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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2005
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from           to
Commission file number 0-22664
Patterson-UTI Energy, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   75-2504748
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
4510 Lamesa Highway, Snyder, Texas 79549
(Address of principal executive offices) (Zip Code)
(325) 574-6300
(Registrant’s telephone number, including area code)
N/ A
(Former name, former address and former fiscal year,
if changed since last report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ
      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
      172,801,959 shares of common stock, $0.01 par value, as of October 26, 2005
 
 


 

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
             
        Page
         
Explanatory Note     3  
 PART I — Financial Information        
 
   Financial Statements        
     Unaudited condensed consolidated balance sheets     5  
     Unaudited condensed consolidated statements of income     6  
     Unaudited condensed consolidated statement of changes in stockholders’ equity     7  
     Unaudited condensed consolidated statements of changes in cash flows     8  
     Notes to unaudited condensed consolidated financial statements     9  
 
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
 
   Quantitative and Qualitative Disclosures About Market Risk     31  
 
   Controls and Procedures     31  
 Forward Looking Statements and Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities       Litigation Reform Act of 1995     33  
 
 PART II — Other Information        
 
   Exhibits     34  
 Signatures     35  
 Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)
 Certification of CFO Pursuant to Rule 13a-14(a)-15d-14(a)
 Certification of CEO & CFO Pursuant to 18 USC Section 1350

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PART I — FINANCIAL INFORMATION
Explanatory Note
      This Amendment No. 1 on Form 10-Q/ A (“Form 10-Q/ A”) to our previously filed Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, initially filed with the United States Securities and Exchange Commission (“SEC”) on October 28, 2005 (“Original Filing”), reflects a restatement of our unaudited interim condensed consolidated financial statements as discussed in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements. Previously issued financial statements are being restated to properly reflect losses incurred as a result of an embezzlement whereby payments were made to or for the benefit of Jonathan D. Nelson (“Nelson”), our former Chief Financial Officer (“CFO”), that had been reflected in previously issued financial statements as payments for assets and services that were not received by the Company. Previously issued financial statements are also being restated for the effects of the correction of other errors that are immaterial both individually and in the aggregate. These other adjustments relate primarily to previously reported property and equipment balances that resulted from our review of our property and equipment records and the underlying physical assets in connection with investigation of the embezzlement.
      The total amount embezzled was approximately $77.5 million in cash, excluding any tax effects, beginning with the year ended December 31, 1998 through November 3, 2005 as follows (in thousands):
           
From 1998 to December 31, 2004
  $ 58,961  
From January 1, 2005 to September 30, 2005
    12,193  
       
 
Total through September 30, 2005
    71,154  
From October 1, 2005 to November 3, 2005 (net of $1,500 repayment)
    6,350  
       
 
Total embezzlement
  $ 77,504  
       
      On November 16, 2005 the SEC obtained a freeze order on Nelson’s assets (including assets held by entities controlled by him) and a Receiver was appointed to collect those assets. The Company understands that the Receiver will ultimately liquidate the assets and propose a plan to distribute the proceeds. While the Company believes it has a claim for at least the full amount embezzled, other creditors have or may assert claims on the assets held by the Receiver. As a result, recovery by the Company from the Receiver is uncertain as to timing and amount, if any. Recoveries, if any, will be recognized when they are considered collectable.
      The effects of the embezzlement on the Company’s financial position follow (in thousands):
                 
    September 30,   December 31,
Decrease in Amounts Previously Reported   2005   2004
         
Assets
  $ (66,952 )   $ (56,133 )
Liabilities(1)
    (24,836 )     (20,848 )
             
Retained Earnings & Stockholders’ Equity
  $ (42,116 )   $ (35,285 )
             
 
(1)  Consists of increases in Federal and state income taxes payable of $2.6 million and $1.3 million at September 30, 2005 and December 31, 2004, respectively and decreases in deferred tax liabilities of $27.4 million and $22.2 million at September 30, 2005 and December 31, 2004, respectively.

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      The effects of the restatement due to the embezzlement and other adjustments on operating income as previously reported for the three and nine months ended September 30, 2005 and 2004, respectively, follow (in thousands):
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
Operating Income:   2005   2004   2005   2004
                 
As previously reported
  $ 173,511     $ 47,408     $ 390,179     $ 110,717  
Adjustment for effects of embezzlement
    (4,721 )     (4,642 )     (10,819 )     (13,125 )
Other adjustments
    (1,344 )     (1,024 )     (3,430 )     (2,953 )
                         
As restated
  $ 167,446     $ 41,742     $ 375,930     $ 94,639  
                         
      The effects of the restatement due to the embezzlement and other property and equipment adjustments on net income as previously reported for the three and nine months ended September 30, 2005 and 2004, respectively, follow (in thousands):
                                   
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2005   2004   2005   2004
                 
Net Income:
                               
As previously reported
  $ 110,135     $ 29,964     $ 247,548     $ 70,253  
                         
Adjustments:
                               
 
Embezzled funds expense
    (5,431 )     (4,759 )     (12,193 )     (13,479 )
 
Embezzled amounts previously expensed as depreciation and selling, general and administrative
    710       117       1,374       354  
 
Other adjustments
    (1,344 )     (1,024 )     (3,430 )     (2,953 )
 
Tax benefits
    2,235       2,100       5,252       5,946  
                         
 
Net adjustment
    (3,830 )     (3,566 )     (8,997 )     (10,132 )
                         
Net income, as restated
  $ 106,305     $ 26,398     $ 238,551     $ 60,121  
                         
Net income per common share:
                               
Basic:
                               
 
As previously reported
  $ 0.64     $ 0.18     $ 1.46     $ 0.42  
 
Adjustment for effects of embezzlement
  $ (0.02 )   $ (0.02 )   $ (0.04 )   $ (0.05 )
 
Other adjustments
  $     $     $ (0.01 )   $ (0.01 )
 
As restated
  $ 0.62     $ 0.16     $ 1.40     $ 0.36  
Diluted:
                               
 
As previously reported
  $ 0.63     $ 0.18     $ 1.43     $ 0.42  
 
Adjustment for effects of embezzlement
  $ (0.02 )   $ (0.02 )   $ (0.04 )   $ (0.05 )
 
Other adjustments
  $     $     $ (0.01 )   $ (0.01 )
 
As restated
  $ 0.61     $ 0.16     $ 1.38     $ 0.36  
      Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Filing and the Company has not updated the disclosure contained herein to reflect events that occurred at a later date.

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Item 1. Financial Statements
      The following unaudited condensed consolidated financial statements include all adjustments which, in the opinion of management, are necessary in order to make such financial statements not misleading.
PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                       
    Restated (See Note 2)
     
    September 30,   December 31,
    2005   2004
         
    (In thousands, except share
    data)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 131,211     $ 112,371  
 
Accounts receivable, net of allowance for doubtful accounts of $2,431 at September 30, 2005 and $1,909 at December 31, 2004
    362,976       214,097  
 
Inventory
    20,916       17,738  
 
Deferred tax assets, net
    19,688       15,991  
 
Other
    26,738       26,836  
             
   
Total current assets
    561,529       387,033  
Property and equipment, at cost, net
    980,456       765,019  
Goodwill
    99,056       99,056  
Other
    5,065       5,677  
             
     
Total assets
  $ 1,646,106     $ 1,256,785  
             
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable:
               
   
Trade
  $ 99,964     $ 54,553  
   
Accrued revenue distributions
    14,379       11,297  
   
Other
    2,956       2,309  
 
Accrued federal and state income taxes payable
    33,618       4,231  
 
Accrued expenses
    102,493       79,163  
             
   
Total current liabilities
    253,410       151,553  
Deferred tax liabilities, net
    139,177       140,475  
Other
    4,122       3,256  
             
     
Total liabilities
    396,709       295,284  
             
Commitments and contingencies
           
Stockholders’ equity:
               
 
Preferred stock, par value $.01; authorized 1,000,000 shares, no shares issued
           
   
Common stock, par value $.01; authorized 300,000,000 shares with 175,791,288 and 171,625,841 issued and 172,678,192 and 168,512,745 outstanding at September 30, 2005 and December 31, 2004, respectively
    1,758       1,716  
 
Additional paid-in capital
    671,303       597,280  
 
Deferred compensation
    (11,018 )     (5,420 )
 
Retained earnings
    591,822       373,712  
 
Accumulated other comprehensive income
    8,669       7,350  
 
Treasury stock, at cost, 3,113,096 shares
    (13,137 )     (13,137 )
             
     
Total stockholders’ equity
    1,249,397       961,501  
             
     
Total liabilities and stockholders’ equity
  $ 1,646,106     $ 1,256,785  
             
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                   
    Restated (See Note 2)
     
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
         
    2005   2004   2005   2004
                 
    (In thousands, except per share amounts)
Operating revenues:
                               
 
Contract drilling
  $ 401,046     $ 206,454     $ 1,025,938     $ 573,851  
 
Pressure pumping
    27,640       19,663       66,358       48,490  
 
Drilling and completion fluids
    29,819       23,455       88,812       65,018  
 
Oil and natural gas
    10,234       9,602       28,146       25,104  
                         
      468,739       259,174       1,209,254       712,463  
                         
Operating costs and expenses:
                               
 
Contract drilling
    202,956       140,608       558,607       402,986  
 
Pressure pumping
    15,662       10,455       38,648       26,871  
 
Drilling and completion fluids
    24,062       19,851       71,857       55,327  
 
Oil and natural gas
    2,365       1,715       6,953       6,051  
 
Depreciation, depletion and impairment
    39,545       31,661       112,319       91,037  
 
Selling, general and administrative
    10,565       8,303       30,157       22,999  
 
Bad debt expense
    50       192       416       499  
 
Embezzled funds expense
    5,431       4,759       12,193       13,479  
 
Other (including gain or loss on sale of assets)
    657       (112 )     2,174       (1,425 )
                         
