- - --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 0-22664

PATTERSON ENERGY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2504748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

P. O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS, 79550
(Address of principal executive offices) (Zip Code)

(915) 573-1104
(Registrant's telephone number, including area code)

No change
(Former name, former address and former fiscal year, if changed
since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [x] No [ ]

As of November 13, 1998 the issuer had outstanding 31,671,132 shares of common
stock, $0.01 par value, its only class of voting stock.

- - --------------------------------------------------------------------------------

PATTERSON ENERGY, INC.

INDEX

Page

Report of Independent Accountants, PricewaterhouseCoopers LLP........................... 3

Part I - Financial Information

Item 1. Financial Statements

Unaudited condensed consolidated balance sheets........................ 4

Unaudited condensed consolidated statements of operations.............. 6

Unaudited condensed consolidated statement of stockholders' equity..... 7

Unaudited condensed consolidated statements of cash flows.............. 8

Notes to unaudited condensed consolidated financial statements......... 10

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 16

Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995................. 21

Part II - Other Information

Item 4. Submission of Matters to a Vote of Security Holders................... 22

Item 6. Exhibits and Reports on Form 8-K...................................... 23

Signatures.............................................................................. 27

2
3

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
of Patterson Energy, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of
Patterson Energy, Inc. and Subsidiaries as of September 30, 1998 and the related
condensed consolidated statements of operations for the three and nine months
ended September 30, 1998 and 1997 and cash flows for the nine months ended
September 30, 1998 and 1997 and the related condensed consolidated statement of
stockholders' equity for the nine months ended September 30, 1998. These
financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based upon our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997 and the
related consolidated statements of income and cash flows for the year then ended
(not presented herein); and in our report dated February 27, 1998, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1997, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
November 11, 1998

3
4

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE FOLLOWING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INCLUDE ALL ADJUSTMENTS, WHICH IN THE OPINION OF MANAGEMENT, ARE NECESSARY IN
ORDER TO MAKE SUCH FINANCIAL STATEMENTS NOT MISLEADING.

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

December 31, September 30,
1997 1998
-------------- --------------
(in thousands)

Current assets:
Cash and cash equivalents...................................... $ 23,338 $ 10,948
Marketable securities.......................................... 566 --
Accounts receivable:
Trade....................................................... 44,732 35,536
Oil and natural gas sales................................... 773 879
Costs of uncompleted drilling contracts in excess of related
billings.................................................... -- 233
Inventory...................................................... -- 973
Deferred income taxes.......................................... 2,309 --
Undeveloped oil and natural gas properties held for resale..... 4,781 6,369
Other current assets........................................... 515 4,479
----------- ----------
Total current assets..................................... 77,014 59,417
Property and equipment, at cost, net.............................. 100,405 141,495
Intangible assets, net............................................ 24,644 46,496
Other assets...................................................... 1,137 663
----------- ----------
Total assets............................................. $ 203,200 $ 248,071
========== ==========

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
(continued)

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED

LIABILITIES AND STOCKHOLDERS' EQUITY

(Unaudited)
December 31, September 30,
1997 1998
------------ -----------
(in thousands)

Current liabilities:
Current maturities of notes payable ....................... $ 1,467 $ 8,571

Accounts payable:
Trade ................................................... 12,126 13,939
Revenue distribution .................................... 3,352 1,936
Other ................................................... 1,569 192
Accrued expenses .......................................... 5,142 4,714
Accrued state and federal income taxes payable ............ 6,874 2,670
-------- --------
Total current liabilities ....................... 30,530 32,022
Deferred income taxes ........................................ 3,268 3,666
Deferred liabilities ......................................... 687 194
Notes payable, less current maturities ....................... 21,783 49,287
-------- --------
Total liabilities ............................... 56,268 85,169
-------- --------
Commitments and contingencies ................................ -- --

Stockholders' equity:
Preferred stock - par value $.01; authorized
1,000,000 shares, no shares issued ..................... -- --
Common stock - par value $.01; authorized 50,000,000 shares
with 30,967,084 and 31,671,132 issued and outstanding at
December 31, 1997 and September 30, 1998, respectively . 310 317
Additional paid-in capital ................................ 102,306 112,544
Retained earnings ......................................... 44,316 50,041
-------- --------
Total stockholders' equity ...................... 146,932 162,902
-------- --------
Total liabilities and stockholders' equity ...... $203,200 $248,071
======== ========

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

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -----------------------------------
1997 1998 1997 1998
--------------- ------------- --------------- ---------------
(in thousands, except per share data)

