XNYS:PES Pioneer Energy Services Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________________________________ 
FORM 10-Q
______________________________________________ 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-8182

PIONEER ENERGY SERVICES CORP.
(Exact name of registrant as specified in its charter)
_____________________________________________ 
TEXAS
 
74-2088619
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1250 NE Loop 410, Suite 1000
San Antonio, Texas
 
78209
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (210) 828-7689
Registrant's former name: Pioneer Drilling Company
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
   (Do not check if a small reporting company.)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x

As of July 20, 2012, there were 62,022,191 shares of common stock, par value $0.10 per share, of the registrant issued and outstanding.

 




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2012
 
December 31,
2011
 
(Unaudited)
 
(Audited)
 
(In thousands, except share data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,380

 
$
86,197

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
128,950

 
106,084

Unbilled receivables
31,267

 
31,512

Insurance recoveries
5,693

 
5,470

Income taxes
1,583

 
2,168

Deferred income taxes
14,350

 
15,433

Inventory
13,211

 
11,184

Prepaid expenses and other current assets
13,333

 
11,564

Total current assets
228,767

 
269,612

Property and equipment, at cost
1,550,277

 
1,336,926

Less accumulated depreciation
610,832

 
542,970

Net property and equipment
939,445

 
793,956

Intangible assets, net of amortization
48,205

 
52,680

Goodwill
41,683

 
41,683

Noncurrent deferred income taxes
1,242

 
735

Other long-term assets
12,066

 
14,088

Total assets
$
1,271,408

 
$
1,172,754

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
95,189

 
$
66,440

Current portion of long-term debt
871

 
872

Prepaid drilling contracts
4,071

 
3,966

Accrued expenses:
 
 
 
Payroll and related employee costs
24,965

 
29,057

Insurance premiums and deductibles
9,741

 
10,583

Insurance claims and settlements
5,580

 
5,470

Interest
12,269

 
12,283

Other
14,199

 
11,009

Total current liabilities
166,885

 
139,680

Long-term debt, less current portion
453,290

 
418,728

Noncurrent deferred income taxes
105,689

 
94,745

Other long-term liabilities
7,607

 
9,156

Total liabilities
733,471

 
662,309

Commitments and contingencies (Note 8)

 

Shareholders’ equity:
 
 
 
Preferred stock, 10,000,000 shares authorized; none issued and outstanding

 

Common stock $.10 par value; 100,000,000 shares authorized; 62,018,191 shares and 61,782,180 shares outstanding at June 30, 2012 and December 31, 2011, respectively
6,215

 
6,188

Additional paid-in capital
445,985

 
442,020

Treasury stock, at cost; 134,188 shares and 95,409 shares at June 30, 2012 and December 31, 2011, respectively
(1,261
)
 
(904
)
Accumulated earnings
86,998

 
63,141

Total shareholders’ equity
537,937

 
510,445

Total liabilities and shareholders’ equity
$
1,271,408

 
$
1,172,754

See accompanying notes to condensed consolidated financial statements.
PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Drilling services
$
119,048

 
$
106,523

 
$
243,352

 
$
206,279

Production services
110,776

 
64,762

 
218,450

 
118,355

Total revenues
229,824

 
171,285

 
461,802

 
324,634

Costs and expenses:
 
 
 
 
 
 
 
Drilling services
78,631

 
73,190

 
159,708

 
140,699

Production services
65,683

 
37,754

 
126,379

 
70,982

Depreciation and amortization
39,989

 
32,424

 
78,362

 
64,680

General and administrative
22,265

 
15,860

 
43,408

 
30,381

Bad debt (recovery) expense
(56
)
 
139

 
(147
)
 
55

Impairment of equipment

 

 
1,032

 

Total costs and expenses
206,512

 
159,367

 
408,742

 
306,797

Income from operations
23,312

 
11,918

 
53,060

 
17,837

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(7,650
)
 
(7,983
)
 
(17,205
)
 
(15,522
)
Other
20

 
754

 
952

 
(5,763
)
Total other expense
(7,630
)
 
(7,229
)
 
(16,253
)
 
(21,285
)
Income (loss) before income taxes
15,682

 
4,689

 
36,807

 
(3,448
)
Income tax (expense) benefit
(5,997
)
 
(1,039
)
 
(12,950
)
 
1,063

Net income (loss)
$
9,685

 
$
3,650

 
$
23,857

 
$
(2,385
)
 
 
 
 
 
 
 
 
Income (loss) per common share—Basic
$
0.16

 
$
0.07

 
$
0.39

 
$
(0.04
)
 
 
 
 
 
 
 
 
Income (loss) per common share—Diluted
$
0.15

 
$
0.07

 
$
0.38

 
$
(0.04
)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Basic
61,768

 
54,205

 
61,673

 
54,087

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Diluted
62,620

 
55,881

 
62,624

 
54,087


See accompanying notes to condensed consolidated financial statements.

PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended June 30,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
23,857

 
$
(2,385
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
78,362

 
64,680

Allowance for doubtful accounts
370

 
56

Loss (gain) on dispositions of property and equipment
(1,004
)
 
691

Stock-based compensation expense
3,670

 
3,483

Amortization of debt issuance costs, discount and premium
1,475

 
2,044

Impairment of equipment
1,032

 

Deferred income taxes
11,221

 
(2,843
)
Change in other long-term assets
744

 
1,432

Change in other long-term liabilities
(1,549
)
 
1,655

Changes in current assets and liabilities:
 
 
 
Receivables
(22,518
)
 
(26,800
)
Inventory
(2,027
)
 
(1,635
)
Prepaid expenses and other current assets
(1,560
)
 
(990
)
Accounts payable
1,279

 
7,411

Prepaid drilling contracts
105

 
1,121

Accrued expenses
(1,759
)
 
5,691

Net cash provided by operating activities
91,698

 
53,611

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of production services businesses

 
(2,000
)
Purchases of property and equipment
(193,884
)
 
