheets and consolidated statement of operations subsequent to the Effective Date will not be comparable to our consolidated balance sheets and statements of operations prior to the Effective Date. Our consolidated financial statements and related footnotes are presented with a black line division which delineates the lack of comparability between amounts presented on or after August 1, 2016 and dates prior thereto. Our financial results for future periods following the application of fresh-start accounting will be different from historical trends, and such differences may be material.

Risks and Uncertainties

We operate in a highly cyclical industry. The main factor influencing demand for oilfield services is the level of drilling and completions activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Demand for oil and natural gas is cyclical and is subject to large and rapid fluctuations. When oil and natural gas price increases occur, producers increase their capital expenditures, which generally results in greater revenues and profits for oilfield service companies. The increased capital expenditures also ultimately result in greater production, which historically has resulted in increased supplies and reduced prices that, in turn, tend to reduce demand for oilfield services. For these reasons, our results of operations may fluctuate from quarter-to-quarter and from year-to-year.

Industry activity is beginning to increase as the U.S. domestic rig count was 589 during the fourth quarter of 2016, which, while down 22% compared to the fourth quarter of 2015, was up 22% compared to the third quarter of 2016. Additionally, the average price of oil during the fourth quarter of 2016 was $49.25 per barrel, which represented a 17% increase compared to the fourth quarter of 2015 and a 10% increase compared to the third quarter of 2016. These average oil prices remain well below the average prices in 2014. The average price of natural gas during the fourth quarter of 2016 was $3.04 per McF, an increase of 47% compared to the fourth quarter of 2015 and a 6% increase compared to the third quarter of 2016. Future price declines or prolonged levels of low prices would further negatively affect the demand for our services and the prices we are able to charge to our customers. Additionally, we may incur costs and have downtime during periods when our customers’ activities are refocused towards different drilling regions.

Historically, we have provided a significant percentage of our oilfield services to CHK. For the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014, CHK accounted for approximately 51%, 65%, 70% and 81%, respectively, of our revenues. As of December 31, 2016 and 2015, CHK accounted for approximately 49% and 65%, respectively, of our accounts receivable. If CHK ceases to engage us on terms that are attractive to us during any future period, our business, financial condition, cash flows and results of operations would be materially adversely affected during such period.

Accounts Receivable

Trade accounts receivable are recorded at the invoice amount and do not bear interest. As of December 31, 2016 and 2015, 49% and 65%, respectively, of our receivables are with CHK and its subsidiaries. The allowance for doubtful accounts represents our best estimate for losses that may occur resulting from disputed amounts with our customers or their inability to pay amounts owed. We determine the allowance based on historical write-off experience and information about specific customers. For the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014, we recognized a nominal amount, $1.4 million, $1.4 million and $2.9 million, respectively, of bad debt expense related to potentially uncollectible receivables.

On August 1, 2016, in connection with the application of fresh-start accounting, the carrying value of accounts receivable was adjusted to fair value, eliminating our historical allowance for doubtful accounts totaling $2.8 million. We recognized reductions to our allowance of $2.3 million, $0.5 million and $0.1 million as we wrote off specific receivables against our allowance for the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, respectively.

 

22

Inventory

We value inventory at the lower of cost or market, with cost determined using the average cost method. Average cost is derived from third-party invoices and production cost. Production cost includes material, labor and manufacturing overhead. Inventory primarily consists of proppants and chemicals used in our hydraulic fracturing operations.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation of assets is based on estimates, assumptions and judgments relative to useful lives and salvage values. Upon the disposition of an asset, we eliminate the cost and related accumulated depreciation and include any resulting gain or loss in operating expenses in the consolidated statements of operations. Expenditures for maintenance and repairs that do not add capacity or extend the useful life of an asset are expensed as incurred.

In connection with our application of fresh-start accounting, property and equipment were adjusted to estimated fair value on August 1, 2016. A summary of our property and equipment amounts (in thousands) and useful lives (in years) is as follows:

 

     Successor      Predecessor      Estimated
Useful
Life
     December 31,
2016 		     December 31,
2015 		    

Drilling rigs and related equipment

   $ 509,734      $ 1,594,377      5-15

Hydraulic fracturing equipment

     98,102        323,989      2-7

Oilfield rental equipment

     34,157        324,976      2-10

Trucks and tractors

     18,887        77,678      7

Vehicles

     5,674        33,478      3

Buildings and improvements

     107,450        196,240      10-39

Land

     7,432        16,261      —

Other

     31,855        79,447      3-7
  

 

 

    

 

 

    

Total property and equipment, at cost

     813,291        2,646,446     

Less: accumulated depreciation and amortization

     (71,977 )       (1,116,026 )    

Property and equipment held for sale, net (see Note 10)

     8,226        —       
  

 

 

    

 

 

    

Total property and equipment, net

   $ 749,540      $ 1,530,420     
  

 

 

    

 

 

    

Depreciation is calculated using the straight-line method based on the assets’ estimated useful lives and salvage values. These estimates are based on various factors including age (in the case of acquired assets), manufacturing specifications, technological advances and historical data concerning useful lives of similar assets.

We review the estimated useful lives of our property and equipment on an ongoing basis. Based on this review in the first quarter of 2015, we concluded that the estimated useful lives of certain drilling rig components and certain drilling rigs were shorter than the estimated useful lives used for depreciation in our consolidated financial statements. We reflected this useful life change as a change in estimate, effective January 1, 2015, which increased depreciation expense by $13.7 million, increased net loss by $9.7 million and increased our basic and diluted loss per share by $0.19 for the year ended December 31, 2015. Effective July 1, 2014, we concluded that the estimated useful lives of certain of our drilling rigs were shorter than the estimated useful lives used for depreciation, which increased depreciation expense by $3.9 million, increased net loss by $3.0 million and increased basic and diluted loss per share by $0.08 for the year ended December 31, 2014.

 

23

Depreciation expense on property and equipment for the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014 was $73.9 million, $162.4 million, $295.1 million and $290.9 million, respectively. Included in property and equipment are $10.9 million and $77.7 million at December 31, 2016 and 2015, respectively, of assets that are being constructed or have not been placed into service, and therefore are not subject to depreciation.

Interest is capitalized on the average amount of accumulated expenditures for major capital projects under construction using a weighted average interest rate based on our outstanding borrowings until the underlying assets are placed into service. Capitalized interest is added to the cost of the assets and amortized to depreciation expense over the useful life of the assets. During the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, we capitalized interest of approximately $1.0 million, $2.3 million and $2.1 million, respectively.

Impairment of Long-Lived Assets

We review our long-lived assets, such as property and equipment, whenever, in management’s judgment, events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Factors that might indicate a potential impairment include a significant decrease in the market value of the long-lived asset, a significant change in the long-lived asset’s physical condition, a change in industry conditions or a reduction in cash flows associated with the expected use of the long-lived asset. If these or other factors indicate the carrying amount of the asset may not be recoverable, we determine whether an impairment has occurred through analysis of the future undiscounted cash flows of the asset. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. We measure the fair value of the asset using market prices or, in the absence of market prices, based on an estimate of discounted cash flows.

Investments

Investments in securities are accounted for under the equity method in circumstances where we have the ability to exercise significant influence, but not control, over the operating and investing policies of the investee. Under the equity method, we recognize our share of the investee’s earnings in our consolidated statements of operations. We consolidate all subsidiaries in which we hold a controlling interest.

We evaluate our investments for impairment and recognize a charge to earnings when any identified impairment is determined to be other-than-temporary. See Note 16 for further discussion of investments.

Goodwill

Goodwill represents the cost in excess of fair value of the net assets of businesses acquired. In 2011, we recorded goodwill in the amount of $27.4 million related to our acquisition of Bronco Drilling Company, Inc. (“Bronco”). This goodwill was assigned to our drilling segment. Goodwill is not amortized.

We review goodwill for impairment annually on October 1 or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. Circumstances that could indicate a potential impairment include a significant adverse change in the economic or business climate, a significant adverse change in legal factors, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel, and the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of. Under GAAP, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, accounting guidance requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. Second, if

 

24

impairment is indicated, the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination on the impairment test date. The amount of impairment for goodwill is measured as the excess of the carrying value of the goodwill over its implied fair value.

When estimating fair values of a reporting unit for our goodwill impairment test, we use the income approach. The income approach provides an estimated fair value based on the reporting unit’s anticipated cash flows that are discounted using a weighted average cost of capital rate. Estimated cash flows are primarily based on projected revenues, operating expenses and capital expenditures and are discounted using comparable industry average rates for weighted average cost of capital.

For purposes of performing the impairment tests for goodwill, all of our goodwill related to our drilling reporting unit. We performed the two-step process for testing goodwill for impairment on October 1, 2015. Due to the further deterioration of industry conditions in the fourth quarter of 2015, including the further decline in oil and natural gas prices, the Company determined that there was an indication of impairment present based on the results of the first step of the goodwill impairment test. During the fourth quarter of 2015, we completed our assessment and recognized an impairment loss of $27.4 million on the goodwill associated with the Bronco acquisition. As of December 31, 2016 and 2015, we had no recorded goodwill on our consolidated balance sheet.

Deferred Financing Costs

Legal fees and other costs incurred in obtaining financing are amortized over the term of the related debt using a method that approximates the effective interest method. We had gross capitalized costs of $1.2 million and $37.3 million, net of accumulated amortization of $0.1 million and $12.4 million, at December 31, 2016 and 2015, respectively. We capitalized costs of $1.2 million associated with our New ABL Credit Facility (see Note 11) in the 2016 Predecessor Period. In 2015, we capitalized costs of $6.3 million associated with the issuance of a Term Loan due 2021. Amortization expense related to deferred financing costs was $0.1 million, $2.5 million, $4.6 million and $6.1 million for the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014, respectively, and is included in interest expense in the consolidated statements of operations. During the 2016 Predecessor Period, in connection with the reorganization and application of fresh-start accounting, unamortized costs totaling $22.4 million related to the Pre-Petition Credit Facility, Term Loan, Incremental Term Loan, 2019 Notes and 2022 Notes were written off and included in reorganization items, net in the consolidated statement of operations.

Revenue Recognition

We recognize revenue when services are performed, collection of receivables is reasonably assured, persuasive evidence of an arrangement exists and the price is fixed or determinable.

Drilling . We earn revenues by drilling oil and natural gas wells for our customers under daywork contracts. We recognize revenue on daywork contracts for the days completed based on the day rate each contract specifies. Payments received and costs incurred for mobilization services are recognized as earned over the days of mobilization. We also recognize revenue for contract termination fees paid by our customers. Under certain of our contracts, we have agreed to allow customers to pay the termination cost over the life of the contract in lieu of a lump sum, and we refer to a rig in this circumstance as “idle but contracted” or “IBC”. IBC payments are structured to preserve our anticipated operating margins for the affected rigs through the end of the contract terms and are recognized as revenue over the life of the contract.

Hydraulic Fracturing . We recognize revenue upon the completion of each fracturing stage. We typically complete one or more fracturing stages per day per active crew during the course of a job. A stage is considered complete when the customer requests or the job design dictates that pumping discontinue for that stage. Invoices typically include a lump sum equipment charge determined by the rate per stage each contract specifies and product charges for sand, chemicals and other products actually consumed during the course of providing our services.

 

25

Oilfield Rentals . We rent many types of oilfield equipment including drill pipe, drill collars, tubing, blowout preventers, frac tanks, mud tanks and environmental containment. We also provide air drilling, flowback services and services associated with the transfer of water to the wellsite for well completions. We price our rentals and services by the day or hour based on the type of equipment rented and the services performed and recognize revenue ratably over the term of the rental.