Operating revenues:
Drilling.............................. $ 55,051 $ 37,704 $ 120,207 $ 137,914
Drilling fluids....................... -- 2,900 -- 10,689
Oil and natural gas sales............. 2,678 1,289 8,013 4,409
Well operation fees................... 429 363 1,255 1,098
Other................................. -- 2 16 50
---------- ---------- ---------- ----------
58,158 42,258 129,491 154,160
---------- ---------- ---------- ----------
Operating costs and expenses:
Direct drilling costs................. 38,663 30,423 89,049 104,834
Drilling fluids....................... -- 2,274 -- 8,017
Lease operating and production........ 502 419 1,564 1,364
Impairment of oil and natural gas
properties......................... 300 300 750 1,089
Exploration costs..................... 153 166 478 503
Dry holes and abandonments............ 237 -- 830 123
Depreciation, depletion and
amortization....................... 4,988 7,441 12,188 20,060
General and administrative expense.... 1,828 1,487 4,459 7,029
---------- ---------- ---------- ----------
46,671 42,510 109,318 143,019
---------- ---------- ---------- ----------
Operating income (loss)................... 11,487 (252) 20,173 11,141
---------- ---------- ---------- ----------
Other income (expense):
Net gain on sale of assets............ 1,036 267 1,354 639
Interest income....................... 159 200 799 646
Interest expense...................... (186) (1,195) (695) (3,360)
Other................................. 29 59 169 152
---------- ---------- ---------- ----------
1,038 (669) 1,627 (1,923)
---------- ---------- ---------- ----------
Income (loss) before income taxes......... 12,525 (921) 21,800 9,218
---------- ---------- ---------- ----------
Income tax expense (benefit):
Current............................... 4,228 (1,064) 6,702 786
Deferred.............................. 418 672 1,301 2,707
---------- ---------- ---------- ----------
4,646 (392) 8,003 3,493
---------- ---------- ---------- ----------
Net income (loss)......................... $ 7,879 $ (529) $ 13,797 $ 5,725
========== ========== ========== ==========
Net income (loss) per common share:
Basic................................. $ 0.27 $ (0.02) $ 0.49 $ 0.18
========== ========== ========== ==========
Diluted............................... $ 0.25 $ (0.02) $ 0.47 $ 0.18
========== ========== ========== ==========
Weighted average number of common
shares outstanding:
Basic................................. 29,538 31,671 27,901 31,636
========== ========== ========== ==========
Diluted............................... 31,284 31,671 29,193 31,910
========== ========== ========== ==========

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

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)

Common Stock
---------------------------- Additional
Number paid-in Retained
of shares Amount capital earnings Total
------------ ----------- ------------- --------------- ---------------

Balance, December 31, 1997........ 30,967 $ 310 $ 102,306 $ 44,316 $ 146,932
Issuances of common stock......... 571 5 9,941 -- 9,946
Exercise of stock options........ 133 2 297 -- 299
Net income........................ -- -- -- 5,725 5,725
------ --------- --------- --------- ----------

Balance, September 30, 1998....... 31,671 $ 317 $ 112,544 $ 50,041 $ 162,902
====== ========= ========= ========= ==========

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

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended September 30,
-------------------------------
1997 1998
------------- -------------
(in thousands)

Cash flows from operating activities:
Net income ..................................................... $ 13,797 $ 5,725
Adjustments to reconcile net income to net cash from
operating activities:
Abandonment of oil and natural gas properties .................. 658 --
Depreciation, depletion and amortization ....................... 12,188 20,060
Impairment of oil and natural gas properties ................... 750 1,089
Net gain on sale of assets ..................................... (1,354) (639)
Deferred income tax expense .................................... 1,301 2,707
Tax benefit related to stock options ........................... 1,304 --
Decrease in deferred compensation liabilities .................. (20) (493)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable .......... (17,110) 9,196
Increase in oil and natural gas sales receivables ......... (201) (106)
Increase in inventory held for resale ..................... -- (973)
Increase in undeveloped oil and natural gas
properties held for resale ............................ (536) (1,588)
Increase in other current assets .......................... (537) (4,197)
Increase in trade accounts payable ........................ 6,275 1,813
Increase (decrease) in revenue distribution payable ....... 1,841 (1,416)
Increase (decrease) in accrued expenses ................... 7,486 (428)
Decrease in accrued state and federal income taxes payable -- (4,204)
Increase (decrease) in other current payables ............. 322 (1,377)
-------- --------
Net cash provided by operating activities ............. 26,164 25,169
-------- --------
Cash flows from investing activities:
Net sales (purchases) of investment securities ................. (15) 566
Acquisitions ................................................... (34,937) (45,453)
Purchases of property and equipment ............................ (26,027) (28,692)
Sale of property and equipment ................................. 4,061 639
Change in other assets ......................................... (142) 474
-------- --------
Net cash used in investing activities ................. (57,060) (72,466)
-------- --------

Cash flows from financing activities:
Proceeds from notes payable .................................... 10,250 40,150
Payments of notes payable ...................................... (25,849) (5,542)
Issuance of common stock ....................................... 59,401 --
Proceeds from exercise of stock options ........................ 855 299
-------- --------
Net cash provided by financing activities ............. 44,657 34,907
-------- --------
Net increase (decrease) in cash and cash equivalents .. 13,761 (12,390)
Cash and cash equivalents at beginning of period .................... 3,494 23,338
-------- --------
Cash and cash equivalents at end of period .......................... $ 17,255 $ 10,948
======== ========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 695 $ 3,360
Income taxes ................................................... 745 8,000

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
(continued)

PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)

Supplemental disclosure of cash flow information - continued:

During the nine months ended September 30, 1998, the Company
acquired Lone Star Mud, Inc. Robertson Onshore Drilling Company and Tejas
Drilling Fluids, Inc. for an aggregate purchase price of approximately $58.8
million of which, approximately $45.5 million was paid in cash as follows (see
Note 2):

(in thousands)

Purchase price.................................................... $58,799
Less non-cash item:
Common stock issued.......................................... (9,946)
Debt assumed................................................. (3,400)
-------
Total cash paid............................................ $45,453
=======

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

9
10

PATTERSON ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF CONSOLIDATION AND PRESENTATION

The condensed consolidated financial statements include the accounts
of Patterson Energy, Inc. ("Patterson"), and its wholly-owned subsidiaries,
Patterson Drilling Company, Patterson Onshore Drilling Company, Lone Star Mud,
Inc., Patterson Petroleum, Inc., Patterson Petroleum Trading Company, Inc. and
Patterson Drilling Programs, Inc. (collectively referred to hereafter as the
"Company"). All significant intercompany accounts and transactions have been
eliminated.

The interim condensed consolidated financial statements have been
prepared by management of the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes the
disclosures included herein are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (consisting of only
normal recurring accruals) considered necessary for presentation of the
information have been included. The unaudited condensed consolidated balance
sheet as of December 31, 1997, as presented herein, was derived from audited
financial statements as of such date, but does not include all disclosures
required by generally accepted accounting principles.