      301,293       217,432       833,324       617,824  
                         
Operating income
    167,446       41,742       375,930       94,639  
                         
Other income (expense):
                               
 
Interest income
    944       233       2,011       688  
 
Interest expense
    (56 )     (75 )     (179 )     (205 )
 
Other
    19       56       39       313  
                         
      907       214       1,871       796  
                         
Income before income taxes
    168,353       41,956       377,801       95,435  
                         
Income tax expense (benefit):
                               
 
Current
    66,574       12,023       145,513       31,298  
 
Deferred
    (4,526 )     3,535       (6,263 )     4,016  
                         
      62,048       15,558       139,250       35,314  
                         
Net income
  $ 106,305     $ 26,398     $ 238,551     $ 60,121  
                         
Net income per common share:
                               
 
Basic
  $ 0.62     $ 0.16     $ 1.40     $ 0.36  
                         
 
Diluted
  $ 0.61     $ 0.16     $ 1.38     $ 0.36  
                         
Weighted average number of common shares outstanding:
                               
 
Basic
    171,613       167,006       169,846       165,744  
                         
 
Diluted
    174,587       169,664       173,211       168,795  
                         
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
                                                                 
    Common Stock               Accumulated        
        Additional           Other        
    Number       Paid-In   Deferred   Retained   Comprehensive   Treasury    
    of Shares   Amount   Capital   Compensation   Earnings   Income   Stock   Total
                                 
    (In thousands)
December 31, 2004, as previously reported
    171,626     $ 1,716     $ 597,280     $ (5,420 )   $ 415,489     $ 11,611     $ (13,137 )   $ 1,007,539  
Adjustment for effects of embezzlement (net of applicable income tax benefit of $20,848)
                            (35,285 )                 (35,285 )
Other adjustments (net of applicable income tax benefit of $3,501) (See Note 2)
                            (6,492 )     (4,261 )           (10,753 )
                                                 
December 31, 2004, as restated
    171,626       1,716       597,280       (5,420 )     373,712       7,350       (13,137 )     961,501  
Issuance of restricted stock
    305       3       8,040       (8,043 )                        
Amortization of deferred compensation expense
                      2,121                         2,121  
Forfeitures of restricted shares
    (17 )           (324 )     324                          
Exercise of stock options
    3,877       39       42,260                               42,299  
Tax benefit related to exercise of stock options
                24,047                               24,047  
Foreign currency translation adjustment, net of tax of $749, as restated
                                  1,319             1,319  
Payment of cash dividend
                            (20,441 )                 (20,441 )
Net income, as restated
                            238,551                   238,551  
                                                 
September 30, 2005, as restated
    175,791     $ 1,758     $ 671,303     $ (11,018 )   $ 591,822     $ 8,669     $ (13,137 )   $ 1,249,397  
                                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS
(Unaudited)
                         
    Restated (See Note 2)
     
    Nine Months
    Ended September 30,
     
    2005   2004
         
    (In thousands)
Cash flows from operating activities:
               
 
Net income
  $ 238,551     $ 60,121  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation, depletion and impairment
    112,319       91,037  
   
Provision for bad debts
    416       499  
   
Deferred income tax expense
    (6,263 )     4,016  
   
Tax benefit related to exercise of stock options
    24,047       6,682  
   
Amortization of deferred compensation expense
    2,121       749  
   
Gain on sale of assets
    (1,253 )     (1,425 )
     
Changes in operating assets and liabilities, net of business acquired:
               
       
Accounts receivable
    (148,825 )     (34,480 )
       
Income taxes receivable
          21,923  
       
Inventory and other current assets
    (4,044 )     (6,997 )
       
Accounts payable
    48,568       2,820  
       
Income taxes payable
    29,660        
       
Accrued expenses
    22,662       (5,416 )
       
Other liabilities
    1,513       (6,729 )
             
     
Net cash provided by operating activities
    319,472       132,800  
             
Cash flows from investing activities:
               
 
Acquisitions, net of cash acquired
    (73,577 )     (30,387 )
 
Purchases of property and equipment
    (262,723 )     (125,501 )
 
Proceeds from sales of property and equipment
    12,502       2,631  
 
Restricted cash deposited to collateralize retained insurance losses
          (11,316 )
 
Change in other assets
    1,766        
             
     
Net cash used in investing activities
    (322,032 )     (164,573 )
             
Cash flows from financing activities:
               
   
Purchase of treasury stock
          (1,482 )
   
Dividends paid
    (20,441 )     (6,674 )
   
Proceeds from exercise of stock options
    42,299       9,293  
             
     
Net cash provided by financing activities
    21,858       1,137  
             
     
Effect of foreign exchange rate changes on cash
    (458 )     (81 )
             
       
Net increase (decrease) in cash and cash equivalents
    18,840       (30,717 )
Cash and cash equivalents at beginning of period
    112,371       100,483  
             
Cash and cash equivalents at end of period
  $ 131,211     $ 69,766  
             
Supplemental disclosure of cash flow information:
               
   
Net cash paid during the period for:
               
     
Interest expense
  $ 179     $ 205  
     
Income taxes
  $ 85,824     $ 500  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Consolidation and Presentation
      The interim condensed consolidated financial statements include the accounts of Patterson-UTI Energy, Inc. (the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
      The interim condensed consolidated financial statements have been prepared by management of the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for presentation of the information have been included.
      The Company’s former Chief Financial Officer (“CFO”), Jonathan D. Nelson (“Nelson”), perpetrated an embezzlement over a period of more than five years. The accompanying interim unaudited condensed consolidated financial statements have been restated to reflect the effects of losses incurred as a result of the embezzlement in the periods of occurrence. Payments related to the embezzlement previously capitalized as property and equipment and goodwill acquired, and the related depreciation and other amounts expensed have been reversed from the Company’s accounting records. Embezzled payments have been recognized as expense in the periods they were embezzled. The cumulative effects of the embezzlement prior to 2004, have been recognized as a reduction of retained earnings. The accompanying interim unaudited condensed consolidated financial statements have also been restated for the effects of the correction of other errors that are immaterial both individually and in the aggregate (See Note 2).
      The unaudited condensed consolidated balance sheet as of December 31, 2004, as presented herein, was derived from the audited balance sheet of the Company. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.
      The U.S. dollar is the functional currency for all of the Company’s operations except for its Canadian operations, which use the Canadian dollar as their functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive income, which is a separate component of stockholders’ equity (see Note 5 of these Notes to Unaudited Condensed Consolidated Financial Statements).
      The Company provides a dual presentation of its earnings per share in its Unaudited Condensed Consolidated Statements of Income: Basic Earnings per Share (“Basic EPS”) and Diluted Earnings per Share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is based on the weighted-average number of common shares outstanding and the assumed exercise of dilutive instruments, including stock options, warrants and restricted shares, less the number of treasury shares assumed to be purchased with the exercise proceeds. For the three and nine months ended September 30, 2005 and 2004, all potentially dilutive options and warrants were included in the calculation of Diluted EPS. The following table presents information necessary to calculate earnings per share for the three and nine months ended September 30, 2005 and 2004 as

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
well as cash dividends per share paid during the three and nine months ended September 30, 2005 and 2004 (in thousands, except per share amounts).
                                 
    Restated (See Note 2)
     
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
         
    2005   2004   2005   2004
                 
Net income
  $ 106,305     $ 26,398     $ 238,551     $ 60,121  
Weighted average common shares outstanding
    171,613       167,006       169,846       165,744  
                         
Basic earnings per share
  $ 0.62     $ 0.16     $ 1.40     $ 0.36  
                         
Weighted average common shares outstanding
    171,613       167,006       169,846       165,744  
Dilutive effect of stock options and restricted shares
    2,974       2,658       3,365       3,051  
                         
Weighted average dilutive common shares outstanding
    174,587       169,664       173,211       168,795  
                         
Diluted earnings per share
  $ 0.61     $ 0.16     $ 1.38     $ 0.36  
                         
Cash dividends per share(a)
  $ 0.04     $ 0.02     $ 0.12     $ 0.04  
                         
 
  (a)  During March, June and September of 2005, cash dividends of $6.7 million, $6.8 million and $6.9 million, respectively, were paid on outstanding shares of 168,679,334, 169,741,460 and 172,591,361, respectively. During June and September of 2004, cash dividends of $3.3 million were paid on outstanding shares of 166,786,254 and 166,988,651, respectively.
      The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year.
      Certain reclassifications have been made to the 2004 consolidated financial statements in order for them to conform with the 2005 presentation.
2. Embezzlement and Restatements
      On November 3, 2005, the Company announced the resignation of its CFO, Jonathan D. Nelson. On November 10, 2005, the Company announced that, based on information received by Company senior management on November 9, 2005, the Audit Committee of the Company’s Board of Directors began an investigation into an embezzlement from the Company by Nelson.
      Most of the embezzled funds result from Nelson causing the wiring of Company funds aggregating approximately $72.3 million, to, or for the benefit of, entities owned and controlled by him. Nelson was originally able to initiate these wire transfers by requesting the wire transfers himself in telephone calls to one of the Company’s banks. After changes to the Company’s internal controls and procedures in 2004, Nelson initiated the wire transfers through instructions to one his subordinates and by the creation of fraudulent invoices containing forged senior management approvals. This false documentation was created by our former CFO to conceal the true nature of these transactions from the Company and its independent registered public accountants.
      Nelson also instructed certain former employees, who worked under his supervision, to alter management reports related to property and equipment expenditures and created fictitious property and equipment approval forms with forged signatures.
      On December 22, 2005, upon recommendation of Company management and the Audit Committee of its Board of Directors, the Company announced that based on the results to date of its ongoing internal investigation into the facts and circumstances surrounding the embezzlement by Nelson, the Company would restate its previously issued financial statements and amend its previously issued Annual Report on Form 10-K for the year ended December 31, 2004 and Quarterly Reports on Form 10-Q for the periods ended March 31,