Former Oilfield Trucking . Oilfield trucking provided rig relocation and logistics services as well as fluid handling services. Our trucks moved drilling rigs, crude oil, and other fluids and construction materials to and from the wellsite and also transported produced water from the wellsite. We priced these services by the hour and volume and recognized revenue as services were performed. As part of the spin-off, we sold our crude hauling business to a third party. During the second quarter of 2015, we sold our drilling rig relocation and logistics business and water hauling assets. As of June 30, 2015, there were no remaining assets or operations in this former segment.

Other Operations . We designed, engineered and fabricated natural gas compression packages, accessories and related equipment that we sold to CHK and other customers. We priced our compression units based on certain specifications such as horsepower, stages and additional options. We recognized revenue upon completion and transfer of ownership of the natural gas compression equipment. As part of the spin-off, we distributed our compression unit manufacturing business to CHK.

Litigation Accruals

We estimate our accruals related to litigation based on the facts and circumstances specific to the litigation and our past experience with similar claims. We estimate our liability related to pending litigation when we believe the amount or a range of the loss can be reasonably estimated. We record our best estimate of a loss when the loss is considered probable. When a loss is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to a lawsuit or claim. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates accordingly.

Environmental Costs

Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and regulated substances. These operations are subject to various federal, state and local laws and regulations intended to protect the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. There were no amounts capitalized as of December 31, 2016 and 2015. We record liabilities on an undiscounted basis when remediation efforts are probable and the costs to conduct such remediation efforts can be reasonably estimated.

Leases

We lease rail cars and other property and equipment through various leasing arrangements (see Note 13). When we enter into a leasing arrangement, we analyze the terms of the arrangement to determine its accounting treatment. As of December 31, 2016, all leases have been accounted for as operating leases.

We periodically incur costs to improve the assets that we lease under these arrangements. We record the improvement as a component of property and equipment and amortize the improvement over the shorter of the useful life of the improvement or the remaining lease term.

 

26

Share-Based Compensation

For the Successor Company, our share-based compensation program consists of restricted stock granted to employees and non-employee directors under the 2016 Omnibus Incentive Plan. For the Predecessor Company, our share-based compensation program consisted of restricted stock and stock options granted to employees and restricted stock granted to non-employee directors under the SSE 2014 Incentive Plan (the “2014 Incentive Plan”).

We recognize in our financial statements the cost of employee services received in exchange for restricted stock and stock options based on the fair value of the equity instruments as of the grant date. In general, this value is amortized over the vesting period; for grants with a non-substantive service condition, this value is recognized immediately. Amounts are recognized in operating costs and general and administrative expenses.

Income Taxes

Our effective tax rate was 0%, 28%, 29% and 22% for the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014, respectively. We did not record any income tax benefit for the 2016 Successor Period due to the tax benefit at expected rates being offset by a full valuation allowance. Our effective tax rate can fluctuate as a result of state income taxes, permanent differences and changes in pre-tax income.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry.

As of December 31, 2016, we are in a net deferred tax asset position. We believe it is more likely than not that these deferred tax assets will not be realized, and accordingly, we have recorded a full valuation allowance against our net deferred tax assets. In connection with the Company’s emergence from Chapter 11 and subsequent application of fresh-start accounting, we recorded a full valuation allowance of $219.6 million in the 2016 Predecessor Period. We recorded the reduction of net operating losses related to cancellation of indebtedness income (“CODI”) in the 2016 Successor Period. The deferred tax impact of the tax attribute reduction was fully offset by a corresponding decrease in valuation allowance in the 2016 Successor Period.

The benefit of an uncertain tax position taken or expected to be taken on an income tax return is recognized in the consolidated financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority. Interest and penalties, if any, related to uncertain tax positions would be recorded in interest expense and other expense, respectively. We had no uncertain tax positions at December 31, 2016 and 2015. As of December 31, 2016, the tax years ended December 31, 2014 and December 31, 2015 remain open to examination by U.S. federal and state taxing authorities.

 

7. Earnings Per Share

Upon emergence from bankruptcy on August 1, 2016, the Company’s then outstanding common stock was cancelled and the New Common Stock and Warrants were issued.

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide nonforfeitable dividend rights and are required to be included in the computation of our basic earnings per share using the two-

 

27

class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Diluted earnings per share is computed using the weighted average shares outstanding for basic earnings per share, plus the dilutive effect of stock options for the Predecessor periods and warrants for the Successor Period. For the Predecessor periods, the dilutive effect of unvested restricted stock and stock options was determined using the treasury stock method, which assumes the amount of unrecognized compensation expense related to unvested share-based compensation awards is used to repurchase shares at the average market price for the period. For the Successor Period, the dilutive effect of warrants is determined using the treasury stock method, which assumes that any proceeds obtained upon the exercise of the warrants would be used to purchase common stock at the average market price for the period.

 

     Successor        
     Five Months
Ended
December 31,
2016 		    Predecessor  
       Seven Months
Ended
July 31, 2016 		     Years Ended December 31,  
                2015                  2014        
           (in thousands, except per share data)  

Basic loss per share:

            

Allocation of earnings:

            

Net loss

   $ (63,559 )    $ (155,710 )     $ (221,391 )     $ (7,979 ) 

Weighted average common shares outstanding(a)

     22,186       54,832        50,096        47,236  

Basic loss per share

   $ (2.86 )    $ (2.84 )     $ (4.42 )     $ (0.17 ) 

Diluted loss per share:

            

Allocation of earnings:

            

Net loss

   $ (63,559 )    $ (155,710 )     $ (221,391 )     $ (7,979 ) 

Weighted average common shares, including dilutive effect(a)(b)(c)(d)

     22,186       54,832        50,096        47,236  

Diluted loss per share

   $ (2.86 )    $ (2.84 )     $ (4.42 )     $ (0.17 ) 

 

(a) On June 30, 2014, 46,932,433 shares of our common stock were distributed to CHK shareholders in conjunction with the spin-off. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, we have assumed this amount to be outstanding for periods prior to the spin-off.
(b) No incremental shares of potentially dilutive restricted stock awards or units were included for the periods presented as their effect was antidilutive under the treasury stock method.
(c) The exercise price of stock options exceeded the average market price of our common stock during the 2016 Predecessor Period and the years ended December 31, 2015 and 2014. Therefore, the stock options were not dilutive.
(d) No incremental shares of potentially dilutive Series A Warrants were included for the 2016 Successor Period as their effect was antidilutive under the treasury stock method. The exercise price of the Series B and Series C Warrants exceeded the average market price of our common stock during the 2016 Successor Period. Therefore, the Series B and Series C Warrants were not dilutive.

 

8. Sale of Hodges Trucking Company, L.L.C.

On June 14, 2015, we sold Hodges Trucking Company, L.L.C. (“Hodges”), our previously wholly-owned subsidiary that provided drilling rig relocation and logistics services, to Aveda Transportation and Energy Services Inc. (“Aveda”) for aggregate consideration of $42.0 million. At the time of the sale, Hodges owned 270 rig relocation trucks and 65 cranes and forklifts. The sale did not include the land and buildings used in Hodges’ operations.

The consideration received consisted of $15.0 million in cash and a $27.0 million secured promissory note due June 15, 2020 (the “Note Receivable”). The Note Receivable bears a fixed interest rate of 9.00% per annum,

 

28

which is payable quarterly in arrears beginning on June 30, 2015. Aveda can, at any time, make prepayments of principal before the maturity date without premium or penalty. The Note Receivable is secured by a second lien on substantially all of Aveda’s fixed assets and accounts receivable. The Note Receivable is presented in other long-term assets on our consolidated balance sheet.

In connection with the application of fresh-start accounting (see Note 4), the Note Receivable was written down to fair value of $20.5 million using an income approach. The difference between the $27.0 million face amount and the fair value recorded in fresh-start accounting is being accreted over the remaining life of the Note Receivable.

We recognized interest income of $1.0 million, $1.4 million and $1.4 million during the the 2016 Successor Period, the 2016 Predecessor Period and the year ended December 31, 2015, respectively, related to the Note Receivable.

We recognized a loss of $35.0 million on the sale of Hodges during the year ended December 31, 2015. Additionally, we recognized $2.1 million of stock-based compensation expense related to the vesting of restricted stock held by Hodges employees and $0.6 million of severance-related costs during the year ended December 31, 2015.

Hodges was included in our former oilfield trucking segment. The sale of Hodges did not qualify as discontinued operations because the sale did not represent a strategic shift that had or will have a major effect on our operations or financial results.

 

9. Asset Sales and Impairments and Other

Asset Sales

During the 2016 Successor Period and 2016 Predecessor Period, we sold assets, primarily consisting of real estate and ancillary equipment, for $11.9 million and $3.3 million, respectively. During the year ended December 31, 2015, we sold our water hauling assets for $6.5 million, which consisted of property and equipment that had a total carrying amount of $12.3 million, and other ancillary equipment for $21.2 million. During the year ended December 31, 2014, we sold 28 Tier 3 drilling rigs and ancillary drilling equipment for $44.8 million. Additionally, during 2014, we sold our crude hauling assets, which included 124 fluid handling trucks and 122 trailers that had a total carrying amount of $20.7 million, for $43.8 million. We recorded net losses (gains) on sales of property and equipment of approximately ($1.7) million, $0.8 million, $14.7 million and ($6.3) million during the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31 2015 and 2014, respectively.

Impairments and Other

A summary of our impairments and other is as follows:

 

     Successor        
     Five Months
Ended
December 31,
2016 		    Predecessor  
       Seven Months
Ended
July 31, 2016 		     Years Ended December 31,  
                2015                  2014        
           (in thousands)         

Trucking and water disposal equipment

   $ —       $ —        $ 2,737      $ —    

Drilling rigs held for sale

     —         —          —          11,237  

Drilling rigs held for use

     —         305        5,202        8,366  

Lease termination costs

     —         —          —          9,701  

Drilling related services equipment

     —         2,900        8,687        —    

Other

     —         2,911        2,006        1,460  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total impairments and other

   $ —       $ 6,116      $ 18,632      $ 30,764  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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We recognized $2.7 million of impairment charges during the year ended December 31, 2015 for certain trucking and water disposal equipment that we deemed to be impaired based on expected future cash flows of this equipment. Estimated fair value for the trucking and water disposal equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

During the year ended December 31, 2014 we recognized $11.2 million of impairment charges for certain drilling rigs and spare equipment we had identified to sell as part of our broader strategy to divest of non-essential drilling rigs. We were required to present such assets at the lower of carrying amount or fair value less the anticipated costs to sell at the time they met the criteria for held for sale accounting. Estimated fair value was based on the expected sales price, less costs to sell.

We recognized $0.3 million, $5.2 million and $8.4 million of impairment charges during the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, respectively, for certain drilling rigs that we deemed to be impaired based on our assessment of future demand and the suitability of the identified rigs in light of this demand. Estimated fair value for these drilling rigs was determined using significant unobservable inputs (Level 3) based on a market approach.

During the year ended December 31, 2014, we purchased 45 leased drilling rigs for approximately $158.4 million and paid lease termination costs of approximately $9.7 million.

We recognized $2.9 million and $8.7 million of impairment charges during the 2016 Predecessor Period and the year ended December 31, 2015 for drilling-related services equipment that we deemed to be impaired based on the expected future cash flows of this equipment. The estimated fair value for the drilling-related services equipment was determined using significant unobservable inputs (Level 3) based on a market approach.

