Commitments – As of December 31, 2019, the Company maintained letters of credit in the aggregate amount of $63.4 million primarily 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 annually at various times during the year and are typically renewed. As of December 31, 2019, no amounts had been drawn under the letters of credit.

As of December 31, 2019, the Company had commitments to purchase major equipment and make investments totaling approximately $51 million for its drilling, pressure pumping, directional drilling and oilfield rentals businesses.

The Company’s pressure pumping business has entered into agreements to purchase minimum quantities of proppants and chemicals from certain vendors. The agreements expire in years 2020 through 2023. As of December 31, 2019, the remaining obligation under these agreements was approximately $37.8 million, of which approximately $15.8 million relates to purchases required during 2020. In the event the required minimum quantities are not purchased during any contract year, the Company could be required to make a liquidated damages payment to the respective vendor for any shortfall. In 2017, the Company entered into a capacity reservation agreement that required a cash deposit to increase the Company’s access to finer grades of sand for its pressure pumping business. As market prices for sand substantially decreased since 2017, the Company purchased lower cost sand outside of this capacity reservation contract and recorded a charge of $12.7 million in the second quarter of 2019 to revalue the deposit to its expected realizable value.

Contingencies – The Company’s operations are subject to many hazards inherent in the businesses in which it operates, including inclement weather, blowouts, explosions, fires, loss of well control, equipment failure, pollution, exposure and reservoir damage. These hazards could cause personal injury or death, work stoppage, and serious damage to equipment and other property, as well as significant environmental and reservoir damages. These risks could expose the Company to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages. An accident or other event resulting in significant environmental or property damage, or injuries or fatalities involving the Company’s employees or other persons could also trigger investigations by federal, state or local authorities. Such an accident or other event could cause the Company to incur substantial expenses in connection with the investigation, remediation and resolution, as well as cause lasting damage to the Company’s reputation, loss of customers and an inability to obtain insurance.

The Company has indemnification agreements with many of its customers, and also maintains liability and other forms of insurance. In general, the Company’s contracts typically contain provisions requiring its customers to indemnify the Company for, among other things, reservoir and certain pollution damage. The Company’s right to indemnification may, however, be unenforceable or limited due to negligent or willful acts or omissions by the Company, its subcontractors and/or suppliers. In addition, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of the Company.

The Company’s customers and other third parties may dispute, or be unable to meet, their indemnification obligations to the Company due to financial, legal or other reasons. Accordingly, the Company may be unable to transfer these risks to its customers and other third parties by contract or indemnification agreements. Incurring a liability for which the Company is not fully indemnified or insured could have a material adverse effect on its business, financial condition, cash flows and results of operations.

The Company maintains insurance coverage of types and amounts that the Company believes to be customary in the industry, but is not fully insured against all risks, either because insurance is not available or because of the high premium costs. The insurance coverage that the Company maintains includes insurance for fire, windstorm and other risks of physical loss to its equipment and certain other assets, employer’s liability, automobile liability, commercial general liability, workers’ compensation and insurance for other specific risks. The Company cannot assure, however, that any insurance obtained will be adequate to cover any losses or liabilities, or that this insurance will continue to be available, or available on terms that are acceptable to the Company. While the Company carries insurance to cover physical damage to, or loss of, a substantial portion of its equipment and certain other assets, such insurance does not cover the full replacement cost of such equipment or other assets. The Company has also elected in some cases to accept a greater amount of risk through increased deductibles on certain insurance policies. For example, the Company generally maintains a $1.5 million per occurrence deductible on its workers’ compensation insurance coverage, a $1.0 million per occurrence deductible on its equipment insurance coverage, a $10.0 million per occurrence deductible on its general liability coverage and a $2.0 million per occurrence deductible on its automobile liability insurance coverage. The Company also self-insures a number of other risks, including loss of earnings and business interruption and most cybersecurity risks, and does not carry a significant amount of insurance to cover risks of underground reservoir damage.

On July 18, 2018, the U.S. Occupational Safety and Health Administration (“OSHA”) issued a citation containing alleged violations, proposed abatement dates and an aggregate proposed penalty of approximately $74,000 in connection with an accident at a drilling site in Pittsburg County, Oklahoma that resulted in the losses of life of five people, including three of the Company’s employees. The Company filed a notice of contest with OSHA that contested all citation items, abatement dates and proposed penalties. The Department of Labor (the “DOL”) filed a complaint on OSHA’s behalf seeking enforcement of the citation as issued, and the Company filed an answer to the complaint. In October 2019, the Company and the DOL agreed to a settlement of all but one of the citation items, and a hearing on the remaining citation item was held before an administrative law judge. The Company and the DOL will file post-hearing briefs and await the judge’s determination.