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
June 30 and September 30, 2005. These restatements reflect losses incurred as a result of payments made to or for the benefit of Nelson that had been recognized in the Company’s accounting records and previously issued financial statements as payments for assets and services that were not received by the Company.
      The total amount embezzled was approximately $77.5 million in cash, excluding any tax effects, beginning with the year ended December 31, 1998 through November 3, 2005 as follows (in thousands):
           
From 1998 to December 31, 2004
  $ 58,961  
From January 1, 2005 to September 30, 2005
    12,193  
       
 
Total through September 30, 2005
    71,154  
From October 1, 2005 to November 3, 2005 (net of $1,500 repayment)
    6,350  
       
 
Total embezzlement
  $ 77,504  
       
      The Company promptly advised the United States Securities and Exchange Commission (“SEC”) when it became aware of the embezzlement. The SEC promptly obtained a freeze order on Nelson’s assets (including assets held by entities controlled by him) and a Receiver was appointed to collect those assets. The United States Attorney for the Northern District of Texas obtained an indictment against Nelson and investigation of this matter continues.
      The Company understands that the Receiver will ultimately liquidate the assets and propose a plan to distribute the proceeds. While the Company believes it has a claim for at least the full amount embezzled, other creditors have or may assert claims on the assets held by the Receiver. As a result, recovery by the Company from the Receiver is uncertain as to timing and amount, if any. Recoveries, if any, will be recognized when they are considered collectable.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
      The accompanying unaudited condensed consolidated financial statements have been restated to provide for, net of related tax effects, (1) the effects of losses incurred as a result of the former CFO’s embezzlement and (2) the effects of the correction of other errors that are immaterial both individually and in the aggregate. These other adjustments relate primarily to previously reported property and equipment balances that resulted from our review of the Company’s property and equipment records and the underlying physical assets in connection with the investigation of the embezzlement as well as the tax effects of our foreign currency translation adjustment. The effects of the embezzlement and other adjustments on the Company’s financial position follow (in thousands):
                                     
        Effect of   Effect of    
    Previously   Adjustment for   Other    
    Reported   Embezzlement   Adjustments   Restated
                 
September 30, 2005:
                               
 
Property and equipment:
                               
   
At cost
  $ 1,701,246     $ (67,386 )   $ 1,626     $ 1,635,486  
   
Accumulated depreciation
    (652,685 )     2,704       (5,049 )     (655,030 )
   
Net
    1,048,561       (64,682 )     (3,423 )     980,456  
 
Goodwill
    101,326       (2,270 )           99,056  
 
Total assets
    1,716,481       (66,952 )     (3,423 )     1,646,106  
 
Accounts payable, trade
    89,964             10,000       99,964  
 
Federal and state income taxes payable
    30,854       2,603       161       33,618  
 
Deferred tax liabilities, net
    171,542       (27,439 )     (4,926 )     139,177  
 
Liabilities
    416,310       (24,836 )     5,235       396,709  
 
Retained earnings
    642,596       (42,116 )     (8,658 )     591,822  
 
Stockholders’ equity
    1,300,171       (42,116 )     (8,658 )     1,249,397  
December 31, 2004:
                               
 
Property and equipment:
                               
   
At cost
    1,400,848       (55,211 )     (6,866 )     1,338,771  
   
Accumulated depreciation
    (571,973 )     1,348       (3,127 )     (573,752 )
   
Net
    828,875       (53,863 )     (9,993 )     765,019  
 
Goodwill
    101,326       (2,270 )           99,056  
 
Total assets
    1,322,911       (56,133 )     (9,993 )     1,256,785  
 
Federal and state income taxes payable
    2,754       1,311       166       4,231  
 
Deferred tax liabilities, net
    162,040       (22,159 )     594       140,475  
 
Liabilities
    315,372       (20,848 )     760       295,284  
 
Retained earnings
    415,489       (35,285 )     (6,492 )     373,712  
 
Accumulated other comprehensive income
    11,611             (4,261 )     7,350  
 
Stockholders’ equity
    1,007,539       (35,285 )     (10,753 )     961,501  

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
      The effects of the embezzlement and other adjustments on the Company’s results of operations and cash flows follow (in thousands, except per share amounts):
                                       
    Three Months Ended September 30,
     
        Effect of   Effect of    
    Previously   Adjustment for   Other    
    Reported   Embezzlement   Adjustments   Restated
                 
2005:
                               
 
Depreciation, depletion and impairment
  $ 39,216     $ (704 )   $ 1,033     $ 39,545  
 
Selling, general and administrative
    10,571       (6 )           10,565  
 
Other (including gain or loss on sale of assets)
    346             311       657  
 
Embezzled funds expense
          5,431             5,431  
 
Operating income
    173,511       (4,721 )     (1,344 )     167,446  
 
Income before income taxes
    174,418       (4,721 )     (1,344 )     168,353  
 
Income tax expense
    64,283       (1,740 )     (495 )     62,048  
 
Net income
    110,135       (2,981 )     (849 )     106,305  
   
Per common share:
                               
     
Basic
    0.64       (0.02 )           0.62  
     
Diluted
    0.63       (0.02 )           0.61  
 
Net cash provided by (used in):
                               
   
Operating activities
    165,779       (5,425 )           160,354  
   
Investing activities
    (110,462 )     5,425             (105,037 )
 
Purchases of property and equipment
    105,949       (5,425 )           100,524  
2004:
                               
 
Depreciation, depletion and impairment
  $ 30,789     $ (111 )   $ 983     $ 31,661  
 
Selling, general and administrative
    8,309       (6 )           8,303  
 
Other (including gain or loss on sale of assets)
    (153 )           41       (112 )
 
Embezzled funds expense
          4,759             4,759  
 
Operating income
    47,408       (4,642 )     (1,024 )     41,742  
 
Income before income taxes
    47,622       (4,642 )     (1,024 )     41,956  
 
Income tax expense
    17,658       (1,721 )     (379 )     15,558  
 
Net income
    29,964       (2,921 )     (645 )     26,398  
   
Per common share:
                               
     
Basic
    0.18       (0.02 )           0.16  
     
Diluted
    0.18       (0.02 )           0.16  
 
Net cash provided by (used in):
                               
   
Operating activities
    55,577       (4,753 )           50,824  
   
Investing activities
    (46,467 )     4,753             (41,714 )
 
Purchases of property and equipment
    47,112       (4,753 )           42,359  

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
                                       
    Nine Months Ended September 30,
     
        Effect of   Effect of    
    Previously   Adjustment for   Other    
    Reported   Embezzlement   Adjustments   Restated
                 
    (In thousands, except per share amounts)
2005:
                               
 
Depreciation, depletion and impairment
  $ 110,575     $ (1,356 )   $ 3,100     $ 112,319  
 
Selling, general and administrative
    30,175       (18 )           30,157  
 
Other (including gain or loss on sale of assets)
    1,844             330       2,174  
 
Embezzled funds expense
          12,193             12,193  
 
Operating income
    390,179       (10,819 )     (3,430 )     375,930  
 
Income before income taxes
    392,050       (10,819 )     (3,430 )     377,801  
 
Income tax expense
    144,502       (3,988 )     (1,264 )     139,250  
 
Net income
    247,548       (6,831 )     (2,166 )     238,551  
   
Per common share:
                               
     
Basic
    1.46       (0.04 )     (0.01 )     1.40  
     
Diluted
    1.43       (0.04 )     (0.01 )     1.38  
 
Net cash provided by (used in):
                               
   
Operating activities
    321,647       (12,175 )     10,000       319,472  
   
Investing activities
    (324,207 )     12,175       (10,000 )     (322,032 )
 
Purchases of property & equipment
    264,898       (12,175 )     10,000       262,723  
2004:
                               
 
Depreciation, depletion and impairment
  $ 88,523     $ (336 )   $ 2,850     $ 91,037  
 
Selling, general and administrative
    23,017       (18 )           22,999  
 
Other (including gain or loss on sale of assets)
    (1,528 )           103       (1,425 )
 
Embezzled funds expense
          13,479             13,479  
 
Operating income
    110,717       (13,125 )     (2,953 )     94,639  
 
Income before income taxes
    111,513       (13,125 )     (2,953 )     95,435  
 
Income tax expense
    41,260       (4,854 )     (1,092 )     35,314  
 
Net income
    70,253       (8,271 )     (1,861 )     60,121  
   
Per common share:
                               
     
Basic
    0.42       (0.05 )     (0.01 )     0.36  
     
Diluted
    0.42       (0.05 )     (0.01 )     0.36  
 
Net cash provided by (used in):
                               
   
Operating activities
    146,261       (13,461 )           132,800  
   
Investing activities
    (178,034 )     13,461             (164,573 )
   
Acquisitions
    32,514       (2,127 )           30,387  
 
Purchases of property & equipment
    136,835       (11,334 )           125,501  
3. Recent Acquisitions
      On January 15, 2005, the Company purchased land drilling assets from Key Energy Services, Inc. for $61.8 million. The assets included 25 active and 10 stacked land-based drilling rigs, related drilling equipment, yard facilities and a rig moving fleet consisting of approximately 45 trucks and 100 trailers. The transaction was accounted for as an acquisition of assets and the purchase price was allocated among the assets acquired based on their estimated fair market values.
      On June 17, 2005, the Company acquired one land-based drilling rig for $3.6 million. The transaction was accounted for as an acquisition of assets and the purchase price was allocated to the acquired drilling rig.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
      On September 29, 2005, the Company acquired five land-based drilling rigs and related drilling equipment for $8.2 million. The transaction was accounted for as an acquisition of assets and the purchase price was allocated among the assets acquired based on their estimated fair market values.
4. Stock-based Compensation
      During June 2005, the Company’s shareholders approved the Patterson-UTI Energy, Inc. 2005 Long-Term Incentive Plan (the “2005 Plan”). In addition, the Board of Directors adopted a resolution that no future grants would be made under any of the previously existing equity plans of the Company. The Company accounts for activity under the 2005 Plan and previous activity of its other equity plans using the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. During the second quarters of 2004 and 2005 and the third quarter of 2005, the Company granted restricted shares of the Company’s common stock (the “Restricted Shares”) to certain key employees under the Patterson-UTI Energy, Inc. 1997 Long-Term Incentive Plan, as amended, and the 2005 Plan. As required by APB 25, the Restricted Shares were valued based upon the market price of the Company’s common stock on the date of the grant. The resulting value is being amortized over the vesting period of the stock. For the three and nine months ended September 30, 2005, compensation expense of $639,000 and $1.3 million, net of $29,000 and $160,000 of forfeitures and of $374,000 and $782,000 of taxes, respectively, was included as a reduction in net income. Compensation expense of $306,000 and $471,000, net of $180,000 and $278,000 of taxes, was included as a reduction in net income for the three and nine months ended September 30, 2004, respectively. Other than the Restricted Shares discussed above, no additional stock-based employee compensation expense is reflected in net income, as all options granted under the plans discussed above had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to stock-based employee compensation (in thousands, except per share amounts):
                                   