We recognized impairment charges of $2.9 million, $2.0 million and $1.5 million during the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, respectively, related to certain other property and equipment that we deemed to be impaired based on our assessment of the market value and expected future cash flows of the long-lived asset. Estimated fair value for this property and equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

The assumptions used in our impairment evaluation for long-lived assets are inherently uncertain and require management’s judgment.

 

10. Property and Equipment Held for Sale

During the 2016 Successor Period, we identified certain drilling rigs to sell. We are required to present such assets at the lower of carrying amount or fair value less the anticipated costs to sell at the time they meet the criteria for held-for-sale accounting. Estimated fair value was based on the expected sales price, less costs to sell. As of December 31, 2016, $8.2 million was included in property and equipment held for sale on our consolidated balance sheet. These assets are included in our drilling segment.

 

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11. Debt

As of December 31, 2016 and 2015, our long-term debt consisted of the following (in thousands):

 

     Successor      Predecessor  
     December 31,
2016 		     December 31,
2015 		 

6.625% Senior Notes due 2019

   $ —        $ 650,000  

6.50% Senior Notes due 2022

     —          450,000  

Term Loans

     473,250        493,250  
  

 

 

    

 

 

 

Total principal amount of debt

     473,250        1,593,250  

Less:

     

Discount on Term Loans

     43,038        —    

Current portion of long-term debt

     5,000        5,000  

Unamortized deferred financing costs

     —          23,658  
  

 

 

    

 

 

 

Total long-term debt

   $ 425,212      $ 1,564,592  
  

 

 

    

 

 

 

2019 Senior Notes

In October 2011, we issued $650.0 million in aggregate principal amount of 6.625% Senior Notes due 2019. The filings of the Bankruptcy Petitions described in Note 3 constituted an event of default with respect to the 2019 Notes. The Company did not make the payment of $21.5 million in accrued interest that was due on May 15, 2016. The amount of contractual interest on the 2019 Notes that was not recorded from June 7, 2016 through July 31, 2016 was $6.5 million.

On the Effective Date, by operation of the Plan, all outstanding obligations under the 2019 Notes were cancelled.

2022 Senior Notes

In June 2014, we issued $500.0 million in aggregate principal amount of 6.50% Senior Notes due 2022. The filings of the Bankruptcy Petitions described in Note 3 constituted an event of default with respect to the 2022 Notes. The Company did not make the payment of $14.6 million in accrued interest that was due on July 15, 2016. The amount of contractual interest on the 2022 Notes that was not recorded from June 7, 2016 through July 31, 2016 was $4.4 million.

On the Effective Date, by operation of the Plan, all outstanding obligations under the 2022 Notes were cancelled.

During the year ended December 31, 2015, we repurchased and cancelled $50.0 million in aggregate principal amount of the 2022 Notes in multiple transactions for $31.3 million. We recognized gains on extinguishment of debt of $18.1 million, which included the accelerated amortization of deferred financing costs of $0.6 million.

Term Loans

In June 2014, we entered into a $400.0 million seven-year term loan credit agreement. Borrowings under the Term Loan bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month London Interbank Offered Rate (“LIBOR”) rate adjusted daily plus 1.00% or (ii) LIBOR, with a floor of 0.75%, plus, in each case, an applicable margin. The applicable margin for borrowings is 2.00% for Base Rate loans and 3.00% for LIBOR loans, depending on whether the Base Rate or LIBOR is used, provided that if and for so long as the leverage

 

31

ratio is less than a certain level and the term loans have certain ratings from each of S&P and Moody’s, such margins will be reduced by 0.25%. As of December 31, 2016, the applicable rate for borrowings under the Term Loan was 3.88733%. The Term Loan is repayable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Term Loan and will mature in full on June 25, 2020.

Obligations under the Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Term Loan at any time. Borrowings under our Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. We are in compliance with the related covenants as of December 31, 2016.

In May 2015, we entered into an incremental term supplement to the Term Loan and borrowed an additional $100.0 million in aggregate principal amount (the “Incremental Term Loan”), receiving net proceeds of $94.5 million. Borrowings under the Incremental Term Loan bear interest at our option at either (i) LIBOR, with a floor of 1.00% or (ii) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month LIBOR rate adjusted daily plus 1.00%, plus, in each case, an applicable margin. The applicable margin for borrowings is 9.00% for LIBOR loans and 8.00% for Base Rate loans, depending on whether the Base Rate or LIBOR is used. As of December 31, 2016, the applicable rate for borrowings under the Incremental Term Loan was 10.00%. The Incremental Term Loan is payable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Incremental Term Loan and will mature in full on June 25, 2021.

Obligations under the Incremental Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Incremental Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Incremental Term Loan at any time. Borrowings under our Incremental Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Incremental Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. All prepayments of the Incremental Term Loan, except for mandatory prepayments described above, if made on or prior to the 42-month anniversary of the Incremental Term Loan, are subject to a prepayment premium equal to (i) a make-whole premium determined pursuant to a formula set forth in the Incremental Term Loan if made on or prior to the 18-month anniversary of the Incremental Term Loan, (ii) 5.00% of such principal amount if made after the 18-month anniversary and on or prior to the 30-month anniversary of the Incremental Term Loan, or (iii) 3.00% of such principal amount if made after the 30-month anniversary and on or prior to the 42-month anniversary of the Incremental Term Loan. We are in compliance with the related covenants as of December 31, 2016.

 

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The filings of the Bankruptcy Petitions described in Note 3 constituted an event of default with respect to the Term Loan and the Incremental Term Loan. Upon the Effective Date of the Plan, such defaults were deemed cured or waived. As outlined in the Plan, we paid a consent fee equal to 2% of the Term Loan and Incremental Term Loan, paid $15.0 million of the Incremental Term Loan balance and the Incremental Term Loan prepayment premium was suspended for an 18-month period beginning on the Effective Date of the Plan.

On the Effective Date, by operation of the Plan, the Company entered into an amendment to the Term Loan and related guaranty agreement that, among other things, requires us to use commercially reasonable efforts to maintain credit ratings with Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, restrict our ability to create foreign subsidiaries, and revise certain provisions to address the granting of new liens on our assets.

In addition, on the Effective Date, by operation of the Plan, the Company entered into a waiver in respect of the Incremental Term Loan (the “Incremental Term Loan Waiver”) whereby the incremental term lenders agreed to waive their right to any prepayment premium that may be payable in respect of the Incremental Term Loan (other than in connection with a pre-maturity acceleration of the Incremental Term Loan) for a period of eighteen months following the Effective Date. The Company also entered into an amendment to the Incremental Term Loan and the related guaranty agreement to revise certain provisions to address the granting of new liens on our assets.

On the Effective Date, by operation of the Plan, the Company entered into new amended and restated security documentation in connection with the Term Loan and Incremental Term Loan that grants liens on and security interests in substantially all of our assets (subject to certain exclusions). The Company also entered into an inter-creditor agreement with the agents for the New ABL Credit Facility, the Term Loan and the Incremental Term Loan that will govern the rights of its lenders with respect to the distribution of proceeds from our assets securing our obligations under the New ABL Credit Facility, the Term Loan and the Incremental Term Loan.

Senior Secured Debtor-In-Possession Credit Agreement

On June 8, 2016, in connection with the filings of the Bankruptcy Petitions, the Company, with certain of our subsidiaries as borrowers, entered into a senior secured debtor-in-possession credit facility with total commitments of $100.0 million.

On the Effective Date, by operation of the Plan, the DIP Facility was amended and restated, and the outstanding obligations pursuant thereto were converted to obligations under the New ABL Credit Facility.

New ABL Credit Facility

On the Effective Date, by operation of the Plan, certain of our domestic subsidiaries as borrowers entered into a five-year senior secured revolving credit facility with total commitments of $100.0 million. The maximum amount that we may borrow under the New ABL Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable, subject to reserves and other adjustments.

All obligations under the New ABL Credit Facility are fully and unconditionally guaranteed jointly and severally by the Company and all of our other present and future direct and indirect material domestic subsidiaries. Borrowings under the New ABL Credit Facility are secured by liens on substantially all of our personal property, and bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the rate of interest publicly announced by Wells Fargo Bank, National Association, as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR Rate plus 1.00%, each of which is subject to an applicable margin, or (ii) LIBOR, plus, in each case, an applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum for Base Rate loans and 2.00% to 2.50% per annum for LIBOR loans. The unused portion of the New ABL Credit Facility is subject to a commitment fee that varies from 0.375% to 0.50% per

 

33

annum, according to average unused amounts. Interest on LIBOR loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on Base Rate loans is payable monthly in arrears.

The New ABL Credit Facility contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. The New ABL Credit Facility also requires maintenance of a fixed charge coverage ratio based on the ratio of consolidated EBITDA to fixed charges, in each case as defined in the New ABL Credit Facility. If we fail to perform our obligations under the agreement that results in an event of default, the commitments under the New ABL Credit Facility could be terminated and any outstanding borrowings under the New ABL Credit Facility may be declared immediately due and payable. The New ABL Credit Facility also contains cross default provisions that apply to our other indebtedness. We are in compliance with the related covenants as of December 31, 2016.

As of December 31, 2016, we had no borrowings outstanding under the New ABL Credit Facility, letters of credit of $15.9 million and availability of $58.6 million.

 

12. Other Current Liabilities

Other current liabilities as of December 31, 2016 and 2015 are detailed below (in thousands):

 

     Successor      Predecessor  
     December 31,
2016 		     December 31,
2015 		 

Other Current Liabilities:

       

Payroll-related accruals

   $ 15,964      $ 21,561  

Accrued operating expenses

     15,499        29,760  

Self-insurance reserves

     7,638        9,718  

Income, property, sales, use and other taxes

     4,899        8,336  

Accrued capital expenditures

     2,115        5,993  

Interest

     3,661        22,950  
  

 

 

    

 

 

 

Total Other Current Liabilities

   $ 49,776      $ 98,318  
  

 

 

    

 

 

 

 

13. Commitments and Contingencies

Operating Leases

As of December 31, 2016, we were party to five lease agreements with various third parties to utilize 724 lease rail cars for initial terms of five to seven years. Additional rental payments are required for the use of rail cars in excess of the allowable mileage stated in the respective agreement.

As of December 31, 2016, we were also party to various lease agreements for other property and equipment with varying terms.

Aggregate undiscounted minimum future lease payments under our operating leases at December 31, 2016 are presented below:

 

     Rail Cars      Other      Total  
     (in thousands)  

2017

   $ 3,290      $ 417      $ 3,707  

2018

     2,165        259      $ 2,424  

2019

     1,331        30      $ 1,361  

2020

     490        —        $ 490  
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,276      $ 706      $ 7,982  
  

 

 

    

 

 

    

 

 

 

 

34

Rent expense for drilling rigs, real property, rail cars and other property and equipment for the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014 was $2.4 million, $4.1 million, $8.0 million and $35.5 million, respectively, and was included in operating costs in our consolidated statements of operations.

Litigation

While the filing of the Bankruptcy Petitions automatically stayed certain actions against the Company, including actions to collect pre-petition indebtedness or to exercise control over the property of its bankruptcy estates, the Company received an order from the Bankruptcy Court allowing it to pay all general claims, including claims of litigation counterparties, in the ordinary course of business in accordance with applicable non-bankruptcy laws notwithstanding the commencement of the Chapter 11 cases. The Plan confirmed in the Chapter 11 cases provides for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 cases.