(79,196
)
Proceeds from sale of property and equipment
1,957

 
2,000

Proceeds from sale of auction rate securities

 
12,569

Net cash used in investing activities
(191,927
)
 
(66,627
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Debt repayments
(863
)
 
(13,742
)
Proceeds from issuance of debt
35,000

 
17,000

Debt issuance costs
(23
)
 
(3,186
)
Proceeds from exercise of options
655

 
2,091

Purchase of treasury stock
(357
)
 
(352
)
Excess tax benefit of stock option exercises

 
696

Net cash provided by financing activities
34,412

 
2,507

 
 
 
 
Net decrease in cash and cash equivalents
(65,817
)
 
(10,509
)
Beginning cash and cash equivalents
86,197

 
22,011

Ending cash and cash equivalents
$
20,380

 
$
11,502

 
 
 
 
Supplementary disclosure:
 
 
 
Interest paid
$
21,783

 
$
13,781

Income tax paid
$
823

 
$
409

 
See accompanying notes to condensed consolidated financial statements.


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PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Organization and Summary of Significant Accounting Policies
Business and Principles of Consolidation
On July 30, 2012, we changed our company name from "Pioneer Drilling Company" to "Pioneer Energy Services Corp." Our common stock will continue to trade on the New York Stock Exchange, but our ticker symbol has changed from "PDC" to "PES". Our company name change reinforces our strategy to expand our service offerings beyond drilling services, which has been our core, legacy business. Pioneer Energy Services provides drilling services and production services to independent and major oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia.
Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies with its fleet of 66 drilling rigs which are currently assigned to the following divisions:
Drilling Division
 
Rig Count
South Texas
 
15

East Texas
 
3

West Texas
 
20

North Dakota
 
11

Utah
 
5

Appalachia
 
4

Colombia
 
8

 
 
66

Drilling revenues and rig utilization have steadily improved since late 2009, primarily due to increased demand for drilling services in domestic shale plays and oil or liquid rich regions. We capitalized on this trend by moving drilling rigs in our fleet to these higher demand regions from lower demand regions. As a result, we closed our Oklahoma and North Texas drilling divisions during 2011 and established our West Texas drilling division in early 2011.
In 2011, we began construction, based on term contracts, on ten new-build AC drilling rigs that are fit for purpose for domestic shale plays. Construction has been completed for four of these new-build drilling rigs, three of which began operating under their term contracts in June and July 2012. We expect another four of the new-build drilling rigs to begin working by the end of 2012, with the remaining three during the first quarter of 2013. As of July 20, 2012, 54 drilling rigs are operating under drilling contracts, 45 of which are under term contracts, and one completed new-build drilling rig is under contract to begin working in the third quarter of 2012. We are actively marketing all our idle drilling rigs.
In March 2012, we evaluated the drilling rigs in our fleet that had remained idle and decided to retire two mechanical drilling rigs that were assigned to our East Texas drilling division, with most of their components to be used for spare equipment. We recognized an impairment charge of $0.6 million in March 2012 in association with our decision to retire these two drilling rigs.
In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with clients. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed.
Our Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services, coiled tubing services, and fishing and rental services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. As of July 20, 2012, we have a fleet of 101 well servicing rigs consisting of ninety 550 horsepower rigs, ten 600 horsepower rigs and one 400 horsepower rig. All our well servicing rigs are currently operating


3



or are being actively marketed. We currently provide wireline services and coiled tubing services with a fleet of 117 wireline units and 11 coiled tubing units, and we provide rental services with approximately $15.6 million of fishing and rental tools. We plan to add another seven well servicing rigs, three wireline units and two coiled tubing units by the end of 2012. In March 2012, we decided to retire two older wireline units and certain wireline equipment resulting in an impairment charge of approximately $0.4 million.
The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Energy Services Corp. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to our recognition of revenues and costs for turnkey contracts, our estimate of the allowance for doubtful accounts, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, our estimate of asset impairments, our estimate of deferred taxes, our estimate of compensation related accruals and our determination of depreciation and amortization expense. The condensed consolidated balance sheet as of December 31, 2011 has been derived from our audited financial statements. We suggest that you read these condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2011.
In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after June 30, 2012, through the filing of this Form 10-Q, for inclusion as necessary.
Recently Issued Accounting Standards
Fair Value Measurement. In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies existing guidance about how fair value should be applied where it already is required or permitted and provides wording changes that align this standard with International Financial Reporting Standards (IFRS). We are required to apply this guidance prospectively beginning with our first quarterly filing in 2012. The adoption of this new guidance has not had an impact on our financial position or results of operations.
Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update increases the prominence of other comprehensive income in financial statements, eliminating the option of presenting other comprehensive income in the statement of changes in equity, and instead, requiring the components of net income and comprehensive income to be presented in either one or two consecutive financial statements. We are required to comply with this guidance prospectively beginning with our first quarterly filing in 2012. We have not recognized any other comprehensive income during either of the six month periods ended June 30, 2012 or 2011. The adoption of this new guidance has not had an impact on our financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update delays the effective date of the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.
Intangibles–Goodwill and Other. In September 2011, the FASB issued ASU No. 2011-08, Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update allows entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step one of the two-step goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this new guidance has not had an impact on our financial position or results of operations.