The results of operations for the three and nine months ended September
30, 1998, are not necessarily indicative of the results to be expected for the
full year.

Certain reclassifications have been made to the 1997 condensed
consolidated financial statements in order for them to conform to the 1998
presentation.

The Company's earnings per share and weighted average number of common
shares outstanding for all periods presented and as otherwise indicated herein,
reflect a two-for-one split of the Company's common stock effected in January
1998.

2. RECENT ACQUISITIONS

On January 5, 1998, the Company acquired 100% of the outstanding stock
of Lone Star Mud, Inc. ("Lone Star"), a privately-owned, non-affiliated company
based in Midland, Texas. The purchase price of approximately $12.98 million
consisted of $1.430 million in cash, 571,328 shares of the Company's common
stock valued at $17.41 per share, the assumption of $1.6 million of debt and
approximately $3,300 of other direct costs incurred relative to the transaction.
Pursuant to certain terms of the Company's existing loan agreement with Norwest
Bank Texas, N.A. ("Norwest"), the outstanding balance of the above mentioned
note payable was paid in full. The fair market values of the assets acquired
were estimated and the purchase price, as of the date of the acquisition, was
allocated as follows (in thousands):

Net assets acquired.................................. $ 3,069
Goodwill............................................. 9,911
-------
Total purchase price............................. $12,980
=======

10
11

PATTERSON ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2. RECENT ACQUISITIONS - CONTINUED

On February 6, 1998, the Company completed the merger of Robertson
Onshore Drilling Company ("Robertson") a privately-owned, non-affiliated,
contract drilling company based in Dallas, Texas, with and into Patterson
Onshore Drilling Company, a wholly-owned subsidiary of Patterson Drilling
Company. The purchase price of approximately $42.245 million was funded using
cash on hand of approximately $3.25 million, proceeds of $36.75 million provided
by the Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. The
assets acquired consisted of 15 operable drilling rigs and a shop and yard
located in Liberty City, Texas. The purchase price, as of the date of the
acquisition, was allocated based on estimated fair values as follows (in
thousands):

Net assets acquired.................................. $ 31,565
Goodwill............................................. 10,680
---------
Total purchase price.............................. $ 42,245
=========

On September 17, 1998, the Company acquired 100% of the outstanding
stock of Tejas Drilling Fluids, Inc. ("Tejas"), a privately-owned,
non-affiliated company based in Corpus Christi, Texas for $3.5 million cash and
approximately $74,000 of other direct costs incurred relative to the
transaction. The fair market values of the assets acquired were estimated and
the purchase price, as of the date of acquisition, was allocated as follows (in
thousands):

Net assets acquired................................... $ 263
Goodwill.............................................. 2,061
Covenants not to compete.............................. 1,250
---------
Total purchase price.............................. $ 3,574
=========

On June 12, 1997, the Company consummated an acquisition to purchase
the contract drilling assets of Wes-Tex Drilling Company ("Wes-Tex"), a
privately-held, non-affiliated company based in Abilene, Texas, for a purchase
price of approximately $35.4 million; consisting of $25 million in cash, 283,000
shares of Patterson common stock valued at $31.50 per share, which represented
the approximate fair market value on the date the terms of the acquisition were
agreed to and announced, a three-year stock purchase warrant (valued at $6.24
per share) to purchase 200,000 additional shares of Patterson common stock at an
exercise price of $32 per share and approximately $190,000 of other direct costs
incurred relative to the transaction. The acquisition was funded using $19
million of the Company's cash on hand and $6 million provided by the Company's
line of credit. The assets acquired consisted of 21 fully operable contract
drilling rigs, all related rolling stock and a shop and yard. The purchase
price, as of the date of acquisition, was allocated as follows (in thousands):

Contract drilling assets............................. $ 17,450
Goodwill.............................................. 16,629
Covenants not to compete.............................. 1,273
---------
Total purchase price.............................. $ 35,352
=========

(continued)

PATTERSON ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2. RECENT ACQUISITIONS - CONTINUED

As the acquisitions of both Robertson and Wes-Tex are significant to
the Company's operations, the following summary for the nine months ended
September 30, 1997 and 1998, prepared on a pro forma basis, combines the
consolidated results of operations as if Robertson and Wes-Tex had been acquired
on January 1, 1997, after including the impact of certain adjustments, such as
restatement of depreciation using the fair values instead of the book values of
the assets acquired, the increased interest expense on the acquisition debt,
increased amortization expense on intangible assets and the related income tax
effects.

1997 1998
------------------- -------------------
(in thousands, except per share data)

Revenues.............................. $ 180,772 $ 159,919
Net income............................ 12,287 5,899
Basic earnings per share.............. .44 .19
Diluted earnings per share............ .42 .18

The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.

The aforementioned acquisitions have been accounted for as purchases
and the results of operations and cash flows relating to the entities or
drilling assets acquired have been included in the condensed consolidated
financial statements since the respective dates of acquisition. The purchase
price allocations set forth above are preliminary and are subject to change as
the allocations are finalized.

3. INTANGIBLE ASSETS

Intangible assets at September 30, 1998 consisted principally of
covenants not to compete and goodwill arising from the Company's acquisitions
completed during fiscal year 1997 and the nine months ended September 30, 1998.
The covenants are being amortized on a straight line basis over their
contractual lives of five years. Goodwill, representing the excess of the
purchase price over the estimated fair value of the assets acquired, is being
amortized on a straight line basis over 15 years.