    Restated (See Note 2)
     
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
         
    2005   2004   2005   2004
                 
Net income, as reported
  $ 106,305     $ 26,398     $ 238,551     $ 60,121  
Add: Stock-based employee compensation expense recorded, net of forfeitures and taxes
    639       306       1,339       471  
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects
    (3,426 )     (3,468 )     (9,484 )     (9,794 )
                         
Pro-forma net income
  $ 103,518     $ 23,236     $ 230,406     $ 50,798  
                         
Net income per common share:
                               
 
Basic, as reported
  $ 0.62     $ 0.16     $ 1.40     $ 0.36  
                         
 
Basic, pro-forma
  $ 0.60     $ 0.14     $ 1.36     $ 0.31  
                         
 
Diluted, as reported
  $ 0.61     $ 0.16     $ 1.38     $ 0.36  
                         
 
Diluted, pro-forma
  $ 0.60     $ 0.14     $ 1.34     $ 0.30  
                         

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
5. Comprehensive Income
      The following table illustrates the Company’s comprehensive income (expense) including the effects of foreign currency translation adjustments for the three and nine months ended September 30, 2005 and 2004 (in thousands):
                                   
    Restated (See Note 2)
     
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
         
    2005   2004   2005   2004
                 
Net income
  $ 106,305     $ 26,398     $ 238,551     $ 60,121  
Other comprehensive income (expense):
                               
 
Foreign currency translation adjustment related to our Canadian operations, net of tax
    2,286       1,872       1,319       675  
                         
Comprehensive income, net of tax   $ 108,591     $ 28,270     $ 239,870     $ 60,796  
                         
6. Property and Equipment
      Property and equipment consisted of the following at September 30, 2005 and December 31, 2004 (in thousands):
                 
    Restated (See Note 2)
     
    September 30, 2005   December 31, 2004
         
Equipment
  $ 1,537,197     $ 1,239,519  
Oil and natural gas properties
    77,349       82,711  
Buildings
    15,654       12,892  
Land
    5,286       3,649  
             
      1,635,486       1,338,771  
Less accumulated depreciation and depletion
    (655,030 )     (573,752 )
             
    $ 980,456     $ 765,019  
             
7. Business Segments
      Our revenues, operating profits and identifiable assets are primarily attributable to four business segments: (i) contract drilling of oil and natural gas wells, (ii) pressure pumping services, (iii) drilling and completion fluid services to operators in the oil and natural gas industry, and (iv) the exploration, development, acquisition and production of oil and natural gas. Each of these segments represents a distinct type of business based upon the type and nature of services and products offered. These segments have separate management teams which report to the Company’s chief executive officer and have distinct and

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
identifiable revenues and expenses. Separate financial data for each of our four business segments is provided below (in thousands).
                                   
    Restated (See Note 2)
     
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
         
    2005   2004   2005   2004
                 
Revenues:
                               
 
Contract drilling(a)
  $ 401,626     $ 207,808     $ 1,028,230     $ 577,824  
 
Pressure pumping
    27,640       19,663       66,358       48,490  
 
Drilling and completion fluids(b)
    29,842       23,475       88,994       65,146  
 
Oil and natural gas
    10,234       9,602       28,146       25,104  
                         
Total segment revenues
    469,342       260,548       1,211,728       716,564  
 
Elimination of intercompany revenues(a)(b)
    603       1,374       2,474       4,101  
                         
Total revenues
  $ 468,739     $ 259,174     $ 1,209,254     $ 712,463  
                         
Income before income taxes:
                               
 
Contract drilling
  $ 163,109     $ 38,752     $ 367,721     $ 92,697  
 
Pressure pumping
    7,691       6,199       15,779       12,787  
 
Drilling and completion fluids
    2,546       1,110       8,061       2,518  
 
Oil and natural gas
    4,098       3,674       10,532       7,217  
                         
      177,444       49,735       402,093       115,219  
 
Corporate and other
    (3,892 )     (3,234 )     (10,743 )     (7,101 )
 
Other operating
    (675 )           (3,227 )      
 
Embezzled funds expense(c)
    (5,431 )     (4,759 )     (12,193 )     (13,479 )
 
Interest income
    944       233       2,011       688  
 
Interest expense
    (56 )     (75 )     (179 )     (205 )
 
Other
    19       56       39       313  
                         
Income before income taxes
  $ 168,353     $ 41,956     $ 377,801     $ 95,435  
                         
                   
    Restated (See Note 2)
     
    September 30,   December 31,
    2005   2004
         
Identifiable assets:
               
 
Contract drilling
  $ 1,301,286     $ 961,873  
 
Pressure pumping
    70,919       49,145  
 
Drilling and completion fluids
    75,787       62,970  
 
Oil and natural gas
    59,781       62,984  
             
      1,507,773       1,136,972  
 
Corporate and other(d)
    138,333       119,813  
             
Total assets
  $ 1,646,106     $ 1,256,785  
             
 
(a)  Includes contract drilling intercompany revenues of approximately $580,000 and $1.4 million for the three months ended September 30, 2005 and 2004, respectively, and approximately $2.3 million and $4.0 million for the nine months ended September 30, 2005 and 2004, respectively.
 
(b)  Includes drilling and completion fluids intercompany revenues of approximately $23,000 and $20,000 for the three months ended September 30, 2005 and 2004, respectively, and approximately $182,000 and $128,000 for the nine months ended September 30, 2005 and 2004, respectively.

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
(c)  The Company’s former CFO perpetrated an embezzlement over a period of more than five years. Embezzled funds expense includes adjustments to eliminate payments related to the embezzlement previously capitalized as property and equipment and goodwill acquired. The related depreciation and other amounts expensed have been reversed from the Company’s accounting records (See Note 2).
 
(d)  Corporate assets primarily include cash on hand managed by the parent corporation and certain deferred federal income tax assets.
8. Recently Issued Accounting Standards
      The Financial Accounting Standards Board (“FASB”) issued Staff Position FIN 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143, in March 2005. The Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The statement clarifies the term “conditional asset retirement obligation” as used in FASB 143. The Company believes that it is already in compliance with the statement and does not expect any impact on its financial position or results of operations when adopted.
      The FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), in December 2004; it replaces SFAS 123, and supersedes APB 25. Under SFAS 123(R), companies would have been required to implement the standard as of the beginning of the first interim reporting period that begins after June 15, 2005. However, in April 2005, the SEC announced the adoption of an Amendment to Rule 4-01(a) of Regulation S-X regarding the compliance date for SFAS 123(R) that amends the compliance dates and allows companies to implement SFAS 123(R) beginning with the first annual reporting period beginning on or after June 15, 2005. The Company intends to adopt SFAS 123(R) in its fiscal year beginning January 1, 2006.
      The Company currently uses the intrinsic value method to value stock options, and accordingly, no compensation expense has been recognized for stock options since the Company grants stock options with exercise prices equal to the Company’s common stock market price on the date of the grant. SFAS 123(R) requires the expensing of all stock-based compensation, including stock options and restricted shares, using the fair value method. The Company intends to expense stock options using the Modified Prospective Transition method as described in SFAS 123(R). This method will require expense to be recognized for stock options over their respective remaining vesting periods. No expense will be recognized for stock options vested in periods prior to the adoption of SFAS 123(R). The Company is evaluating the impact of its adoption of SFAS 123(R) on its results of operations and financial position. Adoption is not expected to have a material effect on the Company’s financial position or results of operations.
      The FASB issued Statement of Financial Accounting Standard No. 151, Inventory Costs — an amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 is effective, and will be adopted, for inventory costs incurred during fiscal years beginning after June 15, 2005 and is to be applied prospectively. SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to require current period recognition of abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Adoption is not expected to have a material effect on the Company’s financial position or results of operations.
      The FASB issued Statement of Financial Accounting Standard No. 153, Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 is effective, and will be adopted, for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and is to be applied prospectively. SFAS 153 eliminates the exception for fair value treatment of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
of the entity are expected to change significantly as a result of the exchange. Adoption is not expected to have a material effect on the Company’s financial position or results of operations.
      The FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 is effective, and will be adopted, for accounting changes made in fiscal years beginning after December 15, 2005 and is to be applied retrospectively. SFAS 154 requires that retroactive application of a change in accounting principle be limited to the direct effects of the change. Adoption is not expected to have a material effect on the Company’s financial position or results of operations.
9. Goodwill
      Goodwill is evaluated to determine if the fair value of an asset has decreased below its carrying value. At December 31, 2004 the Company performed its annual goodwill evaluation and determined no adjustment to impair goodwill was necessary. Goodwill as of September 30, 2005 and December 31, 2004 is as follows (in thousands):
                         
    Restated (See Note 2)
     
    September 30,   December 31,
    2005   2004
         
Drilling:
               