4



Drilling Contracts
Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed. Generally, our contracts provide for the drilling of a single well and typically permit the client to terminate on short notice. During periods of high rig demand, or for our newly constructed rigs, we enter into longer-term drilling contracts. Currently, we have contracts with terms of six months to four years in duration. As of July 20, 2012, we have 45 drilling rigs operating under term contracts, including three of the new-build AC drilling rigs. Of these 45 contracts, if not renewed at the end of their terms, 29 will expire by January 20, 2013 (which includes six drilling rigs in Colombia), 11 will expire by July 20, 2013, two will expire by January 20, 2014, two will expire by July 20, 2014 and one will expire by July 20, 2016. We currently have term contracts for another seven new-build AC drilling rigs that are fit for purpose for domestic shale plays. Three of the new-build drilling rigs are currently working under term contracts and we expect another four to begin working by the end of 2012, with the remaining three during the first quarter of 2013.
Restricted Cash
As of June 30, 2012, we had restricted cash in the amount of $0.7 million held in an escrow account to be used for a future payment due March 2013 in connection with the acquisition of Prairie Investors d/b/a Competition Wireline (“Competition”). Restricted cash of $0.7 million is recorded in other current assets and the associated obligation of $0.7 million is recorded in accrued expenses.
Investments
At December 31, 2010, we held $15.9 million (par value) of auction rate preferred securities (“ARPSs”), which were variable-rate preferred securities with a long-term maturity that were classified as held for sale. On January 19, 2011, we entered into an agreement with a financial institution to sell the ARPSs for $12.6 million, which represented 79% of the par value, plus accrued interest. Under the ARPSs sales agreement, we retained the unilateral right for a period ending January 7, 2013 to: (a) repurchase all the ARPSs that were sold at the $12.6 million price at which they were initially sold to the financial institution; and (b) if not repurchased, receive additional proceeds from the financial institution upon redemption of the ARPSs by the original issuer of these securities (collectively, the “ARPSs Call Option”). Upon origination, the fair value of the ARPSs Call Option was estimated to be $0.6 million and was recognized as other income in our consolidated statement of operations for 2011. We are required to assess the value of the ARPSs Call Option at the end of each reporting period, with any changes in fair value recorded within our consolidated statement of operations. As of June 30, 2012, the ARPSs Call Option had an estimated fair value of $0.2 million, and was included in our prepaid expenses and other current assets in our condensed consolidated balance sheet.
Property and Equipment
As of June 30, 2012, we have incurred $210.7 million in construction costs for ongoing projects, primarily for our new-build drilling rigs. During the six months ended June 30, 2012, we capitalized $6.0 million of interest costs, primarily related to the new-build drilling rigs.
2.
Acquisitions
On December 31, 2011, we acquired Go-Coil, L.L.C., a Louisiana limited liability company (“Go-Coil”) which provided coiled tubing services with a fleet of seven onshore units and three offshore units through its facilities in Louisiana, Texas, Oklahoma and Pennsylvania. The aggregate purchase price for the acquisition was approximately $110.4 million, which consisted of assets acquired of $114.9 million and liabilities assumed of $4.5 million. We funded the acquisition with cash on hand that was primarily generated from the proceeds of the Senior Notes issued in November 2011, as described in Note 3, Long-term Debt.


5




The following table summarizes the allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition (amounts in thousands):
Cash acquired
$
313

Other current assets
9,068

Property and equipment
30,103

Intangibles and other assets
33,695

Goodwill
41,683

Total assets acquired
$
114,862

Current liabilities
$
4,337

Long-term debt
131

Total liabilities assumed
$
4,468

Net assets acquired
$
110,394

The acquisition of the coiled tubing services business from Go-Coil was accounted for as an acquisition of a business in accordance with ASC Topic 805, Business Combinations. The purchase price allocation for the Go-Coil acquisition was finalized as of June 30, 2012. Goodwill was recognized as part of the Go-Coil acquisition, since the purchase price exceeded the estimated fair value of the assets acquired and liabilities assumed. We believe that the goodwill relates to the acquired workforce, future synergies between our existing service offerings and the ability to expand our service offerings.
3.
Long-term Debt
Long-term debt consists of the following (amounts in thousands):
 
June 30, 2012
 
December 31, 2011
Senior secured revolving credit facility
$
35,000

 
$

Senior notes
418,170

 
417,747

Other notes payable
991

 
1,853

 
454,161

 
419,600

Less current portion
(871
)
 
(872
)
 
$
453,290

 
$
418,728

Senior Secured Revolving Credit Facility
We have a credit agreement, as amended on June 30, 2011, with Wells Fargo Bank, N.A. and a syndicate of lenders which provides for a senior secured revolving credit facility, with sub-limits for letters of credit and swing-line loans, of up to an aggregate principal amount of $250 million, all of which matures on June 30, 2016 (the “Revolving Credit Facility”). The Revolving Credit Facility contains customary mandatory prepayments from the proceeds of certain asset dispositions or debt issuances, which are applied to reduce outstanding revolving and swing-line loans and letter of credit exposure, but in no event will reduce the borrowing availability under the Revolving Credit Facility to less than $250 million.
Borrowings under the Revolving Credit Facility bear interest, at our option, at the LIBOR rate or at the bank prime rate, plus an applicable per annum margin that ranges from 2.50% to 3.25% and 1.50% to 2.25%, respectively. The LIBOR margin and bank prime rate margin in effect at July 20, 2012 are 2.75% and 1.75%, respectively. The Revolving Credit Facility requires a commitment fee due quarterly based on the average daily unused amount of the commitments of the lenders, a fronting fee due for each letter of credit issued, and a quarterly letter of credit fee due based on the average undrawn amount of letters of credit outstanding during such period.
Our obligations under the Revolving Credit Facility are secured by substantially all of our domestic assets (including equity interests in Pioneer Global Holdings, Inc. and 65% of the outstanding equity interests of any first-tier foreign subsidiaries owned by Pioneer Global Holdings, Inc., but excluding any equity interest in, and any assets of, Pioneer Services Holdings, LLC and Pioneer Coiled Tubing Services, LLC) and are guaranteed by certain of our domestic subsidiaries, including Pioneer Global Holdings, Inc. Borrowings under the Revolving Credit Facility are available for acquisitions, working capital and other general corporate purposes.