The Company is party to various other legal proceedings arising in the normal course of its business. The Company does not believe that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition, cash flows or results of operations.

Other Matters — The Company has Change in Control Agreements with its Chairman of the Board and one of its Executive Vice Presidents (the “Specified Employees”). Each Change in Control Agreement generally has an initial term with automatic twelve-month renewals unless the Company notifies the Specified Employee at least ninety days before the end of such renewal period that the term will not be extended. If a change in control of the Company occurs during the term of the agreement and the Specified Employee’s employment is terminated (i) by the Company other than for cause or other than automatically as a result of death, disability or retirement, or (ii) by the Specified Employee for good reason (as those terms are defined in the Change in Control Agreements), then the Specified Employee shall generally be entitled to, among other things:

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a bonus payment equal to the highest bonus paid after the Change in Control Agreement was entered into (such bonus payment for each Specified Employee prorated for the portion of the fiscal year preceding the termination date);

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a payment equal to 2.5 times (in the case of the Chairman of the Board) or 2 times (in the case of the Executive Vice President) of the sum of (i) the highest annual salary in effect for such Specified Employee and (ii) the average of the three annual bonuses earned by the Specified Employee for the three fiscal years preceding the termination date and

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continued coverage under the Company’s welfare plans for up to three years (in the case of the Chairman of the Board) or two years (in the case of the Executive Vice President).

Each Change in Control Agreement provides the Specified Employee with a full gross-up payment for any excise taxes imposed on payments and benefits received under the Change in Control Agreements or otherwise, including other taxes that may be imposed as a result of the gross-up payment.

The Company has Employment Agreements with its Chief Executive Officer, Chief Financial Officer, General Counsel and the President of the Company’s subsidiary, Patterson-UTI Drilling Company LLC (“Patterson-UTI Drilling”). In the case of the Chief Executive Officer and the General Counsel, the Employment Agreement supersedes the prior Change in Control Agreement with each executive and, in the case of the President of Patterson-UTI Drilling, the Employment Agreement supersedes his prior employment agreement. Each Employment Agreement generally has an initial three-year term, subject to automatic annual renewal. The executive may terminate his employment under his Employment Agreement by providing written notice of such termination at least 30 days before the effective date of such termination. Under specified circumstances, the Company may terminate the executive’s employment under his Employment Agreement for Cause (as defined in the Employment Agreement) by either (i) providing written notice 10 days before the effective date of such termination and by granting at least 10 days to cure the cause for such termination or (ii) by providing written notice of such termination at least 30 days before the effective date of such termination and by granting at least 20 days to cure the cause for such termination, provided that if the matter is reasonably determined by the Company to not be capable of being cured, the executive may be terminated for cause on the date the written notice is delivered. The Employment Agreement also provides for, among other things, severance payments and the continuation of certain benefits following termination by the Company of the executive other than for Cause, or termination by the executive for Good Reason (as defined in each Employment Agreement). Under these provisions, if the executive’s employment is terminated by the Company without Cause, or the executive terminates his employment for Good Reason:

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the executive will have the right to receive a lump-sum payment consisting of 3 times (in the case of the Chief Executive Officer) or 2.5 times (in the case of the Chief Financial Officer, General Counsel and President of Patterson-UTI Drilling) the sum of (i) his base salary and (ii) the average annual cash bonus received by him for the three years prior to the date of termination;

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the executive will have the right to receive a pro-rated lump-sum payment equal to his annual cash bonus based on actual results for the year, payable at the same time as annual cash bonuses are paid to active employees,

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the Company will accelerate vesting of all options and restricted stock awards on the 60th day following the executive’s termination, and

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the Company will pay the executive certain accrued obligations and certain obligations pursuant to the terms of employee benefit plans.

If a termination by the Company other than for Cause or by the executive for Good Reason occurs following a Change in Control (as defined in his Employment Agreement, which for the President of Patterson-UTI Drilling includes a change in control of the Company or, in certain circumstances, of Patterson-UTI Drilling), the executive will generally be entitled to the same severance payments and benefits described above except that the pro-rated lump-sum payment for annual cash bonuses will be based on his highest annual cash bonus for the last three years, and the executive will be entitled to 36 months (in the case of the Chief Executive Officer) or 30 months (in the case of the Chief Financial Officer, General Counsel and President of Patterson-UTI Drilling) of subsidized benefits continuation coverage.