 
Goodwill at beginning of year
  $ 89,092     $ 41,069  
   
Changes to goodwill
          48,020  
   
Other
          3  
             
     
Goodwill at end of period
    89,092       89,092  
             
Drilling and completion fluids:
               
 
Goodwill at beginning of year
    9,964       9,964  
   
Changes to goodwill
           
             
     
Goodwill at end of period
    9,964       9,964  
             
       
Total goodwill
  $ 99,056     $ 99,056  
             
10. Accrued Expenses
      Accrued expenses consisted of the following at September 30, 2005 and December 31, 2004 (in thousands):
                 
    September 30,   December 31,
    2005   2004
         
Salaries, wages, payroll taxes and benefits
  $ 31,036     $ 21,245  
Workers’ compensation liability
    42,277       38,677  
Sales, use and other taxes
    11,659       5,863  
Insurance, other than workers’ compensation
    9,542       7,061  
Other
    7,979       6,317  
             
    $ 102,493     $ 79,163  
             

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PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
11. Asset Retirement Obligation
      Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS No. 143”), requires that the Company record a liability for the estimated costs to be incurred in connection with the abandonment of oil and natural gas properties in the future. The following table describes the changes to our asset retirement obligations during the nine months ended September 30, 2005 and 2004 (in thousands):
                 
    2005   2004
         
Balance at beginning of year
  $ 2,358     $ 1,163  
Liabilities incurred*
    61       1,242  
Liabilities settled
    (801 )     (144 )
Accretion expense
    55       52  
             
Asset retirement obligation at end of period
  $ 1,673     $ 2,313  
             
 
The 2004 amount includes $1,091 of liabilities assumed in the acquisition of liabilities assumed in the acquisition of TMBR/ Sharp Drilling, Inc. (“TMBR”).
12. Commitments, Contingencies and Other Matters
      The Company maintains letters of credit in the aggregate amount of approximately $56 million for the benefit of various insurance companies as collateral for retrospective premiums and retained losses which could become payable under the terms of the underlying insurance contracts. These letters of credit expire at various times during each calendar year. No amounts have been drawn under the letters of credit.
      The Company has signed non-cancelable commitments to purchase $93.0 million of equipment to be received throughout 2006.
      We are also party to various legal proceedings arising in the normal course of our business. We do not believe that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
13. Stockholders’ Equity
      On February 16, 2005, April 27, 2005 and July 27, 2005, the Company’s Board of Directors approved cash dividends on its common stock in the amount of $0.04 per share. The cash dividends of approximately $6.7 million, $6.8 million and $6.9 million were paid on March 4, 2005, June 1, 2005 and September 1, 2005, respectively. The amount and timing of all future dividend payments is subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial condition, terms of the Company’s credit facilities and other factors.
14. Subsequent Event
      On October 26, 2005, the Company’s Board of Directors approved a quarterly cash dividend of $0.04 on each outstanding share of its common stock. The dividend is to be paid on December 1, 2005 to holders of record as of November 15, 2005.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
      This Quarterly Report on Form 10-Q/A for the three and nine months ended September 30, 2005 amends and restates the financial statements and related financial information for all periods presented herein. The determination to restate these financial statements and other information was made as a result of management’s identification of an embezzlement. Further information on the restatement can be found in Note 2 to unaudited condensed consolidated financial statements.
      Management Overview — We are a leading provider of contract services to the North American oil and natural gas industry. Our services primarily involve the drilling, on a contract basis, of land-based oil and natural gas wells and, to a lesser extent, we provide pressure pumping services and drilling and completion fluid services. In addition to the aforementioned contract services, we also engage in the development, exploration, acquisition and production of oil and natural gas. For the three and nine months ended September 30, 2005 and 2004, our operating revenues consisted of the following (dollars in thousands):
                                                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
         
    2005   2004   2005   2004
                 
Contract drilling
  $ 401,046       86 %   $ 206,454       80 %   $ 1,025,938       85 %   $ 573,851       81 %
Pressure pumping
    27,640       6       19,663       7       66,358       6       48,490       7  
Drilling and completion fluids
    29,819       6       23,455       9       88,812       7       65,018       9  
Oil and natural gas
    10,234       2       9,602       4       28,146       2       25,104       3  
                                                 
    $ 468,739       100 %   $ 259,174       100 %   $ 1,209,254       100 %   $ 712,463       100 %
                                                 
      We provide our contract services to oil and natural gas operators in many of the oil and natural gas producing regions of North America. Our contract drilling operations are focused in various regions of Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, South Dakota and Western Canada, while our pressure pumping services are focused primarily in the Appalachian Basin. Our drilling and completion fluids services are provided to operators in Texas, Southeastern New Mexico, Oklahoma, the Gulf Coast region of Louisiana and the Gulf of Mexico. Our oil and natural gas operations are primarily focused in West and South Texas, Southeastern New Mexico, Utah and Mississippi.
      We have been a leading consolidator of the land-based contract drilling industry over the past several years, increasing our drilling fleet to 403 rigs as of September 30, 2005. Based on publicly available information, we believe we are the second largest owner of land-based drilling rigs in North America. Growth by acquisition has been a corporate strategy intended to expand both revenues and profits.
      The profitability of our business is most readily assessed by two primary indicators: our average number of rigs operating and our average revenue per operating day. During the third quarter of 2005, our average number of rigs operating increased to 283 from 265 in the second quarter of 2005 and 216 in the third quarter of 2004. Our average revenue per operating day increased to $15,410 in the third quarter of 2005 from $13,690 in the second quarter of 2005 and $10,400 in the third quarter of 2004. Primarily due to these improvements, we experienced an increase of approximately $80 million, or 302.7%, in consolidated net income for the third quarter of 2005 as compared to the third quarter of 2004.
      Our revenues, profitability and cash flows are highly dependent upon the market prices of oil and natural gas. During periods of improved commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which results in increased demand for our contract services. Conversely, in periods of time when these commodity prices deteriorate, the demand for our contract services generally weakens and we experience downward pressure on pricing for our services. In addition, our operations are highly impacted by competition, the availability of excess equipment, labor issues and various other factors which are more fully described as risk factors in our “Forward Looking Statements and Cautionary Statements for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” included in our Annual Report on Form 10-K/A for the year ended December 31, 2004, beginning on page 18.

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      Management believes that the liquidity of our balance sheet as of September 30, 2005, which includes approximately $308 million in working capital (including $131 million in cash), no long-term debt and $144 million available under a $200 million line of credit (availability of $56 million is reserved for outstanding letters of credit), provides us with the ability to pursue acquisition opportunities, expand into new regions, make improvements to our assets and survive downturns in our industry.
      Commitments and Contingencies — The Company maintains letters of credit in the aggregate amount of approximately $56 million for the benefit of various insurance companies as collateral for retrospective premiums and retained losses which could become payable under the terms of the underlying insurance contracts. These letters of credit expire at various times during each calendar year. No amounts have been drawn under the letters of credit.
      The Company has signed non-cancelable commitments to purchase $93.0 million of equipment to be received throughout 2006.
      Net income for the three months ended September 30, 2005 and 2004 includes embezzlement expense of approximately $5.4 million and $4.8 million, respectively. Net income for the nine months ended September 30, 2005 and 2004 includes embezzlement expense of approximately $12.2 million and $13.5 million, respectively. On November 16, 2005, the SEC obtained a freeze order on Nelson’s assets (including assets held by entities controlled by him) and a Receiver was appointed to collect those assets. The Company understands that the Receiver will ultimately liquidate the assets and propose a plan to distribute the proceeds. While the Company believes it has a claim for at least the full amount embezzled, other creditors have or may assert claims on the assets held by the Receiver. As a result, recovery by the Company from the Receiver is uncertain as to timing and amount, if any. Recoveries, if any, will be recognized when they are considered collectable.
      Trading and Investing — We have not engaged in trading activities that include high-risk securities, such as derivatives and non-exchange traded contracts. We invest cash primarily in highly liquid, short-term investments such as overnight deposits, money markets, and highly rated municipal and commercial bonds.
      Description of Business — We conduct our contract drilling operations in Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, South Dakota and Western Canada. As of September 30, 2005, we owned 403 drilling rigs. We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. These services consist primarily of well stimulation and cementing for completion of new wells and remedial work on existing wells. We provide drilling fluids, completion fluids and related services to oil and natural gas operators in Texas, Southeastern New Mexico, Oklahoma, the Gulf Coast region of Louisiana and the Gulf of Mexico. Drilling and completion fluids are used by oil and natural gas operators during the drilling process to control pressure when drilling oil and natural gas wells. We are also engaged in the development, exploration, acquisition and production of oil and natural gas. Our oil and natural gas operations are focused primarily in producing regions in West and South Texas, Southeastern New Mexico, Utah and Mississippi.
      The North American land drilling industry has experienced periods of downturn in demand over the last decade. During these periods, there have been substantially more drilling rigs available than necessary to meet demand. As a result, drilling contractors have had difficulty sustaining profit margins during the downturn periods.
      In addition to adverse effects that future declines in demand could have on us, ongoing factors which could adversely affect utilization rates and pricing, even in an environment of stronger oil and natural gas prices and increased drilling activity, include:
  •  movement of drilling rigs from region to region,
 
  •  reactivation of land-based drilling rigs, or
 
  •  new construction of drilling rigs.