On the Effective Date, by operation of the Plan, the Company, on its behalf and on behalf of its subsidiaries, entered into a Litigation Trust Agreement (the “Litigation Trust Agreement”) with Alan Carr (the “Trustee”), pursuant to which the Litigation Trust (the “Trust”) was established for the benefit of specified holders of allowed claims. Pursuant to the Plan and the Confirmation Order, the Company transferred specified claims and causes of action to the Trust with title to such claims and causes of action being free and clear of all liens, claims, encumbrances, and interests. In addition, pursuant to the Plan and Confirmation Order, the Company transferred $50,000 in cash to the Trust to pay the reasonable costs and expenses associated with the administration of the Trust. The Trustee may prosecute the transferred claims and causes of action and conduct such other action as described in and authorized by the Plan, make timely and appropriate distributions to the beneficiaries of the Trust, and otherwise carry out the provisions of the Litigation Trust Agreement. The Company is not a beneficiary of the Trust.

We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, property damage claims and contract actions. We record an associated liability when a loss is probable and the amount can be reasonably estimated. Although the outcome of litigation cannot be predicted with certainty, management is of the opinion that no pending or threatened lawsuit or dispute incidental to our business operations is likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued and actual results could differ materially from management’s estimates.

Self-Insured Reserves

We are self-insured up to certain retention limits with respect to workers’ compensation and general liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history. Included in operating costs is workers’ compensation (credits) expense of ($1.5) million, $2.4 million, $4.0 million and $8.3 million for the 2016 Successor Period, the 2016 Predecessor Period, and the years ended December 31, 2015 and 2014, respectively.

 

14. Share-Based Compensation

2016 Omnibus Incentive Plan

In accordance with the Plan, on September 20, 2016, the Company adopted the 2016 Omnibus Incentive Plan. Our stock-based compensation program currently consists of restricted stock units available to employees and directors, which are equity-classified awards. The aggregate number of shares of common stock reserved for issuance pursuant to the 2016 Omnibus Incentive Plan is 2,200,000.

 

35

The fair value of the restricted stock units is determined based on the estimated fair market value of SSE common shares on the date of grant. This value is amortized over the vesting period. Included in operating costs and general and administrative expenses is stock-based compensation expense of $10.6 million for the 2016 Successor Period related to the 2016 Omnibus Incentive Plan.

A summary of the status of changes of unvested shares of restricted stock units under the 2016 Omnibus Incentive Plan is presented below:

 

     Number of
Unvested
Restricted Shares 		     Weighted
Average
Grant-Date
Fair Value 		 
     (In thousands)         

Unvested shares as of September 20, 2016

     —        $ —    

Granted

     1,945      $ 17.31  

Vested

     (605 )     $ 17.31  

Forfeited

     —        $ —    
  

 

 

    

Unvested shares as of December 31, 2016

     1,340      $ 17.31  
  

 

 

    

As of December 31, 2016, there was $23.1 million of total unrecognized compensation cost related to the unvested restricted stock units. The cost is expected to be recognized over a period of 33 months.

2014 Incentive Plan

Prior to the spin-off, our employees participated in the CHK share-based compensation program and received restricted stock, and in the case of senior management, stock options. Effective July 1, 2014, our employees began participating in the SSE 2014 Incentive Plan. The 2014 Incentive Plan consisted of restricted stock available to employees and stock options. The restricted stock awards and stock options were equity-classified awards.

In connection with the spin-off, unvested awards granted under the CHK share-based compensation program were cancelled and substituted as follows:

 

  •   Each outstanding award of options to purchase shares of CHK common stock was replaced with a substitute award of options to purchase shares of Predecessor SSE common stock. The substitute awards of options were intended to preserve the intrinsic value of the original option and the ratio of the exercise price to the fair market value of the stock subject to the option.

 

  •   The CHK restricted stock awards and restricted stock unit awards were replaced with substitute awards in Predecessor SSE common stock, each of which generally preserved the value of the original award.

Awards granted in connection with the substitution of awards originally issued under the CHK share-based compensation program were a part of the 2014 Incentive Plan and reduced the maximum number of shares of common stock available for delivery under the 2014 Incentive Plan.

Upon the Company’s emergence from bankruptcy on August 1, 2016, as discussed in Note 3, the Company’s common stock was canceled and New Common Stock was issued. SSE’s existing stock-based compensation awards under the 2014 Incentive Plan were also either vested or canceled upon the Company’s emergence from bankruptcy. Accelerated vesting and cancellation of these stock-based compensation awards resulted in the recognition of expense, on the date of vesting or cancellation, to record any previously unamortized expense related to the awards.

 

36

Equity-Classified Awards

Restricted Stock. The fair value of restricted stock awards was determined based on the fair market value of SSE common shares on the date of the grant. This value was amortized over the vesting period. All unvested restricted stock awards under the 2014 Incentive Plan vested upon the Company’s emergence from bankruptcy. During the 2016 Predecessor Period, the Company recognized expense of $24.9 million as a result of the accelerated vesting of these awards, which is included in reorganization items, net in the consolidated statement of operations.

A summary of the changes of the shares of restricted stock under the 2014 Incentive Plan is presented below.

 

     Number of
Unvested
Restricted Shares 		     Weighted
Average
Grant-Date
Fair Value 		 
     (in thousands)         

Unvested shares as of January 1, 2016

     5,896      $ 11.93  

Granted

     —        $ —    

Vested

     (5,746 )     $ 6.74  

Forfeited

     (150 )     $ 14.06  
  

 

 

    

Unvested shares as of August 1, 2016

     —        $ —    
  

 

 

    

Stock Options . CHK granted stock options to our chief executive officer under CHK’s Long-Term Incentive Plan for incentive and retention purposes, which were replaced with a substitute option to purchase shares of SSE common stock in connection with the spin-off. The substitute incentive-based stock options vested ratably over a three-year period and the substitute retention-based stock options vested one-third on each of the third, fourth and fifth anniversaries of the grant date of the original CHK award. Outstanding options were scheduled to expire ten years from the date of grant of the original CHK award. We have not issued any new stock options, other than the replacement awards, since the spin-off. All stock options awarded under the 2014 Incentive Plan were cancelled upon the Company’s emergence from bankruptcy. During the 2016 Predecessor Period, the Company recognized expense of $0.2 million as a result of the cancellations, which is included in reorganization items, net in the consolidated statement of operations.

The following table provides information related to stock option activity for 2016 Predecessor Period:

 

     Number of
Shares
Underlying
Options 		     Weighted
Average
Exercise Price
Per Share 		     Weighted
Average
Contract Life
in Years 		     Aggregate
Intrinsic
Value(a) 		 
     (in thousands)                    (in thousands)  

Outstanding at January 1, 2016

     348      $ 16.19        7.23      $ —    

Granted

     —        $ —          —        $ —    

Exercised

     —        $ —          —        $ —    

Cancelled

     (348 )     $ 16.19        —        $ —    
  

 

 

          

Outstanding at August 1, 2016

     —        $ —          —        $ —    
  

 

 

          

Exercisable at August 1, 2016

     —        $ —          —        $ —    
  

 

 

          

Through the date of the spin-off, we were charged by CHK for share-based compensation expense related to our direct employees. Pursuant to the employee matters agreement with CHK, our employees received a new award under the 2014 Plan in substitution for each unvested CHK award then held (which were cancelled). We recorded a non-recurring credit of $10.5 million to operating costs and general and administrative expenses during the second quarter of 2014 as a result of the cancellation of the unvested CHK awards.

 

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Included in operating costs and general administrative expenses is stock-based compensation expense of $12.3 million, $38.5 million and $29.8 million for the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, respectively, related to the 2014 Incentive Plan.

Other

Performance Share Units . CHK granted performance share units (“PSUs”) to our chief executive officer under CHK’s Long Term Incentive Plan that includes both an internal performance measure and external market condition as it relates to CHK. Following the spin-off, compensation expense is recognized through the changes in fair value of the PSUs over the vesting period with a corresponding adjustment to equity, and any related cash obligations are the responsibility of CHK. We recognized expenses (credits) of a nominal amount, $0.1 million, ($1.6) million and ($0.4) million related to these PSUs for the 2016 Successor Period, the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, respectively.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation,” which modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. We elected to adopt ASU 2016-09 effective December 31, 2016. The adoption of this standard had no impact on our consolidated financial statements.

 

15. Income Taxes

The components of income tax benefit for each of the periods presented below are as follows:

 

     Successor        
     Five Months
Ended
December 31,
2016 		    Predecessor  
       Seven Months
Ended
July 31, 2016 		     Years Ended December 31,  
                  2015                      2014          
           (in thousands)         

Current

   $ —       $ (7 )     $ 58      $ 674  

Deferred

     —         (59,124 )       (92,686 )       (2,863 ) 
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ —       $ (59,131 )     $ (92,628 )     $ (2,189 ) 
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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The effective income benefit differed from the computed “expected” federal income tax benefit on loss before income taxes for the following reasons:

 

     Successor     Predecessor  
     Five Months
Ended
December 31,
2016 		    Seven
Months
Ended
July 31, 2016 		     Years Ended December 31,  
                2015                  2014        
           (in thousands)         

Income tax benefit at the federal statutory rate (35%)

   $ (22,246 )    $ (75,195 )     $ (109,906 )     $ (3,559 ) 

State income taxes (net of federal income tax benefit)

     (1,015 )      (2,277 )       (4,118 )       538  

Discharge of debt and other reorganization-related items

     232,395       (37,283 )       —          —    

Stock-based compensation shortfall

     (1,282 )      23,443        8,967        —    

Executive compensation

     2,110       —          —          —    

Goodwill impairment

     —         —          9,602        —    

Other permanent differences

     1,192       676        2,518        601  

Effect of change in state taxes

     (2,010 )      40        (23 )       —    

Other

     (40 )      155        332        231  

Change in valuation allowance

     (209,104 )      31,310        —          —    
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ —       $ (59,131 )     $ (92,628 )     $ (2,189 ) 
  

 

 

   

 

 

    

 

 

    

 

 

 

Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes. The tax-effected temporary differences and tax loss carryforwards which comprise deferred taxes are as follows:

 

     Successor      Predecessor  
     December 31,
2016 		     December 31,
2015 		 

Deferred tax liabilities:

       

Property and equipment

   $ (35,405 )     $ (242,879 ) 

Term Loan

     (16,071 )       —    

Intangible assets

     (1,563 )       (1,551 ) 

Prepaid expenses

     (2,489 )       (3,580 ) 

Other

     (1,307 )       (1,121 ) 
  

 

 

    

 

 

 

Deferred tax liabilities

     (56,835 )       (249,131 ) 
  

 

 

    

 

 

 

Deferred tax assets:

       

Net operating loss carryforwards

     48,540        172,822  

Intangible assets

     8,271        —    

Deferred stock compensation

     47        10,035  

Accrued liabilities

     3,169        3,231  

Other long-term assets

     6,156        —    

Other

     1,128        3,919  

Valuation allowance

     (10,476 )       —    
  

 

 

    

 

 

 

Deferred tax assets

     56,835        190,007  
  

 

 

    

 

 

 

Net deferred tax liability

   $ —        $ (59,124 ) 
  

 

 

    

 

 

 

Reflected in accompanying balance sheets as:

       

Current deferred income tax asset

   $ —        $ 1,499  

Non-current deferred income tax liability

     —          (60,623 ) 
  

 

 

    

 

 

 

Total

   $ —        $ (59,124 ) 
  

 

 

    

 

 

 

 

39

At December 31, 2016, we had NOL carryforwards of approximately $130.6 million. The NOL carryforwards expire from 2034 through 2036. The value of these carryforwards depends on our ability to generate future taxable income. We considered both positive and negative evidence in our determination of the need for valuation allowances for the deferred tax assets associated with our NOLs and other deferred tax assets. As of December 31, 2016, we are in a net deferred tax asset position. We believe it is more likely than not that these deferred tax assets will not be realized, and accordingly, have recorded a full valuation allowance against our net deferred tax assets. In connection with the Company’s emergence from Chapter 11 and subsequent application of fresh-start accounting, we recorded a full valuation allowance of $219.6 million in the 2016 Predecessor Period.

