S-1/A 1 ds1a.htm AMENDMENT #3 TO FORM S-1 AMENDMENT #3 TO FORM S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on May 3, 2007

Registration No. 333-138599

 


UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

 


AMENDMENT NO. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


Diamondback Energy Services, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware  

1389

  20-5848083

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 


510 E. Memorial Road

Suite B2

Oklahoma City, Oklahoma 73114-2218

(405) 242-4080

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


Arty Straehla

Chief Executive Officer

Diamondback Energy Services, Inc.

510 E. Memorial Road

Suite B2

Oklahoma City, Oklahoma 73114-2218

(405) 242-4080

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies to:

 

Seth R. Molay, P.C.

Akin Gump Strauss Hauer & Feld LLP

1700 Pacific Avenue, Suite 4100

Dallas, TX 75201

(214) 969-4780

 

T. Mark Kelly

Vinson & Elkins L.L.P.

First City Tower, Suite 2300

1001 Fannin Street

Houston, TX 77002

(713) 758-2222

 


Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement is declared effective.

If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 


The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 3, 2007.

PROSPECTUS

                     Shares

LOGO

Common Stock

We are offering              shares of our common stock. This is our initial public offering and no public market currently exists for our common shares. We anticipate that the initial public offering price will be between $             and $             per common share. We have applied for the quotation of our common stock on The NASDAQ Global Market under the symbol “FANG.”

Investing in our common stock involves a high degree of risk. Please read “ Risk Factors” beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 


 

     PER SHARE    TOTAL

Public Offering Price.

   $                $            

Underwriting Discounts and Commissions.

   $                $            

Proceeds to Diamondback Energy Services, Inc. (Before Expenses).

   $                $            

 


Delivery of the common shares is expected to be made on or about             . The underwriters have an option to purchase an additional              common shares from us to cover overallotments.

Prospectus dated                     , 2007.


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LOGO

 

 


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Index to Financial Statements

Table of Contents

 

     Page

Summary

   1

Risk Factors

   8

Cautionary Note Regarding Forward-Looking Statements

   20

Use of Proceeds

   21

Dividend Policy

   21

Capitalization

   22

Dilution

   23

Selected Historical Financial Data

   24

Unaudited Pro Forma Combined Statements of Operations

   26

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   29

Business

   40

Management

   52

Related Party Transactions

   64

Principal Stockholders

   67

Description of Capital Stock

   69

Shares Eligible for Future Sale

   72

Underwriting

   74

Notice to Canadian Residents

   77

Legal Matters

   78

Experts

   78

Where You Can Find More Information

   78

Glossary of Oil and Natural Gas Terms

   79

Index to Financial Statements

   F-1

 


About This Prospectus

You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are only offering to sell, and only seeking offers to buy, the common stock in jurisdictions where offers and sales are permitted.

The information contained in this prospectus is accurate and complete only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.

This prospectus includes market share and industry data and forecasts that we obtained from internal company surveys, publicly available information and industry publications and surveys. Our internal research and forecasts are based on management’s understanding of industry conditions, and such information has not been verified by independent sources. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable.

Unless the context otherwise requires, the information in the prospectus (other than in the historical financial statements) assumes that the underwriters will not exercise their over-allotment option.

 

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Summary

This summary contains basic information about us and a brief overview of key aspects of this offering. Because it is a summary, it does not contain all of the information you should consider before investing in our common stock. You should read and carefully consider the entire prospectus, including “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide whether to invest in our common stock. Please also read “Glossary of Oil and Natural Gas Terms” included in this prospectus for definitions of certain terms that are commonly used in the oilfield services industry.

Diamondback Energy Services, Inc.

Our Company

We are a diversified oilfield services company focused on providing technology-driven solutions to maximize the recovery and present value of oil and natural gas production streams. Our services focus on enhancing drilling and production for our customers, and encompass the life-cycle of the well, from drilling and completion through stimulation, production and eventual abandonment. They include drilling technology services and applications, stimulation and pumping services, fluid logistics and well-site services and completion and production services.

Our business is focused in both proven oil and natural gas basins and emerging high-growth resource plays in Texas, Oklahoma, Louisiana and the Rocky Mountains. Resource play is a term used to describe an accumulation of hydrocarbons known to exist over a large area that typically has lower average decline rates than other producing areas. We believe that the services we provide are critical in increasing the ultimate recovery and present value of production streams from resource plays. The majority of our operations are located in the Barnett Shale in Texas and the Anadarko Basin, the Woodford Shale and other basins across Oklahoma.

Our operations commenced in December 2005 with the acquisition of substantially all of the assets of Quantum Drilling Motors, L.L.C., a directional drilling technology company based in Oklahoma City, Oklahoma. We have since grown rapidly through acquisitions and organic growth, particularly in our directional drilling technology and stimulation and pumping segments.

Our key field managers have an average of over 25 years of oilfield service experience and bring valuable basin-level expertise and long-term customer relationships with large independent exploration and production companies to our business. For the year ended December 31, 2006, our top three customers were Chesapeake Energy Corp., EOG Resources Inc. and Devon Energy Corp.

We currently conduct our operations through the following four business segments:

 

   

Drilling Technology Services and Applications. Our drilling technology services and applications are designed to allow our customers to reach the intended total well depth faster and with more precision, thus improving well economics. Our services include renting downhole motors, motors equipped with Measurement While Drilling, or MWD, technology and shock subs, as well as providing advanced technical drilling expertise. We currently provide drilling technology services and applications in the Granite Wash, Permian Basin, Barnett Shale and the Gulf Coast regions of Texas, the Powder River, Jonah, Uintah, Williston and Piceance Basins in the Rocky Mountains, and across Oklahoma.

 

   

Stimulation and Pumping Services. Our stimulation and pumping services consist of pressure pumping and water transfer services. As part of our pressure pumping services, we provide hydraulic fracturing, acidizing and cementing services. These services are used in maximizing hydrocarbon flow paths and in the drilling, completing and plugging of wells. Currently, we operate stimulation and pumping services primarily in Oklahoma and Texas, including the Barnett Shale.

 

   

Fluid Logistics and Well-Site Services. Our fluid logistics services include storage, transportation and disposal of fluids used in or produced by drilling and subsequent stimulation and production operations. Our well-site

 

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services include building drilling locations, pits and access roads. We currently provide fluid logistics and well-site services in the Barnett Shale, the Texas panhandle and across Oklahoma.

 

   

Completion and Production Services. Our completion and production services include completion, workover and roustabout services, rental and sale of downhole equipment and tools and plugging and abandonment services. We currently provide completion and production services in Texas, Oklahoma, Louisiana and the Rocky Mountains.

Our operations commenced in December 2005. On a pro forma basis, we had $156.8 million in revenue and $34.9 million in EBITDA for the year ended December 31, 2006. For a definition of EBITDA, a reconciliation of EBITDA to net income and a discussion of EBITDA as a performance measure, please see “Summary—Summary Financial Data” and “Selected Historical Financial Data.” For information regarding pro forma adjustments, see “Unaudited Pro Forma Combined Statements of Operations.”

Our Industry

We believe that the following trends in our industry should benefit our operations:

 

   

Need for additional drilling activity to maintain equal levels of production. Even though the number of U.S. natural gas wells drilled has increased over the past ten years, overall levels of production have declined. Given average decline rates and demand forecasts, we believe that the number of wells drilled is likely to continue to increase in coming years. Once a well has been drilled, it requires recurring production and completion services, which drives demand for our products and services.

 

   

Increasing percentages of exploration and production budgets focused on development activities. Large U.S. exploration and production companies are increasingly directing their capital budgets away from exploration-related activity and towards lower-risk development activity. Much of this development-related activity occurs in resource play areas and requires using advanced directional drilling and fracturing and stimulation services to enhance production from existing reserves.

 

   

Trend towards drilling and developing unconventional oil and natural gas resources. As a result of improvements in drilling and production-enhancement technologies, oil and natural gas companies are increasingly developing unconventional hydrocarbon resources such as tight sands, shales and coalbed methane, or CBM, resources. Successful and economic production of these resource plays frequently requires directional drilling and fracturing and stimulation services, and drilling-related activity is done on tighter acre-spacing and thus requires that more wells be drilled relative to conventional resources. All of these characteristics drive utilization of our products and services.

 

   

High demand for oil and natural gas in North America. Demand for oil and natural gas in the United States has increased in recent years, and outpaced domestic supply. This domestic supply and demand imbalance, coupled with geopolitical instability and limited supply responses, has resulted in significant increases in exploration and development activities in the United States in recent years.

Our Strategy

Our strategy is to provide our customers with technology-driven drilling, stimulation and production services designed to optimize the ultimate recovery and present value of hydrocarbon reserves. Our services span the life-cycle of a well which we believe provides cost efficiencies for our customers. Specifically, we intend to:

 

   

Maintain a portfolio of operations in proven oil and natural gas markets and emerging resource plays. Our core operations are focused in proven producing regions, primarily in the Permian Basin in Texas and the Anadarko Basin in Oklahoma and in emerging and high-growth resource plays, primarily in the Barnett Shale in Texas and the Woodford Shale in Oklahoma. By operating in multiple locations and markets, many with different geological characteristics, we create a diverse portfolio of operations, thereby reducing our dependence on individual basins.

 

   

Leverage our experienced field management and basin-level expertise. We seek to manage our business as close to our customer base as possible. We intend to leverage our field management and its basin- and field-level expertise to deliver innovative, basin-specific solutions to our customers.

 

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Provide technology-driven solutions for our customers. Through the development and implementation of customized solutions, we intend to continue to provide technology-driven services to our customers that help reduce their costs and increase their production, thereby creating operational efficiencies.

 

   

Capitalize on organic growth opportunities. We intend to use our existing customer relationships to expand opportunistically to other geographic regions in which our customers have operations. We also plan to continue to focus on expanding our technology-driven segments, including directional drilling and pressure pumping services, which we believe provide strong opportunities for growth.

 

   

Expand through strategic acquisitions. To complement our organic growth, we intend to continue to pursue strategic acquisitions that can meet our targeted returns on invested capital. We believe this strategy will allow us to continue to expand our customer base, geographic footprint and service offering.

 

   

Integrate and cross sell our services. We will continue to offer a broad range of products and services, which will give us the opportunity to cross-sell services to our customers. We seek to provide multiple services to create operational efficiencies for each of our customers.

Our Strengths

We believe that the following strengths position us well within our industry and will help us successfully execute our strategy:

 

   

Long-term, basin-level relationships with a stable customer base. Our customers include large independent oil and natural gas exploration and production companies. For the year ended December 31, 2006, our top customers included Chesapeake Energy Corp., EOG Resources Inc., Devon Energy Corp., Newfield Exploration Co. and Windsor Energy Group, L.L.C. We believe that the long-term relationships that our key field managers have developed with these and other customers help provide us with a stable and growth-oriented client base.

 

   

Experienced management team. Our key field managers have an extensive track record in the oilfield services business and an average of over 25 years of oilfield services experience. We believe their knowledge of our industry and business lines enhances our ability to provide superior customer service. In addition, our field managers have extensive expertise in the geological basins in which they operate and understand the regional challenges our customers face, which we believe strengthens our relationships with our customers.

 

   

New, technologically-advanced equipment and contractual arrangements to purchase equipment. Our service fleet is predominantly comprised of new, technologically-advanced equipment, providing better quality of service and operational efficiencies than older equipment. We continue to expand our fleet with new equipment and have outstanding orders to purchase additional directional drilling and stimulation and pressure pumping equipment and workover rigs, all of which, if ordered today, would have long lead times.

 

   

Operating platforms in proven oil and natural gas markets and key resource plays. We operate in both proven oil and natural gas markets and key resource plays in Texas, Oklahoma, Louisiana and the Rocky Mountains. We believe our operating platforms in Texas and Oklahoma provide a stable revenue stream for our business, as drilling and production activity in these regions is less sensitive to hydrocarbon prices, and complements our operations in emerging and high-growth resource plays like the Barnett and Woodford Shales.

 

   

Multi-cycle operating leverage. We offer a broad range of products and services that span the life-cycle of a well. These include pre-drilling activities with our well-site preparation, drilling with our downhole, horizontal and directional drilling technologies, well-sustaining activities such as fluid logistics and recovery optimization, completion-related fracturing and stimulation services and abandonment activities. We are not excessively dependent on any one particular aspect of the exploration and production cycle.

 

   

Platform for future consolidation and growth. We have a proven track record of completing acquisitions. The market in which we operate is highly fragmented, and our senior management team continues to identify potential acquisition opportunities.

 

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Our Challenges

We face a number of challenges in implementing our strategy. For example:

 

   

We derive our revenues from companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices.

 

   

A material reduction in the levels of exploration and development activities in our market areas could affect our business.

 

   

We operate in a highly competitive industry in which price competition can be intense.

 

   

We intend to grow our business, particularly our drilling technology and pressure pumping segments, and risk being unable to secure equipment and crews to successfully execute our plans.

 

   

We will continue to implement processes and procedures to accommodate our recent growth.

 

   

Competition for experienced oilfield service personnel is intense, and we face significant challenges in competing for crews and management with large and well-established competitors.

 

   

Our business depends upon our ability to obtain specialized equipment and parts from third party suppliers, including companies controlled by our equity sponsor described below, and we may be vulnerable to delayed deliveries and future price increases.

For further discussion of these and other challenges we face, see “Risk Factors” beginning on page 8.

Our Equity Sponsor

We were formed by affiliates of Wexford Capital LLC, which we refer to as Wexford. Wexford is a Greenwich, Connecticut based SEC registered investment advisor. Wexford has made private equity investments in many different industries, with particular expertise in the energy and natural resources sectors. Prior to this offering, Wexford will beneficially own all of our outstanding common stock. Upon completion of the offering, Wexford will continue to beneficially own approximately         % of our common stock (approximately         % if the overallotment option is exercised in full).

Our History

Commencing in 2005, Diamondback Energy Services LLC, or Services LLC, began to target investment opportunities in service-oriented companies in the oil and natural gas industry. During the period October 2005 through March 2006, Services LLC acquired the assets of or equity interests in 20 companies. Services LLC owned these acquired assets, entities and operations, as well as its newly established business operations, through 13 direct, wholly-owned subsidiaries and 12 indirect subsidiaries. Effective as of December 31, 2006, ten of the direct, wholly-owned subsidiaries and all of the indirect subsidiaries were transferred to our parent, Diamondback Holdings, LLC, in a transaction that we refer to as the transfer. Diamondback Holdings is a wholly owned subsidiary of Services LLC and will be merged with Diamondback Energy Services, Inc. immediately prior to the closing of this offering in a transaction that we refer to as the merger. Immediately after the merger, Services LLC will own all of our then outstanding common stock. Diamondback Energy Services, Inc. was formed as a Delaware corporation in November 2006 and will not conduct any material business operations prior to the merger. The descriptions contained in this prospectus give effect to the transfer and the merger. Except as otherwise indicated or required by the context, all references in this prospectus to “Diamondback,” the “Company,” “we,” “us” or “our” are to Diamondback Energy Services, Inc., Diamondback Holdings and the business and assets of the transferred subsidiaries. Services LLC and Diamondback Holdings are controlled by Wexford. See “—Our Equity Sponsor.”

Our Offices

Our principal executive offices are currently located at 510 East Memorial Rd, Suite B-2, Oklahoma City, Oklahoma 73114, and our telephone number is (405) 242-4080. Our website address is www.diamondbackenergy.com. Information contained on our website does not constitute part of this prospectus.

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock to be outstanding immediately after completion of this offering (1)

             shares

 

Use of proceeds

We intend to use the net proceeds of this offering to repay outstanding indebtedness. See “Use of Proceeds.”

 

Dividend policy

We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future.

 

NASDAQ Global Market symbol

“FANG”


 

(1) The number of shares of our common stock to be outstanding after this offering includes              shares of common stock that will be issued under our 2007 Equity Incentive Plan in connection with this offering. Shares of common stock issued under our 2007 Equity Incentive Plan will be issued to officers and employees without consideration and will vest in six approximately equal installments every six months over a three-year period (the requisite service period) beginning on the six-month anniversary of the grant date. Nonvested shares are deemed issued and outstanding from a legal perspective; however, under U.S. generally accepted accounting principles, or GAAP, only vested shares are included in basic shares outstanding. Also, under GAAP, nonvested shares are included in diluted shares outstanding when the effect is dilutive. See “Management – 2007 Equity Incentive Plan.”

 

     The number of shares of our common stock to be outstanding after this offering excludes $2.8 million of our common stock that we are obligated to issue within ten days after the closing of this offering to certain former stockholders of Packers & Service Tools, Inc. under the stock purchase agreement pursuant to which we acquired all of the outstanding shares of that company. The number of shares to be issued will be based on the premarket opening price as of the first trading day for our common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Acquisitions.”

 

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Summary Financial Data

The following table sets forth summary historical and pro forma financial data as of and for each of the periods indicated. The summary historical data as of and for the 11 months ended November 30, 2005 are derived from the historical audited financial statements of Quantum Drilling Motors, L.L.C. (Quantum), our predecessor, for the periods indicated. The summary historical data as of and for the period ended December 31, 2005 and as of and for the year ended December 31, 2006 are derived from our historical audited consolidated financial statements for such periods. The pro forma financial data give effect to the acquisitions as if they had been completed on January 1, 2006 and give effect to income taxes assuming we were operated as a taxable corporation throughout the periods, as described in “Unaudited Pro Forma Combined Statement of Operations”. Such data do not necessarily indicate what our operating results or financial position would have been had the acquisitions actually been completed on such date or had we been a taxable entity for all periods. Operating results for the year ended December 31, 2006 and other historical and pro forma periods presented are not necessarily indicative of results that may be expected for 2007 or any future periods. You should review this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Financial Data,” “Unaudited Pro Forma Combined Statement of Operations” and our consolidated historical financial statements and related notes and Quantum’s historical financial statements and related notes included elsewhere in this prospectus.

 


 

(In thousands, except per share data)  
     11 Months
Ended
November 30,
2005
    Period from
September 29,
2005 (Inception)
to December 31,
2005 (1)
    Year Ended
December 31,
2006 (1)
    Pro Forma
Year Ended
December 31,
2006
 
     Predecessor (2)                    

Statements of Operations Data

        

Revenue:

        

Drilling technology services and applications

   $ 21,586     $ 2,501     $ 52,132     $ 52,132  

Stimulation and pumping services

                 28,541       28,541  

Fluid logistics and well-site services

                 65,740       65,740  

Completion and production services

                 9,487       10,353  
                                

Total

     21,586       2,501       155,900       156,766  

Expenses:

        

Cost of revenues

     13,551       1,677       98,986       99,438  

Selling, general and administrative

     6,338       733       22,704       22,842  

Depreciation, amortization and accretion

     893       205       18,555       18,644  
                                

Operating income (loss)

     804       (114 )     15,655       15,842  

Other income (loss)

     (109 )     1       447       430  

Gain on sale or disposition of assets

                 29       29  

Interest expense

     (192 )     (82 )     (2,161 )     (2,180 )

Provision for income taxes

                 (1,569 )     (5,034 )
                                

Income (loss) before minority interest

     503       (195 )     12,401       9,087  

Income attributable to minority interest in variable interest entities

                 (61 )     (61 )
                                

Net income (loss)

   $ 503     $ (195 )   $ 12,340     $ 9,026  
                                

Pro Forma C Corporation Data: (3) (4)

        

Historical income (loss) before income taxes and minority interest

   $ 503     $ (195 )   $ 13,971    
                          

Pro forma provision (benefit) for income taxes

   $ 190     $ (74 )   $ 5,272    
                          

Pro forma net income (loss)

   $ 313     $ (121 )   $ 8,636    
                          

Pro forma income (loss) per common share - basic and diluted

        

Weighted average pro forma shares outstanding - basic and diluted

        

Other Financial Data:

        

EBITDA (5)

   $ 1,588     $ 92     $ 34,625     $ 34,884  

Cash flows from operating activities

     2,998       (110 )     19,253    

Cash flows from investing activities

     (4,916 )     (34,995 )     (199,707 )  

Cash flows from financing activities

     1,932       35,769       186,986    

Capital expenditurers:

        

Acquisitions, net of cash acquired (6)

           25,464       84,725    

Property and equipment

     5,373       931       116,764    

 

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(In thousands)
    

As of

November 30,
2005

  

As of

December 31,
2005

  

As of

December 31,
2006

    

Predecessor

         

Balance Sheet Data:

        

Total current assets

   $ 6,017    $ 6,675    $ 51,600

Total assets

     12,434      41,230      272,480

Total current liabilities

     10,252      5,595      41,666

Lines of credit

     1,072           44,900

Capital lease obligations, net of current maturities

               2,699

Long-term debt, net of current maturities

     278      60      90

Asset retirement obligations

               100

Total liabilities

     10,530      5,656      93,558

Minority interest in variable interest entities

               7,613

Carve-out equity

     1,904      35,574      171,309

 


 

(1) Effective as of December 31, 2006, the assets, liabilities, revenues and expenses of certain corporations, limited liability companies and partnerships were transferred by our affiliate Diamondback Energy Services LLC, a company controlled by Wexford and referred to as Services LLC, to our parent, Diamondback Holdings, LLC, which, immediately prior to the closing of this offering, will be merged with Diamondback Energy Services, Inc., the issuer of the common stock to be sold in this offering. Diamondback Energy Services, Inc. was formed as a Delaware corporation in November 2006 and will not conduct any material business operations prior to the merger. The financial data in the above table as of and for the periods ended December 31, 2005 and December 31, 2006 are the financial data of Services LLC prepared on a carve-out basis to include (a) the assets, liabilities, revenues and expenses of the entities transferred to us since the date of their respective acquisition or formation and (b) corporate borrowings and substantially all of the expenses of Services LLC since its formation in September 2005. See Note A to our consolidated financial statements appearing elsewhere in this prospectus.