6




As of July 20, 2012, we had $35.0 million outstanding under our Revolving Credit Facility and $9.0 million in committed letters of credit, which resulted in borrowing availability of $206.0 million under our Revolving Credit Facility. There are no limitations on our ability to access this borrowing capacity other than maintaining compliance with the covenants under the Revolving Credit Facility. At June 30, 2012, we were in compliance with our financial covenants. Our total consolidated leverage ratio was 1.9 to 1.0, our senior consolidated leverage ratio was 0.2 to 1.0, and our interest coverage ratio was 8.0 to 1.0. The financial covenants contained in our Revolving Credit Facility include the following:
A maximum total consolidated leverage ratio that cannot exceed 4.00 to 1.00;
A maximum senior consolidated leverage ratio, which excludes unsecured and subordinated debt, that cannot exceed 2.50 to 1.00;
A minimum interest coverage ratio that cannot be less than 2.50 to 1.00; and
If our senior consolidated leverage ratio is greater than 2.00 to 1.00 at the end of any fiscal quarter, our minimum asset coverage ratio cannot be less than 1.00 to 1.00.
The Revolving Credit Facility does not restrict capital expenditures as long as (a) no event of default exists under the Revolving Credit Facility or would result from such capital expenditures, (b) after giving effect to such capital expenditures there is availability under the Revolving Credit Facility equal to or greater than $25 million and (c) the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is less than 2.00 to 1.00. If the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is equal to or greater than 2.00 to 1.00, then capital expenditures are limited to $100 million for the fiscal year. The capital expenditure threshold may be increased by any unused portion of the capital expenditure threshold from the immediate preceding fiscal year up to $30 million.
At June 30, 2012, our senior consolidated leverage ratio was not greater than 2.00 to 1.00 and therefore, we were not subject to the capital expenditure threshold restrictions listed above.
The Revolving Credit Facility has additional restrictive covenants that, among other things, limit the incurrence of additional debt, investments, liens, dividends, acquisitions, redemptions of capital stock, prepayments of indebtedness, asset dispositions, mergers and consolidations, transactions with affiliates, hedging contracts, sale leasebacks and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, judgment defaults in excess of specified amounts, failure of any guaranty or security document supporting the credit agreement and change of control.
Senior Notes
On March 11, 2010, we issued $250 million of unregistered senior notes with a coupon interest rate of 9.875% that are due in 2018 (the “2010 Senior Notes”). The 2010 Senior Notes were sold with an original issue discount of $10.6 million that was based on 95.75% of their face value, which will result in an effective yield to maturity of approximately 10.677%. On March 11, 2010, we received $234.8 million of net proceeds from the issuance of the 2010 Senior Notes after deductions were made for the $10.6 million of original issue discount and $4.6 million for underwriters’ fees and other debt offering costs. The net proceeds were used to repay a portion of the borrowings outstanding under our Revolving Credit Facility.
On November 21, 2011, we issued $175 million of unregistered Senior Notes (the “2011 Senior Notes”). The 2011 Senior Notes have the same terms and conditions as the 2010 Senior Notes. The 2011 Senior Notes were sold with an original issue premium of $1.8 million that was based on 101% of their face value, which will result in an effective yield to maturity of approximately 9.66%. On November 21, 2011, we received $172.7 million of net proceeds from the issuance of the 2011 Senior Notes, including the original issue premium, and after $4.1 million of deductions were made for underwriters' fees and other debt offering costs. A portion of the net proceeds were used to fund the acquisition of Go-Coil in December 2011, as described in Note 2, Acquisitions.
In accordance with a registration rights agreement with the holders of both our 2010 Senior Notes and 2011 Senior Notes, we filed exchange offer registration statements on Form S-4 with the Securities and Exchange Commission that became effective on September 2, 2010 and July 13, 2012, respectively. These exchange offer registration statements enabled the holders of both our 2010 Senior Notes and 2011 Senior Notes to exchange their senior notes for publicly registered notes with substantially identical terms. References to the “2010 Senior Notes” and “2011 Senior Notes” herein include the senior notes issued in the exchange offers.


7



The 2010 and 2011 Senior Notes (the “Senior Notes”) are reflected on our condensed consolidated balance sheet at June 30, 2012 with a total carrying value of $418.2 million, which represents the $425.0 million total face value net of the $8.4 million unamortized portion of original issue discount and $1.6 million unamortized portion of original issue premium. The original issue discount and premium are being amortized over the term of the Senior Notes based on the effective interest method.
The Senior Notes will mature on March 15, 2018 with interest due semi-annually in arrears on March 15 and September 15 of each year. We have the option to redeem the Senior Notes, in whole or in part, at any time on or after March 15, 2014 in each case at the redemption price specified in the Indenture dated March 11, 2010 (the “Indenture”) together with any accrued and unpaid interest to the date of redemption. Prior to March 15, 2014, we may also redeem the Senior Notes, in whole or in part, at a “make-whole” redemption price specified in the Indenture, together with any accrued and unpaid interest to the date of redemption. In addition, prior to March 15, 2013, we may, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Notes at a redemption price of 109.875% of the principal amount, plus any accrued and unpaid interest to the redemption date, with the net proceeds of certain equity offerings, if at least 65% of the aggregate principal amount of the Senior Notes remains outstanding after such redemption and the redemption occurs within 120 days of the closing of the equity offering.
Upon the occurrence of a change of control, holders of the Senior Notes will have the right to require us to purchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase. Under certain circumstances in connection with asset dispositions, we will be required to use the excess proceeds of asset dispositions to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase.
The Indenture contains certain restrictions generally on our and certain of our subsidiaries’ ability to:
pay dividends on stock;
repurchase stock or redeem subordinated debt or make other restricted payments;
incur, assume or guarantee additional indebtedness or issue disqualified stock;
create liens on our assets;
enter into sale and leaseback transactions;
pay dividends, engage in loans, or transfer other assets from certain of our subsidiaries;
consolidate with or merge with or into, or sell all or substantially all of our properties to another person;
enter into transactions with affiliates; and
enter into new lines of business.
We were in compliance with these covenants as of June 30, 2012. The Senior Notes are not subject to any sinking fund requirements. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing domestic subsidiaries and by certain of our future domestic subsidiaries (see Note 9, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements).
Other Notes Payable
We have two notes payable to certain employees that are former shareholders of production services businesses which we have acquired. These notes payable have interest rates of 6% and 14%, require annual payments of principal and interest and have final maturity dates in March and April 2013. We have other debt of $0.1 million as of June 30, 2012 which represents a capital lease obligation for equipment, with monthly payments due through November 2016.
Debt Issuance Costs
Costs incurred in connection with the Revolving Credit Facility and the Senior Notes were capitalized and are being amortized using the straight-line method over the term of the Revolving Credit Facility which matures in June 2016. Costs incurred in connection with the issuance of our Senior Notes were capitalized and are being amortized using the straight-line method (which approximates the use of the interest method) over the term of the Senior Notes which mature in March 2018. Capitalized debt costs related to the issuance of our long-term debt were approximately $10.6 million and $11.6 million as of June 30, 2012 and December 31, 2011, respectively. We recognized approximately $1.1 million and $1.0 million of associated amortization during the six months ended June 30, 2012 and 2011, respectively. In June 2011, we recognized additional amortization expense related to the write-off of $0.6 million of debt issuance costs, representing the portion of unamortized debt issuance costs associated with certain syndicate lenders who are no longer participating in the Revolving Credit Facility as amended on June 30, 2011.