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      We cannot predict either the future level of demand for our contract drilling services or future conditions in the oil and natural gas contract drilling business.
Critical Accounting Policies
      In addition to established accounting policies, our consolidated financial statements are impacted by certain estimates and assumptions made by management. The following is a discussion of our critical accounting policies pertaining to property and equipment, oil and natural gas properties, goodwill, revenue recognition, and the use of estimates.
      Property and equipment — Property and equipment, including betterments which extend the useful life of the asset, are stated at cost. Maintenance and repairs are charged to expense when incurred. We provide for the depreciation of our property and equipment using the straight-line method over their estimated useful lives. Our method of depreciation does not change when equipment becomes idle; we continue to depreciate idled equipment on a straight-line basis. No provision for salvage value is considered in determining depreciation of our property and equipment. We review our assets for impairment when events or changes in circumstances indicate that the carrying values of certain assets either exceed their respective fair values or may not be recovered over their estimated remaining useful lives. The cyclical nature of our industry has resulted in fluctuations in rig utilization over periods of time. Management believes that the contract drilling industry will continue to be cyclical and rig utilization will fluctuate. Based on management’s expectations of future trends we estimate future cash flows in our assessment of impairment assuming the following four-year industry cycle: one year projected with low utilization, one year projected as a recovery period with improving utilization and the remaining two years projecting higher utilization. Provisions for asset impairment are charged to income when estimated future cash flows, on an undiscounted basis, are less than the asset’s net book value. Impairment charges are recorded based on discounted cash flows. There were no impairment charges to property and equipment during the nine months ended September 30, 2005 or 2004.
      Oil and natural gas properties — Oil and natural gas properties are accounted for using the successful efforts method of accounting. Under the successful efforts method of accounting, exploration costs which result in the discovery of oil and natural gas reserves and all development costs are capitalized to the appropriate well. Exploration costs which do not result in discovering oil and natural gas reserves are charged to expense when such determination is made. In accordance with SFAS 19, costs of exploratory wells are initially capitalized to wells in progress until the outcome of the drilling is known. We review wells in progress quarterly to determine the related reserve classification. If the reserve classification is uncertain after one year following the completion of drilling, we consider the costs of the well to be impaired and recognize the costs as expense. Geological and geophysical costs, including seismic costs and costs to carry and retain undeveloped properties, are charged to expense when incurred. The capitalized costs of both developmental and successful exploratory type wells, consisting of lease and well equipment, lease acquisition costs, and intangible development costs, are depreciated, depleted, and amortized on the units-of-production method, based on petroleum engineer estimates of proved oil and natural gas reserves of each respective field. We review our proved oil and natural gas properties for impairment when an event occurs such as downward revisions in reserve estimates or decreases in oil and natural gas prices. Proved properties are grouped by field and undiscounted cash flow estimates are provided by our reserve engineer. If the net book value of a field exceeds its undiscounted cash flow estimate, impairment expense is measured and recognized as the difference between its net book value and discounted cash flow. Unproved oil and natural gas properties are reviewed quarterly to determine impairment. Our intent to drill, lease expiration, and abandonment of area are considered. Assessment of impairment is made on a lease-by-lease basis. If an unproved property is determined to be impaired, then costs related to that property are expensed. Impairment expense of approximately $702,000 and $1.5 million for the three and nine months ended September 30, 2005, respectively, and $891,000 and $3.0 million for the three and nine months ended September 30, 2004, respectively, is included in depreciation, depletion and impairment in the accompanying financial statements.
      The Company adopted Staff Position Financial Accounting Standard 19-1, Accounting for Suspended Well Costs (“FAS 19-1”), on July 1, 2005. At that time, the Company evaluated exploration costs capitalized as wells-in-progress in accordance with FAS 19-1 and determined that no projects with capitalized costs were impaired.

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      Changes in exploration costs capitalized as wells-in-progress, excluding costs capitalized and subsequently expensed in the same period, are provided below. Amounts for periods after June 30, 2005 reflect the requirements of FAS 19-1; prior period amounts reflect previous accounting policy (in thousands).
                           
    Period Ending
     
        December 31,
    September 30,    
    2005   2004   2003
             
Wells-in-progress, January 1
  $ 3,860     $ 1,166     $ 108  
Costs impaired upon adoption of FAS 19-1
                 
Exploration costs incurred
    2,401       4,903       1,312  
Reductions:
                       
 
Costs related to proved reserves transferred to completed wells
    (3,525 )     (1,986 )     (254 )
 
Costs impaired
          (223 )      
                   
Wells-in-progress, end of period
  $ 2,736     $ 3,860     $ 1,166  
                   
      The following table provides the length of time and amount of capitalized exploration costs which are classified as wells-in-progress for each of the respective periods (in thousands).
                         
    Period Ending
     
        December 31,
    September 30,    
    2005   2004   2003
             
Costs of wells-in-progress:
                       
For one year or less
  $ 2,736     $ 3,860     $ 1,166  
For more than one year
                 
                   
End of period
  $ 2,736     $ 3,860     $ 1,166  
                   
      Goodwill — Goodwill is considered to have an indefinite useful economic life and is not amortized. As such, we assess impairment of our goodwill annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value.
      Revenue recognition — Revenues are recognized when services are performed, except for revenues earned under turnkey contract drilling arrangements which are recognized using the completed contract method of accounting, as described below. We follow the percentage-of-completion method of accounting for footage contract drilling arrangements. Under the percentage-of-completion method, management estimates are relied upon in the determination of the total estimated expenses to be incurred drilling the well. Due to the nature of turnkey contract drilling arrangements and risks therein, we follow the completed contract method of accounting for such arrangements. Under this method, all drilling revenues and expenses related to a well in progress are deferred and recognized in the period the well is completed. Provisions for losses on incomplete or in-process wells are made when estimated total expenses are expected to exceed estimated total revenues.
      In accordance with Emerging Issues Task Force Issue No. 00-14, we recognize reimbursements due from third parties for out-of-pocket expenses incurred as revenues and account for out-of-pocket expenses as direct costs.
      Use of estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

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      Key estimates used by management include:
  •  allowance for doubtful accounts,
 
  •  total expenses to be incurred on footage and turnkey drilling contracts,
 
  •  depreciation, depletion, and amortization,
 
  •  asset impairment,
 
  •  reserves for self-insured levels of insurance coverages, and
 
  •  fair values of assets and liabilities assumed in acquisitions.
Liquidity and Capital Resources
      As of September 30, 2005, we had working capital of approximately $308 million, including cash and cash equivalents of $131 million. For the nine months ended September 30, 2005, our significant sources of cash flow included:
  •  $319 million provided by operations,
 
  •  $42 million from the exercise of stock options, and
 
  •  $13 million in proceeds from sales of property and equipment.
      We used $74 million to purchase land drilling assets from Key Energy Services, Inc. and six additional land-based drilling rigs, $20 million to pay dividends on the Company’s common stock and $263 million:
  •  to make capital expenditures for the betterment and refurbishment of our drilling rigs,
 
  •  to acquire and procure drilling equipment,
 
  •  to fund capital expenditures for our pressure pumping and drilling and completion fluids divisions, and
 
  •  to fund leasehold acquisition and exploration and development of oil and natural gas properties.
      In January 2005, the Company purchased land drilling assets of Key Energy Services, Inc. for $61.8 million. The assets acquired included 25 active and 10 stacked land-based drilling rigs, related drilling equipment, yard facilities and a rig moving fleet consisting of approximately 45 trucks and 100 trailers. In June 2005, the Company acquired one land-based drilling rig for $3.6 million. In September 2005, the Company acquired five land-based drilling rigs and related drilling equipment for $8.2 million. The transactions were accounted for as acquisitions of assets and the purchase price was allocated among the assets acquired based on their estimated fair market values.
      On February 16, 2005, April 27, 2005 and July 27, 2005, the Company’s Board of Directors approved cash dividends on its common stock in the amount of $0.04 per share. The dividends of approximately $6.7 million, $6.8 million and $6.9 million were paid on March 4, 2005, June 1, 2005 and September 1, 2005, respectively.
      On October 26, 2005, the Company’s Board of Directors approved a quarterly cash dividend of $0.04 on each outstanding share of its common stock to be paid on December 1, 2005 to holders of record on November 15, 2005. The amount and timing of all future dividend payments is subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial condition, terms of the Company’s credit facilities and other factors.
      We believe that the current level of cash and short-term investments, together with cash generated from operations, should be sufficient to meet our capital needs. From time to time, acquisition opportunities are evaluated. The timing, size or success of any acquisition and the associated capital commitments are unpredictable. Should opportunities for growth requiring capital arise, we believe we would be able to satisfy these needs through a combination of working capital, cash generated from operations, our existing credit

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facility and additional debt or equity financing. However, there can be no assurance that such capital would be available.
Results of Operations
      The following tables summarize operations by business segment for the three months ended September 30, 2005 and 2004:
                         
    Restated (See Note 2)
     
Contract Drilling   2005   2004   % Change
             
    (Dollars in thousands)
Revenues
  $ 401,046     $ 206,454       94.3 %
Direct operating costs
  $ 202,956     $ 140,608       44.3 %
Selling, general and administrative
  $ 1,286     $ 1,086       18.4 %
Depreciation
  $ 33,695     $ 26,008       29.6 %
Operating income
  $ 163,109     $ 38,752       320.9 %
Operating days
    26,015       19,855       31.0 %
Average revenue per operating day
  $ 15.41     $ 10.40       48.2 %
Average direct operating costs per operating day
  $ 7.80     $ 7.08       10.2 %
Number of owned rigs at end of period
    403       361       11.6 %
Average number of rigs owned during period
    398       361       10.2 %
Average rigs operating
    283       216       31.0 %
Rig utilization percentage
    71 %     60 %     18.3 %
Capital expenditures
  $ 90,114     $ 35,758       152.0 %
      Revenues and direct operating costs increased as a result of the increased number of operating days, as well as an increase in the average revenue and average direct operating costs per operating day. Operating days and average rigs operating increased primarily as a result of increased demand for our contract drilling services and the acquisition of land drilling assets from Key Energy Services, Inc. in January 2005. Average revenue per operating day increased as a result of increased demand and pricing for our drilling services. Average direct operating costs per operating day increased primarily as a result of increased wage levels for field personnel. Significant capital expenditures were incurred during the third quarter of 2005 to activate additional drilling rigs to meet increased demand, to modify and upgrade our existing drilling rigs and to acquire additional related equipment such as drill pipe, drill collars, engines, fluid circulating systems, rig hoisting systems and safety enhancement equipment. Increased depreciation expense was due to acquisitions and capital expenditures in 2004 and 2005.
                         