 

(2) Since we succeeded to substantially all of the business of Quantum and our own operations prior to that acquisition were insignificant relative to the operations acquired, the pre-acquisition operations of Quantum have been designated as our “predecessor.”

 

(3) Quantum and Services LLC are entities treated as partnerships for federal income tax purposes. As a result, essentially all taxable earnings and losses, except those of our two C corporation subsidiaries, were passed through to their members, and federal income taxes were not paid at the entity level. Upon completion of this offering, we will be taxed as a C corporation. For comparative purposes, we have included a pro forma provision (benefit) for income taxes assuming we had been taxed as a C corporation in all periods prior to the transfer and merger. The unaudited pro forma data are presented for informational purposes only, and do not purport to project our results of operations for any future period or our financial position as of any future date.

 

(4) Unaudited pro forma basic and diluted income (loss) per share is presented for all periods on the basis of shares to be issued to Services LLC in connection with the transfer and merger discussed in note 1 above.

 

(5) EBITDA consists of net income (loss) before interest expense, taxes, depreciation, amortization and accretion. EBITDA is a non-GAAP financial measure, which is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. EBITDA is included in this prospectus because our management considers it an important supplemental measure of our performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We regularly evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates by using EBITDA. In addition, we use EBITDA in evaluating acquisition targets. Management also believes that EBITDA is a useful tool for measuring our ability to meet our future debt service, capital expenditures and working capital requirements, and EBITDA is commonly used by us and our investors to measure our ability to service indebtedness. Our revolving credit facility also includes a definition of EBITDA which is used in the calculation of certain covenants. EBITDA herein is not the same as would be calculated under the revolving credit facility. EBITDA is not a substitute for the GAAP measures of earnings or of cash flow and is not necessarily a measure of our ability to fund our cash needs. In addition, it should be noted that companies calculate EBITDA differently and, therefore, EBITDA has material limitations as a performance measure because it excludes interest expense, taxes, and depreciation, amortization and accretion. See table set forth in “Selected Historical Financial Data” and Note 4 to our Unaudited Pro Forma Combined Statements of Operations for a reconciliation of EBITDA with our net income (loss).

 

(6) Acquisitions, net of cash acquired, consist only of the cash component of acquisitions. It does not include common stock and notes issued for acquisitions, nor does it include other non-cash consideration issued for acquisitions.

 

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Risk Factors

An investment in our common stock involves a high degree of risk. The following is a description of material risks that are presently known to us. You should carefully consider these risks and all of the other information contained in this prospectus before deciding to invest in our common stock. Additional risks not presently known to us or which we currently consider immaterial also may adversely affect our company.

Risks Related to Our Business and Our Industry

Our business is difficult to evaluate because we have a limited operating history.

We commenced operations in December 2005. All of our assets and operations described in this prospectus were acquired by us since that time. As a result, there is only limited historical financial and operating information available on which to base your evaluation of our performance.

We may have difficulty managing growth in our business, which could adversely affect our financial condition and results of operations.

As a newly-formed company, growth in accordance with our business plan, if achieved, will place a significant strain on our financial, technical, operational and management resources. As we expand our activities through both organic growth and acquisitions, there will be additional demands on our financial, technical, operational and management resources. These demands may be exacerbated as our geographic coverage expands within the United States and possibly Canada. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrences of unexpected expansion difficulties, including the failure to recruit and retain experienced managers, engineers and other professionals in the oil and natural gas services industry, could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan.

If our intended expansion of our business is not successful, our financial condition, profitability and results of operations could be adversely affected, and we may not achieve increases in revenue and profitability that we hope to realize.

A key element of our business strategy involves the expansion of our stimulation and pumping services. We commenced our hydraulic fracturing services in June 2006, spent approximately $52.0 million during 2006 to purchase 30 high pressure fracturing units and related equipment and expect to spend approximately $42.0 million during 2007 for 25 additional high pressure fracturing units and related equipment. Our strategy also involves introducing new services and marketing existing services in new and existing geographical regions. These aspects of our strategy are subject to numerous risks and uncertainties, including:

 

   

inability to retain or hire experienced crews and other personnel;

 

   

lack of customer demand for the services we intend to provide;

 

   

inability to secure necessary equipment or technology to successfully execute our expansion plans;

 

   

unanticipated delays that could limit or defer the provision of services by us and jeopardize our relationships with existing customers and adversely effect our ability to obtain new customers for such services; and

 

   

competition from new and existing services providers.

Encountering any of these or any other unforeseen problems in implementing our planned expansion could have a material adverse impact on our business, financial condition, results of operations and cash flows, and could prevent us from achieving the increases in revenues and profitability that we hope to realize.

Our business depends on the oil and gas industry and particularly on the level of activity for North American oil and natural gas and may be adversely affected by industry conditions that are beyond our control.

We depend on our customers’ willingness and ability to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America. If these expenditures decline, our business will suffer. Our customers’

 

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willingness to explore, develop and produce depends largely upon prevailing industry conditions that are influenced by numerous factors over which management has no control, such as:

 

   

the supply of and demand for oil and natural gas;

 

   

the level of prices, and expectations about future prices, of oil and natural gas;

 

   

the cost of exploring for, developing, producing and delivering oil and natural gas;

 

   

the expected rates of declining current production;

 

   

the discovery rates of new oil and natural gas reserves;

 

   

available pipeline and other transportation capacity;

 

   

weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area;

 

   

domestic and worldwide economic conditions;

 

   

political instability in oil and natural gas producing countries;

 

   

governmental approvals and regulatory requirements and conditions;

 

   

technical advances affecting energy consumption;

 

   

the price and availability of alternative fuels;

 

   

the ability of oil and natural gas producers to raise equity capital and debt financing; and

 

   

merger and divestiture activity among oil and natural gas producers.

The level of activity in the North American oil and natural gas exploration and production industry is volatile. Expected trends in oil and natural gas production activities may not continue and demand for the services provided by us may not reflect the level of activity in the industry. Any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, affect demand for the services we provide. A material decline in oil and natural gas prices or North American activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, a decrease in the development rate of oil and natural gas reserves in our market areas may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.

Any decline in oil and natural gas prices, exploration and production activity levels or the development of oil and natural gas reserves could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Oil and natural gas prices are volatile. For example, since January 1, 2004, the NYMEX crude oil near month delivery contract price has ranged from a low of $32.48 per bbl on February 6, 2004 to a high of $77.03 per bbl on July 14, 2006. The NYMEX natural gas near month delivery contract price has ranged from a low of $4.20 per Mcf on September 27, 2006 to a high of $15.38 per Mcf on December 13, 2005. Until recently, these prices have generally been at historically high levels. On April 5, 2007, the NYMEX near month delivery contract price was $64.28 per bbl for crude oil and $7.61 per Mcf for natural gas.

The level of activity in the oil and natural gas exploration and production industry is volatile. Expected trends in oil and natural gas production activities may not continue and demand for the services provided by us may not reflect the level of activity in the industry. Any reduction in oil and natural gas prices would likely affect oil and natural gas production levels and therefore affect demand for the services we provide. Further, most of our services and products support drilling for and production of natural gas. Therefore, a substantial reduction in natural gas prices or natural gas production levels may have an adverse impact on our business, even if oil prices remain strong. Most industry forecasts anticipate an increase of liquefied natural gas, or LNG, imports from overseas. Any significant increase in LNG imports could adversely impact the price for and activity related to natural gas and therefore may have an adverse impact on our business. We may experience significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices.

Substantially all of the service and rental revenue we earn is based upon a charge for a relatively short period of time (e.g., an hour, a day, a week) for the actual period of time the service or rental is provided to our customer. By contracting services on a short-term basis, we are exposed to the risks of a rapid reduction in market price and utilization and

 

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volatility in our revenues. Product sales are recorded when the actual sale occurs, title or ownership passes to the customer and the product is shipped or delivered to the customer.

Potential for excess capacity in the oilfield services industry could increase competition for our services, which could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Because oil and natural gas prices and drilling activity have recently been at historically high levels, oilfield service companies have been acquiring additional equipment to meet their customers’ increasing demand for services. For example, we have expanded our hydraulic fracturing services, spending approximately $52.0 million in 2006 and budgeting additional expenditures of approximately $42.0 million in 2007. If there is a material reduction in hydrocarbon price levels and drilling activity, there is a potential for excess capacity in the oilfield service industry. This could result in an increased competitive environment for oilfield service companies, which could lead to lower prices and utilization for our services and could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Our business depends upon our ability to obtain specialized equipment and parts from third party suppliers, and we may be vulnerable to delayed deliveries and future price increases.

We purchase specialized equipment and parts from third party suppliers and affiliates, including companies controlled by Wexford. Currently, there is a limited number of suppliers that manufacture equipment we use. Should our current suppliers be unable or unwilling to provide the necessary equipment and parts or otherwise fail to deliver the products timely and in the quantities required, any resulting delays in the provision of our services could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, future price increases for this type of equipment and parts could negatively impact our ability to purchase new equipment to update or expand our existing fleet or to timely repair equipment in our existing fleet.

We rely on a few key employees whose absence or loss could adversely affect our business.

Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. We do not have an employment contract with any of our executive officers and they are not restricted from competing with us if they cease to be employed by us. Also, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees.

If we are unable to employ a sufficient number of skilled and qualified workers, our capacity and profitability could be diminished and our growth potential could be impaired.

The delivery of our products and services requires skilled and qualified workers with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield service industry and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force. The demand for skilled workers is high, and the supply is limited. As a result, competition for experienced oilfield service personnel is intense, and we face significant challenges in competing for crews and management with large and well-established competitors. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.

Advancements in technology could have a material adverse effect on our business, financial condition and results of operations and cash flows.

As new directional drilling, stimulation and pressure pumping and other well service technologies develop, we may be placed at a competitive disadvantage, and competitive pressure may force us to implement new technologies at a substantial cost. We may not be able to successfully acquire or use new technologies. New technologies could render our

 

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current products and services obsolete or significantly reduce demand for our current products and services. As a result, new advancements in technology could have a material adverse effect on our business, financial condition and results of operations and cash flows.

Our operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms, which could limit our ability to grow.

The oilfield services industry is capital intensive. We make, and expect to continue to make, substantial capital expenditures in our business and operations. Our capital expenditures were approximately $116.8 million for 2006 and are estimated to be $87.9 million for 2007. To date, we have financed capital expenditures primarily with funding from our equity sponsor, cash generated by operations and borrowings under our credit facilities. In the near term, we intend to finance our capital expenditures primarily with cash flow from operations and borrowings under our revolving credit facility.

We may be unable to generate sufficient cash from operations and other capital resources to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures for 2007 could exceed our capital expenditure budget. For example, our capital expenditure budget for 2007 does not allocate funds to additional acquisitions. In the event our capital expenditure requirements at any time are greater than the amount we have available, we could be required to seek additional sources of capital, which may include debt financing, joint venture partnerships, sales of assets, offerings of debt or equity securities or other means. We may not be able to obtain any such alternative source of capital or, if we can obtain alternative sources of capital, the terms of such alternative may not be favorable to us. In particular, the terms of any debt financing may include covenants that significantly restrict our operations. Our inability to grow as planned may reduce our chances of maintaining and improving profitability.

Our acquisition strategy exposes us to various risks, including those relating to difficulties in identifying suitable acquisition opportunities and integrating businesses, assets and personnel, as well as difficulties in obtaining financing for targeted acquisitions and the potential for increased leverage or debt service requirements.

As a component of our business strategy, we have pursued and intend to continue to pursue selected acquisitions of complementary assets and businesses. Since our commencement of operations in December 2005, we have completed 16 acquisitions for an aggregate consideration of approximately $122.4 million. Acquisitions involve numerous risks, including:

 

   

unanticipated costs and assumption of liabilities and exposure to unforeseen liabilities of acquired businesses, including but not limited to environmental liabilities;

 

   

difficulties in integrating the operations and assets of the acquired business and the acquired personnel;

 

   

limitations on our ability to properly assess and maintain an effective internal control environment over an acquired business, in order to comply with the recently adopted public reporting requirements;

 

   

potential losses of key employees and customers of the acquired businesses;

 

   

risks of entering markets in which we have limited prior experience; and

 

   

increases in our expenses and working capital requirements.

The process of integrating an acquired business may involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a disproportionate amount of management attention and financial and other resources. Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. Furthermore, there is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions.

In addition, we may not have sufficient capital resources to complete additional acquisitions. Historically, we have financed capital expenditures primarily with funding from our equity sponsor, cash generated by operations and borrowings under our credit facilities. We may incur substantial indebtedness to finance future acquisitions and also may issue equity, debt or convertible securities in connection with such acquisitions. Debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity

 

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or convertible securities could be dilutive to our existing stockholders. Furthermore, we may not be able to obtain additional financing on satisfactory terms. Even if we have access to the necessary capital, we may be unable to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms or successfully acquire identified targets.

Our ability to grow through acquisitions and manage growth will require us to continue to invest in operational, financial and management information systems and to attract, retain, motivate and effectively manage our employees. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods.

Our customer base is concentrated within the oil and natural gas production industry and the loss of one or more of our significant customers could cause our revenue to decline substantially.

Our top three customers accounted for approximately 45% of our revenue for the year ended December 31, 2006, with each of the top two customers accounting for more than 10% of our revenue for this period. It is likely that we will continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer decided not to continue to use our services, our revenue would decline and our operating results and financial condition could be harmed.

Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.

Our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, may adversely affect our operations and limit our growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect our operations in several ways, including the following:

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

the covenants that are contained in the agreements that govern our indebtedness could limit our ability to borrow funds, dispose of assets, pay dividends and make certain investments;

 

   

our debt covenants could also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;

 

   

any failure to comply with the financial or other covenants of our debt could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable;

 

   

our level of debt could impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and

 

   

our business may not generate sufficient cash flow from operations to enable us to meet our obligations under our indebtedness.

Further, under our existing revolving credit facility certain change of control events would constitute events of default.

The majority of our debt is structured under floating interest rate terms. A one percentage point increase in the interest rates on our $94.6 million of debt outstanding as of March 31, 2007 would cause a $0.95 million pre-tax annual increase in interest expense.

Our debt under our revolving credit agreement matures in 2008, and we may not be able to extend or refinance it on acceptable terms.

We may not be able to provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices.

The markets in which we operate are highly competitive and have relatively few barriers to entry. The principal competitive factors in our markets are price, product and service quality and availability, responsiveness, experience,

 

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technology, equipment quality and reputation for safety. We compete with large national and multi-national companies that have longer operating histories, greater financial, technical and other resources and greater name recognition than we do. Several of our competitors provide a broader array of services and have a stronger presence in more geographic markets. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis. Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. Some contracts are awarded on a bid basis, which further increases competition based on price. As a result of competition, we may lose market share or be unable to maintain or increase prices for our present services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our operations are subject to hazards inherent in the oil and natural gas industry, which could expose us to substantial liability and cause us to lose customers and substantial revenue.

Risks inherent to our industry, such as equipment defects, vehicle accidents, explosions and uncontrollable flows of gas or well fluids, and releases of and exposure to hazardous substances can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to or destruction of property, equipment and the environment. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unacceptable, which could cause us to lose customers and substantial revenues. In addition, these risks may be greater for us because we sometimes acquire companies that may not have allocated significant resources and management focus to safety and environmental matters and may have a poor environmental and safety record.

We work in a dangerous business and our safety procedures may not always prevent accidents. Our insurance coverage may be inadequate to cover our liabilities. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable and insurance may not continue to be available on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations and cash flows. Our senior management may not be successful in improving the Company’s overall environmental and safety record.

One of our affiliated companies was involved in an incident in the offshore waters of Louisiana. Certain of our officers and one of our directors served as officers of this affiliated company at the time of the incident. Those with potential claims related to this incident may attempt to pursue their claims against us and these officers and directors.

Effective as of December 31, 2006, Services LLC, an affiliated company with which we are under common control, transfered to us ten of its 13 directly-owned subsidiaries and all of its indirect subsidiaries in return for shares of our common stock. One of the direct subsidiaries that was not transferred to us by Services LLC is Athena Construction, L.L.C., or Athena. Athena owns eight barges with cranes that are used in well construction in the shallow waters off the Louisiana Gulf Coast. On October 12, 2006, one of the barges owned and operated by Athena, a barge rented by Athena and a tug boat owned and operated by an unrelated third party caught fire in West Cote Blanche Bay off the coast of Louisiana. The tow boat was pushing the Athena and rental barges. An eight-inch natural gas line was struck, ruptured and ignited around the tow and barges. A spud leg from the Athena barge was found in the lowered position by investigators. The captain of the tow boat and three Athena construction workers died. Two Athena construction workers are missing and have been declared dead. The deckhand on the tow boat and one Athena worker survived. Several of our officers and one of our directors also served as officers of Athena at the time of the incident. Lawsuits relating to this incident have been filed in state and federal courts naming Athena, Services LLC and other entities as defendants. Neither our company nor any of our officers or directors have been named as defendants in any such lawsuits. However, it is possible that those with potential claims related to this incident may bring one or more actions against our company and/or certain of our officers and directors seeking damages. Litigation is inherently uncertain, and any specific claims that could be made and the outcome of any such actions cannot be predicted with certainty at this time. Even if no damages were recoverable from our company, any proceedings involving our officers and/or directors would likely result in a diversion of their attention from the business of managing our company.

 

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We are subject to extensive environmental laws and regulations that may subject us to substantial liability or require us to take actions that will adversely affect our results of operations.

Our business is significantly affected by stringent and complex federal, state and local laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental protection. As part of our business, we handle, transport and dispose of a variety of fluids and substances. Specifically, as part of our fluid logistics and well-site services segment, we dispose of fluids, including salt water, into disposal wells. This activity poses some risks of environmental liability, including leakage from the wells to surface and subsurface soils, surface water or groundwater. We currently own four water disposal systems in the Barnett Shale and Southern Oklahoma. We intend to plug one of the disposal wells in Oklahoma and acquire or drill additional disposal wells in the future. We also handle, transport and store these fluids. The handling, transportation, storage and disposal of these fluids are regulated by a number of laws, including the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Clean Water Act; the Safe Drinking Water Act; and other federal and state laws and regulations promulgated thereunder. Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, cleanup costs and liability associated with releases of such materials, damages to natural resources and other damages, as well as potentially impair our ability to conduct our operations. We could be exposed to liability for cleanup costs, natural resource damages and other damages under these and other environmental laws. Such liability is commonly on a strict liability basis, without regard to fault. Liability is also potentially imposed on a joint and several basis. Liability may also be imposed as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Environmental laws and regulations have changed in the past, and they are likely to change in the future. If existing environmental requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures.

Any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking actions that could adversely impact our operations and financial condition, including the:

 

   

issuance of administrative, civil and criminal penalties;

 

   

denial or revocation of permits or other authorizations;

 

   

imposition of injunctive obligations or limitations on our operations; and

 

   

performance of site investigatory, remedial or other corrective actions.

The effect of environmental laws and regulations on our business is discussed in greater detail under “Business – Government Regulations – Environmental Matters.”

The nature of our industry subjects us to compliance with other regulatory laws and our failure to comply with such laws may adversely affect our results of operations and profitability.

Our business is significantly affected by state and federal laws and other regulations relating to the oil and natural gas industry in general, and more specifically with respect to environmental, health and safety, waste management and the storage, handling and transportation of hazardous materials and by changes in and the level of enforcement of such laws. The failure to comply with these rules and regulations can result in substantial penalties, revocation of permits, corrective action orders and criminal prosecution. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability. We may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. It is impossible for management to predict the cost or impact of such laws and regulations on our future operations.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged.

 

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Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.

Conservation measures and technological advances could reduce demand for oil and natural gas, which may adversely affect our business, financial condition, results of operations and cash flows.

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. Management cannot predict the impact of the changing demand for oil and gas services and products, and any major changes may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Increasing trucking regulations may increase our costs and negatively impact our results of operations.

Among the services we provide, we operate as a motor carrier and, therefore, are subject to regulation by the U.S. Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations and regulatory safety. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.

Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.

From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.

Losses and liabilities from uninsured or underinsured drilling and operating activities could have a material adverse effect on our financial condition and operations.

We ordinarily maintain insurance against various losses and liabilities arising from our operations; however, insurance against all operational risks is not available to us. Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Thus, losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our business activities, financial condition and results of operations.

We will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act. Our management and auditors have identified significant deficiencies that, in the aggregate, resulted in a material weakness in the operation of our internal controls. If we are unable to remedy this weakness and timely comply with Section 404 or if the costs related to compliance are significant, our profitability, stock price and results of operations and financial condition could be materially adversely affected.

We may be required to comply with the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002 as early as December 31, 2008. Section 404(a) requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Section 404(b) will require that our independent registered public accounting firm opine on those internal controls and management’s assessment of those controls as early as December 31, 2008. We are currently evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission. In connection with preparing our financial statements for the period ended December 31, 2005 and the year ended December 31, 2006, we and our auditors have identified numerous significant deficiencies relating to the lack of a complete and thorough period-end closing and financial reporting process and related controls that, in the aggregate, constitute a material weakness. The Public Company Accounting Oversight Board has defined a material weakness as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the company’s internal control. Accordingly, a material weakness increases the risk that the financial information we report contains material errors.

 

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While we have made progress in remediating certain significant deficiencies that were identified during our 2005 audit, the following significant deficiencies were not remediated for our 2006 period-end closing and financial reporting process and, in the aggregate, continue to constitute a material weakness. Such deficiencies include the fact that processes and controls designed to capture and record all liabilities at period-end did not capture certain transactions that should have been recorded as liabilities at December 31, 2006; the fact that processes and controls relating to account reconciliations designed to identify and correct errors in a timely manner did not result in the necessary adjustments being recorded to the books and records; the lack of detailed and consistent processes and controls to analyze aged accounts receivable and to determine and document the appropriate amount of the allowance for doubtful accounts; the lack of processes and controls to provide detailed reviews of consolidating financial statement and footnote information; and the lack of comprehensive policies, procedures and reviews for recording journal entries by corporate personnel, including establishing authority limits.