As described in Note 3, elements of the Plan provided that our 2019 Notes and 2022 Notes were exchanged for New Common Stock. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of our equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI is approximately $625.3 million, which will reduce the value of the Company’s net operating losses. We recorded the reduction of net operating losses related to CODI in the 2016 Successor Period. The deferred tax impact of this tax attribute reduction was fully offset by a corresponding decrease in valuation allowance in the 2016 Successor Period.

The IRC provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future taxable income in the event of a change in ownership. Emergence from Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of the IRC. The amount of remaining net operating loss carryforward available after the reduction for CODI will be subject to an annual limitation under IRC Section 382 due to the change in ownership.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes,” which simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets to be classified as noncurrent in the balance sheet. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We elected to adopt this change in accounting principle prospectively as of the bankruptcy emergence date of August 1, 2016. The adoption of this standard had no impact on our consolidated financial statements due to the full valuation allowance against our net deferred tax asset as of August 1, 2016. The adoption of this standard continued to have no impact on our consolidated financial statements due to the full valuation allowance recorded as of December 31, 2016.

 

16. Equity Method Investment

Effective June 6, 2016, we assigned our 49% ownership of the membership interest in Maalt Specialized Bulk, L.L.C. (“Maalt”) back to the majority owners. Prior to this assignment, we used the equity method of accounting to account for our investment in Maalt, which had a zero value as of June 6, 2016. We recorded equity method adjustments to our investment of $0.9 million and ($1.6) million for our share of Maalt’s income (loss) for the years ended December 31, 2015 and 2014, respectively. We also made additional investments of $0.1 million and $0.7 million for the years ended December 31, 2015 and 2014, respectively.

We reviewed our equity method investment for impairment whenever certain impairment indicators existed, including the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. A loss in value of an investment which is other than a temporary decline should be recognized. We estimated that the fair value of our investment in Maalt was approximately zero as of December 31, 2015, which was below the carrying value of

 

40

the investment and resulted in a non-cash impairment charge of $8.8 million during the year ended December 31, 2015. We also recognized a non-cash impairment charge of $4.5 million for the year ended December 31, 2014. Estimated fair value for our investment in Maalt was determined using significant unobservable inputs (Level 3) based on an income approach.

 

17. Fair Value Measurements

The fair value measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Authoritative guidance on fair value measurements and disclosures clarifies that a fair value measurement for a liability should reflect the entity’s non-performance risk. In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 —Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 —Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 —Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.

Fair Value on Recurring Basis

The carrying values of our cash, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.

Fair Value on Non-Recurring Basis

Fair value measurements were applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which consist primarily of impairments on long-lived assets, goodwill and an equity method investment based on Level 3 inputs. See Notes 6, 9 and 16 for additional discussion.

Fair Value of Other Financial Instruments

The fair values of our note receivable and debt, as shown in the table below, reflect the estimated amounts that a market participant would have to pay to purchase the note receivable or our debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices, or average valuations of similar debt instruments at the balance sheet date for those debt instruments for which quoted market prices are not available. Estimated fair values are determined using available market information and valuation methodologies. Considerable judgment

 

41

is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

 

     Successor     Predecessor  
     December 31, 2016     December 31, 2015  
     Carrying
Amount 		     Fair Value
(Level 2) 		    Carrying
Amount 		     Fair Value
(Level 2) 		 
                  (in thousands)  

Financial assets:

            

Note Receivable

   $ 21,243      $ 23,498     $ 27,000      $ 17,842  

Financial liabilities:

            

6.625% Senior Notes due 2019

   $ —        $ —       $ 642,713      $ 221,975  

6.50% Senior Notes due 2022

   $ —        $ —       $ 444,701      $ 71,865  

Term Loans

   $ 430,212      $ 469,377     $ 482,178      $ 371,080  
  

 

 

        

 

 

    

Less: Current portion of long-term debt

   $ 5,000          $ 5,000     
  

 

 

        

 

 

    

Total long-term debt

   $ 425,212          $ 1,564,592     
  

 

 

        

 

 

    

 

18. Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and trade receivables. Accounts receivable from CHK and its affiliates were $48.6 million and $109.6 million as of December 31, 2016 and December 31, 2015, or 49% and 65%, respectively, of our total accounts receivable.

Revenues from CHK and its affiliates were $114.5 million, $217.6 million, $789.5 million and $1.676 billion for the 2016 Successor Period, the 2016 Predecessor Period and the years ended December 31, 2015 and 2014, or 51%, 65%, 70% and 81%, respectively, of our total revenues. Additionally, revenues from another customer of our Hydraulic Fracturing segment represents approximately 11% of our total revenues during the 2016 Successor Period. We believe that the loss of these customers would have a material adverse effect on our operating results as there can be no assurance that replacement customers would be identified and accessed in a timely fashion.

Included in total revenues are amounts related to IBC payments of $38.9 million, $80.7 million and $87.9 million for the 2016 Successor Period, the 2016 Predecessor Period and the year ended December 31, 2015 respectively. Excluding IBC revenues, non-CHK revenue as a percentage of total revenue was 58% and 42% for the 2016 Successor Period and 2016 Predecessor Period, respectively, compared to 32% for the year ended December 31, 2015. See Note 19 for further discussion of agreements entered into with CHK as part of the spin-off, including a services agreement and rig-specific daywork drilling contracts.

 

19. Transactions with CHK

Prior to the completion of our spin-off on June 30, 2014, we were a wholly owned subsidiary of CHK, and transactions between us and CHK (including its subsidiaries) were considered to be transactions with affiliates. Subsequent to June 30, 2014, CHK and its subsidiaries are not considered affiliates of us or any of our subsidiaries. We have disclosed below all agreements entered into between us and CHK prior to the completion of our spin-off.

On June 25, 2014, we entered into a master separation agreement and several other agreements with CHK as part of the spin-off. The master separation agreement entered into between CHK and us governs the separation of our businesses from CHK, the distribution of our shares to CHK shareholders and other matters related to CHK’s relationship with us, including cross-indemnities between us and CHK. In general, CHK agreed to indemnify us for any liabilities relating to CHK’s business and we agreed to indemnify CHK for any liabilities relating to our business.

 

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On June 25, 2014, we entered into a tax sharing agreement with CHK, which governs the respective rights, responsibilities and obligations of CHK and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and certain other matters regarding taxes.

On June 25, 2014, we entered into an employee matters agreement with CHK providing that each company has responsibility for its own employees and compensation plans. The agreement also contains provisions concerning benefit protection for both SSE and CHK employees, treatment of holders of CHK stock options, restricted stock, restricted stock units and performance share units, and cooperation between us and CHK in the sharing of employee information and maintenance of confidentiality.

On June 25, 2014, we entered into a transition services agreement with CHK under which CHK provided or made available to us various administrative services and assets for specified periods beginning on the distribution date. In consideration for such services, we paid CHK certain fees, a portion of which was a flat fee, generally in amounts intended to allow CHK to recover all of its direct and indirect costs incurred in providing those services. These charges from CHK were $8.3 million and $18.0 million for the years ended December 31, 2015 and 2014, respectively. This agreement was terminated during the second quarter of 2015.

We are party to a master services agreement with CHK pursuant to which we provide drilling and other services and supply materials and equipment to CHK. Drilling services are typically provided pursuant to rig-specific daywork drilling contracts similar to those we use for other customers. The specific terms of each request for other services are typically set forth in a field ticket, purchase order or work order. The master services agreement contains general terms and provisions, including minimum insurance coverage amounts that we are required to maintain and confidentiality obligations with respect to CHK’s business, and allocates certain operational risks between CHK and us through indemnity provisions. The master services agreement will remain in effect until we or CHK provides 30 days written notice of termination, although such agreement may not be terminated during the term of the services agreement described below.

Prior to the spin-off, we were party to a services agreement with CHK under which CHK guaranteed the utilization of a portion of our drilling rig and hydraulic fracturing fleets during the term of the agreement. In connection with the spin-off, we entered into new services agreements with CHK which supplements the master services agreement. Under the new services agreement, CHK is required to utilize the lesser of (i) seven, five and three of our hydraulic fracturing crews in years one, two and three of the agreement, respectively, or (ii) 50% of the total number of all hydraulic fracturing crews working for CHK in all its operating regions during the respective year. CHK is required to utilize our hydraulic fracturing services for a minimum number of stages as set forth in the agreement. CHK is entitled to terminate the agreement in certain situations, including in the event we fail to materially comply with the overall quality of service provided by similar service providers. Additionally, CHK’s requirement to utilize our services may be suspended under certain circumstances, such as if we are unable to timely accept and supply services ordered by CHK or as a result of a force majeure event.

In connection with the spin-off, we entered into rig-specific daywork drilling contracts with CHK for the provision of drilling services. The drilling contracts had a commencement date of July 1, 2014 and terms ranging from three months to three years. CHK has the right to terminate the drilling contracts under certain circumstances.

Prior to the spin-off, we were party to a facilities lease agreement with CHK pursuant to which we leased a number of the storage yards and physical facilities out of which we conduct our operations. We incurred $8.2 million of lease expense for the year ended December 31, 2014 under this facilities lease agreement. In connection with the spin-off, we acquired the property subject to the facilities lease agreement, and the facilities lease agreement was terminated.

 

43

Prior to the spin-off, CHK provided us with general and administrative services and the services of its employees pursuant to an administrative services agreement. These services included legal, accounting, treasury, environmental, safety, information technology and other corporate services. In return for the general and administrative services provided by CHK, we reimbursed CHK on a monthly basis for the overhead expenses incurred by CHK on our behalf in accordance with its allocation policy, which included costs and expenses incurred in connection with the provision of any of the services under the agreement, including the wages and benefits of CHK employees who perform services on our behalf. The administrative expense allocation was determined by multiplying revenues by a percentage determined by CHK based on the historical average of costs incurred on our behalf. All of the administrative cost allocations were based on assumptions that management believes are reasonable; however, these allocations are not necessarily indicative of the costs and expenses that would have resulted if we had been operating as a stand-alone entity. These charges from CHK were $26.8 million for the year ended December 31, 2014. In connection with the spin-off, we terminated the administrative services agreement and entered into the transition services agreement described above.

 

20. Segment Information

As of December 31, 2016, our revenues, income (loss) before income taxes and identifiable assets are primarily attributable to three reportable segments. During the second quarter of 2015, we sold the remaining business and assets included in our former oilfield trucking segment. Our former oilfield trucking segment’s historical results for periods prior to the sale continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Each of these segments represents a distinct type of business. These segments have separate management teams which report to our chief operating decision-maker. The results of operations in these segments are regularly reviewed by the chief operating decision-maker for purposes of determining resource allocation and assessing performance. Management evaluates the performance of our segments based upon adjusted earnings before interest, taxes and depreciation and amortization.