Pressure Pumping   2005   2004   % Change
             
    (Dollars in thousands)
Revenues
  $ 27,640     $ 19,663       40.6 %
Direct operating costs
  $ 15,662     $ 10,455       49.8 %
Selling, general and administrative
  $ 2,464     $ 1,725       42.8 %
Depreciation
  $ 1,823     $ 1,284       42.0 %
Operating income
  $ 7,691     $ 6,199       24.1 %
Total jobs
    2,714       2,200       23.4 %
Average revenue per job
  $ 10.18     $ 8.94       13.9 %
Average direct operating costs per job
  $ 5.77     $ 4.75       21.5 %
Capital expenditures
  $ 5,865     $ 3,508       67.2 %
      Revenues and direct operating costs increased as a result of the increased number of jobs, as well as an increase in the average revenue and average direct operating cost per job. The increase in jobs was attributable to increased demand for our services and increased operating capacity which was added in 2004 and 2005.

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Increased average revenue per job was due to increased pricing for our services and an increase in the number of larger jobs. Average direct operating costs per job increased as a result of increases in the cost of sand and other materials used in our operations as well as an increase in the number of larger jobs. Selling, general and administrative expenses increased primarily as a result of the expanding operations of the pressure pumping segment. Increased depreciation expense for the 2005 quarter was largely due to the expansion of the pressure pumping segment through capital expenditures during 2004 and 2005. Significant capital expenditures were incurred during the third quarter of 2005 to modify and upgrade existing equipment and to add additional equipment to the segment’s expanded operations to meet increased demand.
                         
    Restated (See Note 2)
     
Drilling and Completion Fluids   2005   2004   % Change
             
    (Dollars in thousands)
Revenues
  $ 29,819     $ 23,455       27.1 %
Direct operating costs
  $ 24,062     $ 19,851       21.2 %
Selling, general and administrative
  $ 2,402     $ 1,965       22.2 %
Depreciation
  $ 609     $ 529       15.1 %
Other operating
  $ 200             N/A %
Operating income
  $ 2,546     $ 1,110       129.4 %
Total jobs
    485       550       (11.8 )%
Average revenue per job
  $ 61.48     $ 42.65       44.2 %
Average direct operating costs per job
  $ 49.61     $ 36.09       37.5 %
Capital expenditures
  $ 687     $ 354       94.1 %
      Revenues and direct operating costs increased as a result of an increase in the average revenue and direct operating costs per job. Average revenue and direct operating costs per job increased primarily as a result of an increase in the number of jobs completed in the Gulf of Mexico and a decrease in the number of smaller land-based jobs. Selling, general and administrative expense increased in 2005 primarily due to increased incentive compensation resulting from higher profitability levels. Other expense from operations in 2005 includes a charge of $200,000 representing the deductible portion of the Company’s insurance coverage for damage caused by the hurricanes in August and September 2005.
                         
Oil and Natural Gas Production and Exploration   2005   2004   % Change
             
    (Dollars in thousands,
    except sales prices)
Revenues
  $ 10,234     $ 9,602       6.6 %
Direct operating costs
  $ 2,365     $ 1,715       37.9 %
Selling, general and administrative
  $ 545     $ 484       12.6 %
Depreciation, depletion and impairment
  $ 3,226     $ 3,729       (13.5 )%
Operating income
  $ 4,098     $ 3,674       11.5 %
Capital expenditures
  $ 3,858     $ 2,739       40.9 %
Average net daily oil production (Bbls)
    869       1,095       (20.6 )%
Average net daily gas production (Mcf)
    6,567       8,203       (19.9 )%
Average oil sales price (per Bbl)
  $ 60.42     $ 42.60       41.8 %
Average gas sales price (per Mcf)
  $ 7.75     $ 6.13       26.4 %
      Revenues increased due to increased market prices for oil and natural gas. Average net daily oil and natural gas production decreased as a result of production declines and the sale of certain oil and natural gas properties during 2005. Depreciation, depletion and impairment expense includes approximately $702,000 and $891,000 of expenses incurred during the three months ended September 30, 2005 and 2004, respectively, to

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impair certain oil and natural gas properties. Depreciation and depletion further decreased in 2005 as a result of decreased oil and natural gas production.
                         
    Restated (See Note 2)
     
Corporate and Other   2005   2004   % Change
             
    (In thousands)
Selling, general and administrative
  $ 3,868     $ 3,043       27.1 %
Bad debt expense
  $ 50     $ 192       (74.0 )%
Depreciation
  $ 192     $ 111       73.0 %
Gain on sale of assets
  $ 218     $ 112       N/A %
Embezzled funds expense
  $ 5,431     $ 4,759       14.1 %
Other
  $ 675     $       N/A %
Interest income
  $ 944     $ 233       305.2 %
Interest expense
  $ 56     $ 75       (25.3 )%
Other income
  $ 19     $ 56       (66.1 )%
      Selling, general and administrative expenses increased primarily as a result of increased insurance costs, payroll taxes attributable to the exercise of employee stock options, compensation expense related to the issuance of restricted shares to certain key employees in the second quarter of 2005 and professional fees. Other in 2005 includes a charge of $675,000 to increase reserves related to the financial failure of a workers’ compensation insurance carrier used previously by the Company. Interest income increased as a result of higher cash balances and interest rates in 2005. Embezzled funds expense includes payments made to or for the benefit of Jonathan D. Nelson, our former CFO, for assets and services that were not received by the Company.
      The following tables summarize operations by business segment for the nine months ended September 30, 2005 and 2004:
                         
    Restated (See Note 2)
     
Contract Drilling   2005   2004   % Change
             
    (Dollars in thousands)
Revenues
  $ 1,025,938     $ 573,851       78.8 %
Direct operating costs
  $ 558,607     $ 402,986       38.6 %
Selling, general and administrative
  $ 3,701     $ 3,249       13.9 %
Depreciation and amortization
  $ 95,909     $ 74,919       28.0 %
Operating income
  $ 367,721     $ 92,697       296.7 %
Operating days
    73,746       56,292       31.0 %
Average revenue per operating day
  $ 13.91     $ 10.19       36.5 %
Average direct operating costs per operating day
  $ 7.57     $ 7.16       5.7 %
Number of owned rigs at end of period
    403       361       11.6 %
Average number of rigs owned during period
    395       358       10.3 %
Average rigs operating
    270       205       31.7 %
Rig utilization percentage
    68 %     57 %     19.3 %
Capital expenditures
  $ 222,492     $ 100,537       121.3 %
      Revenues and direct operating costs increased as a result of the increased number of operating days, as well as an increase in the average revenue and average direct operating costs per operating day. Operating days and average rigs operating increased primarily as a result of the increased demand for our contract drilling services and the acquisition of land drilling assets from Key Energy Services, Inc. in January 2005. Average revenue per operating day increased as a result of increased demand and pricing for our drilling services. Significant capital expenditures were incurred during 2005 to activate additional drilling rigs to meet increased demand, to modify and upgrade our existing drilling rigs and to acquire additional related equipment such as

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drill pipe, drill collars, engines, fluid circulating systems, rig hoisting systems and safety enhancement equipment. Increased depreciation expense was due to acquisitions and capital expenditures in 2004 and 2005.
                         
Pressure Pumping   2005   2004   % Change
             
    (Dollars in thousands)
Revenues
  $ 66,358     $ 48,490       36.8 %
Direct operating costs
  $ 38,648     $ 26,871       43.8 %
Selling, general and administrative
  $ 6,858     $ 5,182       32.3 %
Depreciation
  $ 5,073     $ 3,650       39.0 %
Operating income
  $ 15,779     $ 12,787       23.4 %
Total jobs
    6,968       5,466       27.5 %
Average revenue per job
  $ 9.52     $ 8.87       7.3 %
Average direct operating costs per job
  $ 5.55     $ 4.92       12.8 %
Capital expenditures
  $ 20,598     $ 14,112       46.0 %
      Revenues and direct operating costs increased primarily as a result of the increased number of jobs. The increase in jobs was attributable to increased demand for our services and increased operating capacity which was added in 2004 and 2005. Selling, general and administrative expenses increased primarily as a result of the expanding operations of the pressure pumping segment. Increased depreciation expense in 2005 was largely due to the expansion of the pressure pumping segment through capital expenditures during 2004 and 2005.
                         
    Restated (See Note 2)
     
Drilling and Completion Fluids   2005   2004   % Change
             
    (Dollars in thousands)
Revenues
  $ 88,812     $ 65,018       36.6 %
Direct operating costs
  $ 71,857     $ 55,327       29.9 %
Selling, general and administrative
  $ 6,964     $ 5,550       25.5 %
Depreciation and amortization
  $ 1,730     $ 1,623       6.6 %
Other operating
  $ 200             N/A %
Operating income
  $ 8,061     $ 2,518       220.1 %
Total jobs
    1,515       1,661       (8.8 )%
Average revenue per job
  $ 58.62     $ 39.14       49.8 %
Average direct operating costs per job
  $ 47.43     $ 33.31       42.4 %
Capital expenditures
  $ 2,039     $ 981       107.8 %
      Revenues and direct operating costs increased as a result of an increase in the average revenue and direct operating costs per job. Average revenue and direct operating costs per job increased primarily as a result of an increase in the number of jobs completed in the Gulf of Mexico and a decrease in the number of smaller land-based jobs. Selling, general and administrative expense increased primarily due to increased incentive compensation resulting from higher profitability levels. Other expense from operations includes a charge of

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$200,000 representing the deductible portion of the Company’s insurance coverage for damage caused by the hurricanes in August and September 2005.
                         