These significant deficiencies were in part the result of the 16 business acquisitions completed in a six-month period following our inception. Additional contributing factors include the use of unsophisticated accounting software packages by our subsidiaries, leading to extensive use of manually intensive processes, and having a limited number of qualified personnel.

The steps we are taking to remediate this material weakness, which are discussed in more detail under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls,” may not be effective. In addition, we cannot be certain at this time that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 or that we or our auditors will not identify additional material weaknesses or deficiencies in internal control over financial reporting. If we fail to comply with the requirements of Section 404 or if we or our auditors identify and report such additional material weakness or deficiencies, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness or deficiencies in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.

We believe that the out-of-pocket costs, the diversion of management’s attention from running the day-to-day operations and operational changes caused by the need to remediate our internal control deficiencies and otherwise comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant. If the time and costs associated with such remediation and compliance exceed our current expectations, our results of operations could be adversely affected.

Risks Related to this Offering and Our Common Stock

Our largest stockholder controls a significant percentage of our common stock, and its interests may conflict with those of our other stockholders.

Upon completion of this offering, Wexford will beneficially own approximately         % of our common stock, or         % if the underwriters exercise their over-allotment option in full. See “Principal Stockholders.” As a result, Wexford will continue to be able to exercise significant influence, and in most cases control over matters requiring stockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business. The interests of Wexford with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. Wexford’s continued concentrated ownership will make it impossible for another company to acquire us and for you to receive any related takeover premium for your shares unless Wexford approves the acquisition.

 

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Since we are a “controlled company” for purposes of The NASDAQ Global Market’s corporate governance requirements, our stockholders will not have, and may never have, the protections that these corporate governance requirements are intended to provide.

Since we are a “controlled company” for purposes of The NASDAQ Global Market’s corporate governance requirements, we are not required to comply with the provisions requiring that a majority of our directors be independent, the compensation of our executives be determined by independent directors or nominees for election to our board of directors be selected by independent directors. As a result, our stockholders may not have the protections that these rules are intended to provide.

The corporate opportunity provisions in our certificate of incorporation could enable Wexford, our equity sponsor, or other affiliates of ours to benefit from corporate opportunities that might otherwise be available to us.

Subject to the limitations of applicable law, our certificate of incorporation, among other things:

 

   

permits us to enter into transactions with entities in which one or more of our officers or directors are financially or otherwise interested;

 

   

permits any of our stockholders, officers or directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and

 

   

provides that if any director or officer of one of our affiliates who is also one of our officers or directors becomes aware of a potential business opportunity, transaction or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as our director or officer), that director or officer will have no duty to communicate or offer that opportunity to us, and will be permitted to communicate or offer that opportunity to such affiliates and that director or officer will not be deemed to have (i) acted in a manner inconsistent with his or her fiduciary or other duties to us regarding the opportunity or (ii) acted in bad faith or in a manner inconsistent with our best interests.

These provisions create the possibility that a corporate opportunity that would otherwise be available to us may be used for the benefit of one of our affiliates.

We have engaged in transactions with our affiliates and expect to do so in the future. The terms of such transactions and the resolution of any conflicts that may arise may not always be in our or our stockholders’ best interests.

We have engaged in transactions and expect to continue to engage in transactions with affiliated companies. As described under the caption “Related Party Transactions,” these include, among others, administrative services provided to us by Gulfport Energy Corporation, a disposal well drilled for us by Bronco Drilling Company, oilfield services provided by us to Windsor Energy Group, L.L.C. and real property leased by us from Caliber Development Company LLC. Mike Liddell, one of our directors and our Chairman of the Board, is also a director and the Chairman of the Board of Gulfport, Bronco and Windsor and Scott Streller, one of our director nominees, is also a director of Gulfport. This may create conflicts of interest because Mr. Liddell has responsibilities to Gulfport, Bronco and Windsor and their respective stockholders and Mr. Streller has responsibilities to Gulfport and its stockholders. Their duties as directors of these companies may conflict with their duties as directors of our company in connection with business dealings between us and them. The resolution of these conflicts may not always be in our or our stockholders’ best interests. Further, as of March 31, 2007, Wexford, our equity sponsor, or its affiliates, beneficially owned 42% and 100%, respectively, of the outstanding equity interests of Gulfport and Windsor and was the controlling member of Caliber. These overlapping ownerships may also create conflicts that may not always be resolved in our or our stockholders’ best interests. See “Related Party Transactions” for information regarding our transactions with these companies.

There has been no public market for our common stock and if the price of our common stock fluctuates significantly, your investment could lose value.

We have applied to have our common stock listed on The NASDAQ Global Market. Prior to this offering, there has been no public market for our common stock, and an active public market may not develop for our common stock or our common stock may not trade in the public market subsequent to this offering at or above the initial public offering price. If an active public market for our common stock does not develop, the trading price and liquidity of our common

 

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stock will be materially and adversely affected. If there is a thin trading market or “float” for our stock, the market price for our common stock may fluctuate significantly more than the stock market as a whole. Without a large float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In addition, in the absence of an active public trading market, investors may be unable to liquidate their investment in us. The initial offering price, which will be negotiated between us and the underwriters, may not be indicative of the trading price for our common stock after this offering. In addition, the stock market is subject to significant price and volume fluctuations, and the price of our common stock could fluctuate widely in response to several factors, including:

 

   

our quarterly or annual operating results;

 

   

changes in our earnings estimates;

 

   

investment recommendations by securities analysts following our business or our industry;

 

   

additions or departures of key personnel;

 

   

changes in the business, earnings estimates or market perceptions of our competitors;

 

   

our failure to achieve operating results consistent with securities analysts’ projections;

 

   

changes in industry, general market or economic conditions; and

 

   

announcements of legislative or regulatory change.

The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in our industry. The changes often appear to occur without regard to specific operating performance. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company and these fluctuations could materially reduce our stock price.

Future sales of our common stock, or the perception that such future sales may occur, may cause our stock price to decline.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. See “Shares Eligible for Future Sale.” In addition, the sale of these shares could impair our ability to raise capital through the sale of additional common or preferred stock.

After this offering, we will have              shares of common stock outstanding, excluding stock options. Of these shares, all shares sold in this offering, other than shares, if any, purchased by our affiliates, will be freely tradable. We, Services LLC and our officers and directors will be subject to agreements that limit their ability to sell our common stock held by them. These holders cannot sell or otherwise dispose of any shares of our common stock for a period of at least 180 days after the date of this prospectus, which period may be extended under limited circumstances, without the prior written consent of                                     . However, these lock-up agreements are subject to certain specific exceptions.

Purchasers in this offering will experience immediate dilution and will experience further dilution with the future exercise of stock options.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, you will experience immediate and substantial dilution of approximately $             per share, representing the difference between our net tangible book value per share as of              after giving effect to this offering and an assumed initial public offering price of $             (which is the midpoint of the range set forth on the cover of the prospectus). A $1.00 increase (decrease) in the assumed initial public offering price of $             per share (which is the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) our net tangible book value per share after giving effect to this offering by $            , and increase (decrease) the dilution to new investors by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offered expenses payable by us. See “Dilution” for a description of dilution.

 

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Provisions in our certificate of incorporation and bylaws will make it more difficult to effect a change in control of the company, which could adversely affect the price of our common stock.

The existence of some provisions in our certificate of incorporation and bylaws could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws will contain provisions that may make acquiring control of our company difficult, including:

 

   

provisions regulating the ability of our stockholders to nominate directors for election or to bring matters for action at annual meetings of our stockholders;

 

   

limitations on the ability of our stockholders to call a special meeting and act by written consent;

 

 

 

the ability of our board of directors to adopt, amend or repeal bylaws, and the requirement that the affirmative vote of holders representing at least 66 2/3% of the voting power of all outstanding shares of capital stock be obtained for stockholders to amend our bylaws;

 

 

 

the requirement that the affirmative vote of holders representing at least 66 2/3% of the voting power of all outstanding shares of capital stock be obtained to remove directors;

 

 

 

the requirement that the affirmative vote of holders representing at least 66 2/3% of the voting power of all outstanding shares of capital stock be obtained to amend our certificate of incorporation; and

 

   

the authorization given to our board of directors to issue and set the terms of preferred stock without the approval of our stockholders, which preferred stock could adversely impact the voting power or value of our common stock.

These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, which may limit the price that investors are willing to pay in the future for shares of our common stock.

We do not intend to pay cash dividends on our common stock in the foreseeable future and, therefore, only appreciation of the price of our common stock will provide a return to our stockholders.

We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, contractual restrictions capital requirements, business prospects and other factors deemed relevant by our board of directors. In addition, the terms of our revolving credit facility prohibit us from paying dividends and making other distributions. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.

 

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Cautionary Note Regarding Forward-Looking Statements

This prospectus contains forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

   

business strategy;

 

   

planned acquisitions and future capital expenditures;

 

   

technology;

 

   

financial strategy;

 

   

future operating results; and

 

   

plans, objectives, expectations and intentions.

All of these types of statements, other than statements of historical fact included in this prospectus, are forward-looking statements. These forward-looking statements may be found in the “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and other sections of the prospectus. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “seek,” “objective” or “continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this prospectus are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this prospectus are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the many factors including those listed in the “Risk Factors” section and elsewhere in this prospectus. All forward-looking statements speak only as of the date of this prospectus. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

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Use of Proceeds

Our net proceeds from the sale of the              shares of common stock in this offering, assuming a public offering price of $             per share (which is the midpoint of the range set forth on the cover of this prospectus), are estimated to be $             million, after deducting underwriting discounts and commissions and estimated offering expenses. The net proceeds would be $             million if the underwriters’ overallotment option is exercised in full. We intend to use the net proceeds of this offering to repay outstanding indebtedness under our revolving credit facility with Fortis Capital Corp. and other lenders. Immediately after this repayment, we intend to borrow approximately $22.0 million under the Fortis credit facility which we will use to repay in full the amounts outstanding under our subordinated unsecured revolving facility with Kappa Investors LLC.

We entered into a revolving credit facility with Fortis Capital Corp. and certain other lenders on August 30, 2006, which was amended and restated on February 13, 2007. As of March 31, 2007, we had outstanding borrowings of $72.6 million under this credit facility. Borrowings bear interest, at our option, at a rate equal to either the London Interbank Offered Rate, or LIBOR, plus 2.25%, or the prime rate plus 1.25%. At March 31, 2007, our average interest rate under this facility was 7.57%. The credit facility requires that the net proceeds from this offering be used to repay outstanding borrowings. Prior borrowings under this facility were used to repay our outstanding indebtedness of $7.9 million under our revolving credit agreement with Coppermark Bank, to repay $7.0 million of outstanding indebtedness under our credit facility with Kappa Investors, to repay other debt of $0.9 million and for general corporate purposes. We intend to use cash flow from operations and future borrowings under our credit facility to fund our operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We entered into a $25.0 million subordinated unsecured revolving facility with Kappa Investors LLC effective as of July 5, 2006. As of March 31, 2007, $22.0 million was outstanding under this facility and bore interest at a rate of LIBOR plus 4% per annum. Borrowings under this facility are due upon the earlier of July 5, 2007 and the closing of this offering.

Pending these uses, we may invest the net proceeds from this offering temporarily in short-term, investment-grade, interest bearing securities or guaranteed obligations of the United States government.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of our credit facility with Fortis prohibit us from paying dividends and making other distributions. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant.

 

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Capitalization

The following table sets forth, as of December 31, 2006, a summary of:

 

   

our actual capitalization; and

 

   

our capitalization as adjusted to give effect to (a) our issuance of              shares of our common stock in our merger with Diamondback Holdings, (b) the sale of              shares of our common stock in this offering at an assumed initial public offering price of $             per share (which is the midpoint of the range set forth on the cover of this prospectus) and the application of the net proceeds from such offering to repay outstanding borrowings as described under the caption “Use of Proceeds,” (c) the issuance of an aggregate of              shares of restricted stock under our 2007 Equity Incentive Plan in connection with this offering, and (d) the issuance of an aggregate of              shares of our common stock to certain former stockholders of Packers & Service Tools, Inc. under the stock purchase agreement pursuant to which we acquired all of the outstanding shares of that company.

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and related notes appearing elsewhere in this prospectus.

 


 

(in thousands)

         
     As of December 31, 2006
     Actual   

As Adjusted for

Offering (1)

Cash and cash equivalents

   $ 7,195    $  
             

Total debt (2)

   $ 61,863    $                 —

Carve-out equity

   $ 171,309     

Stockholders’ equity:

     

Common stock, par value $0.01; 1,000 shares authorized and              shares issued and outstanding actual; 100,000,000 shares authorized and              shares issued and outstanding as adjusted for the offering

     

Additional paid-in capital

       
             

Total stockholders’ equity

         
             

Total capitalization

   $ 240,367    $  
             

 


 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share (which is the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) each of cash and cash equivalents, additional paid-in-capital and total capitalization by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2) Includes our long-term debt, lines of credit and current portion of long-term debt, and excludes a $2.8 million obligation incurred in connection with our acquisition of Packers & Service Tools, Inc. which we intend to satisfy through the issuance of our common stock. See Note B to our consolidated financial statements.

 

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Dilution

Our reported net tangible book value as of December 31, 2006 was $             million, or $             per share, based upon              shares outstanding as of that date after giving pro forma effect to the transfer and the merger. Net tangible book value per share is determined by dividing such number of outstanding shares of common stock into our net tangible book value, which is our total tangible assets less total liabilities. Assuming the sale by us of              shares of common stock offered in this offering at an estimated initial public offering price of $             per share (which is the midpoint of the range set forth on the cover of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of December 31, 2006 would have been approximately $             million, or $             per share after giving pro forma effect to the transfer and the merger. This represents an immediate increase in net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to new investors purchasing shares at the initial public offering price.

The following table illustrates the per share dilution:

 


 

Assumed initial public offering price per share

      $                 

Net tangible book value per share as of December 31, 2006

   $                    

Increase per share attributable to new investors

   $     

As adjusted net tangible book value per share after the offering

      $  
         

Dilution per share to new investors

      $  
         

 


A $1.00 increase (decrease) in the assumed initial public offering price of $             per share (which is the midpoint of the range set forth in the cover of this prospectus) would increase (decrease) our net tangible book value after the offering by $            , and increase (decrease) the dilution to new investors by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table sets forth, as of December 31, 2006, after giving pro forma effect to the transfer and the merger, the number of shares of common stock issued by us to our existing stockholders and by the new investors at the assumed initial public offering price of $             per share, together with the total consideration paid and average price per share paid by each of these groups, before deducting underwriting discounts and commissions and estimated offering expenses.

 


 

    

Shares Purchased

  

Total Consideration

  

Average

Price

    

Number

  

Percent

  

Amount

  

Percent

  

Per Share

Existing stockholders

                  %    $                                     %    $                 

New investors

      %       %   
                            

Total

      100.0%    $      100.0%    $  
                            

 


If the underwriters’ over-allotment option is exercised in full, the number of shares held by new investors will be increased to                     , or approximately         % of the total number of shares of our common stock.

The data in the table excludes              shares of restricted common stock under our 2007 Equity Incentive Plan that will be issued in connection with the completion of this offering and shares valued at $2.8 million of our common stock that will be issued to certain former stockholders of Packers & Service Tools, Inc. as a portion of the purchase price for the acquisition of the outstanding stock of that company.

 

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Selected Historical Financial Data

The following table sets forth selected historical financial data as of and for each of the periods indicated. The data as of December 31, 2002 and 2003 and for the year ended December 31, 2002 are derived from the historical unaudited financial statements of Quantum Drilling Motors, L.L.C. (Quantum). The data for the year ended December 31, 2003, as of and for the year ended December 31, 2004 and as of and for the 11 months ended November 30, 2005 are derived from the historical audited financial statements of Quantum, our predecessor, for the periods indicated. The data as of and for the period ended December 31, 2005 and as of and for the year ended December 31, 2006 are derived from our historical audited consolidated financial statements for such periods. You should review this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Statements of Operations” and our consolidated historical financial statements and related notes and Quantum’s historical financial statements and related notes included elsewhere in this prospectus.

 


 

(In thousands, except per share data)   

Predecessor (1)

             
    

Year Ended December 31,

    11 Months
Ended
November 30,
2005
    Period from
September 29,
2005
(Inception) to
December 31,
2005 (2)
   

Year

Ended
December 31,
2006 (2)

 
    

2002

   

2003

   

2004

       
            

Statements of Operations Data

            

Revenue:

            

Drilling Technology services and applications

   $ 2,688     $ 5,298     $ 10,252     $ 21,586     $ 2,501     $ 52,132  

Stimulation and pumping services

                                   28,541  

Fluid logistics and well-site services

                                   65,740  

Completion and production services

                                   9,487  
                                                

Total

     2,688       5,298       10,252       21,586       2,501       155,900  

Expenses:

            

Cost of revenues

     1,332       3,328       6,349       13,551       1,677       98,986  

Selling, general and administrative

     947       1,646       3,180       6,338       733       22,704  

Depreciation, amortization and accretion

     119       258       473       893       205       18,555  
                                                

Operating income (loss)

     290       66       250       804       (114 )     15,655  

Other income (loss)

     (132 )           1       (109 )     1       447  

Gain on sale or disposition of assets

                               29  

Interest Expense

     (5 )     (11 )     (78 )     (192 )     (82 )     (2,161 )

Provision for income taxes

                               (1,569 )
                                                

Income (loss) before minority interest

     153       55       173       503       (195 )     12,401  

Income attributable to minority interest in variable interest entities

                           (61 )
                                                

Net income (loss)

   $ 153     $ 55     $ 173     $ 503     $ (195 )   $ 12,340  
                                                

Pro Forma C Corporation Data: (3) (4)

            

Historical income (loss) before income taxes and minority interest

   $ 153     $ 55     $ 173     $ 503     $ (195 )   $ 13,971  
                                                

Pro forma provision (benefit) for income taxes

   $ 58     $ 21     $ 65     $ 190     $ (74 )   $ 5,272  
                                                

Pro forma net income (loss)

   $ 95     $ 34     $ 108     $ 313     $ (121 )   $ 8,636  
                                                

Pro forma income (loss) per common share – basic and diluted

            

Weighted average pro forma shares outstanding – basic and diluted

            

Other Financial Data:

            

EBITDA (5)

     $ 324     $ 724     $ 1,588     $ 92     $ 34,625  

Cash flows from operating activities

       (118 )     372       2,998       (110 )     19,253  

Cash flows from investing activities

       (487 )     (1,355 )     (4,916 )     (34,995 )     (199,707 )

Cash flows from financing activities

       605       995       1,932       35,769       186,986  

Capital expenditures:

            

Acquisitions, net of cash acquired (6)

                         25,464       84,725  

Property and equipment

       668       1,376       5,373       931       116,764  

 


 

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(In thousands)   

Predecessor(1)

         
     As of December 31,   

As of

November 30,

2005

  

As of

December 31,

2005(2)

  

As of

December 31,

2006(2)

     2002    2003    2004         

Balance Sheet Data:

              

Total current assets

   $ 791    $ 1,636    $ 3,099    $ 6,017    $ 6,675    $ 51,600

Total assets

     1,195      3,067      5,233      12,434      41,230      272,480

Total current liabilities

     572      1,696      3,737      10,252      5,595      41,666

Lines of credit

     122      696      1,396      1,072           44,900

Capital lease obligations, net of current maturities

          365                     2,699

Long-term debt, net of current maturities

          594      562      278      60      90

Asset retirement obligations

                              100

Total liabilities

     572      2,290      4,299      10,530      5,656      93,558

Minority interest in variable interest entities

                              7,613

Carve-out equity

     623      777      934      1,904      35,574      171,309

 


(1) Since we succeeded to substantially all of the business of Quantum and our own operations prior to that acquisition were insignificant relative to the operations acquired, the pre-acquisition operations of Quantum have been designated as our “predecessor.”

 

(2) Effective as of December 31, 2006, the assets, liabilities, revenues and expenses of certain corporations, limited liability companies and partnerships were transferred by our affiliate Diamondback Energy Services LLC, a company controlled by Wexford and referred to as Services LLC, to our parent, Diamondback Holdings, LLC, which, immediately prior to the closing of this offering, will be merged with Diamondback Energy Services, Inc., the issuer of the common stock to be sold in this offering. Diamondback Energy Services, Inc. was formed as a Delaware corporation in November 2006 and will not conduct any material business operations prior to the merger. The financial data in the above table as of and for the periods ended December 31, 2005 and December 31, 2006 are the financial data of Services LLC prepared on a carve-out basis to include only (a) the assets, liabilities, revenues and expenses of the entities transferred to us since the date of their respective acquisition or formation and (b) corporate borrowings and substantially all of the expenses of Services LLC since its formation in September 2005. See Note A to our consolidated financial statements appearing elsewhere in this prospectus.

 

(3) Quantum and Services LLC are entities treated as partnerships for federal income tax purposes. As a result, essentially all taxable earnings and losses, except those of our two C corporation subsidiaries, were passed through to their members, and federal income taxes were not paid at the entity level. Upon completion of this offering, we will be taxed as a C corporation. For comparative purposes, we have included a pro forma provision (benefit) for income taxes assuming we had been taxed as a C corporation in all periods prior to the transfer and merger. The unaudited pro forma data are presented for informational purposes only, and do not purport to project our results of operations for any future period or our financial position as of any future date.

 

(4) Unaudited pro forma basic and diluted income (loss) per share is presented for all periods on the basis of shares to be issued to Services LLC in connection with the transfer and merger discussed in note 2 above.