8



4.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value.
At June 30, 2012 and December 31, 2011, our financial instruments consist primarily of cash, trade receivables, trade payables, long-term debt, and our ARPSs Call Option. The carrying value of cash, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.
At June 30, 2012, our ARPSs Call Option is reported at an amount that reflects our current estimate of fair value. To estimate the value of our ARPSs Call Option as of June 30, 2012, we used inputs defined by ASC Topic 820 as level 3 inputs, which are significant unobservable inputs. The fair value of the ARPSs Call Option was estimated using a modified Black-Scholes model, based on an analysis of recent historical transactions for securities with similar characteristics to the underlying ARPSs, and an analysis of the probability that the options would be exercisable as a result of the underlying ARPSs being redeemed or traded in a secondary market at an amount greater than the option price before the expiration date. As of June 30, 2012, the ARPSs Call Option had an estimated fair value of $0.2 million, and was included in our prepaid expenses and other current assets in our consolidated balance sheet. Future changes in the fair values of the ARPSs Call Option will be reflected in other income (expense) in our condensed consolidated statements of operations.
The fair value of our long-term debt at June 30, 2012 and December 31, 2011 is estimated using a discounted cash flow analysis, based on rates that we believe we would currently pay for similar types of debt instruments. This discounted cash flow analysis based on inputs defined by ASC Topic 820 as level 2 inputs, which are observable inputs for similar types of debt instruments. The following table presents the supplemental fair value information about long-term debt at June 30, 2012 and December 31, 2011 (amounts in thousands):
 
June 30, 2012
 
December 31, 2011
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt
$
454,161

 
$
490,392

 
$
419,600

 
$
443,309

5.
Earnings (Loss) Per Common Share
The following table presents a reconciliation of the numerators and denominators of the basic income (loss) per share and diluted income (loss) per share computations (amounts in thousands, except per share data):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Basic
 
 
 
 
 
 
 
Net income (loss)
$
9,685

 
$
3,650

 
$
23,857

 
$
(2,385
)
Weighted-average shares
61,768

 
54,205

 
61,673

 
54,087

Income (loss) per share
$
0.16

 
$
0.07

 
$
0.39

 
$
(0.04
)
Diluted
 
 
 
 
 
 
 
Net income (loss)
$
9,685

 
$
3,650

 
$
23,857

 
$
(2,385
)
Effect of dilutive securities

 

 

 

Net income (loss) available to common shareholders after assumed conversion
$
9,685

 
$
3,650

 
$
23,857

 
$
(2,385
)
Weighted average shares:
 
 
 
 
 
 
 
Outstanding
61,768

 
54,205

 
61,673

 
54,087

Diluted effect of stock options, restricted stock, and restricted stock unit awards
852

 
1,676

 
951

 

 
62,620

 
55,881

 
62,624

 
54,087

Income (loss) per share
$
0.15

 
$
0.07

 
$
0.38

 
$
(0.04
)
Potentially dilutive stock options, restricted stock and restricted stock unit awards representing a total of 4,416,886 and 2,153,147 shares of common stock for the three months ended June 30, 2012 and 2011, respectively, and 4,309,528 and 2,916,322 for the six months ended June 30, 2012 and 2011, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect.


9



6.
Equity Transactions and Stock Based Compensation Plans
Stock-based Compensation Plans
We grant stock option awards with vesting based on time of service conditions and we grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. We recognize compensation cost for stock option, restricted stock and restricted stock unit awards based on the fair value estimated in accordance with ASC Topic 718, Compensation—Stock Compensation. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
Stock Options
We grant stock option awards which generally become exercisable over a three-year period and expire ten years after the date of grant. Our stock-based compensation plans require that all stock option awards have an exercise price that is not less than the fair market value of our common stock on the date of grant. We issue shares of our common stock when vested stock option awards are exercised.
We estimate the fair value of each option grant on the date of grant using a Black-Scholes options-pricing model. The following table summarizes the assumptions used in the Black-Scholes option-pricing model based on a weighted-average calculation for the three and six months ended June 30, 2012 and 2011:
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Expected volatility
68
%
 
68
%
 
70
%
 
65
%
Risk-free interest rates
0.4
%
 
1.8
%
 
0.8
%
 
1.5
%
Expected life in years
3.50
 
4.00
 
5.12

 
4.33

Options granted
55,000
 
5,000
 
530,156
 
602,298
Grant-date fair value
$3.35
 
$7.18
 
$5.02
 
$4.69
The assumptions above are based on multiple factors, including historical exercise patterns of homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and volatility of our stock price. As we have not declared dividends since we became a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an optionee actually realizes will be at or near the value we have estimated using the Black-Scholes options-pricing model.
The following table summarizes the compensation expense recognized for stock option awards during the three and six months ended June 30, 2012 and 2011 (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
General and administrative expense
$
637

 
$
897

 
$
1,556

 
$
1,893

Operating costs
8

 
56

 
52

 
137

 
$
645

 
$
953

 
$
1,608

 
$
2,030


During the three and six months ended June 30, 2012, 95,166 and 163,266 stock options were exercised at a weighted-average exercise price of $4.22 and $4.01, respectively. During the three and six months ended June 30, 2011, 184,512 and 311,812 stock options were exercised at a weighted-average exercise price of $8.29 and $6.71, respectively. We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of our stock on the date of exercise over the exercise price of the options. In accordance with ASC Topic 718, we reported all excess tax benefits resulting from the exercise of stock options as financing cash flows in our condensed consolidated statement of cash flows.