Intangible assets consisted of the following at September 30, 1998 (in
thousands):

Goodwill.................................. $ 45,990
Covenants not to compete.................. 2,922
Other..................................... 883
---------
49,795
Less accumulated amortization............. (3,299)
---------
$ 46,496
=========

Management continually reviews the carrying amounts of goodwill for
recoverability based on the anticipated undiscounted cash flows of the assets to
which it relates. The Company considers operating results, trends and prospects
of the Company, as well as competitive comparisons. The Company also takes into
consideration competition within the industry and any other events or
circumstances which might indicate potential impairment. If goodwill is
determined to not be recoverable, an impairment charge will be recognized to the
extent that the carrying value of the related assets, including goodwill,
exceeds the estimated fair value.

(continued)

12
13

PATTERSON ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4. NOTE PAYABLE

During February 1998, the Company amended its loan agreement with
Norwest increasing its line of credit from $60 million to $70 million. At May
31, 1998, the line of credit, in accordance with the terms of such agreement,
was converted to a term note with a maturity date of January 1, 2001 and a
seven-year amortization period. At the time of conversion, $60 million had been
drawn under the available credit facility. The note bears interest at the 30-day
LIBOR rate plus 2.375% and includes various covenants the most restrictive of
which are maintaining a debt to tangible net worth ratio of 1.35:1.00 and a
current ratio of 1.40:1.00.

5. STOCKHOLDERS' EQUITY

On December 8, 1997, Patterson's Board of Directors authorized a
two-for-one stock split in the form of a stock dividend payable on January 23,
1998. The stockholders of Patterson, at a Special Meeting of Stockholders on
December 30, 1997, approved an amendment to Patterson's Certificate of
Incorporation increasing the number of authorized shares of common stock from
18,000,000 to 50,000,000. Par value of the Company's common stock remained at
$0.01 per common share. Accordingly, earnings per share and weighted average
number of common shares outstanding for all periods presented herein reflect the
effects of the stock split.

During January 1998, the Company issued 571,328 shares of its common
stock as partial consideration for the Company's acquisition of Lone Star (see
Note 2). The common stock was valued at $17.41 per share for purposes of the
transaction.

6. EARNINGS PER SHARE

The following table summarizes the dilutive effect of certain options
and warrants to the Company's earnings per share for the three and nine months
ended September 30, 1997 and 1998:

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
1997 1998 1997 1998
----------- ------------ ----------- ----------
(in thousands, except per share data)

Net income (loss) .................... $ 7,879 $ (529) $ 13,797 $ 5,725
Weighted average number of common
shares outstanding ............... 29,538 31,671 27,901 31,636
======== ======== ======== ========
Basic earnings per share ............. $ 0.27 $ (0.02) $ 0.49 $ 0.18
======== ======== ======== ========

Net income ........................... $ 7,879 $ (529) $ 13,797 $ 5,725
Weighted average number of common
shares outstanding ............... 29,538 31,671 27,901 31,636
Dilutive effect of outstanding options
and warrants ..................... 1,746 -- 1,292 274
-------- -------- -------- --------
Weighted average number of common
shares outstanding, as adjusted .. 31,284 31,671 29,193 31,910
======== ======== ======== ========
Diluted earnings per share ........... $ 0.25 $ (0.02) $ 0.47 $ 0.18
======== ======== ======== ========

(continued)

13
14
PATTERSON ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

6. EARNINGS PER SHARE - CONTINUED

The following options and warrants to purchase the Company's common
stock were outstanding as of September 30, 1997 and 1998 but were excluded from
the computation of diluted earnings per share because (1) the respective
exercise prices were greater than the average market prices of the Company's
common stock for the period indicated or (2) the effect of adding such options
and warrants would further dilute a per share computation of a net loss for that
period.

Options/Warrants Exercise
Outstanding Price Per Share
--------------------- -------------------

Three Months Ended:
-------------------
September 30, 1997 4,000 .................. $ 15.81
632,000 .................. 14.81
8,000 .................. 10.00
800,000 .................. 8.00
---------
1,444,000
=========
September 30, 1998 4,000 .................. $ 15.81
608,000 .................. 14.81
8,000 .................. 11.06
8,000 .................. 10.00
475,600 .................. 9.88
10,000 .................. 7.63
4,000 .................. 7.38
20,000 .................. 4.38
4,000 .................. 4.31
230,480 .................. 3.13
20,000 .................. 2.25
10,656 .................. 1.94
92,000 .................. 1.82
---------
1,494,736
=========
Nine Months Ended:
------------------
September 30, 1997 4,000 .................. $ 15.81
632,000 .................. 14.81
---------
636,000
=========
September 30, 1998 608,000 .................. $ 14.81
4,000 .................. 15.81
8,000 .................. 11.06
---------
620,000
=========

(continued)

14
15

PATTERSON ENERGY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

7. RECENT ACCOUNTING STANDARDS

During the quarter ended March 31, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement 130"), which establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Statement 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Statement 130
requires that an enterprise (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company's adoption of Statement 130 did not result in any significant changes to
its related reporting disclosures.

During the quarter ended March 31, 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 establishes
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The Company's adoption of
Statement 131 did not result in any significant changes to its related reporting
disclosures.

During the quarter ended June 30, 1998, the Company adopted Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("Statement 132"). Statement 132
revises employers' disclosures about pension and other postretirement benefit
plans. The Company's adoption of Statement 132 did not result in any changes to
its related reporting disclosures.

During June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"), which establishes
accounting and reporting standards for derivative instruments and other hedging
activities. Statement 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The provisions of Statement 133 are not expected
to have a material impact on the Company.