 

(5) EBITDA consists of net income (loss) before interest expense, taxes, depreciation, amortization and accretion. EBITDA is a non-GAAP financial measure, which is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. EBITDA is included in this prospectus because our management considers it an important supplemental measure of our performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We regularly evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates by using EBITDA. In addition, we use EBITDA in evaluating acquisition targets. Management also believes that EBITDA is a useful tool for measuring our ability to meet our future debt service, capital expenditures and working capital requirements, and EBITDA is commonly used by us and our investors to measure our ability to service indebtedness. Our revolving credit facility also includes a definition of EBITDA which is used in the calculation of certain covenants. EBITDA herein is not the same as would be calculated under the revolving credit facility. EBITDA is not a substitute for the GAAP measures of earnings or of cash flow and is not necessarily a measure of our ability to fund our cash needs. In addition, it should be noted that companies calculate EBITDA differently and, therefore, EBITDA has material limitations as a performance measure because it excludes interest expense, taxes, and depreciation, amortization and accretion. The table below reconciles EBITDA with our net income (loss).

 

(6) Acquisitions, net of cash acquired, consist only of the cash component of acquisitions. It does not include common stock and notes issued for acquisitions, nor does it include other non-cash consideration issued for acquisitions.

Reconciliation of EBITDA

 


 

(In thousands)   

Predecessor

          
     Year Ended
December 31,
  

11 Months

Ended

November 30,

2005

  

Period from

September 29,

2005

(Inception) to

December 31,

2005

   

Year Ended

December 31,

2006

    

2003

  

2004

       
             

Net income (loss)

   $ 55    $ 173    $ 503    $ (195 )   $ 12,340

Plus: interest expense

     11      78      192      82       2,161

Plus: tax expense

                          1,569

Plus: depreciation, amortization and accretion

     258      473      893      205       18,555
                                   

EBITDA

   $ 324    $ 724    $ 1,588    $ 92     $ 34,625
                                   

 


 

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Index to Financial Statements

Unaudited Pro Forma Combined Statement of Operations

The following is our unaudited pro forma combined statement of operations for the year ended December 31, 2006. The unaudited pro forma combined statement of operations gives pro forma effect to the acquisitions identified in “Note 1. Basis of Presentation” as if they had been consummated on January 1, 2006 and give effect to income taxes assuming we were operated as a taxable corporation throughout the period.

As all the acquisitions occurred prior to December 31, 2006, they are all reflected in our historical audited consolidated balance sheet as of December 31, 2006. Accordingly, no pro forma balance sheet information has been provided.

All acquisitions were accounted for as purchases and, as a result, the acquired assets were recorded at their fair value at the time of purchase. The fair values were based upon an outside firm’s estimates of fair value and are believed to be reasonable.

The following unaudited pro forma combined statement of operations and accompanying notes should be read together with the historical statements of Pioneer Oilfield Services, Inc., which we refer to as Pioneer, appearing elsewhere in this prospectus. The unaudited pro forma combined statement of operations was derived by adjusting those historical financial statements. The adjustments are based on currently available information and certain estimates and assumptions that our management believes provide a reasonable basis for presenting the significant effects of the acquisition specified above. The pro forma adjustments give appropriate effect to the assumptions made and are properly applied in the unaudited pro forma combined statements of operations.

The unaudited pro forma combined statement of operations does not purport to present our results of operations had the acquisitions actually been completed as of the date indicated. Moreover, it does not purport to project our results of operations for any future date or period.

Unaudited Pro Forma Combined Statement of Operations

For the Year Ended December 31, 2006

 


 

(In thousands)   Diamondback    

Packers
Historical

   

Pioneer
Historical

   

Pro Forma

Adjustments

   

Pro Forma

Combined

 

Revenues

  $ 155,900     $ 309     $ 557     $     $ 156,766  

Costs and expenses

         

Cost of revenues

    98,986       194       258             99,438  

Selling, general and administrative

    22,704       60       78             22,842  

Depreciation, amortization and accretion

    18,555       17       19         18,644  
          27 (b)  
          26 (a)  
                                       

Total costs and expenses

    140,245       271       355       53       140,924  
                                       

Operating income

    15,655       38       202       (53 )     15,842  

Other income and expense

         

Other income (expense)

    447             (17 )           430  

Gain on sale of assets

    29                         29  

Interest expense

    (2,161 )     (3 )           (16 )(c)     (2,180 )
                                       
    (1,685 )     (3 )     (17 )     (16 )     (1,721 )
                                       

Income (loss) before income taxes and minority interest

    13,970       35       185       (69 )     14,121  
                                       

Income tax

    1,569       13             3,452 (d)     5,034  
                                       

Income before minority interest

    12,401       22       185       (3,521 )     9,087  

Income attributable to minority interest in VIE

    (61 )                       (61 )
                                       

Net income (loss)

  $ 12,340     $ 22     $ 185     $ (3,521 )   $ 9,026  
                                       

Other Financial Data:

         

EBITDA

  $ 34,625     $ 55     $ 204     $     $ 34,884  

 


 

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Index to Financial Statements

Note 1. Basis of Presentation

The historical financial information is derived from the historical statements of operations of Services LLC, Packers & Service Tools, Inc., which we refer to as Packers, and Pioneer Oilfield Services, Inc., which we refer to as Pioneer. All acquisitions were accounted for as purchases, and, as a result, these assets are recorded at their fair value at the time of purchase, as follows.

 

   

In January 2006, we closed a series of purchase agreements, with a purchase accounting effective date of January 1, 2006, under which we acquired all of the issued and outstanding equity interests in two entities and substantially all of the assets of eleven other entities, all of which were under related ownership. In these transactions, which we refer to as the Sooner-Total acquisition, we acquired equipment, vehicles, trucks, frac tanks, trailers, backhoes, tanks, tractors, pumps, mobile fluid manifolds, pipe and other tangible and intangible property. The Sooner-Total results of operations have been included in the audited historical statement of operations of Services LLC since January 2006.

 

   

On January 31, 2006, we acquired all of the issued and outstanding shares of capital stock of Packers. In this transaction, we acquired trucks, trailers, packers, downhole equipment and tools and other tangible and intangible property. The purchase price was approximately $1.9 million in cash and an agreement to issue shares of our common stock valued at $2.8 million. The number of shares will be calculated by the premarket opening price of our common stock as of the first trading day for the initial public offering.

 

   

On March 23, 2006, we acquired substantially all of the assets of Pioneer. The assets acquired included several light towers and compressors, vehicles, trailers, travel trailers, backhoes, pumps, valves, flow-back tanks and other tangible and intangible property. The purchase price was $1.8 million.

Note 2. Pro Forma Adjustments and Assumptions

 

  (a) To reflect an increase in depreciation and amortization expense resulting from the purchase of Packers equipment in service, depreciated on a straight-line basis over three to five years, and amortization of customer relationships over an estimated useful period approximating ten years and straight-line amortization of a trademark over 20 years.

 

  (b) To reflect an increase in depreciation and amortization expense resulting from the purchase of Pioneer equipment in service, depreciated on a straight-line basis over three to seven years, and amortization of customer relationships over an estimated useful period approximating ten years and straight-line amortization of a trademark over two years.

 

  (c) To reflect the accretion of the discount on the obligation incurred in the purchase agreement relating to the Packers acquisition.

 

  (d) To reflect income taxes assuming we were operated as a taxable corporation throughout the period (see Note 3).

Note 3. Income Taxes

Services LLC, a limited liability company, was classified as a partnership for income tax purposes. Accordingly, income taxes on net earnings were payable by members and are not reflected in the historical financial statements except for taxes associated with taxable subsidiaries. Pro forma adjustments are reflected to provide for income taxes in accordance with Statement of Financial Accounting Standards No. 109. For unaudited pro forma income tax calculations, a statutory Federal tax rate of 34% and a blended effective state tax rate of approximately 2.0% (net of Federal income tax effects) were used for the pro forma enacted tax rate. The pro forma tax effects are based upon currently available information and assume the Company had been a taxable entity for the periods presented. Management believes that these assumptions provide a reasonable basis for presenting the pro forma effects.

Based on estimates of the temporary differences as of December 31, 2006, upon conversion to a taxable entity, net deferred income tax liabilities of approximately $4,032,000 will be recognized with a corresponding charge to earnings. This charge has not been reflected in the pro forma adjustments.

 

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Index to Financial Statements

Note 4. Reconciliation of EBITDA

EBITDA consists of net income (loss) before interest expense, taxes, depreciation, amortization and accretion. EBITDA is a non-GAAP financial measure, which is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. EBITDA is included in this prospectus because our management considers it an important supplemental measure of our performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We regularly evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates by using EBITDA. In addition, we use EBITDA in evaluating acquisition targets. Management also believes that EBITDA is a useful tool for measuring our ability to meet our future debt service, capital expenditures and working capital requirements, and EBITDA is commonly used by us and our investors to measure our ability to service indebtedness. Our revolving credit facility also includes a definition of EBITDA which is used in the calculation of certain covenants. EBITDA herein is not the same as would be calculated under the revolving credit facility. EBITDA is not a substitute for the GAAP measures of earnings or of cash flow and is not necessarily a measure of our ability to fund our cash needs. In addition, it should be noted that companies calculate EBITDA differently and, therefore, EBITDA has material limitations as a performance measure because it excludes interest expense, taxes, and depreciation, amortization and accretion. The table below reconciles pro forma EBITDA with our pro forma net income (loss).


 

(in thousands)   

Year Ended

December 31, 2006

     Diamondback    Packers Historical    Pioneer Historical    Pro Forma
Adjustments
    Pro Forma
Combined

Net income

   $ 12,340    $ 22    $ 185    $ (3,521 )   $ 9,026

Plus: interest expense

     2,161      3           16       2,180

Plus: tax expenses

     1,569      13           3,452       5,034

Plus: depreciation, amortization and accretion

     18,555      17      19      53       18,644
                                   

EBITDA

   $ 34,625    $ 55    $ 204    $     $ 34,884
                                   

 


 

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Index to Financial Statements

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

The following discussion and analysis should be read in conjunction with the “Selected Historical Financial Data,” “Unaudited Pro Forma Combined Statements of Operations,” and our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations and estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this prospectus.

Introduction

Commencing in 2005, Services LLC, a company controlled by Wexford, began to target investment opportunities in service-oriented companies in the oil and natural gas industry. During the period October 2005 through March 2006, Services LLC acquired the assets of or equity interests in 20 companies. Services LLC owned these acquired assets, entities and operations, as well as its newly established business operations, through 13 direct, wholly-owned subsidiaries and 12 indirect subsidiaries. Effective December 31, 2006, ten of the direct, wholly-owned subsidiaries and all of the indirect subsidiaries were transferred to our parent, Diamondback Holdings, LLC, in a transaction that we refer to as the transfer. Immediately prior to the closing of this offering, Diamondback Holdings will be merged with Diamondback Energy Services, Inc. in a transaction that we refer to as the merger. In the merger, Services LLC will be issued shares of our common stock.

Diamondback Energy Services, Inc. was formed as a Delaware corporation in November 2006 and will not conduct any material business operations prior to the merger. Our historical financial statements included in this prospectus as of December 31, 2005 and for the period September 29, 2005 (inception) through December 31, 2005 and as of December 31, 2006 and for the year then ended reflect the historical financial statements of Services LLC and have been prepared on a carve-out basis to include (a) the assets, liabilities, revenues and expenses of the direct and indirect subsidiaries transferred to us in the transfer since the date of their respective acquisition or formation, as applicable, and (b) corporate borrowings and substantially all of the expense of Services LLC since its formation in September 2005. See “—The Acquisitions” and Note A to our consolidated financial statements appearing elsewhere in this prospectus for additional information regarding the acquisitions completed and entities formed by Services LLC, the entities and operations transferred to us and the basis upon which our financial statements have been prepared.

Since we succeeded to substantially all of the business of Quantum and our own operations prior to that acquisition were insignificant relative to the operations acquired, the pre-acquisition operations of Quantum have been designated as our “predecessor.” Because our operations effectively began in December 2005 and grew rapidly in 2006, comparisons of our financial results to prior periods are not meaningful. Accordingly, the discussion below of our results of operations focuses on the fiscal year ended December 31, 2006.

Overview

We are a diversified oilfield services company focused on providing technology-driven solutions to maximize the recovery and present value of oil and natural gas production streams. Our services focus on enhancing drilling and production for our customers and encompass the life-cycle of the well, from drilling and production through completion, stimulation and eventual abandonment. They include drilling technology services and applications, stimulation and pumping services, fluid logistics and well-site services and completion and production services.

Our business is focused in both proven oil and natural gas basins and emerging high-growth resource plays in Texas, Oklahoma, Louisiana and the Rocky Mountains. We believe that the services we provide are critical in increasing the ultimate recovery and present value of production streams from resource plays. The majority of our operations are located in the Barnett Shale in North Texas, and the Anadarko Basin, the Woodford Shale and other basins across Oklahoma.

 

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Index to Financial Statements

We currently conduct our operations through the following four business segments:

 

   

Drilling Technology Services and Applications. Our drilling technology services and applications are designed to allow our customers to reach the intended total well depth faster and with more precision, thus optimizing well economics. Our services include renting downhole motors, motors equipped with Measurement While Drilling, or MWD, technology and shock subs, as well as providing advanced technical drilling expertise.

 

   

Stimulation and Pumping Services. Our stimulation and pumping services consist of pressure pumping and water transfer services. As part of our pressure pumping services, we provide hydraulic fracturing, acidizing and cementing services. These services are used in optimizing hydrocarbon flow paths and in the drilling, completing and plugging of wells.

 

   

Fluid Logistics and Well-Site Services. Our fluid logistics services include storage, transportation and disposal of fluids used in drilling and subsequent stimulation and production operations. Our well-site services include building drilling locations, pits and access roads.

 

   

Completion and Production Services. Our completion and production services include completion, workover and roustabout services, rental and sale of downhole equipment and tools and plugging and abandonment services.

Outlook

Our customers are predominately independent oil and natural gas exploration and production companies. The primary factors that affect demand for our services are the levels of drilling and production-related activity of our customers, which in turn are affected in part by current and anticipated future oil and natural gas prices.

The U.S. Department of Energy’s Energy Information Administration has reported that in the lower 48 states from 2000 to 2006, the number of natural gas wells drilled per year increased at a compounded annual growth rate of 11.7%, while natural gas production actually declined at a compounded annual rate of 0.62%. These numbers indicate that increasingly more natural gas wells will need to be drilled simply to maintain current production levels. In addition, the servicing needs of existing and recently re-completed natural gas wells will likely rise as the number of producing wells grows.

We consider the number of wells drilled, number of drilling rigs working and well service rig counts to be indicative of spending levels in our industry. We believe that our customers tend to invest more capital in drilling-related activities when hydrocarbon prices are at higher levels or anticipated to increase. The following tables summarize average North American drilling and well service rig activity as reported by Baker-Hughes Incorporated, as well as historical natural gas and crude oil near-month prices on the New York Mercantile Exchange (NYMEX) as recorded by Bloomberg.

 


 

     Average Rig Count (1)  
     

Year Ended

12/31/02

  

Year Ended

12/31/03

  

Year Ended

12/31/04

  

Year Ended

12/31/05

  

Year Ended

12/31/06

   2007 Year-
To-Date
 

BHI Rotary Rig Count

                 

U.S. Land

   717    924    1,096    1,290    1,559    1,627 (2)

U.S. Offshore

   113    108    97    93    90    83 (2)
                               

Total U.S.

   830    1,032    1,193    1,383    1,649    1,710  
                               

BHI Workover Rig Count

                 

United States

   1,010    1,129    1,235    1,354    1,572    *  

 


 

30


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Index to Financial Statements

 

     U.S. Oil and Natural Gas Prices (3)
     Natural Gas Near Month Delivery Contract Price    Crude Oil Near Month Delivery Contract Price

Period

  

Minimum

  

Average

  

Maximum

  

Minimum

  

Average

  

Maximum

1/1/02 – 12/31/02

   1.91    3.37    5.34    17.97    26.15    32.72

1/1/03 – 12/31/03

   4.43    5.49    9.58    25.24    30.98    37.83

1/1/04 – 12/31/04

   4.57    6.18    8.75    32.48    41.48    55.17

1/1/05 – 12/31/05

   5.79    9.01    15.38    42.12    56.70    69.81

1/1/06 – 12/31/06

   4.20    6.98    10.63    55.81    66.25    77.03

1/1/07 –   3/31/07

   6.16    7.18    7.87    50.48    58.23    66.03

 


 

 * Information unavailable.
(1) Source: Baker Hughes Incorporated; rotary rig count data on weekly basis; workover rig count data on monthly basis. Baker Hughes is a large oilfield services firm that has issued the rotary rig counts as a service to the petroleum industry since 1944.

 

(2) Rotary rig count data through March 31, 2007.

 

(3) Source: Bloomberg; all data on daily basis.

 

Our Growth Strategy

Our growth strategy is focused on growth by increasing service and product offerings in our current basins and expanding our operations into new service areas either through acquisitions or establishment of new field offices. We seek to capitalize on the long-term customer relationships developed by our key field managers in achieving our growth strategy.

 

   

Organic Growth. Our organic growth approach is to first increase the scope of our service and product offerings in established oil and natural gas markets in which we have operational platforms before expanding into new regions with less established basins and emerging resource plays. We expect to grow our operations in each of these locations by expanding services to current customers, attracting new customers and hiring local personnel with basin- and field-level expertise and leadership skills. In addition, we plan to focus on expanding our technology-driven segments, including directional drilling and pressure pumping services, which we believe provide opportunities for growth.

 

   

Growth through Strategic Acquisitions. We have used strategic acquisitions as an integral part of our growth strategy. We intend to continue to pursue strategic acquisitions that can meet our targeted returns on invested capital. We believe this strategy will allow us to continue to expand our customer base, geographic footprint and service offering.

The Acquisitions

The following acquisitions were completed by Services LLC between December 2005 and March 2006. The entities, assets and operations described below form the platform for our business:

Quantum Acquisition. On December 16, 2005, Services LLC acquired substantially all of the assets of Quantum. The assets acquired included Monel drill collars, straight hole and directional drilling motors, Measurement While Drilling, or MWD, equipment, other related drilling equipment and components and other tangible and intangible property. The aggregate net purchase price was approximately $26 million, which included the repayment of $3.7 million of debt. This acquisition forms the platform for our drilling technology services and applications segment.

Sooner-Total Acquisition. In January 2006, Services LLC closed a series of purchase agreements, each with a purchase accounting effective date of January 1, 2006, under which it acquired all of the issued and outstanding equity interests in two entities and substantially all of the assets of eleven other entities, all of which were under related ownership. These transactions involved the acquisition of equipment, vehicles, trucks, frac tanks, trailers, backhoes, tanks, tractors, pumps, mobile fluid manifolds, pipe and other tangible and intangible property. Also acquired was real estate in Oklahoma and

 

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Table of Contents
Index to Financial Statements

Texas, which included disposal wells. These transactions closed simultaneously on January 10, 2006, and the aggregate purchase price was approximately $90.4 million, net of cash acquired, which included the repayment of debt of approximately $12.5 million. Seven of these transactions, Hi Pressure Partners, Peach Street Partners, LLC, J & T Construction, Cementing Services, L.L.C., Total Oilfield Services, LP, Total Pumping Services, LP and Total Oilfield Services of Oklahoma, L.L.C., form the platform for our stimulation and pumping services segment while six of these transactions, Sooner Trucking & Oilfield Services, Inc., PJ Trucking, PL Trucking, Countyline Disposal, Inc., Tolar Disposal Systems, L.P. and PDQ Business Travel, L.L.C., form the platform for our fluid logistics and well-site services segment.

Packers Acquisition. On January 31, 2006, Services LLC acquired all of the issued and outstanding shares of capital stock of Packers. Acquired in this transaction were trucks, trailers, packers, downhole equipment and tools and other tangible and intangible property. The purchase price was approximately $1.9 million in cash and an agreement to issue shares of our common stock valued at $2.8 million. If we have not successfully completed our initial public offering within 18 months of the acquisition, we are obligated to pay $2.8 million in cash with interest from the acquisition date. The number of shares will be calculated by the premarket opening price of our common stock as of the first trading day for the initial public offering. This acquisition forms the platform for our completion and production services segment.

Pioneer Acquisition. On March 23, 2006, Services LLC acquired substantially all of the assets of Pioneer. The assets acquired included several light towers and compressors, vehicles, trailers, travel trailers, backhoes, pumps, valves, flow-back tanks and other tangible and intangible property. The aggregate purchase price was $1.8 million. This acquisition enhanced our completion and production services segment.

In addition to the 16 acquisitions discussed immediately above, Services LLC also acquired all the equity interests in Taylor Rig, L.L.C. and Athena Construction, L.L.C. and substantially all of the assets of Special Equipment Manufacturing, Inc. and Athena Construction, a division of Hellenic, Inc. None of these entities or their operations or assets will be transferred to us in the merger with Diamondback Holdings, LLC and their financial results have not been included in the financial statements contained in this prospectus. Services LLC continues to own those assets and operations through its three remaining direct, wholly-owned subsidiaries.

Internal Controls

We may be required to comply with the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002 as early as December 31, 2008. Section 404(a) requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Section 404(b) will require that our independent registered public accounting firm opine on those internal controls and management’s assessment of those controls as early as December 31, 2008. We are currently evaluating our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission. In connection with preparing our financial statements for the periods ended December 31, 2005 and December 31, 2006, we and our auditors have identified numerous significant deficiencies relating to the lack of a complete and thorough period-end closing and financial reporting process and related controls that, in the aggregate, constitute a material weakness. The Public Company Accounting Oversight Board has defined a material weakness as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the company’s internal control. Accordingly, a material weakness increases the risk that the financial information we report contains material errors.