10




Restricted Stock
We grant restricted stock awards that vest over a three-year period with a fair value based on the closing price of our common stock on the date of the grant. When restricted stock awards are granted, or when restricted stock unit awards are converted to restricted stock, shares of our common stock are considered issued, but subject to certain restrictions. During the six months ended June 30, 2012 and 2011, we granted 49,748 and 32,360 shares of restricted stock awards, with a weighted-average grant-date price of $8.04 and $12.36, respectively. During the three months ended June 30, 2011, we issued an additional 166,918 shares of restricted stock upon the conversion of performance-based RSU awards, as described below.
The following table summarizes the compensation expense recognized for restricted stock awards during the three and six months ended June 30, 2012 and 2011 (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
General and administrative expense
$
179

 
$
291

 
$
395

 
$
451

Operating costs
13

 
17

 
28

 
42

 
$
192

 
$
308

 
$
423

 
$
493

Restricted Stock Units
We grant restricted stock unit awards with vesting based on time of service conditions only (“time-based RSUs”), and we grant restricted stock unit awards with vesting based on time of service, which are also subject to performance and market conditions (“performance-based RSUs”). Shares of our common stock are issued to recipients of restricted stock units only when they have satisfied the applicable vesting conditions.
Our time-based RSUs generally vest over a three-year period, with fair values based on the closing price of our common stock on the date of grant. The following table summarizes the number and weighted-average grant-date fair value of the time-based RSUs granted during the three and six months ended June 30, 2012 and 2011:
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Time-based RSUs granted
151,500

 
130,570

 
356,813

 
233,473

Weighted-average grant-date fair value
$
7.04

 
$
12.51

 
$
8.21

 
$
10.97

Our performance-based RSUs are granted at a target number of issuable shares, for which the final number of shares of common stock is adjusted based on our actual achievement levels that are measured against predetermined performance conditions. There were no grants of performance-based RSUs during the three months ended June 30, 2012 or 2011. The following table summarizes the number and weighted-average grant-date fair value of performance-based RSUs granted during the six months ended June 30, 2012 and 2011:
 
Six months ended June 30,
 
2012
 
2011
Performance-based RSUs granted
221,495

 
146,479

Weighted-average grant-date fair value
$
9.85

 
$
10.23

Performance-based RSUs granted during the six months ended June 30, 2012 and 2011 will cliff vest after 39 months from the date of grant. The number of shares of common stock awarded will be based upon the Company’s achievement of certain performance conditions, as compared to a predefined peer group, over the respective performance period. Approximately one-third of the performance-based RSUs are subject to a market condition, and therefore the fair value of these awards is measured using a Monte Carlo simulation model. Compensation expense for awards with a market condition is reduced only for estimated forfeitures; no adjustment to expense is otherwise made, regardless of the number of shares issued, if any. The remaining two-thirds of the performance-based RSUs are subject to performance conditions, and therefore the fair value is based on the closing price of our common stock on the date of grant, applied to the estimated number of shares that will be awarded. Compensation expense ultimately recognized for awards with performance conditions will be equal to the fair value of the restricted stock unit award based on the actual outcome of the service and performance conditions.


11




The following table summarizes the compensation expense recognized for restricted stock unit awards during the three and six months ended June 30, 2012 and 2011 (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
General and administrative expense
$
744

 
$
433

 
$
1,402

 
$
824

Operating costs
89

 
75

 
237

 
136

 
$
833

 
$
508

 
$
1,639

 
$
960

7.
Segment Information
We have two operating segments referred to as the Drilling Services Segment and the Production Services Segment which is the basis management uses for making operating decisions and assessing performance.
Drilling Services Segment—Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies with its fleet of 66 drilling rigs which are currently assigned to the following divisions:
Drilling Division
 
Rig Count
South Texas
 
15

East Texas
 
3

West Texas
 
20

North Dakota
 
11

Utah
 
5

Appalachia
 
4

Colombia
 
8

 
 
66

Production Services SegmentOur Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services, coiled tubing services, and fishing and rental services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. We currently have a fleet of 101 well servicing rigs consisting of ninety 550 horsepower rigs, ten 600 horsepower rigs and one 400 horsepower rig. We currently provide wireline services and coiled tubing services with a fleet of 117 wireline units and 11 coiled tubing units, and we provide rental services with approximately $15.6 million of fishing and rental tools.
The following tables set forth certain financial information for our two operating segments and corporate as of and for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):
 
As of and for the three months ended June 30, 2012
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
803,264

 
$
432,584

 
$
35,560

 
$
1,271,408

Revenues
$
119,048

 
$
110,776

 
$

 
$
229,824

Operating costs
78,631

 
65,683

 

 
144,314

Segment margin
$
40,417

 
$
45,093

 
$

 
$
85,510

Depreciation and amortization
$
26,307

 
$
13,391

 
$
291

 
$
39,989

Capital expenditures
$
80,608

 
$
27,634

 
$
734

 
$
108,976



12



 
As of and for the three months ended June 30, 2011
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
609,886

 
$
254,901

 
$
23,649

 
$
888,436

Revenues
$
106,523

 
$
64,762

 
$

 
$
171,285

Operating costs
73,190

 
37,754

 