15
16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1998, the Company had working capital of
approximately $27.4 million and cash and cash equivalents of approximately $10.9
million as compared to working capital of approximately $46.5 million and cash
and cash equivalents of approximately $23.3 million as of December 31, 1997. The
decrease in the Company's working capital at September 30, 1998 was largely
attributable to cash expended by the Company related to acquisitions completed
during the first three months of fiscal year 1998. Approximately $8.7 million of
the aggregate purchase price was funded using cash on hand at the respective
dates of acquisition. In addition, the Company assumed approximately $3.4
million of debt, which was paid in full using cash on hand immediately following
the consummation of such acquisitions and made an $8.0 million payment to the
Internal Revenue Service for the Company's estimated Federal tax liability. For
the nine months ended September 30, 1998, the Company generated net cash from
operations of approximately $25.2 million, received proceeds of approximately
$299,000 from the exercise of stock options, sold property and equipment for
proceeds of approximately $639,000, received approximately $566,000 from the
sale of investment securities and borrowed $40.15 million under an existing
credit facility. These funds were used primarily to acquire drilling rigs,
related equipment and associated intangible assets of approximately $45.4
million, to provide certain necessary refurbishment of approximately $24.8
million to the Company's operable drilling fleet, to reduce certain notes
payable by approximately $5.5 million and to fund leasehold acquisition,
exploration and development of approximately $3.9 million.

On January 5, 1998, the Company completed the acquisition of Lone Star
Mud, Inc. ("Lone Star"), a privately-owned, non-affiliated company based in
Midland, Texas for a purchase price of approximately $12.98 million consisting
of $1.430 million in cash, 571,328 shares of the Company's common stock valued
at $17.41 per share, which was the market price on the acquisition date, the
assumption of $1.6 million of debt and approximately $3,300 of direct costs
incurred related to the acquisition. Lone Star is a provider of drilling fluids
to the oil and natural gas industry. Management of the Company viewed the
acquisition as an opportunity to enter into a related segment of the oilfield
service industry, which would integrate well with the Company's existing
operations.

On February 6, 1998, the Company completed its merger with Robertson
Onshore Drilling Company ("Robertson"), a privately-owned, non-affiliated
contract drilling company based in Dallas, Texas. The purchase price of $42.245
million consisted of $3.25 million in cash, $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. As a
result of the merger, the Company acquired 15 operable drilling rigs, increasing
the Company's rig fleet to 114 drilling rigs, and a shop and yard located in
Liberty City, Texas.

On September 17, 1998, the Company completed the acquisition of Tejas
Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated company based
in Corpus Christi, Texas for a purchase price of approximately $3.5 million cash
and approximately $74,000 of direct costs incurred related to the acquisition.
Tejas is a provider of drilling fluids to the oil and natural gas industry with
its primary focus of operations in the south Texas region.

At May 31, 1998, the Company's existing $70 million line of credit with
Norwest Bank Texas, N.A. converted to a term note with a maturity date of
January 1, 2001 with a seven-year, level-principal amortization. The note bears
interest at the 30-day LIBOR rate plus 2.375%. At the time of conversion, the
Company had drawn $60 million under the available credit facility. The Company
began making monthly principal and interest payments of approximately $1.1
million on July 1, 1998.

16
17

Management believes that the current level of cash and short-term
investments, together with cash generated from operations, should be sufficient
to meet the Company's immediate capital needs. From time to time, the Company
reviews acquisition opportunities relating to its business. The timing, size or
success of any acquisition and the associated capital commitments are
unpredictable. Should further opportunities for growth requiring capital arise,
the Company believes it would be able to satisfy these needs through a
combination of working capital, cash from operations, and either debt or equity
financing. However, there can be no assurance that such capital would be
available.

RESULTS OF OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

For the nine months ended September 30, 1998, contract drilling
revenues were approximately $137.9 million as compared to $120.2 million for the
same period in 1997, an increase of 15%. Average rig utilization was 61% for the
nine months ended September 30, 1998, as compared to 90% for the same period in
1997. Direct contract drilling expenses for the nine months ended September 30,
1998 were approximately $104.8 million, or 76% of related contract drilling
revenues, as compared to approximately $89.0 million, or 74% of contract
drilling revenues, for the same period in 1997. The increase in contract
drilling revenues and direct contract drilling expenses was largely attributable
to an increase in the number of operable drilling rigs. Since August 1, 1997,
the Company added 24 operable drilling rigs to its drilling fleet which were
predominantly available during the nine months ended September 30, 1998. General
and administrative expense for the contract drilling segment was approximately
$4.9 million for the nine months ended September 30, 1998 as compared to $3.4
million for the same period in 1997. The increase in general and administrative
expenses was largely attributable to additional expense associated with the
administrative offices of Lone Star Mud Company and Robertson Onshore Drilling
Company acquired by the Company during January 1998 and February 1998,
respectively. The administrative responsibilities of the Robertson Onshore
operations were terminated during July 1998 and absorbed by the Company's
personnel in Snyder, Texas. Depreciation and amortization expense for the
contract drilling segment increased from $8.7 million for the nine months ended
September 30, 1997 to approximately $16.4 million for the same nine-month period
in 1998. The increase in depreciation and amortization expense was largely
attributable to the increased number of drilling rigs added by acquisition
during fiscal years 1997 and 1998. For the nine months ended September 30, 1998,
operating income, including the net gain on sale of fixed assets, from the
contract drilling segment was approximately $12.3 million as compared to
approximately $19.7 million for the same period in 1997.