While we have made progress in remediating certain significant deficiencies that were identified during our 2005 audit, the following significant deficiencies were not remediated for our 2006 period-end closing and financial reporting process and, in the aggregate, continue to constitute a material weakness. Such deficiencies include the fact that processes and controls designed to capture and record all liabilities at period-end did not capture certain transactions that should have been recorded as liabilities at December 31, 2006; the fact that processes and controls relating to account reconciliations designed to identify and correct errors in a timely manner did not result in the necessary adjustments being recorded to the books and records; the lack of detailed and consistent processes and controls to analyze aged accounts receivable and to determine and document the appropriate amount of the allowance for doubtful accounts; the lack of processes and controls to provide detailed reviews of consolidating financial statement and footnote information; and the lack of comprehensive policies, procedures and reviews for recording journal entries by corporate personnel, including establishing authority limits.

 

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These significant deficiencies were in part the result of the 16 business acquisitions completed in a six-month period following our inception. Additional contributing factors include the use of unsophisticated accounting software packages by our subsidiaries, leading to extensive use of manually intensive processes, and having a limited number of qualified personnel.

To remediate the significant deficiencies that, in the aggregate, resulted in a material weakness relating to our period-end closing and financial reporting process and related controls, we have implemented an enterprise-wide accounting system and are expanding our corporate accounting staff. To date, we believe we have fully staffed our needs for qualified accounting professionals in our field offices and intend to hire additional resources in our corporate office to assist in period-end closing control processes and system management. We have also engaged an independent consulting firm with experience in the area of Sarbanes-Oxley Act compliance to assist us in documenting our policies, procedures and internal control over financial reporting, assessing the effectiveness of the design of those controls and testing whether those controls are operating as designed. On an ongoing basis, we will monitor the effectiveness of these control and process changes to determine the success of our financial reporting procedures. We intend to hire additional accounting staff and engage additional outside advisors as appropriate. However, the steps we are taking to remediate these significant deficiencies that, in the aggregate, resulted in a material weakness may not be effective. See “Risk Factors—We will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act. Our management and auditors have identified significant deficiencies that, in the aggregate, resulted in a material weakness in the operation of our internal controls. If we are unable to remedy this weakness and timely comply with Section 404 or if the costs related to compliance are significant, our profitability, stock price and results of operations and financial condition could be materially adversely affected.”

Marketing Environment

We operate in a highly competitive industry. Our competition includes many large and small oilfield service companies. As such, we price our services and products to remain competitive in the markets in which we operate, adjusting our rates to reflect current market conditions as necessary. We examine the rate of utilization of our equipment as one measure of our ability to compete in the current market environment.

Seasonality

We provide oilfield services for oil and natural gas operations mostly in Texas and Oklahoma. As a result, we are generally not affected by seasonal weather conditions. Although we also have operations in the U.S. Rocky Mountains where weather conditions, particularly during winter months, may be severe and may limit our ability to operate in that area during those months, our operations in the Rocky Mountains currently represent a small percentage of our business.

Critical Accounting Policies and Estimates

Our combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles, also referred to as GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates include the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. We evaluate these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ materially from these estimates.

We believe the following accounting policies and estimates are critical to our business operations and the understanding of our operations and include the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Depreciation and Amortization. In order to depreciate and amortize our property and equipment and our intangible assets with finite lives, we estimate useful lives, attrition factors and salvage values of these items. Our estimates may be affected

 

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by such factors as changing market conditions, technological advances in industry or changes in regulations governing the industry. Useful lives and attrition factors used in determining amortization of customer relationship intangible assets were estimated, in consultation with an independent valuation specialist, based on entity specific and industry data relating to historical and expected turnover of our customer base. In total, approximately 900 existing customers were included in the determination of value of customer relationships for all acquired entities. For 2006, our average attrition/amortization rate was 9.2%, which equated to the loss of approximately 83 of our existing customers. If our actual attrition exceeded expected attrition by 10% due to higher than anticipated turnover, amortization expense would have increased by $4.3 million. Because some of the customer relationships are sizable and would have an adverse effect on the recoverability of the intangible asset if lost, we will test this asset for impairments if such an event occurs. Also, if such an event occurs, the amortization methodology and attrition rates will be reviewed.

Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an analysis of historical collection activity and specific identification of overdue accounts. Factors that may affect this estimate include (1) changes in the financial position of significant customers and (2) a decline in commodity prices that could affect the entire customer base. Our analysis is performed on a quarterly basis, and changes in our estimates are reflected as new information about collectibility becomes available.

Annual Evaluation of Goodwill. We are required to test for impairment of goodwill recorded in business combinations annually or more frequently if events or changes in circumstances indicate that goodwill may be impaired. This requires us to estimate the fair values of our reporting units. This assessment involves a considerable degree of judgment. At December 31, 2006, the carrying value of our goodwill was $39.9 million. We performed an evaluation of each reporting unit that carried goodwill, with the assistance of an independent appraiser, and recorded no impairment of goodwill. The results of our October 1, 2006 evaluation indicated that the excess of fair value over carrying value for each of our reporting units ranged from a low of $1.5 million to a high of $38.1 million. These estimates were determined by using two separate methods, the income approach and the market approach, equally weighted to estimate fair value. The income approach calculates the present value of projected cash flows for each reporting unit over a period of five years plus a residual value. The projected cash flows are forecasted by our management. The market approach uses comparison companies in the industry as benchmarks for calculating a capital to EBITDA (earnings before interest expense, tax, depreciation and amortization) multiple. That benchmark multiple is applied to each reporting unit’s projected one year EBITDA, forecasted by management, to obtain a value indication for this method. The results of the income approach and the market approach are then equally weighted (50%) to derive the fair value for each reporting unit. Estimates and assumptions used in these methods include revenue growth rates and profitability assumptions used to calculate projected future cash flows, discount rates and market conditions and the determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. As an example, if actual cash flows were 10% lower than forecasted, the excess fair value over carrying value range would decrease from a low of $1.1 million to a high of $32.0 million. If forecasts and assumptions used in our analysis change in the future, significant impairment charges could result that would adversely affect our results of operations and financial position.

Results of Operations

Year Ended December 31, 2006

Revenue

Revenue for the year ended December 31, 2006 was $155.9 million.

 

   

Drilling Technology Services and Applications. Our drilling technology services and applications segment generated $52.1 million, or 33.4%, of our total revenue for the year ended December 31, 2006. The acquisition of Quantum contributed all of this revenue. During 2006, the segment benefited from favorable market conditions that allowed for price increases for our services.

 

   

Stimulation and Pumping Services. Our stimulation and pumping services generated $28.5 million, or 18.3%, of our total revenue for the year ended December 31, 2006. This included revenue attributable to the acquisitions in January 2006 of Cementing Services, L.L.C., which contributed $21.8 million of this revenue, and Total

 

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Pumping Services, LP, which contributed $5.8 million of this revenue. We also formed a new company in January 2006, Diamondback Pumping, LP, which contributed $0.9 million of this revenue. In addition, the segment benefited from increased pricing for our services and additional investment in cementing and pressure pumping equipment for operations in the Southern Oklahoma region.

 

   

Fluid Logistics and Well-Site Services. Our fluid logistics and well-site services generated $65.7 million, or 42.2%, of our total revenue for the year ended December 31, 2006. This included revenue attributable to the January 2006 acquisitions of Total Oilfield Services, LP, which contributed $30.6 million of this revenue, Sooner Trucking Inc. and Total Oilfield Services of Oklahoma, L.L.C., which in the aggregate contributed $34.8 million of this revenue, and Tolar Disposal Systems, LP. and Countyline Disposal, Inc., which in the aggregate contributed $0.3 million of this revenue.

 

   

Completion and Production Services. Our completion and production services segment generated $9.5 million, or 6.1%, of our total revenue for the year ended December 31, 2006. This included revenue attributable to the acquisitions of Packers & Service Tools, Inc. in January 2006, which contributed $5.9 million of this revenue, and Pioneer Oilfield Services, Inc. in March 2006, which contributed $2.6 million of this revenue. We also formed three new companies, Diamondback-Well Service LLC, Diamondback-PST LLC and Diamondback-Completions LLC during 2006, which in the aggregate contributed $1.0 million of this revenue.

Service and Product Expenses. Service and product expenses include labor costs associated with our services, materials used in the performance of those services and other costs directly related to the support and maintenance of equipment. For the year ended December 31, 2006, service and product expenses were approximately $99.0 million. As a percentage of revenue, service and product expenses were 63.5%. By segment, service and product expenses as a percentage of revenue for the year ended December 31, 2006 were 66.0% for the drilling technology services and applications segment, 57.7% for the stimulation and pumping services segment, 63.6% for the fluid logistics and well-site services segment and 66.0% for the completion and production services segment.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A expenses, consist primarily of salaries and other related expenses for our administrative, finance, information technology and human resource functions. For the year ended December 31, 2006, SG&A expenses were approximately $22.7 million. As a percentage of revenue, SG&A expenses were 14.6% for the period.

Depreciation and Amortization. Depreciation and amortization expense was approximately $18.6 million for the year ended December 31, 2006. As a percentage of revenue, depreciation and amortization expense was 11.9% for the period. Depreciation and amortization expense for 2006 is attributable to equipment and intangible assets acquired through capital expenditures and acquisitions.

Interest Expense

Interest expense was $2.2 million for the year ended December 31, 2006.

Taxes

Services LLC is a limited liability company that is treated as a pass-through entity for federal income tax purposes. The provision for income tax of $1.6 million for the year ended December 31, 2006 was attributable to two of our subsidiaries that are taxable as C corporations. As a percentage of revenue, taxes were 1.0% for the period.

Liquidity and Capital Resources

Overview. Our liquidity needs have focused primarily on funding capital expenditures and strategic acquisitions. Historically, the sources of our funds have been capital contributions and loans from Wexford, our equity sponsor, operational cash flow and borrowings under our revolving credit facilities. After the completion of this offering, our liquidity will be provided primarily by operational cash flow, borrowings under our revolving credit facility, any remaining net proceeds from this offering and proceeds from any future equity or debt offerings.

 

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Operating Activities

For the year ended December 31, 2006, net cash provided by operating activities was approximately $19.3 million, reflecting increasing operating cash flows due to completed acquisitions and expansion of our business lines.

Investing Activities

For the year ended December 31, 2006, net cash used in investing activities was approximately $199.7 million. We completed several acquisitions during the year ended December 31, 2006 for total net cash of $84.7 million and made capital expenditures during the period totaling $116.8 million. These expenditures were primarily for directional drilling, cementing, hydraulic fracturing, fluid hauling, disposal and rental equipment.

Financing Activities

For the year ended December 31, net cash provided by financing activities was approximately $187.0 million. Contributions from Wexford amounted to $123.4 million and were used for acquisitions, capital expenditures and working capital. Borrowings totaled $73.8 million and debt payments totaled $16.9 million.

Capital Expenditures. Capital expenditures were approximately $116.8 million in 2006. These expenditures were focused on expanding our pressure pumping and cementing fleets, fluid hauling and disposal equipment and increasing our directional drilling technology equipment. Our capital expenditures budget for 2007 is estimated to be $87.9 million. However, the amount and timing of our capital expenditures is largely discretionary and within our control. We could choose to defer a portion of these planned 2007 capital expenditures depending on a variety of factors, including but not limited to the success of our oilfield services activities, prevailing and anticipated prices for oil and natural gas, and the availability of necessary equipment, labor, infrastructure and capital.

We believe that following the application of net proceeds from this offering to reduce debt as contemplated in “Use of Proceeds,” our operating cash flow and available borrowings under our credit facility will be sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and significant additional capital expenditures will be required to expand our service and product offerings. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our capital expenditure budget for 2007 does not allocate funds to any acquisitions. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital for that or other reasons, we may do so through traditional borrowings, offerings of debt and equity securities or other means. Needed capital may not be available on acceptable terms or at all. If we are unable to obtain funds when needed or on acceptable terms, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to implement our business plan.

Credit Facilities. On August 30, 2006, Services LLC entered into a revolving credit agreement with Fortis Capital Corp., as the administrative agent, lead arranger and sole bookrunner, and certain other lenders and agents party thereto. Services LLC and certain of its subsidiaries entered into an amendment and consent, effective as of December 31, 2006, with Fortis under which, among other things, we became the borrower under this credit agreement in connection with the transfer. Also, under the amendment, the three direct subsidiaries of Services LLC that were not transferred to our parent, Diamondback Holdings, LLC, in the transfer were released from their obligations as guarantors under the revolving credit agreement. On February 13, 2007, this credit agreement was amended and restated in its entirety. Originally, the revolving credit agreement provided for a $50.0 million facility, subject to borrowing base limitations, which could be increased to $80.0 million if certain requirements were met. The amended and restated credit agreement increased the facility to $80.0 million. The facility will mature on August of 2008. As of March 31, 2007, $72.6 million in borrowings was outstanding under this facility, leaving $7.4 million available for future borrowings. The description below summarizes the terms of the revolving credit agreement as amended and restated.

Interest on borrowings under the credit facility, subject to certain limitations, accrues, at the borrower’s election, at a reference rate equal to (1) the London Interbank Offered Rate, or LIBOR, plus 2.25% per annum or (2) the base rate, prime, plus an applicable margin of 1.25% per annum. In the case that we are in default under the revolving credit

 

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agreement, interest on all outstanding revolving advances shall be computed at their applicable rate of interest plus 2.00% per annum.

The revolving credit agreement requires us to meet certain financial covenants, at all times, based on a consolidated basis of all of our operations. These ratios and conditions include the requirements to maintain:

 

   

a minimum interest coverage ratio;

 

   

a minimum tangible net worth equal to the sum of 85% of our tangible net worth at as of December 31, 2006, plus 50% of our consolidated net income earned in each fiscal quarter ending after December 31, 2006, plus all net proceeds from equity issuances by us;

 

   

a minimum consolidated EBITDA, as such term is defined in the revolving credit agreement of $12.5 million for the fiscal quarter ended December 31, 2006, $12.0 million for the fiscal quarter ended March 31, 2007 and $15.0 million for each fiscal quarter ending after March 31, 2007; and

 

   

a total net debt leverage ratio not to exceed 2.50 to 1.00 for the four consecutive fiscal quarters ending December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007 and not to exceed 2.00 to 1.00 for the four consecutive fiscal quarters ending December 31, 2007 and each fiscal quarter after December 31, 2007.

In addition, the revolving credit agreement contains certain customary restrictive covenants, including covenants that: limit our ability and the ability of our subsidiaries to: create, assume or incur certain liens; create, assume, guarantee or otherwise become liable for other debts; merge, dissolve, liquidate or consolidate with or into another entity; dispose of certain assets or all or substantially all of our assets; make certain investments or acquisitions; declare or make certain restricted payments; engage in other lines of business outside oil and gas services; enter into any transactions with affiliates; enter into agreements restricting liens or the ability to make certain restricted payments property transfers and guarantees; change accounting policies unless permitted or required under GAAP; participate in speculative hedging; enter into certain operating leases; enter into sale and leaseback transactions and off-balance sheet transactions; and make payments on certain subordinated debts.

As of December 31, 2006, we were in compliance with our covenants under the revolving credit agreement.

Under the revolving credit agreement, we have the option to prepay our borrowings in the aggregate amount of $1.0 million and integral multiples of $500,000. In addition, we are required to make prepayments in certain other circumstances, including from the net proceeds of the issuance of equity or if we dispose of assets, except for disposition of assets of Diamondback-Well Services LLC, which assets in the aggregate do not exceed $5.0 million in book value. All the obligations under the revolving credit agreement are secured by first priority liens on substantially all of our assets and those of our subsidiaries. In the event of default, the lenders may accelerate the maturity and require that all outstanding obligations be immediately repaid in full. We intend to repay outstanding borrowings under this facility with the net proceeds from this offering. Immediately after this repayment, we intend to borrow approximately $22.0 million under the facility which we will use to repay in full the amounts outstanding under, and then terminate, our subordinated unsecured revolving facility with Kappa Investors LLC. We currently intend to thereafter use additional borrowings under this facility with Fortis Capital, together with cash flow from operations, to fund our operations.

In July and August of 2006, we borrowed an aggregate of $21.0 million from Kappa Investors LLC, an entity controlled by Wexford, under the terms of a subordinated unsecured credit facility. Of this amount, $7.0 million was repaid by us from the borrowings under the Fortis credit facility on August 30, 2006. This facility provides for aggregate outstanding borrowings of $25.0 million, of which $22.0 million was outstanding as of March 31, 2007 (with additional availability of $3.0 million). The loan matures on the earlier of July 5, 2007 and the closing of this offering. Borrowings under this loan bear an interest rate of LIBOR plus 4%, which we refer to as the borrowing rate. Kappa Investors has the right to increase the interest rate applicable to the outstanding principal under this facility to a rate which is 2% in excess of the borrowing rate in the event we default on the payment of interest or principal. The default rate will continue until all events of default have been cured. We paid Kappa Investors a commitment fee of $250,000. The loan provides for certain restrictions on merger or consolidation, sale, lease or other disposal of all or any substantial part of our business or

 

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assets and our ability to incur additional indebtedness. We intend to repay all outstanding borrowings under this facility upon the closing of this offering.

On May 26, 2006, we entered into a senior revolving credit facility with Coppermark Bank providing for aggregate borrowings of $8.0 million, with a maturity of 90 days. Borrowings under this credit facility bore interest at LIBOR plus 2.875% and provided bridge financing to us while we finalized the revolving credit agreement with Fortis on August 30, 2006. Outstanding borrowings of $7.9 million were repaid with proceeds from the initial borrowing under the Fortis credit facility and this facility was terminated.

On October 11, 2005, Cementing Services, L.L.C. entered into an equipment financing agreement with Arvest Bank. The liability was acquired by our subsidiary Diamondback–Cementing Services LLC upon its acquisition of Cementing Services, L.L.C. in January 2006. The equipment financing agreement provided approximately $1.5 million of available financing for general equipment needs of the company. Outstanding borrowings of $0.9 million were repaid with proceeds from the initial borrowing under the Fortis credit agreement on August 30, 2006 and this facility was terminated.

Contractual and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments at December 31, 2006.

 


     Payments Due by Year (1)
    

2007

  

2008

  

2009

  

2010

  

2011

  

Thereafter        

  

Totals

Operating leases

   1,090,111    465,028    434,137    374,460    190,224    265,806    2,819,766

Capital leases

   344,050    355,874    355,874    355,874    352,327    3,202,774    4,966,773

Long term debt

   23,689    26,983    29,477    32,201    1,212       113,562

Lines of credit (2)

   14,000,000    46,995,000                60,995,000

Contractual equipment commitments

   33,383,000                   33,383,000
                                  

Total

   48,840,850    47,842,885    819,488    762,535    543,763    3,468,580    102,278,101
                                  

 


(1) This table does not give effect to the repayment of outstanding indebtedness under our revolving credit facility with Fortis Capital Corp. See “Use of Proceeds.”
(2) The commitment in 2008 includes standby letters of credit in the amount of $2,095,000. Ordinarily, we do not expect these letters of credit to be drawn.

Quantitative and Qualitative Disclosure about Market Risk

The demand, pricing and terms for oil and gas services provided by us are largely dependent upon the level of activity for the U.S. oil and natural gas industry. Industry conditions are influenced by numerous factors over which we have no control, including, but not limited to: the supply of and demand for oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; the discovery rates of new oil and natural gas reserves; available pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of oil and natural gas producers to raise equity capital and debt financing; and merger and divestiture activity among oil and natural gas producers.

The level of activity in the U.S. oil and natural gas exploration and production industry is volatile. Expected trends in oil and natural gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas

 

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production levels and therefore affect demand for our services. A material decline in oil and natural gas prices or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows. Recently, demand for our services has been strong. Although we are continuing our past practice of committing our equipment on a short-term or day-to-day basis, we are also pursuing longer-term contracts with our customers.

Our bank debt is structured under floating rate terms and, as such, our interest expense is sensitive to fluctuations in LIBOR and prime rates. Based on the current debt structure, a 1% increase in interest rates would increase interest expense by approximately $0.95 million per year, based on an aggregate of $94.6 million outstanding under our credit facilities as of March 31, 2007. As of March 31, 2007, we did not have any interest rate swaps to hedge our interest risks.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements,” or SFAS No. 157 which establishes a framework for fair value measurements in the financial statements by providing a single definition of fair value, provides guidance on the methods used to estimate fair value, and increases disclosures about estimates of fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect SFAS No. 157 will have on our financial position, results of operations and cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and interpretation of FASB Statement No. 109,” or FIN 48. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 31, 2006. We are currently evaluating the effect FIN 48 will have on our financial position, results of operations, and cash flows.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108. “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” or SAB 108. This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of our balance sheet and statement of operations financial statements and the related financial statement disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities at the beginning of that year with the offsetting adjustment to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. We adopted SAB 108 effective at the inception of our company.

 

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Business

General

We are a diversified oilfield services company focused on providing technology-driven solutions to maximize the recovery and present value of oil and natural gas production streams. Our services focus on enhancing drilling and production for our customers, and encompass the life-cycle of the well, from drilling and completion through stimulation, production and eventual abandonment. They include drilling technology services and applications, stimulation and pumping services, fluid logistic and well-site services and completion and production services.

Our business is focused in both proven oil and natural gas basins and emerging high-growth resource plays in Texas, Oklahoma, Louisiana and the Rocky Mountains. Resource play is a term used to describe an accumulation of hydrocarbons known to exist over a large area that typically has lower average decline rates than other producing areas. We believe that the services we provide are critical in increasing the ultimate recovery and present value of production streams from resource plays. The majority of our operations are located in the Barnett Shale in Texas and the Anadarko Basin, the Woodford Shale and other basins across Oklahoma.

Our operations commenced in December 2005 with the acquisition of substantially all of the assets of Quantum Drilling Motors, L.L.C., a directional drilling technology company based in Oklahoma City, Oklahoma. We have since grown rapidly through acquisitions and organic growth, particularly in our directional drilling technology and stimulation and pumping segments.