Prior to 2016, the information that was regularly reviewed by our chief operating decision-maker included general and administrative expenses that were allocated to each of our reportable segments for corporate overhead functions provided by the Other Operations segment on behalf of our reportable segments. Effective January 1, 2016, we no longer allocate general and administrative expenses to our reportable segments from the Other Operations segment in the information that is reviewed by our chief operating decision-maker. For comparability purposes, this change has been reflected through retroactive revision of our segment information for the year ended December 31, 2015.

The following is a description of our segments and other operations:

Drilling . Our drilling segment provides land-based drilling services. As of December 31, 2016, we owned a fleet of 91 land drilling rigs.

Hydraulic Fracturing . Our hydraulic fracturing segment provides land-based hydraulic fracturing and other well stimulation services. As of December 31, 2016, we owned 13 hydraulic fracturing fleets with an aggregate of 500,000 horsepower.

Oilfield Rentals . Our oilfield rentals segment provides premium rental tools for land-based drilling, completion and workover activities.

Former Oilfield Trucking . Our oilfield trucking segment historically provided drilling rig relocation and logistics services as well as fluid handling services. During the second quarter of 2015, we sold Hodges and sold our water hauling assets. As part of the spin-off, we sold our crude hauling assets to a third party. As of June 30, 2015, there were no remaining assets or operations in the oilfield trucking segment, although we do have ongoing

 

44

liabilities, primarily related to insurance claims, whose income statement impact is charged to general and administrative expense. Our former oilfield trucking segment’s historical results for periods prior to the sale continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Other Operations . Our other operations consists primarily of our corporate functions, including our Term Loans and New ABL Credit Facility for the Successor Period and 2019 Notes, 2022 Notes, Term Loans and Pre-Petition Credit Facility for the Predecessor periods.

 

     Drilling     Hydraulic
Fracturing 		    Oilfield
Rentals 		    Other
Operations 		    Intercompany
Eliminations 		    Consolidated
Total 		 
     (in thousands)  

Successor

            

For the Five Months Ended December 31, 2016:

            

Revenues

   $ 116,767     $ 89,493     $ 16,361     $ 1,197     $ (1,440 )    $ 222,378  

Intersegment revenues

     (37 )      —         (206 )      (1,197 )      1,440       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 116,730     $ 89,493     $ 16,155     $ —       $ —       $ 222,378  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     26,979       34,079       9,032       3,808       —         73,898  

Losses (gains) on sales of property and equipment, net

     (984 )      31       (590 )      (205 )      —         (1,748 ) 

Interest expense

     —         —         —         (15,497 )      —         (15,497 ) 

Other income

     100       63       75       1,874       —         2,112  

Reorganization items, net

     (43 )      (32 )      (13 )      (1,780 )      —         (1,868 ) 

Income (Loss) Before Income Taxes

   $ 37,934     $ (45,385 )    $ (5,140 )    $ (50,968 )    $ —       $ (63,559 ) 

Capital Expenditures

   $ 10,658     $ 989     $ 805     $ 50     $ —       $ 12,502  

As of December 31, 2016:

            

Total Assets

   $ 551,870     $ 148,524     $ 40,677     $ 207,479     $ —       $ 948,550  

 

     Drilling     Hydraulic
Fracturing 		    Oilfield
Rentals 		    Other
Operations 		    Intercompany
Eliminations 		    Consolidated
Total 		 
     (in thousands)  

Predecessor

            

For the Seven Months Ended
July 31, 2016

            

Revenues

   $ 154,813     $ 160,723     $ 18,597     $ 4,842     $ (5,056 )    $ 333,919  

Intersegment revenues

     (19 )      —         (195 )      (4,842 )      5,056       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 154,794     $ 160,723     $ 18,402     $ —       $ —       $ 333,919  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     87,160       49,124       18,773       7,368       —         162,425  

Losses (gains) on sales of property and equipment, net

     1,211       66       (425 )      (4 )      —         848  

Impairments and other

     3,205       —         287       2,624       —         6,116  

Interest expense

     —         —         —         (48,116 )      —         (48,116 ) 

Other income

     362       349       3       1,604       —         2,318  

Reorganization items, net

     (514,627 )      (45,046 )      (18,966 )      548,747       —         (29,892 ) 

Income (Loss) Before Income Taxes

   $ (509,157 )    $ (91,966 )    $ (39,638 )    $ 425,920     $ —       $ (214,841 ) 

Capital Expenditures

   $ 66,084     $ 16,302     $ —       $ 401     $ —       $ 82,787  

 

45

    Drilling     Hydraulic
Fracturing 		    Oilfield
Rentals 		    Former
Oilfield
Trucking 		    Other
Operations 		    Intercompany
Eliminations 		    Consolidated
Total 		 
    (in thousands)  

Predecessor

             

For The Year Ended December 31, 2015:

             

Revenues

  $ 437,749     $ 575,495     $ 77,292     $ 45,512     $ 8,461     $ (13,265 )    $ 1,131,244  

Intersegment revenues

    (1,345 )      —         (705 )      (2,773 )      (8,442 )      13,265       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 436,404     $ 575,495     $ 76,587     $ 42,739     $ 19     $ —       $ 1,131,244  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

    163,380       70,605       41,049       8,787       11,600       —         295,421  

Losses (gains) on sales of property and equipment, net

    10,566       230       (1,780 )      5,728       (88 )      —         14,656  

Impairment of goodwill

    27,434       —         —         —         —         —         27,434  

Impairments and other

    14,329       —         —         2,737       1,566       —         18,632  

Gains on early extinguishment of debt

    —         —         —         —         18,061       —         18,061  

Interest expense

    —         —         —         —         (99,267 )      —         (99,267 ) 

Loss and impairment from equity investees

    —         (7,928 )      —         —         —         —         (7,928 ) 

Other income

    813       1,201       68       16       954       —         3,052  

Loss Before Income Taxes (as Previously Reported)

  $ (43,195 )    $ (22,680 )    $ (40,216 )    $ (38,420 )    $ (169,508 )    $ —       $ (314,019 ) 

Corporate overhead allocation

    31,894       25,647       9,109       4,182       (70,832 )      —         —    

Loss Before Income Taxes (as Adjusted)

  $ (11,301 )    $ 2,967     $ (31,107 )    $ (34,238 )    $ (240,340 )    $ —       $ (314,019 ) 

Capital Expenditures

  $ 153,279     $ 32,743     $ 6,706     $ —       $ 12,978     $ —       $ 205,706  

As of December 31, 2015:

             

Total Assets

  $ 1,144,144     $ 291,584     $ 92,588     $ —       $ 374,302     $ —       $ 1,902,618  

For The Year Ended December 31, 2014:

             

Revenues

  $ 774,888     $ 885,907     $ 154,416     $ 195,618     $ 109,942     $ (39,879 )    $ 2,080,892  

Intersegment revenues

    (358 )      —         (1,296 )      (5,139 )      (33,086 )      39,879       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 774,530     $ 885,907     $ 153,120     $ 190,479     $ 76,856     $ —       $ 2,080,892  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

    140,884       72,105       52,680       21,817       5,426       —         292,912  

Losses (gains) on sales of property and equipment, net

    17,931       (17 )      (2,355 )      (21,853 )      22       —         (6,272 ) 

Impairments and other(a)

    29,602       207       955       —         —         —         30,764  

Interest expense

    —         —         —         —         (79,734 )      —         (79,734 ) 

Loss and impairment from equity investees

    —         (6,094 )      —         —         —         —         (6,094 ) 

Other income (expense)

    364       60       179       226       (165 )      —         664  

Income (Loss) Before Income Taxes

  $ 79,999     $ 63,548     $ (2,459 )    $ 6,359     $ (157,615 )    $ —       $ (10,168 ) 

Capital Expenditures

  $ 373,353     $ 37,211     $ 22,337     $ 3,599     $ 21,118     $ —       $ 457,618  

As of December 31, 2014:

             

Total Assets

  $ 1,322,160     $ 449,966     $ 155,683     $ 138,909     $ 224,754     $ (1,179 )    $ 2,290,293  

 

(a) Includes lease termination costs of $9.7 million for the year ended December 31, 2014, respectively.

 

46

21. Quarterly Financial Data (unaudited)

Summarized unaudited quarterly financial data for 2016 and 2015 are as follows (in thousands):

 

     Successor      Predecessor  
     Three Months
Ended December 31,
2016 		    Two Months
Ended
September 30,
2016 		     One Month
Ended July 31,
2016 		    Three Months
Ended June 30,
2016 		    Three Months
Ended March 31,
2016 		 

Revenues

   $ 142,722     $ 79,656      $ 40,438     $ 138,120     $ 155,361  

Operating loss(a)

   $ (17,323 )    $ (30,983 )     $ (21,294 )    $ (74,496 )    $ (43,361 ) 

Net loss(a)

   $ (27,031 )    $ (36,528 )     $ (11,640 )    $ (84,505 )    $ (59,563 ) 

Loss per share(c):

             

Basic

   $ (1.21 )    $ (1.66 )     $ (0.21 )    $ (1.53 )    $ (1.09 ) 

Diluted

   $ (1.21 )    $ (1.66 )     $ (0.21 )    $ (1.53 )    $ (1.09 ) 

 

     Predecessor  
     Three Months
Ended December 31,
2015 		     Three Months
Ended
September 30,
2015 		     Three Months
Ended June 30,
2015 		     Three Months
Ended March 31,
2015 		 

Revenues

   $ 192,788      $ 213,541      $ 295,128      $ 429,787  

Operating loss(b)

   $ (45,818 )     $ (46,281 )     $ (104,645 )     $ (31,193 ) 

Net loss(b)

   $ (60,590 )     $ (48,530 )     $ (74,670 )     $ (37,601 ) 

Loss per share(c):

           

Basic

   $ (1.18 )     $ (0.95 )     $ (1.51 )     $ (0.78 ) 

Diluted

   $ (1.18 )     $ (0.95 )     $ (1.51 )     $ (0.78 ) 

 

(a) Includes $2.9 million, $0.1 million, ($0.5) million, $23.7 million and $4.7 million in restructuring charges related to the Chapter 11 filing for the quarter ended December 31, 2016, the two months ended September 30, 2016, the one month ended July 31, 2016, the quarter ended June 30, 2016 and the quarter ended March 31, 2016, respectively. Includes $1.6 million, $0.2 million, $16.5 million and $13.4 million in reorganization items related to the Chapter 11 filing for the quarter ended December 31, 2016, the two months ended September 30, 2016, the one month ended July 31, 2016 and the quarter ended June 30, 2016, respectively. Includes $0.02 million, $5.8 million and $0.3 million of impairments and other for the one month ended July 31, 2016, the quarter ended June 30, 2016 and the quarter ended March 31, 2016, respectively.
(b) Includes $35.0 million of loss on sale of a business for the quarter ended June 30, 2015, $27.4 million of impairment of goodwill for the quarter ended December 31, 2015 and $1.9 million, $1.6 million, $8.8 million and $6.3 million of impairments and other for the quarters ended December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015, respectively.
(c) The sum of quarterly net income per share may not agree to the total for the year as each period’s computation is based on the weighted average number of common shares outstanding during each period.