The Company derives substantially all of its operating revenues and
profit from its contract drilling operations. To a lesser extent, the Company
generated operating revenues from the sales of crude oil and natural gas and the
sales of drilling fluids and related services (collectively referred to herein
as the Company's "ancillary operations") of approximately $16.2 million for the
nine months ended September 30, 1998 as compared to $9.3 million for the same
period in 1997. The increase in current year operating revenues from the
Company's ancillary operations was attributable to the Company's addition of
Lone Star during January 1998, which generated revenues of approximately $10.7
million from its drilling fluid sales and services provided for the nine-month
period ended September 30, 1998. For the nine months ended September 30, 1998,
the Company incurred operating costs of approximately $16.8 million, including
approximately $3.6 million of depreciation, depletion and amortization, $1.1
million of impairment to its oil and natural gas properties and approximately
$2.1 million of general and administrative expenses. This compares to operating
costs of approximately $8.2 million, including $3.5 million of depreciation,
depletion and amortization, $750,000 of impairment to its oil and natural gas
properties and approximately $1.1 million of general and administrative expenses
for the same period in 1997. The Company's ancillary operations for the nine
months ended September 30, 1998 generated an operating loss of approximately
$378,000 as compared to operating income of approximately $1.9 million for the
nine months ended September 30, 1997. The decrease in operating income was
primarily due to the significantly reduced commodity prices received for the
Company's production of crude oil. The Company received $12.93 per barrel of
crude oil during the nine months ended September 30, 1998 as compared to $19.17
per barrel during the same period in 1997, a 33%

17
18

decrease in the associated commodity price. Additionally, a gain that related to
the sale of a significant gas field of approximately $813,000 was included in
1997 operating income.

For the nine months ended September 30, 1998, interest expense was
approximately $3.360 million as compared to $695,000 for the same nine-month
period in 1997. The 1997 interest expense amount includes approximately $265,000
of prepayment penalties and fees incurred as a result of the Company's early
retirement of its notes payable during the first quarter of 1997. As a result of
the Company's acquisitions in fiscal 1997 and 1998, obligations under an
existing line of credit increased from $10.25 million at September 30, 1997 to
$57.9 million at September 30, 1998, resulting in the Company's increased
interest expense. Interest income for the first nine months of fiscal 1998 was
approximately $646,000 as compared to approximately $799,000 for the same period
in 1997.

COMPARISON OF THE FISCAL QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997

For the fiscal quarter ended September 30, 1998, contract drilling
revenues were approximately $37.7 million as compared to $55.1 million for the
same fiscal quarter in 1997, a decrease of 32%. Average rig utilization was 50%
for the fiscal quarter ended September 30, 1998, as compared to 91.5% for the
same fiscal quarter in 1997. Direct contract drilling costs for the fiscal
quarter ended September 30, 1998 were approximately $30.4 million, or 81% of
contract drilling revenues, as compared to approximately $38.7 million, or 70%
of contract drilling revenues, for the same fiscal quarter in 1997. General and
administrative expenses for the contract drilling segment were approximately
$787,000 for the fiscal quarter ended September 30, 1998 as compared to
approximately $1.4 million for the same fiscal quarter in 1997. Depreciation and
amortization expense was approximately $5.7 million for the fiscal quarter ended
September 30, 1998 as compared to $3.7 million for the same fiscal quarter in
1997. The increase in depreciation and amortization expense was due primarily to
the addition of the aforementioned drilling rigs. For the fiscal quarter ended
September 30, 1998, operating income, including the net gain on sale of fixed
assets, from the contract drilling segment was approximately $1.0 million as
compared to approximately $11.5 million for the same fiscal quarter in 1997.

Operating revenues from the Company's ancillary operations for the
three months ended September 30, 1998 were $4.6 million as compared to $3.1
million for the same period in 1997. The increase in operating revenues was
attributable to the Company's addition of Lone Star during January 1998, which
generated revenues of approximately $2.9 million from its drilling fluid sales
and services during the three months ended September 30, 1998. For the three
months ended September 30, 1998, the Company incurred operating costs of
approximately $5.6 million, including approximately $1.7 million of
depreciation, depletion and amortization expense, $300,000 of expense related to
the impairment of its oil and natural gas properties and approximately $700,000
of general and administrative expenses. This compares to operating costs of
approximately $2.9 million, including $1.3 million of depreciation, depletion
and amortization, $300,000 of expense related to the impairment of its oil and
natural gas properties and approximately $400,000 of general and administrative
expenses for the same period in 1997. The Company's ancillary operations for the
three months ended September 30, 1998 generated an operating loss of
approximately $936,000, as compared to operating income of approximately $1.0
million for the three months ended September 30, 1997. The decrease in operating
income, as indicated above, was due primarily to the significantly reduced price
of crude oil the Company received during the third quarter of 1998 as well as a
related decline in the production of crude oil. The average price per barrel of
crude oil decreased from $17.59 for the three months ended September 30, 1997 to
$11.64 for the three months ended September 30, 1998 and the Company's
production of crude oil declined 44% during the quarter ended September 30, 1998
as compared to the same period in 1997.

For the fiscal quarter ended September 30, 1998, interest expense was
approximately $1.195 million as compared to $186,000 for the same period in
1997. As a result of the Company's acquisitions in fiscal 1997 and 1998,
obligations under an existing line of credit increased from $10.25 million at
September 30, 1997 to $57.9

18
19

million at September 30, 1998. Interest income for the three months ended
September 30, 1998, was $200,000 as compared to $159,000 for the same
three-month period in 1997.

VOLATILITY OF OIL AND NATURAL GAS PRICES AND ITS IMPACT ON OPERATIONS

The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and other operating activities.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations. The sharp decline in crude oil prices beginning in the fourth
quarter of 1997 has adversely impacted the Company's operations. Should oil
prices remain at current levels or continue to decline or natural gas prices
begin to decline, the Company's operations could be further adversely affected.

IMPACT OF INFLATION

The Company believes that inflation will not have a significant impact
on its financial position.

RECENT ACCOUNTING STANDARDS

During the quarter ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("Statement 132"). Statement
132 revises employers' disclosures about pension and other postretirement
benefit plans. The Company's adoption of Statement 132 did not however, change
the measurement recognition of those plans.