Oil and Natural Gas Production and Exploration   2005   2004   % Change
             
    (Dollars in thousands,
    except sales prices)
Revenues
  $ 28,146     $ 25,104       12.1 %
Direct operating costs
  $ 6,953     $ 6,051       14.9 %
Selling, general and administrative
  $ 1,598     $ 1,324       20.7 %
Depreciation, depletion and impairment
  $ 9,063     $ 10,512       (13.8 )%
Operating income
  $ 10,532     $ 7,217       45.9 %
Capital expenditures
  $ 12,286     $ 9,871       24.5 %
Average net daily oil production (Bbls)
    854       1,065       (19.8 )%
Average net daily gas production (Mcf)
    7,465       7,728       (3.4 )%
Average oil sales price (per Bbl)
  $ 52.92     $ 38.37       37.9 %
Average gas sales price (per Mcf)
  $ 6.63     $ 5.63       17.8 %
      Revenues increased primarily due to increased market prices for oil and natural gas. Average net daily oil and natural gas production decreased as a result of production declines and the sale of certain oil and natural gas properties during 2005. Depreciation, depletion and impairment expense includes approximately $1.5 million and $3.0 million of expenses incurred during 2005 and 2004, respectively, to impair certain oil and natural gas properties.
                         
    Restated (See Note 2)
     
Corporate and Other   2005   2004   % Change
             
    (In thousands)
Selling, general and administrative
  $ 11,036     $ 7,694       43.4 %
Bad debt expense
  $ 416     $ 499       (16.6 )%
Depreciation and amortization
  $ 544     $ 333       63.4 %
Gain on sale of assets
  $ 1,253     $ 1,425       (12.1 )%
Embezzled funds expense
  $ 12,193     $ 13,479       (9.5 )%
Other
  $ 3,227     $       N/A %
Interest income
  $ 2,011     $ 688       192.3 %
Interest expense
  $ 179     $ 205       (12.7 )%
Other income
  $ 39     $ 313       (87.5 )%
Capital expenditures
  $ 5,308     $       N/A %
      Selling, general and administrative expenses increased primarily as a result of payroll taxes attributable to the exercise of employee stock options, increased professional fees, and additional compensation expense related to the issuance of restricted shares to certain key employees in 2004 and 2005. Other in 2005 includes a charge of $3.2 million to increase reserves related to the financial failure of a worker’s compensation insurance carrier used previously by the Company. Interest income increased as a result of higher cash balances and interest rates in 2005. Embezzled funds expense includes payments made to or for the benefit of Jonathan D. Nelson, our former CFO, for assets and services that were not received by the Company.
Volatility of Oil and Natural Gas Prices and its Impact on Operations
      Our revenue, profitability, and future rate of growth are substantially dependent upon prevailing prices for oil and natural gas, with respect to all of our operating segments. For many years, oil and natural gas prices have been volatile. Prices are affected by market supply and demand factors as well as international military, political and economic conditions, and the ability of OPEC to set and maintain production and price targets. All of these factors are beyond our control. Natural gas prices fell from an average of $6.23 per Mcf in the first

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quarter of 2001 to an average of $2.51 per Mcf for the same period in 2002. During this same period, the average number of our rigs operating dropped by approximately 50%. The average market price of natural gas improved from $3.36 in 2002 to $5.45 in 2003 to $5.95 in 2004 and $7.78 in the third quarter of 2005, resulting in an increase in demand for our drilling services. Our average number of rigs operating increased from 126 in 2002 to 188 in 2003 to 211 in 2004 and 283 in the third quarter of 2005. We expect oil and natural gas prices to continue to be volatile and to affect our financial condition and operations and ability to access sources of capital.
      The North American land drilling industry has experienced periods of downturn in demand over the last decade. During these periods, there have been substantially more drilling rigs available than necessary to meet demand. As a result, drilling contractors have had difficulty sustaining profit margins during the downturn periods.
Impact of Inflation
      We believe that inflation will not have a significant near-term impact on our financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
      We currently have no exposure to interest rate market risk as we have no outstanding balance under our credit facility. Should we incur a balance in the future, we would have exposure associated with the floating rate of the interest charged on that balance. The revolving credit facility calls for periodic interest payments at a floating rate ranging from LIBOR plus 0.625% to 1.0% or at the prime rate. The applicable rate above LIBOR is based upon our debt to capitalization ratio. Our exposure to interest rate risk due to changes in LIBOR is not expected to be material.
      We conduct some business in Canadian dollars through our Canadian land-based drilling operations. The exchange rate between Canadian dollars and U.S. dollars has fluctuated during the last several years. If the value of the Canadian dollar against the U.S. dollar weakens, revenues and earnings of our Canadian operations will be reduced when they are translated to U.S. dollars and the value of our Canadian net assets will decline.
Item 4. Controls and Procedures
      Background to the Fraud and Restatement — In November 2005, the Company discovered that its former Chief Financial Officer, Jonathan D. Nelson (“Nelson”), had fraudulently diverted approximately $78 million in Company funds for his own benefit. Nelson’s fraudulent diversions began in 1998 and continued until the fourth quarter of 2005 when he resigned from the Company. The funds fraudulently diverted were recorded as payments for assets or services that were not actually received by the Company. The Audit Committee of the Board of Directors commenced an investigation into Nelson’s activities and retained independent counsel and independent forensic accountants to assist with the investigation.
      On December 22, 2005, the Company announced that the Audit Committee of the Board of Directors of the Company had concluded that it was necessary to restate its previously reported consolidated financial statements for the years ended December 31, 2004, 2003 and 2002, and for the first three quarters of 2005 and all quarters in 2004 and 2003.
      As discussed in Note 2 to the consolidated financial statements included within this Quarterly Report on Form 10-K/A for the quarterly period ended September 30, 2005, we have restated our previously issued financial statements.
      Disclosure Controls and Procedures — We maintain disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) designed to ensure that the information required to be disclosed in the reports that we file with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief

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Executive Officer (“CEO”) and current Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
      Under the supervision and with the participation of our management, including our CEO and current CFO, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q/A.
      At the time of the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, our CEO and former CFO concluded that our disclosure controls and procedures were effective as of September 30, 2005. Subsequent to that evaluation, our CEO and current CFO concluded that our disclosure controls and procedures were not effective at a reasonable level of assurance, as of September 30, 2005, because of material weaknesses. For a discussion of the material weakness, see Item 9A of our Annual Report on Form 10-K/A for the year ended December 31, 2004. Based upon the substantial work performed during the restatement process, management has concluded that the Company’s unaudited condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q/A are fairly stated in all material respects.
      Changes in Internal Control Over Financial Reporting — Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). With the participation of our CEO and CFO, our management evaluates any changes in our internal control over financial reporting that occurred during each fiscal quarter which have materially affected, or are reasonably likely to materially affect, such internal control. At the time of the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, our management, including our CEO and former CFO, concluded that there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2005, that have materially affected or were reasonably likely to materially affect our internal control over financial reporting.
      Our CEO and current CFO have subsequently concluded that the material weaknesses described in Item 9A of our Annual Report on Form 10-K/A for the year ended December 31, 2004 existed as of September 30, 2005.
      You can find more information about the investigation, the material weaknesses and the actions that we have taken and are planning to take to remediate the material weaknesses in Item 9A of our Annual Report on Form 10-K/A, for the year ended December 31, 2004.

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FORWARD LOOKING STATEMENTS AND CAUTIONARY STATEMENTS FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
      “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Report contains forward-looking statements which are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements relating to: liquidity; financing of operations; continued volatility of oil and natural gas prices; source and sufficiency of funds required for immediate capital needs and additional rig acquisitions (if further opportunities arise); and other matters. The words “believes,” “plans,” “intends,” “expected,” “estimates” or “budgeted” and similar expressions identify forward-looking statements. The forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. We do not undertake to update, revise or correct any of the forward-looking information. Factors that could cause actual results to differ materially from our expectations expressed in the forward-looking statements include, but are not limited to, the following:
  •  Changes in prices and demand for oil and natural gas;
 
  •  Changes in demand for contract drilling, pressure pumping and drilling and completion fluids services;
 
  •  Shortages of drill pipe and other drilling equipment;
 
  •  Labor shortages, primarily qualified drilling personnel;
 
  •  Effects of competition from other drilling contractors and providers of pressure pumping and drilling and completion fluids services;
 
  •  Occurrence of operating hazards and uninsured losses inherent in our business operations; and
 
  •  Environmental and other governmental regulation.
      For a more complete explanation of these various factors and others, see “Forward Looking Statements and Cautionary Statements for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” included in our Annual Report on Form 10-K/A for the year ended December 31, 2004, beginning on page 18.
      You are cautioned not to place undue reliance on any of our forward-looking statements, which speak only as of the date of this Report or, in the case of documents incorporated by reference, the date of those documents.
 

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PART II — OTHER INFORMATION
Item 6. Exhibits
      (a) Exhibits.
      The following exhibits are filed herewith or incorporated by reference, as indicated:
         
  3.1     Restated Certificate of Incorporation, as amended (filed August 9, 2004 as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 and incorporated herein by reference).
  3.2     Amendment to Restated Certificate of Incorporation, as amended (filed August 9, 2004 as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 and incorporated herein by reference).
  3.3     Amended and Restated Bylaws (filed March 19, 2002 as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference).
  31.1     Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
  31.2     Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
  32.1     Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  99.1     Controls and Procedures (filed March 17, 2006 as Item 9A to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 and incorporated herein by reference).

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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 thereunto duly authorized.
  PATTERSON-UTI ENERGY, INC.
  By:  /s/ Cloyce A. Talbott
 
 
  Cloyce A. Talbott
  (Principal Executive Officer)
  Chief Executive Officer
  By:  /s/ John E. Vollmer III
 
 
  John E. Vollmer III
  (Principal Accounting Officer)
  Senior Vice President — Corporate Development, Chief Financial Officer,
  Secretary and Treasurer
DATED: March 27, 2006

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