Our key field managers have an average of over 25 years of oilfield service experience and bring valuable basin-level expertise and long-term customer relationships with large independent exploration and production companies to our business. For the year ended December 31, 2006, our top three customers were Chesapeake Energy Corp., EOG Resources Inc. and Devon Energy Corp.

Currently, we operate in the following areas:

 

   

Texas: the Barnett Shale area of North Texas, the Permian Basin of West Texas, the Texas Gulf Coast and the Granite Wash in the Texas panhandle;

 

   

Oklahoma: the Deep Anadarko Trend, the Anadarko Shelf, Sahara, the Woodford Shale, the Arkoma Basin, the Sho-Vel-Tum Field, the Golden Trend and the Mountain Front;

 

   

Louisiana: South Louisiana and shallow waters of the Gulf of Mexico; and

 

   

Rocky Mountains: the Williston, Powder River, Jonah, Green River, Uintah and Piceance Basins.

As part of our business plan, we intend to use our existing customer relationships to expand opportunistically to other geographic regions in which our customers operate.

We currently conduct our operations through the following four business segments:

 

   

Drilling Technology Services and Applications. Our drilling technology services and applications are designed to allow our customers to reach the intended total well depth faster and with more precision, thus improving well economics. Our services include renting downhole motors, motors equipped with Measurement While Drilling, or MWD, technology and shock subs, as well as providing advanced technical drilling expertise. We currently provide drilling technology services and applications in the Granite Wash, Permian Basin, Barnett Shale and the Gulf Coast regions of Texas, the Powder River, Jonah, Uintah, Williston and Piceance Basins in the Rocky Mountains, and across Oklahoma.

 

   

Stimulation and Pumping Services. Our stimulation and pumping services consist of pressure pumping and water transfer services. As part of our pressure pumping services, we provide hydraulic fracturing, acidizing and cementing services. These services are used in maximizing hydrocarbon flow paths and in the drilling, completing and plugging of wells. Currently, we operate stimulation and pumping services primarily in Oklahoma and Texas, including the Barnett Shale.

 

   

Fluid Logistics and Well-Site Services. Our fluid logistics services include storage, transportation and disposal of fluids used in or produced by drilling and subsequent stimulation and production operations. Our well-site

 

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services include building drilling locations, pits and access roads. We currently provide fluid logistics and well-site services in the Barnett Shale, the Texas panhandle and across Oklahoma.

 

   

Completion and Production Services. Our completion and production services include completion, workover and roustabout services, rental and sale of downhole equipment and tools and plugging and abandonment services. We currently provide completion and production services in Texas, Oklahoma, Louisiana and the Rocky Mountains.

Our Strategy

Our strategy is to provide our customers with technology-driven drilling, stimulation and production services designed to optimize the ultimate recovery and present value of hydrocarbon reserves. Our services span the life-cycle of a well which we believe provides cost efficiencies for our customers. Specifically, we intend to:

 

   

Maintain a portfolio of operations in proven oil and natural gas markets and emerging resource plays. Our core operations are focused in proven producing regions, primarily in the Permian Basin in Texas and the Anadarko Basin in Oklahoma, and in emerging and high-growth resource plays, primarily in the Barnett Shale in Texas and the Woodford Shale in Oklahoma. By operating in multiple locations and markets, many with different geological characteristics, we create a diverse portfolio of operations, thereby reducing our dependence on individual basins.

 

   

Leverage our experienced field management and basin-level expertise. We seek to manage our business as close to our customer base as possible. We intend to leverage our field management and its basin- and field-level expertise to deliver innovative, basin-specific solutions to our customers.

 

   

Provide technology-driven solutions for our customers. Through the development and implementation of customized solutions, we intend to continue to provide technology-driven services to our customers that help reduce their costs and increase their production, thereby creating operational efficiencies.

 

   

Capitalize on organic growth opportunities. We intend to use our existing customer relationships to expand opportunistically to other geographic regions in which our customers have operations. We also plan to continue to focus on expanding our technology-driven segments, including directional drilling and stimulation and pressure pumping services, which we believe provide strong opportunities for growth.

 

   

Expand through strategic acquisitions. To complement our organic growth, we intend to continue to pursue strategic acquisitions that can meet our targeted returns on invested capital. We believe this strategy will allow us to continue to expand our customer base, geographic footprint and service offering.

 

   

Integrate and cross sell our services. We will continue to offer a broad range of products and services, which will give us the opportunity to cross-sell services to our customers. We seek to provide multiple services to create operational efficiencies for each of our customers.

Our Strengths

We believe that the following strengths position us well within our industry and will help us successfully execute our strategy:

 

   

Long-term, basin-level relationships with a stable customer base. Our customers include large independent oil and natural gas exploration and production companies. For the year ended December 31, 2006, our top customers included Chesapeake Energy Corp., EOG Resources Inc., Devon Energy Corp., Newfield Exploration Co. and Windsor Energy Group, L.L.C. We believe that the long-term relationships that our key field managers have developed with these and other customers help provide us with a stable and growth-oriented client base.

 

   

Experienced management team. Our key field managers have an extensive track record in the oilfield services business and an average of over 25 years of oilfield services experience. We believe their knowledge of our industry and business lines enhances our ability to provide superior customer service. In addition, our field managers have extensive expertise in the geological basins in which they operate and understand the regional challenges our customers face, which we believe strengthens our relationships with our customers.

 

   

New, technologically-advanced equipment and contractual arrangements to purchase equipment. Our service fleet is predominantly comprised of new, technologically-advanced equipment, providing better quality of service and operational efficiencies than older equipment. We continue to expand our fleet with new equipment and have

 

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outstanding orders to purchase additional directional drilling and stimulation and pressure pumping equipment and workover rigs, all of which, if ordered today, would have long lead times.

 

   

Operating platforms in proven oil and natural gas markets and key resource plays. We operate in both proven oil and natural gas markets and key resource plays in Texas, Oklahoma, Louisiana and the Rocky Mountains. We believe our operating platforms in Texas and Oklahoma offer a stable revenue stream for our business, as drilling and production activity in these regions is less sensitive to hydrocarbon prices, and complements our operations in emerging and high-growth resources plays like the Barnett and Woodford Shales.

 

   

Multi-cycle operating leverage. We offer a broad range of products and services that span the life-cycle of a well. These include pre-drilling activities with our well-site preparation, drilling with our downhole, horizontal and directional drilling technologies, well-sustaining activities such as fluid logistics and recovery optimization, completion-related fracturing and stimulation services and abandonment activities. We are not excessively dependent on any one particular aspect of the exploration and production cycle.

 

   

Platform for future consolidation and growth. We have a proven track record of completing acquisitions. The market in which we operate is highly fragmented, and our senior management team continues to identify potential acquisition opportunities.

Our Industry

We believe that the following trends in our industry should benefit our operations:

 

   

Need for additional drilling activity to maintain equal levels of production. As the chart below shows, even though the number of U.S. natural gas wells drilled has increased over the past ten years, overall levels of production have declined. Given average decline rates and demand forecasts, we believe that the number of wells drilled is likely to continue to increase in coming years. Once a well has been drilled, it requires recurring production and completion services, which drives demand for our products and services.

U.S. Natural Gas Production vs. Wells Drilled

LOGO

Source: Energy Information Administration

 

   

Increasing percentages of exploration and production budgets focused on development activities. As the chart below illustrates, large U.S. exploration and production companies are increasingly directing their capital budgets away from exploration-related activity and towards lower-risk development activity. Much of this development-related activity occurs in resource play areas and requires using advanced directional drilling and fracturing and stimulation services to enhance production from existing reserves.

 

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Aggregate Capital Spending – Major U.S. Exploration & Production Companies 1

LOGO

Source: Energy Information Administration


1 “Major U.S. Exploration and Production Companies” as defined by the United States Energy Information Administration consist of any U.S.-based company (or its parent company) that is publicly-traded, and accounts for one percent or more of U.S. production or reserves of crude oil (including natural gas liquids) or natural gas, or one percent or more of U.S. refining capacity or refined product sales volume. Capital spending data has been converted to 2005 dollars using the Consumer Price Index published by the Bureau of Labor Statistics. Source: United States Energy Information Administration.

 

   

Trend towards drilling and developing unconventional oil and natural gas resources. As a result of improvements in drilling and production-enhancement technologies, oil and natural gas companies are increasingly developing unconventional hydrocarbon resources such as tight sands, shales and coalbed methane, or CBM, resources. Successful and economic production of these resource plays frequently requires directional drilling and fracturing and stimulation services, and drilling-related activity is done on tighter acre-spacing and thus requires that more wells be drilled relative to conventional resources. All of these characteristics drive utilization of our products and services.

 

   

High demand for oil and natural gas in North America. Demand for oil and natural gas in the United States has increased in recent years, and outpaced domestic supply. From 1990 through 2005, according to the Energy Information Administration, or EIA, demand for natural gas in the United States grew at an annual rate of 0.9%, while domestic production during the same period increased by only 0.2%. For oil during the same time period, U.S. demand grew at an annual rate of 0.9% while domestic production actually declined at an annual rate of 2.4%. This domestic supply and demand imbalance, coupled with geopolitical instability and limited supply responses, has resulted in significant increases in exploration and development activities in the United States in recent years.

 

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Overview of Our Segments

We manage our business through four segments: drilling technology services and applications, stimulation and pumping services, fluid logistics and well-site services and completion and production services.

 

Our services span the life-cycle of a well, from drilling and production to completion and, ultimately, abandonment. The chart below depicts our various services by segment and indicates each phase of the well life-cycle in which such services are used. A significant portion of the demand for our services is related to recurring production, rather than drilling activities, thus reducing our business exposure to short-term volatility in commodity prices, which we believe have more of an impact on drilling activities.

 


 

     Well Life-Cycle

Product/Service Offering

  

Well-Site

Preparation

  

Drilling

  

Completion

  

Stimulation

  

Production

  

Plugging and

Abandonment

Drilling Technology Services and Applications:

                 

Directional/Horizontal Technology

      ¨            

Shock Subs

      ¨            

Stimulation and Pumping Services:

                 

Hydraulic Fracturing

            ¨    ¨   

Cementing

      ¨    ¨          ¨

Water Transfer

      ¨       ¨      

Fluid Logistics and Well-site Services:

                 

Fluid Hauling

      ¨    ¨    ¨    ¨    ¨

Fluid Storage

   ¨       ¨    ¨      

Fluid Disposal

      ¨       ¨    ¨   

Drill Pad Construction/Clean-up

   ¨             ¨    ¨

Pit Construction/Clean-up

   ¨       ¨    ¨      

Road Construction

   ¨               

Completion and Production Services:

                 

Packers and Plugs

         ¨    ¨    ¨   

Completion/Workover

         ¨       ¨    ¨

Rentals

         ¨    ¨      

Roustabouts

   ¨       ¨       ¨    ¨

 


Drilling Technology Services and Applications

Our drilling technology services and applications are designed to allow our customers to reach the intended total well depth faster, thus increasing well economics by accelerating the timing of hydrocarbon production and facilitating recovery of hydrocarbons from the reservoir. Our drilling services include onshore downhole, horizontal and directional drilling. Downhole drilling involves drilling vertically to the productive zone of the well. Horizontal drilling involves drilling vertically to the productive zone of a well and, upon reaching the productive portion of the well, changing the direction of the wellbore and drilling a certain section of the well horizontally to expose a larger portion of the productive zone of the well. A similar technique is used to drill directional wells, which deviate from vertical by a planned angle and direction.

A large portion of our services involves renting downhole motors, including motors equipped with MWD technology, and shock subs. As of March 31, 2007, we owned 193 downhole motors and 28 MWD kits used in vertical, horizontal drilling and directional drilling. MWD kits are downhole tools that provide real-time measurements of the location and orientation of the bottom hole assembly, which is necessary to adjust the drilling process and guide the wellbore to a

 

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specific target. We plan to increase the number of downhole motors to approximately 230 and the number of MWD kits to approximately 42 by the end of 2007. As part of our services, we also provide downhole, horizontal and directional drilling crews. As of March 31, 2007, we had approximately 30 drilling crews including 60 MWD operators. Horizontal wells require four people and directional wells require at least two people per job. We perform our drilling technology services and applications in the Rocky Mountains, the Barnett Shale, the Permian Basin, South Texas and Southwest Louisiana and across Oklahoma. We plan to increase our operating presence in these areas, focusing on the Rocky Mountains, South Texas and Southwest Louisiana and the Woodford Shale in Oklahoma.

On a pro forma basis, our drilling technology services and applications segment generated approximately $52.1 million, or 33.3% of our total revenue, for the year ended December 31, 2006.

Stimulation and Pumping Services

Our stimulation and pumping services consist of hydraulic fracturing, acidizing, cementing and water transfer services. These services are used in the completion of wells and to stimulate hydrocarbon flow. Currently, we operate stimulation and pumping equipment in the Barnett Shale and West Texas Shale in Texas and across Oklahoma.

Within this segment, we provide the following specific services:

 

   

Hydraulic Fracturing Services. Hydraulic fracturing services are used to force sand or artificial proppants in a gel or other viscous solution down the wellbore and into the producing formation. At the completion of the fracturing process, production rates are usually enhanced substantially, thus increasing the rate of return for the operator. Such services are typically performed at high flow rates and extreme pressures. We purchased new fracturing and well stimulation equipment and commenced our hydraulic fracturing services in June 2006. As of March 31, 2007, we owned 40 high-pressure fracturing units and two twin-pump units capable of delivering a total of 93,000 horsepower. These pressure pumping services are for use primarily in the Barnett Shale in Texas and across Oklahoma. We expect to take delivery of an additional 15 high-pressure units and one twin-pump unit, and operate a total of 55 high-pressure units and three twin-pump units, by October 2007 for a total of 128,250 horsepower.

 

   

Acidizing. Acidizing services involve the injection of highly reactive, low ph (such as hydrochloric acid) solutions into the area where the hydrocarbons enter the well bore. Acidizing is the most common means of reducing near-wellbore damage, as it dissolves and dilutes contaminants which have accumulated and are restricting flow of hydrocarbons from a reservoir toward the wellbore, thus increasing well productivity. Acid is also used in conjunction with hydraulic fracturing as a spearhead fluid. As of March 31, 2007, we owned eight acid transports in Oklahoma. By the end of 2007, we expect to add four additional acid transports in Texas.

 

   

Cementing Services. Cementing services involve the pumping of a cement slurry down the wellbore. During the drilling and completion phase, the wellbore is lined with large diameter steel pipe called casing. Casing is cemented into place by circulating the slurry into the annulus space created between the pipe and the rock wall of the wellbore. Cementing services are also utilized over the life of a well to repair leaks in the casing, to close perforations that are no longer productive and ultimately “plug” the well at the end of its productive life. As of March 31, 2007, we operated nine cementing pumps and auxiliary equipment throughout Oklahoma. We expect to add five additional cementing units by December 31, 2007.

 

   

Water Transfer Services. Our water transfer services involve providing water pumps and piping systems required for pressure pumping and fracturing operations at the well-site. This allows for large quantities of fresh water to be piped to various well locations in a more efficient and cost effective manner. As of March 31, 2007, we owned and operated 24 pumps and approximately 32 miles of water transfer pipe, and provided water transfer services in the Barnett Shale, in West Texas, and in Southeast New Mexico.

On a pro forma basis, our stimulation and pumping services generated approximately $28.5 million, or 18.2% of our total revenue, for the year ended December 31, 2006.

 

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Fluid Logistics and Well-site Services

Our fluid logistics and well-site services include the following:

Fluid Logistics. Oil and natural gas operations use and produce significant quantities of fluids. We provide a variety of services to assist our customers to obtain, transport, store and dispose of fluids that are involved in the drilling, development and production of hydrocarbons. As of March 31, 2007, we owned approximately 114 fluid hauling transports and trucks, which are used to transport various fluids in the life-cycle of an oil or natural gas well. We anticipate increasing our fleet of fluid hauling trucks to approximately 120 by the end of 2007. As of March 31, 2007, we also owned 420 frac tanks which are rented to producers for use in fracturing and stimulation operations plus other fluid storage needs. We expect to increase the number of frac tanks we own to approximately 470 by the end of 2007. We use our fleet of fluid hauling trucks to fill and empty the frac tanks and we deliver and remove these tanks from the well-sites. As of March 31, 2007, we owned seven flow back tanks, and plan to increase the number of flow back tanks to nine by the end of 2007. As of March 31, 2007, we owned and operated four water disposal systems in the Barnett Shale and Southern Oklahoma and leased one in Seymore, Texas. We intend to drill or acquire additional wells, including one in Tarrant County, Texas. We are also currently in discussions with unrelated third parties regarding the development of a disposal well in Hill County, Texas. The disposal wells are an important component of fluid logistic operations as they provide an efficient solution for the disposal of waste waters. Fluid logistics are generally lower risk, lower barrier-to entry services, which in the past have helped us enter new markets and acquire new customers.

Well-site Services. As part of our well-site services, we rent equipment and provide services to build, maintain and reclaim drilling well-sites before and after the drilling operations take place. We build roads, dig pits, construct drilling pads, clear land, haul road materials and provide a host of construction services to drilling contractors and to oil and natural gas producers. We provide well-site construction services throughout Oklahoma. As of March 31, 2007, we owned approximately 100 miscellaneous trucks and mobile earth moving equipment that is used for drilling site preparation, rig logistics and other oilfield applications.

On a pro forma basis, our fluid logistics and well-site services segment generated approximately $65.7 million, or 41.9% of our total revenue, for the year ended December 31, 2006.

Completion and Production Services

Our completion and production services and other production related activities include specialty services, many of which are performed after drilling has been completed. Consequently, these services occur later in the life-cycle while a well is being completed or during the production stage. These services require skilled personnel and various types and sizes of equipment.

 

   

Completion Services. As newly drilled oil and natural gas wells are prepared for production, our operations include selectively testing producing zones of the wells before and after stimulation. This service is called “flow back” testing and assists producers in determining potential production and production equipment needs.

 

   

Workover Services. These services can be provided for both new and existing oil and natural gas wells. Once a new well is drilled, the drilling rig is replaced by a smaller, more mobile unit called a workover rig. The workover rig is used extensively during the completion process to assist in testing and equipping the well for production. Producing oil and gas wells occasionally require major repairs or modifications. These services may include re-completions of existing wells to exploit new formations either through deepening wellbores to new zones or by drilling horizontal lateral wellbores to improve reservoir drainage patterns. In less extensive re-completions, we provide services and products to seal off depleted zones in existing wellbores and access previously bypassed productive zones. Other workover services that we provide include: major subsurface repairs, such as casing repair or replacement; recovery of tubing and removal of foreign objects in the wellbore; repairing downhole equipment failures; plugging back the bottom of a well to reduce the amount of water being produced; cleaning out and recompleting a well if production has declined; and repairing leaks in the tubing and casing. As of March 31, 2007, we owned and operated three workover rigs, which operate in the Rocky Mountains and Texas. We commenced our workover services in May 2006. Using our workover rig and ancillary equipment, we also provide recurring maintenance services that are required throughout the life of most producing oil and natural gas wells to ensure efficient and continuous operation. These services may include pulling rods, tubing, pumps and other downhole equipment out of the wellbore to identify and repair a production equipment problem.

 

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Roustabout Services. We provide roustabout services on well-sites, ranging from constructing production sites, repairing production equipment, laying production flow lines, disassembly of tank batteries, transporting equipment and other ancillary duties. These services are used during completion, production and abandonment phases of a well’s life-cycle and are generally more labor intensive than equipment intensive.

 

   

Sale and Rental of Equipment. We sell expendable equipment that is used during the cementing process and in the completion of wells including plugs, tubing anchors, retainers and other accessories. We also rent electric generators and lighting equipment and a comprehensive line of reusable tools and equipment that are used in the completion and production phases. The most frequently used equipment includes packers and plugs, which are used to seal the wellbore to isolate certain zones for completion and re-completion procedures.

 

   

Plugging and Abandonment. We provide plugging and abandonment services when a well has reached the end of its productive life. We use workover rigs, cementing equipment, roustabout services and other equipment in the process of permanently closing oil and natural gas wells no longer capable of producing in economic quantities.

On a pro forma basis, our completion and production services segment generated approximately $10.4 million, or 6.6% of our total revenue, for the year ended December 31, 2006.

Properties

Our corporate headquarters are located at 510 E. Memorial Road, Suite B-2, Oklahoma City, Oklahoma in an office building leased from a third party. We currently own two properties and, in addition to our headquarters, lease 22 properties that are used for field offices or yards, or for both purposes. Of the owned properties, both are located in Texas. Of the leased properties, 11 are located in Oklahoma, five are located in Texas, two are located in Louisiana, two are located in Colorado, one is located in Kansas and one is located in Wyoming. We lease 14 properties from third parties and eight from our affiliates. We also own four disposal wells, two of which are located in Oklahoma and two of which are in Texas, and we lease one disposal well in Texas from a third party. We intend to drill or acquire additional wells.

We are currently in discussions with an unrelated third party regarding a joint venture to develop one disposal well. It will be in Hill County, Texas and our 40% interest would require us to contribute approximately $1.3 million of the well’s estimated $3.2 million cost. The well is expected to be completed in the second quarter of 2007 and it is expected that we would manage its operations.

Our leases with unaffiliated third parties have terms ranging from month-to-month to five years, and most include a right to extend the term for a period of time. In addition, some of the leases include an option to purchase the leased premises. The leases with our affiliate have a 20-year term and provide for a fixed rent during such term, subject to increases only if improvements we request are made. For a more detailed description of our transactions with our affiliates, see “Related Party Transactions” included elsewhere in this prospectus.

We believe that our facilities are adequate for our current operations. Presently, an affiliate is constructing a new building and, upon completion, we intend to lease approximately 15,000 square feet in the building for our corporate headquarters. It is expected that construction will be completed in or about July 2007. See “Related Party Transactions.”