 

22. Recently Issued and Proposed Accounting Standards

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Inventory”, which updates previously issued standards to improve the income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

 

47

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which amends eight specific cash flow issues with the objective of reducing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall,” which requires separate presentation of financial assets and liabilities on the balance sheet and requires evaluation of the need for valuation allowance of deferred tax assets related to available-for-sale securities. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017 with early adoption not permitted. We do not expect the adoption of this guidance will have a material effect on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance will have a material effect on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern,” which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for fiscal years, and interim periods within those years, ending after December 15, 2016. Adoption of this standard had no impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; the FASB also provided for early adoption for annual reporting periods beginning after December 15, 2016. We are currently evaluating what impact this standard, including related ASU Nos. 2016-08, 2016-10, 2016-12 and 2016-20, will have on our consolidated financial statements.

 

23. Subsequent Events

Between January 1, 2017 and February 9, 2017, 564,854 Series A Warrants were exercised through cash settlement and 30,201 Series A Warrants were exercised through net share settlement. As a result, the Company received cash proceeds of $13.5 million and issued 578,986 shares of New Common Stock subsequent to December 31, 2016.

 

48

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 combine the historical consolidated statements of operations of Patterson-UTI and SSE, giving effect to the merger as if it had occurred on January 1, 2016. The unaudited pro forma condensed combined balance sheet as of December 31, 2016 combines the historical condensed consolidated balance sheets of Patterson-UTI and SSE, giving effect to the merger as if it had occurred on December 31, 2016. The historical condensed consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the merger, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the combined company’s results. The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial statements were based on and should be read in conjunction with the:

 

  •   separate historical financial statements of Patterson-UTI as of and for the year ended December 31, 2016 and the related notes included in Patterson-UTI’s Annual Report on Form 10-K for the year ended December 31, 2016, which has been filed separately by Patterson-UTI with the United States Securities and Exchange Commission (the “SEC”); and

 

  •   separate historical financial statements of SSE as of and for the five months ended December 31, 2016 and for the seven months ended July 31, 2016 and the related notes included as Exhibit 99.2 to this Current Report.

The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. Such pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the merger been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting under U.S. generally accepted accounting principles, and the regulations of the SEC. All material transactions between Patterson-UTI and SSE during the periods presented in the unaudited pro forma condensed combined financial statements have been eliminated. Patterson-UTI will be considered the acquirer in the merger for accounting purposes. The acquisition accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements. Differences between these preliminary estimates and the final acquisition accounting will occur, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger, the costs to integrate the operations of Patterson-UTI and SSE, or the costs necessary to achieve any such cost savings, operating synergies or revenue enhancements.

 

1

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of December 31, 2016

(in thousands)

 

     Patterson-UTI     SSE     Reclass
Adjustments 		         Pro Forma
Adjustments 		         Pro Forma
Combined 		 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 35,152     $ 48,654     $ —          $ 471,570     B    $ 125,767  
              (429,609 )    K   

Accounts receivable, net

     148,091       99,530       —            —            247,621  

Federal and state income taxes receivable

     2,126       —         —            —            2,126  

Inventory

     20,191       12,935       (8,023 )    A      —            25,103  

Deferred tax assets, net

     36,439       —         —            1,822     C      38,261  

Other

     41,322       14,414       2,696     A      —            58,432  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total current assets

     283,321       175,533       (5,327 )         43,783          497,310  

Property and equipment, net

     3,408,963       749,540       5,327     A      216,486     D      4,380,316  

Goodwill

     86,234       —         —            452,305     E      538,539  

Intangibles, net

     2,732       —         —            41,860     F      44,592  

Deposits on equipment purchases

     16,050       —         —            —            16,050  

Note receivable

     —         21,243       —            —            21,243  

Other

     7,306       2,234       —            (1,132 )    G      8,408  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total assets

   $ 3,804,606     $ 948,550     $ —          $ 753,302        $ 5,506,458  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable and accrued expenses

   $ 264,815     $ 65,366     $ —          $ 16,590     H    $ 384,242  
              35,161     I   
              2,310     J   

Current portion of long-term debt

     —         5,000       —            (5,000 )    K      —    
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total current liabilities

     264,815       70,366       —            49,061          384,242  

Other long-term debt

     598,437       425,212       —            (425,212 )    K      598,437  

Deferred tax liabilities, net

     682,976       —         —            (18,417 )    C      741,469  
              76,910     L   

Other

     9,654       1,724       —            —            11,378  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total liabilities

     1,555,882       497,302       —            (317,658 )         1,735,526  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Stockholders’ equity:

                

Common stock

     1,044,611       514,807       —            471,570     B      2,583,409  
              (514,807 )    M   
              1,067,228     N   

Retained earnings (deficit)

     2,116,341       (63,559 )      —            63,559     M      2,099,751  
              (16,590 )    H   

Accumulated other comprehensive loss

     (1,134 )      —         —            —            (1,134 ) 

Treasury stock, at cost

     (911,094 )      —         —            —            (911,094 ) 
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total stockholders’ equity

     2,248,724       451,248       —            1,070,960          3,770,932  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total liabilities and stockholders’ equity

   $ 3,804,606     $ 948,550     $ —          $ 753,302        $ 5,506,458  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

2

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the year ended December 31, 2016

(in thousands, except per share amounts)

 

    Patterson-UTI     SSE
Successor
5 months 		    SSE
Predecessor
7 months 		    Reclass
Adjustments 		        Pro Forma
Adjustments 		        Pro Forma
Combined 		     

Operating revenues:

                 

Contract drilling

  $ 543,663     $ 116,730     $ 154,794     $ —         $ —         $ 815,187    

Pressure pumping

    354,070       89,493       160,723       —           —           604,286    

Oilfield Rentals

    —         16,155       18,402       —           —           34,557    

Other

    18,133       —         —         —           —           18,133    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating revenues

    915,866       222,378       333,919       —           —           1,472,163    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Operating costs and expenses:

                 

Contract drilling

    305,804       52,571       57,573       —           —           415,948    

Pressure pumping

    334,588       100,401       158,569       (846 )    AA     —           580,852    
          (11,860 )    BB        

Oilfield Rentals

    —         12,827       20,172       —           —           32,999    

Other

    8,384       927       700       —           —           10,011    

Depreciation, depletion, amortization and impairment

    668,434       73,898       168,541       11,860     BB     (254,299 )    CC     825,107    
              32,970     DD    
              123,703     EE    

Selling, general and administrative

    69,205       31,808       66,667       846     AA     —           168,526    

Other operating (income) expense, net

    (14,323 )      (1,748 )      848       —           —           (15,223 )   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating costs and expenses

    1,372,092       270,684       473,070       —           (97,626 )        2,018,220    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Operating (loss) income

    (456,226 )      (48,306 )      (139,151 )      —           97,626         (546,057 )   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Other income (expense):

                 

Interest income

    327       —         —         —           —           327    

Interest expense, net of amount capitalized

    (40,366 )      (15,497 )      (48,116 )      —           63,613     FF     (40,366 )   

Other

    69       244       (27,574 )      —           —           (27,261 )   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total other income (expense)

    (39,970 )      (15,253 )      (75,690 )      —           63,613         (67,300 )   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

(Loss) income before income
taxes

    (496,196 )      (63,559 )      (214,841 )      —           161,239         (613,357 )   

Income tax (benefit) expense

    (177,562 )      —         (59,131 )      —           56,434     GG     (180,259 )   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Net (loss) income

  $ (318,634 )    $ (63,559 )    $ (155,710 )    $ —         $ 104,805       $ (433,098 )   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Net loss per common share:

                 

Basic and Diluted

  $ (2.18 )    $ (2.86 )    $ (2.84 )            $ (2.04 )   
 

 

 

   

 

 

   

 

 

           

 

 

   

Weighted average number of common shares outstanding:

                 

Basic and Diluted

    146,178       22,186       54,832           (11,310 )        211,886     HH
 

 

 

   

 

 

   

 

 

       

 

 

     

 

 

   

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

 

3

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1: Description of Transaction

On April 20, 2017, Seventy Seven Energy Inc., a Delaware corporation (“ SSE ”), became a wholly-owned subsidiary of Patterson-UTI Energy, Inc., a Delaware corporation (“ Patterson-UTI ”), as a result of the merger of Pyramid Merger Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Patterson-UTI (“ Merger Sub ”), with and into SSE (the “ Merger ”). The Merger was effected pursuant to an Agreement and Plan of Merger, dated as of December 12, 2016, by and among Patterson-UTI, SSE, and Merger Sub (the “ Merger Agreement ”).

At the effective time of the Merger (the “ Effective Time ”) each issued and outstanding share of SSE common stock, par value $0.01 per share, other than shares owned by SSE and its wholly owned subsidiaries, shares owned by Patterson-UTI or Merger Sub and shares for which appraisal rights held by SSE stockholders have been perfected in compliance with Section 262 of the General Corporation Law of the State of Delaware, was converted into the right to receive 1.7851 shares (the “ Exchange Ratio ”) of newly issued Patterson-UTI common stock, par value $0.01 per share, rounded down to the nearest whole share. Instead of issuing fractional shares, each SSE stockholder who otherwise would have been entitled to receive a fraction of a share of Patterson-UTI common stock will receive cash (without interest) in lieu thereof, upon surrender of his or her shares of SSE common stock. Based on the number of shares of SSE common stock issued and outstanding immediately prior to the Effective Time, a total of 47,538,488 shares of Patterson-UTI common stock were issued to the former holders of SSE common stock pursuant to the Merger Agreement.

Immediately prior to the Effective Time, each SSE restricted stock unit award granted prior to December 12, 2016 that was outstanding as of immediately prior to the Effective Time (the “ Incentive Awards ”) immediately vested, any forfeiture restrictions applicable to such Incentive Awards immediately lapsed, the Incentive Awards were deemed settled, and each share of SSE common stock subject to such Incentive Awards was treated as a share of SSE common stock. At the Effective Time, each such share of SSE common stock that was distributed in settlement of the Incentive Awards entitled the holder thereof to receive the Merger Consideration. In addition, at the Effective Time, each SSE restricted stock unit award granted on or following December 12, 2016 was assumed by Patterson-UTI and converted into a restricted stock unit award, with the same terms and conditions as in effect immediately prior to the Effective Time, covering a number of shares of Patterson-UTI common stock equal to (i) the number of shares of SSE common stock subject to the award immediately prior to the Effective Time, multiplied by (ii) the Exchange Ratio, rounded to the nearest whole share.

Note 2: Basis of Presentation

The merger is reflected in the unaudited pro forma condensed combined financial statements pursuant to the acquisition method of accounting. Under the acquisition method, the total estimated purchase price as described in Note 3 was measured at the closing date of the merger using the market price of Patterson-UTI common stock at that time. The assets and liabilities of SSE have been measured at fair value based on various preliminary estimates using assumptions that Patterson-UTI management believes are reasonable utilizing information currently available. Use of different

 

4

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)

 

estimates and assumptions could yield materially different results. There were limitations on the type of information that could be exchanged between Patterson-UTI and SSE until the merger was complete.

The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows. The excess of the purchase price over the estimated amounts of identifiable assets and liabilities of SSE as of the effective date of the merger will be allocated to goodwill. The purchase price allocation is subject to finalization of Patterson-UTI’s analysis of the fair value of the assets and liabilities of SSE as of the effective date of the merger. Accordingly, the purchase price allocation in the unaudited pro forma condensed combined financial statements is preliminary and will be adjusted upon completion of the final analysis of the fair value of the assets and liabilities of SSE. Such adjustments could be material.

In accordance with the SEC’s rules and regulations, the unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger, or the costs necessary to integrate the operations of Patterson-UTI and SSE or achieve any such cost savings, operating synergies or revenue enhancements.