During September 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement 133"), which
establishes accounting and reporting standards for derivative instruments and
other hedging activities. Statement 133 is effective for all fiscal quarters
of fiscal years beginning after September 15, 1999. The provisions of
Statement 133 are not expected to have a material impact to the Company.

YEAR 2000 COMPLIANCE PROGRAM

During fiscal year 1997, the Company began implementation of its
program for alleviating potential business interruptions that could be caused by
the year 2000. The Company's program identified two principal areas of concern:
supporting information technology systems ("IT systems") and the Company's
related vulnerability to external providers of services and materials.

The Company currently maintains three separate infrastructures to
facilitate the processing of daily transactions and financial reporting. Each of
the lines of business engaged in by the Company function separately from the
other and therefore operates on individual computer platforms. The Company has
completed its conversion of two of the computer platforms resulting in the
replacement and modification of certain hardware and software applications that
previously were determined not to be compliant with year 2000 issues. The
Company's remaining hardware and software conversion is currently in progress.
The Company anticipates that the conversion will be completed during January
1999.

The ability of the Company to conduct its business efficiently and
productively requires that providers of services and materials to the Company,
as well as, major customers to the Company (collectively referred to herein as
"external agents") be year 2000 compliant. The Company has implemented a process
whereby external agents are identified and prioritized by level of exposure.
Management of the Company is in the process of assessing the readiness and
effectiveness of its external agents for the year 2000. Surveys, solicitations
and other forms of inquiry are being used to make this determination. Management
intends to interpret the responses and information gathered and determine on an
individual basis whether the Company is vulnerable to that external agent. This
process will continue through January 2000 as a means to provide a continuous
update as to the external agents' status and success.

The Company does not expect the total cost associated with the
Company's efforts to become year 2000 compliant to be material to the Company's
financial position. The total amount expended on the project through September
30, 1998 was approximately $1.5 million. The Company estimates that an
additional $300,000 will be required to complete the project. The Company
expects to significantly reduce its level of uncertainty about year 2000 issues
and, in particular, about the year 2000 compliance and readiness of its
external agents. Accordingly, the Company does not deem it necessary to
formally adopt a contingency plan.

The failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of its program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.

21
--------------------

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

"Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 2 of this Report contains
forward-looking statements which are made pursuant to the "safe harbor"
provisions of The Private Securities Litigation Reform Act of 1995. These
statements include, without limitation, statements relating to: liquidity;
financing of operations; continued volatility of oil and natural gas prices;
source and sufficiency of funds required for immediate capital needs and
additional rig acquisitions (if further opportunities arise); and such other
matters. The words "believes," "plans," "intends," "expected," "estimates" or
"budgeted" and similar expressions identify forward-looking statements. The
forward-looking statements are based on certain assumptions and analyses made by
the Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. The Company does not undertake to update,
revise or correct any of the forward-looking information. Factors that could
cause actual results to differ materially from the Company's expectations
expressed in the forward-looking statements include, but are not limited to, the
following: intense competition in the contract drilling industry; continued low
level oil prices and/or fall of natural gas prices; continued adverse market
conditions for contract drilling services; drill-pipe shortages; labor
shortages, primarily qualified drilling rig personnel; insurance coverage
limitations and requirements; inability to acquire additional drilling rigs on
terms favorable to the Company and the loss of key personnel, particularly
Cloyce A. Talbott and A. Glenn Patterson, the Chairman and Chief Executive
Officer and the President and Chief Operating Officer of the Company,
respectively. For a more complete explanation of these various factors and
others, see "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995" included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
beginning on page 10.

--------------------

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22

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on July 1, 1998.
The following table sets forth certain information relating to each of the
matters voted upon at the meeting.

VOTES
-------------------------------------------------------
MATTERS VOTED UPON WITHHELD/ BROKER
---------------------- FOR AGAINST ABSTAIN NON-VOTES
---------- ------- ---------- -----------

1. Ratification of PricewaterhouseCoopers LLP as
the independent accountants of the
Company for the fiscal year ended
December 31, 1998............................ 28,483,286 35,369 44,128 --

2. Election of the following persons to the
Company's Board of Directors:
Cloyce A. Talbott.......................... 28,436,152 -- 126,631 --
A. Glenn Patterson......................... 28,436,452 -- 126,331 --
Robert L. Gist............................. 28,428,404 -- 134,379 --
Kenneth E. Davis........................... 28,414,338 -- 148,445 --
Vincent A. Rossi, Jr....................... 28,427,952 -- 134,831 --

22
23

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS.

The following exhibits are filed herewith or incorporated by reference:

2.1 Plan and Agreement of Merger dated October 14,
1993, between Patterson Energy, Inc., a Texas corporation, and
Patterson Energy, Inc., a Delaware corporation, together with
related Certificates of Merger. (1)

2.2 Agreement and Plan of Merger, dated April 22, 1996
among Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc. (2)

2.2.1 Amendment to Agreement and Plan of Merger, dated
May 16, 1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc. (3)

2.3 Asset Purchase Agreement, dated April 22, 1997,
among and between Patterson Drilling Company and Ziadril,
Inc. (4)

2.4 Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and Wes-Tex
Drilling Company. (5)

2.4.1 Amendment to Asset Purchase Agreement, dated June 4,
1997, among Patterson Energy Inc., Patterson Drilling Company
and Wes-Tex Drilling Company. (5)

2.5 Agreement, dated June 4, 1997, among Patterson
Energy Inc., Patterson Drilling Company, Greathouse Foundation
and Myrle Greathouse, Trustee under Agreement dated
June 2, 1997. (5)

2.6 Asset Purchase Agreement, dated September 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
McGee Drilling Company. (4)

2.7 Agreement and Plan of Merger, dated January 20, 1998,
among Patterson Energy, Inc., Patterson Onshore Drilling
Company and Robertson Onshore Drilling Company. (7)