Customers

Our customers consist primarily of independent oil and natural gas producers and land-based drilling contractors in North America. As of December 31, 2006, we had over 400 customers, including, among others, Chesapeake Energy Corp., EOG Resources Inc., Devon Energy Corp., Newfield Exploration Co. and Windsor Energy Group, L.L.C. Our top three customers accounted for approximately 45% of our revenue for the year ended December 31, 2006. Our two largest customers, Chesapeake Energy Corp. and EOG Resources, accounted for 22.3% and 13.6%, respectively, of our revenues during that period. Although we believe we have a broad customer base and wide geographic coverage of operations, it is likely that we will continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer decided not to continue to use our services, revenue could decline and our operating results and financial condition could be harmed.

 

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Operating Risk and Insurance

Our operations are subject to hazards inherent in the oil and natural gas industry, such as accidents, blowouts, explosions, fires and spills and releases that can cause:

 

   

personal injury or loss of life;

 

   

damage or destruction of property, equipment and the environment; and

 

   

suspension of operations.

In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant in lawsuits asserting large claims.

Because our business involves the transportation of heavy equipment and materials, we may also experience traffic accidents which may result in spills, property damage and personal injury.

Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past and anticipate that we could experience accidents in the future. In addition to the property damage, personal injury and other losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability and our relationships with customers, employees, regulatory agencies and other parties. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other material adverse effects on our financial condition and results of operations.

Although we maintain insurance coverage of types and amounts that we believe to be customary in the industry, we are not fully insured against all risks, either because insurance is not available or because of the high premium costs relative to perceived risk. We do maintain commercial general liability, workers’ compensation, business auto, excess auto liability, commercial property, motor truck cargo, umbrella liability and excess liability, owned aircraft liability, directors and officers, and employment practices liability insurance policies. However, any insurance obtained by us may not be adequate to cover any losses or liabilities and this insurance may not continue to be available or available on terms which are acceptable to us. Liabilities for which we are not insured, or which exceed the policy limits of our applicable insurance, could have a material adverse effect on us.

Safety Program

In the oilfield service industry, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced and skilled workforce. Recently, many of our large customers have placed an emphasis not only on pricing, but also on safety records and quality management systems or contractors. We believe these factors will gain further importance in the future. We have directed substantial resources toward employee safety and quality management training programs, as well as our employee review process. While our efforts in these areas are not unique, many competitors, particularly small contractors, have not undertaken similar or as extensive training programs for their employees.

Competition

The markets in which we operate are highly competitive. To be successful, a company must provide services and products that meet the specific needs of oil and natural gas exploration and production companies and drilling services contractors at competitive prices.

We provide our services and products across North America, and we compete against different companies in each service and product line we offer. Our competition includes many large and small oilfield service companies, including the largest integrated oilfield services companies.

 

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In our drilling technology and applications services segment, our primary competitors include Baker Hughes Incorporated and Weatherford International Ltd. Our major competitors in the stimulation and pumping services segment include Halliburton Company, Schlumberger Ltd. and BJ Services Company. Our major competitors for our fluid logistics and well-site services segment and our completion and production segment include Complete Production Services, Inc., Key Energy Services, Inc., Basic Energy Services, Inc. and a significant number of locally oriented businesses. We believe that the principal competitive factors in the market areas that we serve are quality of service and products, reputation for safety and technical proficiency, availability and price. While we must be competitive in our pricing, we believe our customers select our services and products based on local leadership and basin-expertise that our field management and operating personnel use to deliver quality services and products.

Government Regulation

We operate under the jurisdiction of a number of regulatory bodies that regulate worker safety standards, the handling of hazardous materials, the transportation of explosives, the protection of human health and the environment and driving standards of operation. Regulations concerning equipment certification create an ongoing need for regular maintenance which is incorporated into our daily operating procedures. The oil and natural gas industry is subject to environmental regulation pursuant to local, state and federal legislation.

Transportation Matters

Among the services we provide, we operate as a motor carrier and therefore are subject to regulation by the U.S. Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations, and regulatory safety, financial reporting and certain mergers, consolidations and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.

Interstate motor carrier operations are subject to safety requirements prescribed by the Department of Transportation. To a large degree, intrastate motor carrier operations are subject to safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations. Department of Transportation regulations mandate drug testing of drivers.

From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.

Environmental Matters

Our operations are subject to numerous federal, state and local environmental laws, regulations and other requirements governing the release and/or discharge of materials into the environment or otherwise relating to protection of human health and the environment. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly and difficult. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, assessment of administrative and civil penalties, and even criminal prosecution. We believe that we are in substantial compliance with applicable environmental laws and regulations. Further, we do not anticipate that compliance with existing environmental laws and regulations will have a material effect on our consolidated financial statements. However, it is possible that substantial costs for compliance or liability may be incurred in the future. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations, and enforcement policies, could result in additional costs or liabilities that we cannot currently quantify.

We handle, transport, store and dispose of wastes that are subject to the federal Resource Conservation and Recovery Act, or RCRA, and comparable state statutes. The U.S. Environmental Protection Agency, or EPA, and state agencies

 

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have limited the approved methods of disposal for some types of hazardous and nonhazardous wastes. Some wastes handled by us in our field service activities that currently are exempt from treatment as hazardous wastes may in the future be designated as “hazardous wastes” under RCRA or other applicable statutes. If this were to occur, we would become subject to more rigorous and costly operating and disposal requirements.

The federal Comprehensive Environmental Response, Compensation, and Liability Act, CERCLA or the “Superfund” law, and comparable state statutes impose liability, without regard to fault or legality of the original conduct, on certain classes of persons. Such classes of persons include the current and past owners or operators of sites where a hazardous substance was released, and companies that disposed or arranged for disposal of hazardous substances, including at offsite locations such as landfills. Under CERCLA, these persons may be ordered to take certain actions or subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We currently own, lease, or operate numerous properties and facilities that for many years have been used for industrial activities, including oil and gas production operations. We have also formerly owned or operated such facilities. Hazardous substances, wastes, or hydrocarbons may have been released on or under the properties owned or leased by us, or on or under other locations where such substances have been taken for disposal. In addition, some of these properties have been operated by third parties or by previous owners whose treatment and disposal or release of hazardous substances, wastes, or hydrocarbons, was not under our control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes (including substances disposed of or released by prior owners or operators or other parties), remediate contaminated property (including groundwater contamination, whether from prior owners or operators or other activities or spills), or perform remedial plugging or pit closure operations to prevent future contamination. These laws and regulations may also expose us to liability for our acts that were in compliance with applicable laws at the time the acts were performed.

In the course of our operations, some of our equipment may be exposed to naturally occurring radiation associated with oil and gas deposits, and this exposure may result in the generation of wastes and other materials containing naturally occurring radioactive materials or “NORM.” NORM exhibiting trace levels of naturally occurring radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping, and work area affected by NORM may be subject to remediation or restoration requirements. Because many of the properties presently or previously owned, operated, or occupied by us have been used for oil and gas production operations for many years, it is possible that we may incur costs or liabilities associated with NORM.

The Federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the EPA or applicable state agencies. Many of our properties and operations require permits for discharges of wastewater and/or stormwater, and we have a system for securing and maintaining these permits. In addition, the Oil Pollution Act of 1990 imposes a variety of requirements on responsible parties related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills. A responsible party includes the owner or operator of a facility. The Federal Water Pollution Control Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the Oil Pollution Act, impose rigorous requirements for spill prevention and response planning, as well as substantial potential liability for the costs of removal, remediation, and damages in connection with any unauthorized discharges.

Our underground injection operations are subject to the federal Safe Drinking Water Act, as well as analogous state and local laws and regulations. Under Part C of the Safe Drinking Water Act, the EPA established the Underground Injection Control program, which established the minimum program requirements for state and local programs regulating underground injection activities. The Underground Injection Control program includes requirements for permitting, testing, monitoring, record keeping and reporting of injection well activities, as well as a prohibition against the migration of fluid containing any contaminant into underground sources of drinking water. Regulations require us to obtain a permit from the applicable regulatory agencies to operate our underground injection wells. We believe that we have obtained the necessary permits from these agencies for our underground injection wells and that we are in

 

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substantial compliance with permit conditions and applicable rules. Nevertheless, these regulatory agencies have the general authority to suspend or modify one or more of these permits if continued operation of one of our underground injection wells is likely to result in pollution of freshwater, substantial violation of permit conditions or applicable rules, or leaks to the environment. Although we monitor the injection process of our wells, any leakage from the subsurface portions of the injection wells could cause degradation of fresh groundwater resources, potentially resulting in cancellation of operations of a well, issuance of fines and penalties from governmental agencies, incurrence of expenditures for remediation of the affected resource and imposition of liability by third parties for property damages and personal injuries. In addition, our sales of residual crude oil collected as part of the saltwater injection process could impose liability on us in the event that the entity to which the oil was transferred fails to manage the residual crude oil in accordance with applicable environmental health and safety laws.

Some of our operations also result in emissions of regulated air pollutants. The federal Clean Air Act and analogous state laws require permits for facilities that have the potential to emit substances into the atmosphere that could adversely affect environmental quality. Failure to obtain a permit or to comply with permit requirements could result in the imposition of substantial administrative, civil and even criminal penalties. The obtaining of new or modified air permits could also expose us to increased costs of operations.

OSHA Matters

We are also subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances.

Employees

As of March 31, 2007, we had approximately 957 full-time employees. None of our employees are represented by labor unions or covered by any collective bargaining agreements. We also hire independent contractors and consultants involved in land, technical, regulatory and other disciplines to assist our full time employees.

Historically, certain personnel of Gulfport Energy Corporation have provided management and administrative services to us, including accounting, human resources, legal and technical support. Gulfport also administered health and related benefits for our employees. We reimbursed Gulfport for its dedicated employee time and related general and administrative costs based upon the pro rata share of time its employees spent performing services for us. See “Related Party Transactions – Shared Services Agreement.”

Legal Proceedings

Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, will have a material adverse effect on our financial condition or results of operations.

 

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Management

Executive Officers and Directors

Set forth below is the name, age, position and a brief account of the business experience of each of our directors, executive officers and other key field management employees as of March 31, 2007.

 


 

Name

  

Age    

  

Position

Arty Straehla

   53    Chief Executive Officer and Director

Grant DeFehr

   29    Chief Operating Officer

Cale Coulter

   30    Chief Financial Officer, Treasurer and Secretary

Mike Liddell

   53    Chairman of the Board and Director

Gilbert Gibson

   72    Director Nominee

Craig Groeschel

   39    Director Nominee

Scott Streller

   39    Director Nominee

Will Higginbotham

   49    General Manager – Fluid Logistics and Well-site Services – Oklahoma

Randall D. Holleyman, P.E

   55    General Manager – Drilling Technology Services and Applications

Jack Little

   50    General Manager – Fluid Logistics and Well-site Services – Texas

Mark McKelvey

   49    General Manager – Stimulation and Pumping Services – Texas

Doug Rather

   47    General Manager – Stimulation and Pumping Services – Oklahoma

Danny Ward

   50    Vice President of Operations – Drilling Technology Services and Applications

 


Arty Straehla has served as our Chief Executive Officer since October 2006. Mr. Straehla served as our Chief Operating Officer from January 2006 until December 2006. Prior to joining our company, Mr. Straehla completed a 26-year career with the Goodyear Tire and Rubber Co. in December 2005 where his last position was the director of consumer tire manufacturing for the North American consumer tire operations. In this capacity, Mr. Straehla oversaw eight tire plants with 12,000 employees, a $2.5 billion operating budget, a $115.0 million capital expenditures budget and a production capacity of 100 million tires per year. Mr. Straehla holds a Bachelor of Science degree in Secondary Education and a Master of Arts degree in History from Oklahoma State University. Mr. Straehla also has a Master of Business Administration degree from Oklahoma City University.

Grant DeFehr has served as our Chief Operating Officer since December 2006. From March 2006 until November 2006, he was Chief Operating Officer of Great White Energy Services, an energy service company recently formed by Wexford. Mr. DeFehr served as Vice President of Acquisitions of Services LLC from May 2005 until March 2006. From March 2005 until March 2006, Mr. DeFehr was employed by Gulfport Energy Corporation, a NASDAQ Global Select Market listed independent oil and natural gas exploration and production company, where he was responsible for corporate development and acquisitions. From August 2001 until May 2005, Mr. DeFehr was a full-time student. Mr. DeFehr served as Political Director for Oklahoma Families for Jobs & Justice, a successful Right to Work referendum, from April 2001 until September 2001; Director of Redistricting and Cabinet Liaison and Policy Specialist for Oklahoma Governor Frank Keating from March 2001 until July 2001; and Director of Business Development for My eCommunity, a start-up Internet company specializing in the research, design and marketing of political portals, from January 2000 until October 2000. Mr. DeFehr received a Juris Doctorate degree from Georgetown University Law Center in 2005, a Masters in Public Administration degree from Harvard University in 2005, and a Bachelor of Arts degree in Government and Foreign Affairs from the University of Virginia in 1999.

Cale Coulter has served as our Chief Financial Officer, Treasurer and Secretary since November 2005. Mr. Coulter completed a four-year career with Hunt Oil Company in November 2005, where his last position was the Manager of Finance and Administration for Peru LNG and Hunt Oil Company of Peru. Mr. Coulter holds Bachelor of Business Administration degrees in Finance and Management Information Systems from the University of Oklahoma.

 

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Mike Liddell has served as the Chairman of the Board and a director of our company since our incorporation in November 2006 and has been involved with our company since commencement of our operations in 2005. He has served as a director of Gulfport Energy Corporation, a NASDAQ Global Select Market listed independent oil and natural gas exploration and production company, since July 1997 and as its Chairman of the Board since July 1998. He also served as Gulfport’s Chief Executive Officer from April 1998 to December 2005 and as its President from July 2000 to December 2005. Mr. Liddell has served since May 2005 as Chairman of the Board and a director of Bronco Drilling Company, Inc., a NASDAQ Global Market listed provider of contract land drilling services. Mr. Liddell also serves as the Chairman of the Board and a director of Windsor Energy Resources, Inc., an independent oil and natural gas exploration and production company, since December 2005. In addition, Mr. Liddell served as Chief Executive Officer of DLB Oil & Gas, Inc., a publicly held oil and natural gas company, from October 1994 to April 1998, and as a director of DLB Oil & Gas from 1991 through April 1998. From 1991 to 1994, Mr. Liddell was President of DLB Oil & Gas. From 1979 to 1991, he was President and Chief Executive Officer of DLB Energy. Bronco, Gulfport and Windsor Energy are companies in which Wexford, our equity sponsor, or its affiliates, beneficially own approximately 31%, 42% and 100%, respectively, of the outstanding shares of common stock as of December 15, 2006. Mr. Liddell received a Bachelor of Science degree in Education from Oklahoma State University.

Dr. Gilbert “Gib” Gibson has agreed to serve as a director of our company and is expected to join our board prior to the closing of this offering. Dr. Gibson currently serves as a member of the board of directors of IBC Bank Oklahoma, a position he assumed in July 2004. From November 1998 to July 2004, Dr. Gibson served as an advisory director for Local Oklahoma Bank. In addition, from July 1969 to November 1998, Dr. Gibson served as a director of various financial institutions in Oklahoma, including First Southwest Bank, Arrowhead Federal Savings and Loan, Heartland Federal Savings and Loan Association, BankSouth Corp., First Bank of Chattanooga and Mustang State Bank. Dr. Gibson was a founding director and served as Chairman and Chief Executive Officer of Citizens Bank and First Commercial Bank from May 1975 to November 1998 and March 1985 to April 1995, respectively. Dr. Gibson was a practicing dentist from 1958 to 1969. In addition, Dr. Gibson served as Chairman of the Lawton/ Ft. Sill Chamber of Commerce from June 1989 to June 1990 and Chairman of the Oklahoma State Chamber of Commerce from June 1991 to June 1992. He has been elected to the State of Oklahoma Hall of Fame and to the Oklahoma City University Hall of Fame. Dr. Gibson received a Bachelor of Arts degree from Oklahoma State University and a Doctor of Dental Surgery Degree from the University of Missouri at Kansas City.

Craig Groeschel has agreed to serve as a director of our company and is expected to join our board prior to the closing of this offering. In January 1996, he founded Lifechurch.tv, which is now one of the ten largest churches in the United States. In addition to leading Lifechurch.tv, since January 1998 Mr. Groeschel has provided consultant and public speaking services to various organizations across the country. In March 2006, he published Chazon, and in October 2006 he published Confessions of a Pastor. From May 1990 to June 1991, Mr. Groeschel served as a salesman for Honeywell Procection Services. From June 1991 to December 1995, he served as associate pastor at First United Methodist Church in Oklahoma City, Oklahoma. Mr. Groeschel holds a Masters of Divinity degree from Phillips Graduate Seminary and holds a Bachelor of Business Administration degree in Business Marketing from Oklahoma City University.

Scott Streller has agreed to serve as a director of our company and is expected to join our board prior to the closing of this offering. Since April 1993, Mr. Streller has operated an insurance agency for Farmer’s Insurance and Farmer’s Financial Solutions. Since August 2006, Mr. Streller has also served as a director of Gulfport Energy Corporation. Mr. Streller holds a Master’s degree in Athletic Administration from Oklahoma State University and a Bachelor of Business Administration degree in Business Management from the University of Central Oklahoma.

Key Field Management

Will Higginbotham has served as general manager of our fluid logistics and well-site services division in Oklahoma since August 2006. From April 2003 until joining our company, Mr. Higginbotham was self employed in the oil field services industry. He was a sales and account representative for Quantum Drilling Motors from August 2002 until April 2003, a fleet account manager for Commercial Insurance Services from July 2000 to August 2002 and an executive sales manager for Hammond Phillips, an oilfield fluid logistics company, from 1996 until July 2000. Mr. Higginbotham’s family owned and operated two large independent oilfield services companies, Capital Well Service and Oklahoma Tank Service, for more than 30 years before selling the companies in 1998. Mr. Higginbotham served as general manager, secretary and treasurer of these companies from 1977 until 1998.

 

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Randall D. Holleyman, P.E. has served as general manager of our drilling technology services and applications division since December 2005. Mr. Holleyman served as president of Quantum Drilling Motors, a directional drilling company, since its inception in August 1998 until we acquired substantially all of the assets of that company in December 2005. A registered professional engineer, Mr. Holleyman has more than 30 years experience in the oil and natural gas industry, specializing in management, drilling and completion engineering and operations. Mr. Holleyman received a bachelor’s degree in petroleum engineering in 1974 and a master’s degree in petroleum engineering and economics in 1987 from the University of Oklahoma.

Jack Little has served as general manager of our fluid logistics and well-site services division in Texas since January 2006. Mr. Little served as general manager of Total Oilfield Services, a Fort Worth Basin-based fluid logistics and disposal company, from February 2004 until our acquisition of this entity in January 2006. Mr. Little was one of the original partners in Total Oilfield Services and its affiliate, Total Pumping Services, which we also acquired in January 2006. Mr. Little managed fluid logistics in the Barnett Shale, Texas for Key Energy from August 2001 until February 2004 and for Q Services from 1996 until August 2001. Prior to his tenure at Key Energy and Q Services, Mr. Little founded Johnson Tank Trucks in north Texas in 1984, which he operated until 1996. Mr. Little began his career in sales with Dowell, Inc. in 1978 and has 28 years of experience in the oil and natural gas industry, primarily as a fluid transportation company owner or manager.

Mark McKelvey has served as general manager of our stimulation and pumping services division in Texas since January 2006. Mr. McKelvey served as general manager of Total Pumping Services, a water transfer company, which is located in the Fort Worth Basin, from January 2004 until our acquisition of this entity in January 2006. Mr. McKelvey began his career with Dowell in 1979 and held various sales and field engineering positions, including as a procurement and frac coordinator, first at Dowell and then at Schlumberger where he was employed from 1985 until January 2004. Mr. McKelvey has 27 years of oil and natural gas industry experience, most of it in stimulation and pumping business.

Doug Rather has served as general manager of our stimulation and pumping services division in Oklahoma since January 2006. Mr. Rather was one of the founding partners and served as general manager of Cementing Services, a multi-line stimulation company based in Marlow, Oklahoma, from December 2004 until our acquisition of this entity in January 2006. Mr. Rather began his career with Halliburton in February 1981 where he served in various capacities, including franchise manager, stimulation team coordinator and manager, until December 2004.

Danny Ward has served as vice-president of operations of our drilling technology services and applications division since December 2005. Mr. Ward served as vice-president of operations of Quantum Drilling Motors from June 2002 until our acquisition of substantially all of the assets of that company in December 2005. From December 1997 to June 2002, Mr. Ward served as mid-continent regional manager of Weatherford-Dailey International and from November 1988 to June 1997, he served as operations manager for Drillex Systems Performance Drilling. Mr. Ward has 31 years of oil and natural gas industry experience, including experience in all aspects of the directional, horizontal and drilling motor services.

Our Board of Directors and Committees

Upon completion of this offering, our board of directors will consist of five directors. Our certificate of incorporation provides that the terms of office of the directors are one year from the time of their election until the next annual meeting of stockholders or until their successors are duly elected and qualified.

Our bylaws provide that the authorized number of directors may be changed by an amendment to the bylaws adopted by our board of directors or by the stockholders. In addition, our certificate of incorporation and our bylaws provide that, in general, vacancies on the board may be filled by a majority of directors in office, although less than a quorum.

Our board of directors will establish an audit committee in connection with this offering whose functions include the following:

 

   

assist the board of directors in its oversight responsibilities regarding (1) the integrity of our financial statements, (2) our compliance with legal and regulatory requirements, (3) the independent accountant’s qualifications and independence and (4) our accounting and financial reporting processes of and the audits of our financial statements;

 

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prepare the report required by the SEC for inclusion in our annual proxy or information statement;

 

   

appoint, retain, compensate, evaluate and terminate our independent accountants;

 

   

approve audit and non-audit services to be performed by the independent accountants; and

 

   

perform such other functions as the board of directors may from time to time assign to the audit committee.