Now that the merger is complete Patterson-UTI will perform a detailed review of SSE’s accounting policies. As a result of that review, Patterson-UTI may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the consolidated financial statements of the combined company.

Further review of SSE’s financial statements may result in revisions to SSE’s historical presentation to conform to Patterson-UTI’s presentation.

Note 3: Consideration Transferred

The following is the consideration transferred to effect the acquisition of SSE.

 

     (in thousands, except
exchange ratio and per
share amounts) 		 

Equity Consideration:

     

Number of shares of SSE common stock outstanding as of December 31, 2016

     22,354     

Number of SSE “in-the-money” warrants exercised after December 31, 2016

     2,812     

Number of SSE restricted stock unit awards vesting on change of control

     1,182     

Number of SSE retention restricted stock unit awards

     283     
  

 

 

    
     26,631     

Multiplied by the exchange ratio

     1.7851     
  

 

 

    

Patterson-UTI shares of common stock issued in connection with the merger

     47,538     

Patterson-UTI common stock share price on April 20, 2017

   $ 22.45     
  

 

 

    

Common stock equity consideration

        1,067,228  

Other Consideration

     

SSE Long-Term Debt repaid by Patterson-UTI

        472,000  
     

 

 

 

Consideration transferred

        1,539,228  
     

 

 

 

 

5

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)

 

Note 4: Estimate of Assets to be Acquired and Liabilities to be Assumed

The following is a preliminary estimate of the assets acquired and the liabilities assumed by Patterson-UTI, reconciled to the estimate of consideration expected to be transferred:

 

     (in thousands)  

Book value of assets acquired at December 31, 2016

   $ 948,550  

Less: SSE liabilities acquired at December 31, 2016

     (67,090 ) 

Less: SSE deferred financing fees on loan facility not assumed by Patterson-UTI

     (1,132 ) 

Less: SSE transaction costs

     (35,161 ) 

Add: Proceeds on exercise of SSE warrants

     42,391  

Add: Deferred tax asset revaluation

     20,239  
  

 

 

 

Adjusted book value of the net assets acquired

     907,797  
  

 

 

 

Fair value adjustments to:

  

Fixed assets

     216,486  

Intangible assets

     41,860  

Intangible liabilities

     (2,310 ) 

Deferred tax liabilities

     (76,910 ) 

Goodwill

     452,305  
  

 

 

 

Total fair value adjustments

     631,431  
  

 

 

 

Estimate of consideration expected to be transferred

   $ 1,539,228  
  

 

 

 

The following is a discussion of the adjustments made to SSE’s assets and liabilities in connection with the preparation of these unaudited pro forma condensed combined financial statements.

Fixed Assets : For purposes of these unaudited pro forma condensed combined financial statements, Patterson-UTI has estimated that the fair value adjustment to write-up fixed assets to fair value will be approximately $216 million. This estimate of fair value is preliminary and subject to change once Patterson-UTI has sufficient information as to the specific types, nature, age, condition and location of SSE’s fixed assets.

Intangible Assets and Liabilities : The fair value of identifiable intangible assets and liabilities was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows as the primary input into either the discounted cash flow method, the relief-from-royalty method or the multi-period excess earnings method. Some of the more significant assumptions inherent in the development of

 

6

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)

 

intangible asset values include: the amount and timing of projected future cash flows, the differential between contractual cash flows and market-driven cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle and various other factors. For purposes of these unaudited pro forma condensed combined financial statements, using certain high-level assumptions, the fair value of the identifiable intangible assets, their weighted average useful lives and the resulting amortization expense for the periods presented have been estimated as follows:

 

     Estimated
Fair Value 		     Weighted
Average
Estimated
Useful Life 		     Amortization
Expense Year Ended
December 31, 2016 		 
     (in thousands)      (in years)      (in thousands)  

Assets

        

Customer relationships

   $ 4,040        7      $ 577  

Favorable drilling contracts

     37,430        2        34,573  

Tradename

     390        3        130  
  

 

 

       

 

 

 
   $ 41,860           35,280  
  

 

 

       

Liabilities

        

Unfavorable drilling contracts

   $ 2,310        1        (2,310 ) 
  

 

 

       

 

 

 
         $ 32,970  
        

 

 

 

These preliminary estimates of fair value and estimated useful life will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in annual amortization expense of approximately $2.5 million, assuming an overall weighted average useful life of 1.7 years. Once Patterson-UTI reviews to the specifics of SSE’s intangible assets, additional insight will be gained that could impact: (i) the estimated total value assigned to intangible assets and (ii) the estimated weighted average useful life of each category of intangible assets. The estimated intangible asset values and related useful lives could be impacted by a variety of factors that may become known to Patterson-UTI only upon further review of additional information.

Deferred Tax Liabilities : As of the effective date of the merger, adjustments will be made for deferred taxes as part of the accounting for the acquisition. These adjustments reflect the estimated deferred tax liability impact of the acquisition on the pro forma condensed combined balance sheet, primarily relating to estimated fair value adjustments for acquired fixed assets and intangible assets. For purposes of these unaudited pro forma condensed combined financial statements, deferred taxes are provided at the 35% U.S. federal statutory income tax rate.

Goodwill : Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the identifiable assets acquired and liabilities assumed. The qualitative factors that are expected to lead to goodwill being recognized in the acquisition include access to new geographies, access to new product lines, increased scale of operations, supply chain and corporate efficiencies as well as infrastructure optimization. Goodwill is not amortized, but rather is subject to impairment testing on at least an annual basis.

Note 5: Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet

 

(A)

Reclassification made to SSE’s historical balance sheet to conform to Patterson-UTI presentation. Patterson-UTI limits the inventory line item to items for sale and as such drilling supplies are treated as

 

7

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)

 

  other current assets and fixed assets not yet in service are treated as property and equipment as opposed to SSE’s historical presentation.

 

(B) To record net proceeds of Patterson-UTI equity offering of 18.2 million shares of its common stock on January 27, 2017. The proceeds funded the repayment of SSE’s outstanding net indebtedness upon closing of the SSE merger (see item (K) below).

 

(C) To record value for the deferred tax assets of SSE that Patterson-UTI will more-likely-than-not benefit from as Patterson-UTI does not require a valuation allowance against its deferred tax assets. The non-current portion of the deferred tax asset has been shown as a reduction of deferred tax liabilities, net as the combined company has an overall non-current deferred tax liability.

 

(D) To adjust for the estimated differences between the carrying value and fair value of SSE’s fixed assets. See Note 4 for further details.

 

(E) To record the estimated goodwill created as a result of this transaction. See Note 4 for further details.

 

(F) To record the estimated fair value of identifiable intangible assets. See Note 4 for further details.

 

(G) To remove SSE deferred financing costs on a lending facility not assumed by Patterson-UTI.

 

(H) Reflects an estimate of Patterson-UTI’s transaction-related costs. Transaction costs related to the merger with SSE include advisory and legal fees, and retention and severance payments. These amounts will be expensed as incurred and are not reflected in the unaudited pro forma condensed combined statements of operations because they will not have a continuing impact to the combined company’s results of operations.

 

(I) Reflects an estimate of SSE’s merger-related transaction costs, including advisory and legal fees as well as amounts relating to employee benefits such as change in control payments and restricted stock unit vesting. These amounts will be expensed by SSE as incurred and, while not reflected in the unaudited pro forma condensed combined statements of operations because they will not have a continuing impact to the combined company’s results of operations, they are reflected as a retained earnings adjustment on the pro forma balance sheet.

 

(J) To record the estimated fair value of identifiable intangible liabilities for unfavorable drilling contracts.

 

(K) To record the repayment of SSE long-term debt at gross value of $472 million with $42.4 million of proceeds from the exercise of SSE warrants and $430 million from available cash. The difference between the gross value of the SSE’s long-term debt and the fair value reflected on SSE’s December 31, 2016 balance sheet increased goodwill.

 

(L) Represents the estimated deferred tax liability related to the fair value adjustments made to assets acquired and liabilities assumed, excluding goodwill, as calculated below:

Establish deferred tax liabilities (assets) for the following (in thousands):

 

Identified intangible assets

   $ 41,860  

Identified intangible liabilities

     (2,310 ) 

Increase in the basis of fixed assets

     216,486  

Write-off of SSE deferred financing fees

     (1,132 ) 

SSE transaction costs

     (35,161 ) 
  

 

 

 
     219,743  

U.S. federal statutory tax rate

     35%  
  

 

 

 
   $ 76,910  
  

 

 

 

 

(M) To eliminate SSE’s historical equity balances.

 

8

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)

 

(N) To record the fair value of the equity consideration issued. See Note 3 for further details.

Note 6: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

 

(AA) Certain reclassifications have been made to SSE’s historical statement of operations to conform with Patterson-UTI’s presentation. SSE’s historical statement of operations includes certain selling expenses in operating costs whereas Patterson-UTI reports these types of selling expenses in the selling, general and administrative line item in the statement of operations.

 

(BB) Certain reclassifications have been made to SSE’s historical statement of operations to conform with Patterson-UTI’s presentation. Fluid ends, an integral component of a frac pump unit, are expensed by SSE when placed in service. Patterson-UTI treats fluid ends as fixed assets and depreciates them over their estimated useful life. The pro forma adjustment assumes that depreciation expense approximates the amount expensed by SSE. The cost of fluid ends expensed by SSE as an operating expense has been reclassed to depreciation expense.

 

(CC) To eliminate SSE’s adjusted historical depreciation and intangible asset amortization expense.

 

(DD) Reflects amortization expense associated with intangible assets recorded in this transaction. See Note 4 for further details.

 

(EE) Represents depreciation expense associated with the estimated fair value of SSE’s fixed assets. Depreciation was calculated by asset class over an average estimated life relevant for that class of assets. The average estimated life on an aggregate basis was approximately 8 years.

 

(FF) To eliminate SSE’s historical interest expense under its previous capital structure as none of the historical debt of SSE was assumed by Patterson-UTI in connection with the acquisition, due to covenants under Patterson-UTI’s revolving credit facility.

 

(GG) Patterson-UTI has assumed a 35% tax rate when estimating the tax impacts of the appropriate pro forma adjustments, which represents the U.S. federal statutory tax rate. The effective tax rate of the combined company could be significantly different from what is presented in these unaudited pro forma condensed combined financial statements for a variety of reasons, including post-merger activities.

The tax impact of the pro forma adjustments has been calculated as follows ($ in thousands):

 

     Year Ended
December 31, 2016 		 

Elimination of SSE’s historical depreciation and amortization expense

   $ 254,299  

Elimination of SSE’s historical interest expense

     63,613  

Amortization expense associated with the fair value of SSE intangible assets

     (32,970 ) 

Depreciation expense associated with the fair value of SSE fixed assets

     (123,703 ) 
  

 

 

 

Pro forma reduction in expense

     161,239  

U.S. federal statutory tax rate

     35%  
  

 

 

 

Tax expense relating to pro forma reduction in expenses

   $ 56,434  
  

 

 

 

(HH) Represents the adjusted weighted-average shares outstanding calculated as follows (in thousands):

 

     Year Ended
December 31, 2016 		 

Patterson-UTI weighted average historical shares outstanding

     146,178  

Patterson-UTI shares of common stock issued in equity offering

     18,170  

New Patterson-UTI shares of common stock to be issued upon merger

     47,538  
  

 

 

 

Weighted average number of diluted common shares outstanding

     211,886  
  

 

 

 

 

9