3.1 Restated Certificate of Incorporation. (8)

3.1.1 Certificate of Amendment to the Certificate of
Incorporation. (9)

3.2 Bylaws. (1)

4.1 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock. (10)

4.2 Registration Rights Agreement, dated June 12, 1997,
among Patterson Energy Inc. and Wes-Tex Drilling Company,
Greathouse Foundation and Myrle Greathouse, Trustee under
Agreement dated June 2, 1997. (11)

4.3 Stock Purchase Warrant of Patterson Energy, Inc.,
dated June 12, 1997. (11)

10.1 Credit Agreement dated December 9, 1997 among Patterson
Energy, Inc., Patterson Drilling Company, Patterson Petroleum, Inc.,
Patterson Trading Company, Inc. and Norwest Bank Texas, N.A. (6)

10.1.1 Promissory Note dated December 9, 1997 among Patterson Energy,
Inc. and Norwest Bank Texas, N.A. (6)

10.1.2 Security Agreement dated December 9, 1997 between Patterson
Drilling Company and Norwest Bank Texas, N.A. (6)

10.1.3 Corporate Guarantees of Patterson Drilling Company, Patterson
Petroleum, Inc. and Patterson Petroleum Trading Company, Inc. (6)

10.2 Aircraft Lease, dated January 15, 1998, (effective January 1,
1998) between Talbott Aviation, Inc. and Patterson Energy, Inc. (18)

10.3 Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT Marketing, Inc. (12)

10.3.1 Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT Marketing, Inc. (13)

10.4 Crude Oil Purchase Contract, dated October 19, 1994, between
Patterson Petroleum, Inc. and BHT Marketing, Inc. (14)

10.4.1 Crude Oil Purchase Contract, dated October 24, 1995, between
Patterson Petroleum, Inc. and BHT Marketing, Inc. (13)

10.5 Patterson Energy, Inc. 1993 Stock Incentive Plan, as amended
(15)

10.6 Patterson Energy, Inc. Non-Employee Directors' Stock Option
Plan, as amended. (16)

10.7 Consulting and Stock Option Agreement, dated as of November
15, 1994, between Patterson Energy, Inc. and E. Peter Hoffman, Jr. (13)

10.8 Consulting and Stock Option Agreement, dated as of February
15, 1995, between Patterson Energy, Inc. and E. Peter Hoffman, Jr. (13)

10.9 Consulting and Stock Option Agreement, dated as of August 2,
1995, between Patterson Energy, Inc. and E. Peter Hoffman, Jr. (13)

10.10 Model Form Operating Agreement. (17)

10.11 Form of Drilling Bid Proposal and Footage Drilling Contract.
(17)

10.12 Form of Turnkey Drilling Agreement. (17)

15.1 Awareness letter of Independent Accountants;
PricewaterhouseCoopers LLP

21.1 Subsidiaries of the registrant. (18)

24
25

27.1 Financial Data Schedule as of September 30, 1998 and for the
three and nine months then ended.

27.2 Financial Data Schedule as of September 30, 1997 and for the
three and nine months then ended.

-----------------------

(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment
No. 2 to Registration Statement on Form SB-2 (File No. 33-68058-FW);
filed October 28, 1993.

(2) Incorporated by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated April 22, 1996 and filed on April 30, 1996.

(3) Incorporated by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated May 16, 1996 and filed on May 22, 1996.

(4) Incorporated herein by reference to Item 16, "Exhibits" to Amendment
No. 1 to Registration Statement on Form S-3 (File No. 333-29035);
filed August 5, 1997.

(5) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11,
1997.

(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated November 14, 1997 and filed December 24,
1997.

(7) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits," to Form 8-K dated January 23, 1998; filed February 3, 1998.

(8) Incorporated herein by reference to Item 6, "Exhibits and Reports on
Form 8-K" to Form 10-Q for the quarterly period ended September 30,
1996; filed August 12, 1996.

(9) Incorporated herein by reference to Item 6. "Exhibits and Reports on
Form 8-K" to Form 10-Q for the quarterly period ended June 30, 1997;
filed August 14, 1997.

(10) Incorporated by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.

(11) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19,
1997.

(12) Incorporated by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
33-68058-FW).

(13) Incorporated by reference to Item 7, "Financial Statements and
Exhibits" to Form 10-KSB for the year ended December 31, 1995.

(14) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.

(15) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917); filed March 13, 1998.

(16) Incorporated herein by reference to Item 8, "Exhibits" to
Registration Statement on Form S-8 (File No. 33-39471); filed
November 4, 1997.

(17) Incorporated by reference to Item 27, "Exhibits" to Registration
Statement filed with the Securities and Exchange Commission on August
30, 1993.

(18) Incorporated by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31,
1997.

(b) REPORTS ON FORM 8-K.

The following report on Form 8-K was filed with the Securities and
Exchange Commission during the fiscal quarter ended September 30, 1998
related to:

(1) Report dated July 30, 1998 announcing the Company's results from
operations for the period ended June 30, 1998; filed September 9,
1998.

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27

SIGNATURE

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

PATTERSON ENERGY, INC.

By: /s/ Cloyce A. Talbott
--------------------------------
Cloyce A. Talbott
Chairman of the Board and
Chief Executive Officer

By: /s/ James C. Brown
--------------------------------
James C. Brown
Vice President-Finance

DATED: November 16, 1998

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28

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
----------- ------------

15.1 Awareness Letter of Independent Accountants,
PricewaterhouseCoopers LLP

27.1 Financial Data Schedule as of September 30, 1998 and for
the three and nine months ended September 30, 1998.

27.2 Financial Data Schedule for the three and nine months
ended September 30, 1997.