 
110,944

Segment margin
$
33,333

 
$
27,008

 
$

 
$
60,341

Depreciation and amortization
$
24,702

 
$
7,510

 
$
212

 
$
32,424

Capital expenditures
$
46,306

 
$
17,301

 
$
199

 
$
63,806

 
As of and for the six months ended June 30, 2012
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
803,264

 
$
432,584

 
$
35,560

 
$
1,271,408

Revenues
$
243,352

 
$
218,450

 
$

 
$
461,802

Operating costs
159,708

 
126,379

 

 
286,087

Segment margin
$
83,644

 
$
92,071

 
$

 
$
175,715

Depreciation and amortization
$
51,796

 
$
26,109

 
$
457

 
$
78,362

Capital expenditures
$
161,192

 
$
59,188

 
$
973

 
$
221,353

 
As of and for the six months ended June 30, 2011
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
609,886

 
$
254,901

 
$
23,649

 
$
888,436

Revenues
$
206,279

 
$
118,355

 
$

 
$
324,634

Operating costs
140,699

 
70,982

 

 
211,681

Segment margin
$
65,580

 
$
47,373

 
$

 
$
112,953

Depreciation and amortization
$
49,188

 
$
15,005

 
$
487

 
$
64,680

Capital expenditures
$
65,417

 
$
32,745

 
$
338

 
$
98,500

The following table reconciles the segment profits reported above to income from operations as reported on the consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Segment margin
$
85,510

 
$
60,341

 
$
175,715

 
$
112,953

Depreciation and amortization
(39,989
)
 
(32,424
)
 
(78,362
)
 
(64,680
)
General and administrative
(22,265
)
 
(15,860
)
 
(43,408
)
 
(30,381
)
Bad debt recovery (expense)
56

 
(139
)
 
147

 
(55
)
Impairment of equipment

 

 
(1,032
)
 

Income from operations
$
23,312

 
$
11,918

 
$
53,060

 
$
17,837



13



The following table sets forth certain financial information for our international operations in Colombia as of and for the three and six months ended June 30, 2012 and 2011 which is included in our Drilling Services Segment (amounts in thousands):
 
As of and for the three months ended June 30,
 
As of and for the six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Identifiable assets
$
149,305

 
$
159,701

 
$
149,305

 
$
159,701

Revenues
$
22,485

 
$
29,241

 
$
46,301

 
$
53,476

Identifiable assets for our international operations in Colombia include five drilling rigs that are owned by our Colombia subsidiary and three drilling rigs that are owned by one of our domestic subsidiaries and leased to our Colombia subsidiary.
8.
Commitments and Contingencies
In connection with our operations in Colombia, our foreign subsidiaries have obtained bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. We have guaranteed payments of $46.2 million relating to our performance under these bonds.
The Colombian government enacted a tax reform act which, among other things, adopted a one-time, net-worth tax for all Colombian entities, which was assessed on January 1, 2011 and is payable in eight semi-annual installments from 2011 through 2014. Based on our Colombian operations’ net equity, measured on a Colombian tax basis as of January 1, 2011, our total net-worth tax obligation is approximately $7.3 million, which is not deductible for tax purposes. We recognized this tax obligation in full during the first quarter of 2011 in other expense in our condensed consolidated statement of operations. As of June 30, 2012, we have a remaining obligation of $4.8 million, which is recorded in other accrued expenses and other long-term liabilities on our condensed consolidated balance sheet.
Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations.
9.
Guarantor/Non-Guarantor Condensed Consolidated Financial Statements
Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our existing domestic subsidiaries, except for Pioneer Services Holdings, LLC, Pioneer Coiled Tubing Services, LLC, and certain of our future domestic subsidiaries. The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Notes, the guarantees or the Indenture. In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary will pay the holders of its debt and other liabilities, including its trade creditors, before it will be able to distribute any of its assets to us. In the future, any non-U.S. subsidiaries, immaterial subsidiaries and subsidiaries that we designate as unrestricted subsidiaries under the Indenture will not guarantee the Senior Notes. As of June 30, 2012, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of the guarantee arrangements, we are presenting the following condensed consolidated balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries.



14




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
June 30, 2012
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
20,768

 
$
(3,665
)
 
$
3,277

 
$

 
$
20,380

Receivables, net of allowance
4

 
124,591

 
44,708

 
(1,810
)
 
167,493

Intercompany receivable (payable)
(125,333
)
 
145,911

 
(20,578
)
 

 

Deferred income taxes
620

 
6,704

 
7,026

 

 
14,350

Inventory

 
5,187

 
8,024

 

 
13,211

Prepaid expenses and other current assets
1,197

 
9,294

 
2,842

 

 
13,333

Total current assets
(102,744
)
 
288,022

 
45,299

 
(1,810
)
 
228,767

Net property and equipment
2,301

 
807,952

 
129,942

 
(750
)
 
939,445

Investment in subsidiaries
1,054,605

 
223,940

 

 
(1,278,545
)
 

Intangible assets, net of amortization
59

 
16,707

 
31,439

 

 
48,205

Goodwill

 

 
41,683

 

 
41,683

Noncurrent deferred income taxes
41,608

 

 
1,242

 
(41,608
)
 
1,242

Other long-term assets
10,611

 
1,440

 
15

 

 
12,066

Total assets
$
1,006,440

 
$
1,338,061

 
$
249,620

 
$
(1,322,713
)
 
$
1,271,408

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
1,092

 
$
85,075

 
$
9,022

 

 
$
95,189

Current portion of long-term debt

 
850

 
21

 

 
871

Prepaid drilling contracts

 
2,726

 
1,345

 

 
4,071

Accrued expenses
13,381

 
44,420

 
10,763

 
(1,810
)
 
66,754

Total current liabilities
14,473

 
133,071

 
21,151

 
(1,810
)
 
166,885

Long-term debt, less current portion
453,170

 

 
120

 

 
453,290

Noncurrent deferred income taxes

 
145,902

 
1,395

 
(41,608
)
 
105,689

Other long-term liabilities
110

 
4,483

 
3,014

 

 
7,607

Total liabilities
467,753

 
283,456

 
25,680

 
(43,418
)
 
733,471

Total shareholders’ equity
538,687

 
1,054,605

 
223,940

 
(1,279,295
)
 
537,937

Total liabilities and shareholders’ equity
$
1,006,440

 
$
1,338,061

 
$
249,620

 
$
(1,322,713
)
 
$
1,271,408

 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
91,932

 
$
(13,879
)
 
$
8,144

 
$

 
$
86,197

Receivables, net of allowance
(2
)
 
112,531

 
32,724

 
(19
)
 
145,234

Intercompany receivable (payable)
(122,552
)
 
131,585

 
(9,033
)
 

 

Deferred income taxes
1,408

 
8,644

 
5,381

 

 
15,433

Inventory

 
4,533

 
6,651

 

 
11,184

Prepaid expenses and other current assets
285

 
6,304

 
4,975

 

 
11,564

Total current assets
(28,929
)
 
249,718

 
48,842

 
(19
)
 
269,612

Net property and equipment
1,605

 
675,679

 
117,422

 
(750
)
 
793,956

Investment in subsidiaries
932,237

 
221,201

 

 
(1,153,438
)
 

Intangible assets, net of amortization
171

 
18,829

 
33,680

 

 
52,680

Goodwill

 

 
41,683

 

 
41,683

Noncurrent deferred income taxes
30,835

 

 
735

 
(30,835
)
 
735

Other long-term assets
11,949

 
2,124

 
15

 

 
14,088

Total assets
$
947,868

 
$
1,167,551

 
$
242,377

 
$
(1,185,042
)
 
$
1,172,754

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
1,090

 
$
57,150

 
$
8,200

 
$

 
$
66,440

Current portion of long-term debt

 
850

 
22

 

 
872

Prepaid drilling contracts

 
1,297

 
2,669

 

 
3,966

Accrued expenses
16,779

 
45,012

 
6,631

 
(20
)
 
68,402

Total current liabilities
17,869

 
104,309

 
17,522

 
(20
)
 
139,680

Long-term debt, less current portion
417,747

 
850

 
131

 

 
418,728

Noncurrent deferred income taxes
921

 
124,659

 

 
(30,835
)
 
94,745

Other long-term liabilities
137

 
5,496

 
3,523

 

 
9,156

Total liabilities
436,674

 
235,314

 
21,176

 
(30,855
)
 
662,309

Total shareholders’ equity
511,194

 
932,237

 
221,201

 
(1,154,187
)
 
510,445

Total liabilities and shareholders’ equity
$
947,868

 
$
1,167,551

 
$
242,377

 
$
(1,185,042
)
 
$
1,172,754



15



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
Three months ended June 30, 2012
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
193,332

 
$
36,492

 
$

 
$
229,824

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
116,644

 
27,670

 

 
144,314

Depreciation and amortization
292

 
33,800

 
5,897

 

 
39,989

General and administrative
5,552

 
14,339

 
2,512

 
(138
)
 
22,265

Intercompany leasing

 
(1,215
)
 
1,199

 
16

 

Bad debt (recovery) expense

 
(95
)
 
39

 

 
(56
)
Total costs and expenses
5,844

 
163,473

 
37,317

 
(122
)
 
206,512

Income (loss) from operations
(5,844
)
 
29,859

 
(825
)
 
122

 
23,312

Other (expense) income:
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
17,970

 
(387
)
 

 
(17,583
)
 

Interest expense
(7,695
)
 
43

 
2

 

 
(7,650
)
Other
(72
)
 
250

 
(36
)
 
(122
)
 
20

Total other expense
10,203

 
(94
)
 
(34
)
 
(17,705
)
 
(7,630
)
Income (loss) before income taxes
4,359

 
29,765

 
(859
)
 
(17,583
)
 
15,682

Income tax (expense) benefit
5,326

 
(11,795
)
 
472

 

 
(5,997
)
Net income (loss)
$
9,685

 
$
17,970

 
$
(387
)
 
$
(17,583
)
 
$
9,685

 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2011
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
142,043

 
$
29,242

 
$

 
$
171,285

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
89,034

 
21,910

 

 
110,944

Depreciation and amortization
212

 
29,011

 
3,201

 

 
32,424

General and administrative
4,762

 
10,480

 
726

 
(108
)
 
15,860

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt expense

 
139

 

 

 
139

Total costs and expenses
4,974

 
127,449

 
27,052

 
(108
)
 
159,367

Income (loss) from operations
(4,974
)
 
14,594

 
2,190

 
108

 
11,918

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
11,694

 
2,590

 

 
(14,284
)
 

Interest expense
(7,932
)
 
(56
)
 
5

 

 
(7,983
)
Other
(75
)
 
215

 
722

 
(108
)
 
754

Total other income (expense)
3,687

 
2,749

 
727

 
(14,392
)
 
(7,229
)
Income (loss) before income taxes
(1,287
)
 
17,343

 
2,917

 
(14,284
)
 
4,689

Income tax (expense) benefit
4,937

 
(5,649
)
 
(327
)
 

 
(1,039
)
Net income (loss)
$
3,650

 
$
11,694

 
$
2,590

 
$
(14,284
)
 
$
3,650

 
 
 
 
 
 
 
 
 
 

















16





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
Six months ended June 30, 2012
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
$

 
$
384,174

 
$
77,628

 
$

 
$
461,802

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
231,585

 
54,502

 

 
286,087

Depreciation and amortization
457

 
66,489

 
11,416

 

 
78,362

General and administrative
11,060

 
27,371

 
5,253

 
(276
)
 
43,408

Intercompany leasing

 
(2,430
)
 
2,430

 

 

Bad debt (recovery) expense

 
(275
)
 
128

 

 
(147
)
Impairment of equipment

 
1,032

 

 

 
1,032

Total costs and expenses
11,517

 
323,772

 
73,729

 
(276
)
 
408,742

Income (loss) from operations
(11,517
)
 
60,402

 
3,899

 
276