The specific functions and responsibilities of the audit committee will be set forth in the audit committee charter. Upon completion of this offering, our audit committee will include at least one director who satisfies the independence requirements of current SEC rules and The NASDAQ Global Market listing standards. Within one year after completion of the offering, we expect that our audit committee will be composed of three members that will satisfy the independence requirements of current SEC rules and The NASDAQ Global Market listing standards. We also expect that one of the members of the audit committee will qualify as an audit committee financial expert as defined under these rules and listing standards, and the other members of our audit committee satisfy the financial literacy standards for audit committee members under these rules and listing standards.

Pursuant to our bylaws, our board of directors may, from time to time, establish other committees to facilitate the management of our business and operations. Because we are considered to be controlled by Wexford under The NASDAQ Global Market rules, we are eligible for exemptions from provisions of these rules requiring a majority of independent directors, nominating and corporate governance and compensation committees composed entirely of independent directors and written charters addressing specified matters. We may elect to take advantage of some of these exemptions. In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these provisions after the specified transition periods.

Although we will be eligible for an exemption from the compensation committee requirements under The NASDAQ Global Market rules, we intend to establish a compensation committee composed of at least two independent directors in connection with this offering. See “Executive Compensation—Compensation Discussion and Analysis—Compensation Policy.”

Director Compensation

To date, none of our directors has received compensation for services rendered as a board member. Members of our board of directors who are also officers or employees of our company will not receive compensation for their services as directors. It is anticipated that after the completion of this offering, we will pay our non-employee directors a monthly retainer of $1,000 and a per meeting attendance fee of $500 and reimburse all ordinary and necessary expenses incurred in the conduct of our business.

In connection with this offering, we intend to implement an equity incentive plan. Under the plan, certain non-employee directors will be granted              shares of restricted stock, which will vest in six approximately equal installments every six months beginning on the six-month anniversary of the date of grant.

Compensation Committee Interlocks and Insider Participation

We do not currently have a compensation committee although we intend to establish one prior to completion of this offering. None of our executive officers serves, or has served during the past year, as a member of the board of directors or compensation committee of any other company that has one or more executive officers serving as a member of our board of directors or compensation committee.

Executive Compensation

Compensation Discussion and Analysis

Compensation Practices

From our inception in 2005 through March 2006, the services of our executive officers were provided by our affiliate, Gulfport Energy Corporation. We did not pay these individuals directly, but instead reimbursed Gulfport for the salary

 

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and other benefits paid to these executives. See “Related Party Transactions—Shared Services Agreement.” In June 2006, we began employing our executive management team directly. All compensation decisions relating to our executive officers were subject to approval by Wexford, our equity sponsor and the beneficial owner of all our outstanding common stock prior to the completion of this offering.

Our Board of Directors intends to establish a compensation committee comprised of at least two independent, non-employee directors. Our Board of Directors also intends to adopt a written charter for the compensation committee setting forth the compensation committee’s purpose and responsibilities. The principal responsibilities of the compensation committee will be to review and approve corporate goals and objectives relevant to the compensation of our executive officers, evaluate their performance in light of these goals, determine and approve our executive officers’ compensation based on such evaluation and establish policies, including with respect to the following:

 

   

the allocation between long-term and currently paid out compensation;

 

   

the allocation between cash and non-cash compensation, and among different forms of non-cash compensation;

 

   

the allocation among each different form of long-term award;

 

   

how the determination is made as to when awards are granted, including awards of equity-based compensation such as restricted stock and/or options; and

 

   

stock ownership guidelines and any policies regarding hedging the economic risk of such ownership.

Compensation Policy

The objectives of our compensation programs are to:

 

   

attract, retain and motivate key executive personnel who possess the skills and qualities necessary to perform successfully in the oilfield service industry; and

 

   

closely align the interests of our executives with those of our stockholders.

Upon completion of this offering, the elements of compensation for our executives will include: annual salary, cash bonus awards and long-term incentive equity awards. In making compensation decisions with respect to each of these elements, the compensation committee is expected to consider numerous factors, including:

 

   

the individual’s particular background and circumstances, including training and prior relevant work experience;

 

   

the individual’s role with us and the compensation paid to similar persons in comparable companies;

 

   

the demand for individuals with the individual’s specific expertise and experience at the time of hire;

 

   

achievement of individual and company performance goals and other expectations relating to the position;

 

   

comparison to other executives within our company having similar levels of expertise and experience and the uniqueness of the individual’s industry skills; and

 

   

aligning the compensation of our executives with the performance of our company on both a short-term and long-term basis.

Although we expect the compensation committee to follow these policies, it is possible that the compensation committee could develop a compensation philosophy different than that discussed here.

Components of Compensation Following the Completion of the Offering

Base Salary

Base salaries for our executives are established based on the scope of their responsibilities and their prior relevant background, training and experience, taking into account competitive market compensation paid by other companies in our industry and the overall market demand for such executives at the time of hire. An executive’s base salary is also evaluated together with other components of the executive’s other compensation to ensure that the executive’s total compensation is in line with our overall compensation philosophy. We do not retain compensation consultants to advise us on compensation matters. Base salaries will be reviewed annually as part of our performance management program and may be increased for merit reasons, based on the executive’s success in meeting or exceeding individual performance objectives and an assessment of whether significant corporate goals were achieved. If necessary, we may realign base salaries with market levels for comparable positions in other companies in our industry if we identify significant market

 

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changes. Additionally, we may adjust base salaries as warranted throughout the year for promotions or other changes in the scope or breadth of an executive’s role or responsibilities. Upon completion of this offering, our named executive officers, Messrs. Straehla, DeFehr and Coulter, will be compensated at an annual rate of $250,000, $175,000 and $175,000 respectively.

Discretionary Annual Bonus

The compensation committee will have the authority to award discretionary annual cash bonuses to our executive officers based on individual and company performance. We believe these bonuses will be an important tool in motivating and rewarding the performance of our executive officers. Performance-based cash incentive compensation is expected to be paid to our executive officers based on individual and/or overall performance standards.

Long Term Equity Incentive Compensation

We will seek to promote an ownership culture among our executive officers in an effort to enhance our long-term performance. We believe the use of stock and stock-based awards offers the best approach to achieving our compensation goals. To date, no stock or stock-based awards have been granted to any of our employees and we have not adopted stock ownership guidelines for our executives. In connection with this offering, however, we intend to implement our 2007 Equity Incentive Plan. The purpose of this plan will be to enable us, and our affiliates, to attract and retain the services of the types of employees, consultants and directors who will contribute to our long range success and to provide incentives that will be linked directly to increases in share value that will inure to the benefit of our stockholders. The plan will provide a means by which eligible recipients of awards may be given an opportunity to benefit from increases in value of our common stock through the granting of equity awards.

In connection with this offering, we will grant restricted stock awards to our executive officers under our 2007 Equity Incentive Plan to provide long-term incentive to build stockholder value. Messrs. Straehla, DeFehr and Coulter, will be issued 66,666, 40,000 and 40,000 shares of restricted stock, respectively. The shares of restricted stock subject to such awards will vest in six approximately equal installments every six months over a three-year period beginning on the grant date. Restricted stock awards will be made in recognition of existing, and anticipation of future, contributions that will create value in our company. Because the shares have a defined value at the time the restricted stock grants are made, restricted stock grants are often perceived as having more immediate value than stock options, which have a less calculable value when granted. We will initially grant only restricted stock awards as long-term equity incentive compensation for our executive officers. We believe the total number of shares granted as restricted stock awards is substantially less than the number that would be required under an option program designed to deliver equivalent levels of compensation. However, the 2007 Equity Incentive Plan will provide for other equity awards, including incentive stock options, nonstatutory stock options, performance awards, stock appreciation rights and any combination thereof, that we may issue to our executive officers and other eligible participants in the future. The terms of the 2007 Equity Incentive Plan are described in more detail below.

Other Compensation and Perquisites

Consistent with our compensation philosophy, we anticipate that the compensation committee will continue to provide benefits to our executives that are substantially the same as those currently being offered to our other employees, including health insurance, life and disability insurance and a 401(k) plan. The benefits and perquisites that may be available to our executive officers in addition to those available to our other employees include a car allowance and club dues.

Tax Implications of Executive Compensation Policy

Under Section 162(m) of the Internal Revenue Code, a public company generally may not deduct compensation in excess of $1.0 million paid to its chief executive officer and the four other most highly compensated executive officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. We anticipate that our compensation committee will structure our long-term and incentive compensation programs to preserve the tax deductibility of compensation paid to our executive officers. However, our compensation committee will have the authority to award performance based compensation that is not deductible and we cannot guarantee that it will only award deductible compensation to our executive officers. In addition, notwithstanding our compensation committee’s efforts, ambiguities and uncertainties regarding the application and interpretation of Section 162(m) make it

 

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impossible to provide assurance that any performance based compensation will, in fact, satisfy the requirements for deductibility under Section 162(m). Time vested restricted stock awards will not be treated as performance based compensation and, as a result, the deductibility of such awards could be limited. Also, base salaries and other non-performance based compensation as defined in Section 162(m) in excess of $1.0 million paid to these executive officers in any year would not qualify for deductibility under Section 162(m).

Accounting Implications of Executive Compensation Policy

We will be required to recognize compensation expense of all stock-based awards pursuant to the principles set forth in Statement of Financial Accounting Standards 123(R), “Share-based Payment,” or SFAS 123(R). As discussed above, in connection with this offering, we will grant restricted stock awards to our executive officers under our 2007 Equity Incentive Plan. Our initial restricted stock awards will be issued to officers and employees without consideration and will vest in six approximately equal installments every six months over a three-year period (the requisite service period) beginning on the six-month anniversary of the grant date. Nonvested shares are deemed issued and outstanding from a legal perspective; however, under U.S. generally accepted accounting principles, or GAAP, only vested shares are included in basic shares outstanding. Also, under GAAP, nonvested shares are included in diluted shares outstanding when the effect is dilutive. We believe that restricted stock awards are an essential component of our compensation strategy, and we intend to offer such awards in the future. In addition, we may offer incentive stock options, nonstatutory stock options, performance awards, stock appreciation rights and other forms of stock-based awards to our executive officers and other eligible participants under our 2007 Equity Incentive Plan or any other plans that we may adopt in the future.

Summary of Compensation for our Named Executive Officers

The following table shows the compensation paid or accrued during the fiscal year ended December 31, 2006 to (1) our chief executive officer, (2) our chief financial officer, (3) our chief operating officer and (4) our other most highly compensated executive officer serving in this capacity as of December 31, 2006, whose total compensation exceeded $100,000 for the fiscal year ended December 31, 2006 (collectively, our “named executive officers”).

Summary Compensation Table—2006

 


Name and Principal Position

 

Year

 

Salary

($)

   

Bonus

($)

 

Stock

Awards

($)

 

Option

Awards

($)

 

Non-Equity

Incentive

Plan

Compensation

($)

 

Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings ($)

 

All Other

Compensation

($)

   

Total

($)

Arty Straehla (1)

    Chief Executive Officer

  2006   187,821 (2)   100,000   —     —     —     —     15,049 (3)   302,870

Michael O. Thompson (4)

    Chief Executive Officer

  2006   304,000     —     —     —     —     —     22,992 (5)   326,992

Cale Coulter

    Chief Financial Officer, Treasurer and Secretary

  2006   161,218     40,000   —     —     —     —     12,537 (6)   213,755

Grant DeFehr (7)

    Chief Operating Officer

  2006   13,462     —     —     —     —     —         13,462

Mike Terry (8)

    Executive Vice President

  2006   120,000     15,000   —     —     —     —     16,101 (5)   151,101

 


 

(1) Mr. Straehla, who previously served as our Chief Operating Officer became our Chief Executive Officer in October 2006, when Mr. Thompson, our former Chief Executive Officer, resigned.
(2) Mr. Straehla’s salary for 2006 consisted of $33,333 received for his services as our Chief Executive Officer from October 2006 through December 2006 and $154,487 received for his services as our Chief Operating Officer from January 2006 through October 2006.
(3) Includes a matching contribution to the 401(k) plan and an auto allowance.
(4) Mr. Thompson, our former Chief Executive Officer, resigned in October 2006.
(5) Includes a matching contribution to the 401(k)) plan, an auto allowance and reimbursements for country club dues.
(6) Includes a matching contribution to the 401(k) plan and reimbursements for country club dues.

 

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(7) Mr. DeFehr became our Chief Operating Officer in November 2006 and his compensation reflected in this table is for the period from November 2006 through December 2006.
(8) Mr. Terry, our former Executive Vice President, joined our company in March 2006 and resigned in February 2007, and his compensation reflected in this table is for the period from March 2006 through December 2006.

Employment Agreements

We have not entered into employment agreements with any of our executive officers, however we have entered into agreements with certain of our executive officers providing for specified benefits in the event of a change of control followed by a termination of employment, demotion or similar event. See “—Potential Payments upon Termination or Following a Change in Control.”

2007 Equity Incentive Plan

General

Prior to the completion of this offering, we did not have any stock option or other equity compensation plan and, as a result, there were no stock option or restricted stock grants or other equity awards granted to, or options exercises by, any of our named executive officers in 2006. In connection with this offering, we intend to implement our 2007 Equity Incentive Plan.

Eligible award recipients are employees, consultants and directors of our company and its affiliates. Incentive stock options may be granted only to our employees. Awards other than incentive stock options may be granted to employees, consultants and directors. The shares that may be issued pursuant to awards consist of our authorized but unissued common stock, and the maximum aggregate amount of such common stock which may be issued upon exercise of all awards under the plan, including incentive stock options, may not exceed 1,750,000 shares, subject to adjustment to reflect certain corporate transactions or changes in our capital structure.

We anticipate granting restricted stock awards to employees and certain non-employee directors in an aggregate amount of approximately 550,000 shares of our common stock under the plan upon completion of this offering.

Share Reserve. The aggregate number of shares of common stock initially authorized for issuance under the plan is 1,750,000 shares. However, (i) shares covered by an award that expires or otherwise terminates without having been exercised in full and (ii) shares that are forfeited to, or repurchased by, us pursuant to a forfeiture or repurchase provision under the plan may return to the plan and be available for issuance in connection with a future award.

Administration. Our board of directors (or such committee as may be appointed by our board of directors from time to time) administers the plan. Among other responsibilities, the board selects participants from among the eligible individuals, determines the number of ordinary shares that will be subject to each award and determines the terms and conditions of each award, including methods of payment, vesting schedules and limitations and restrictions on awards. Our board of directors may amend, suspend, or terminate the plan at any time. Amendments will not be effective without stockholder approval if stockholder approval is required by applicable law or stock exchange requirements.

Stock Options. Incentive and nonstatutory stock options are granted pursuant to incentive and nonstatutory stock option agreements. Employees, directors and consultants may be granted nonstatutory stock options, but only employees may be granted incentive stock options. The plan administrator determines the exercise price of a stock option, provided that the exercise price of a stock option generally cannot be less than 100% (and in the case of an incentive stock option granted to a 10% stockholder, 110%) of the fair market value of our common stock on the date of grant, except when assuming or substituting options in limited situations such as an acquisition. Generally, options granted under the plan vest ratably over a five-year period and have a term of ten years (five years in the case of an incentive stock option granted to a 10% stockholder), unless specified otherwise by the plan administrator.

Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (i) cash or check, (ii) a broker-assisted cashless exercise, (iii) the tender of common stock previously owned by the optionee and (iv) other legal consideration approved by the plan administrator.

 

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Unless the plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionee may designate a beneficiary, however, who may exercise the option following the optionee’s death.

Restricted Awards. Restricted awards are awards of either actual shares of common stock, or of hypothetical share units having a value equal to the fair market value of an identical number of shares of common stock, and which may provide that such restricted awards may not be sold, transferred, or otherwise disposed of for such period as the plan administrator determines. The purchase price and vesting schedule, if applicable, of restricted awards are determined by the plan administrator.

Performance Awards. Performance awards entitle the recipient to acquire shares of common stock, or hypothetical share units having a value equal to the fair market value of an identical number of shares of common stock that will be settled in the form of shares of common stock upon the attainment of specified performance goals. Performance awards may be granted independent of or in connection with the granting of any other award under the plan. Performance goals will be established by the plan administrator based on one or more business criteria that apply to the plan participant, a business unit, or our company and our affiliates. Performance goals will be objective and meet the requirements of Section 162(m) of the Code. No payout will be made on a performance award granted to a named executive officer unless all applicable performance goals and service requirements are achieved. Performance awards may not be sold, assigned, transferred, pledged or otherwise encumbered and terminate upon the termination of the participant’s service to us or our affiliates.

Stock Appreciation Rights. Stock appreciation rights may be granted independent of or in tandem with the granting of any option under the plan. Stock appreciation rights are granted pursuant to stock appreciation rights agreements. The exercise price of a stock appreciation right granted independent of an option is determined by the plan administrator, but may be no less than 100% of the fair market value of our common stock on the date of grant. The exercise price of a stock appreciation right granted in tandem with an option is the same as the exercise price of the related option. Upon the exercise of a stock appreciation right, we will pay the participant an amount equal to the product of (i) the excess of the per share fair market value of our common stock on the date of exercise over the strike price, multiplied by (ii) the number of shares of common stock with respect to which the stock appreciation right is exercised. Payment will be made in cash, delivery of stock, or a combination of cash and stock as deemed appropriate by the plan administrator.

Non-qualified deferred compensation awards. In the event any award under the plan is granted with an exercise price less than 100% of the fair market value of our common stock on the date of grant, it will be deemed a non-qualified deferred compensation award under Section 409A of the Internal Revenue Code. Generally, a non-qualified deferred compensation award may not be exercised or distributed prior to (i) a specified time or fixed schedule set forth in the award agreement, (ii) the participant’s separation from service, (iii) the death or disability of the participant, (iii) an unforeseeable emergency, or (iv) a change-in-control event. A non-qualified deferred compensation award may be exercisable no later than the later of (a) two and one-half months following the end of our taxable year in which the award first becomes exercisable or distributable or (b) two and one-half months following the end of the award recipient’s taxable year in which the award first becomes exercisable or distributable.

Adjustments in capitalization. In the event that there is a specified type of change in our common stock without the receipt of consideration by us, such as pursuant to a merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction, appropriate adjustments will be made to the various limits under, and the share terms of, the plan including (i) the number and class of shares reserved under the plan, (ii) the maximum number of stock options and stock appreciation rights that can be granted to any one person in a calendar year and (iii) the number and class of shares and exercise price, strike price, or purchase price, if applicable, of all outstanding stock awards.

Corporate Transactions. In the event of significant corporate transaction (other than a transaction resulting in Wexford or an entity controlled by, or under common control with Wexford maintaining direct or indirect control over the Company), such as a dissolution or liquidation of the Company, or any corporate separation or division, including, but not limited to, a split-up, a split-off or a spin-off, or a sale in one or a series of related transactions, of all or substantially

 

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all of the assets of the Company or a merger, consolidation, or reverse merger in which we are not the surviving entity, then all outstanding stock awards under the plan may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company), or may be cancelled either with or without consideration for the vested portion of the awards. In the event an award would be cancelled without consideration paid to the extent vested, the award recipient may exercise the award in full or in part for a period of ten days.

401(k) Plan.

We maintain a retirement savings plan, or a 401(k) Plan, for the benefit of our eligible employees who have attained the age of 18. Currently, employees may elect to defer their compensation up to the statutorily prescribed limit. Each year we may make a matching contribution equal to a uniform percentage of our employees’ deferrals, not to exceed six percent. In 2006, we made a matching contribution at the six percent level. An employee’s interests in his or her deferrals are 100% vested when contributed. The 401(k) Plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As such, contributions to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) Plan, and all contributions are deductible by us when made.

Potential Payments upon Termination or Following a Change in Control.

Executive officers serve at the will of the board of directors and we have not entered into employment agreements with any of our executive officers. This enables us to remove an executive officer prior to retirement if the Board determines that it is in the best interests of the company, with full discretion as to the amount, if any, of any severance payments or related benefits (other than vested benefits or as may be required under applicable law). Consistent with this policy, the Company does not typically enter into severance agreements with executive officers when they are hired or promoted. Notwithstanding the foregoing, we have entered into key employee retention agreements with certain of our executive officers that provide for payment of certain severance benefits in the event of a change of control followed by a termination of employment, demotion or similar events. The board believes that such agreements are necessary to assure objectivity and continuity of management in the event of a change of control.

In connection with this offering, we entered into key employee retention agreements with Messrs. Straehla, DeFehr and Coulter. Under these agreements, such executive officers will be entitled to certain severance benefits, provided their employment with us is terminated by us without cause or by the executive for good reason upon a change in control (as defined in the agreement) or at any time within twelve months after the change in control. Subject to certain exceptions, change in control as defined in these agreements includes the sale, transfer, conveyance or other disposition of all or substantially all of our properties or assets (other than by way of merger or consolidation) to any individual or entity other than Wexford Capital LLC or its affiliates, the adoption of a plan relating to the liquidation or dissolution of our company, incumbent directors ceasing to constitute a majority of the board of directors or the consummation of any transaction the result of which is that any person or group becomes the beneficial owner of more than 50% of the voting power of our company other than Wexford Capital LLC and its affiliates.

Termination for cause will exist if the executive becomes permanently disabled and is unable to perform his duties as an employee of our company or commits any of the following acts and such acts shall be determined by the board of directors to have been materially harmful to the company: an act of fraud, embezzlement or theft in connection with his duties or employment with us; intentional wrongful damage to our property; intentional wrongful disclosure of trade secrets or confidential information of our company or intentional wrongful competitive activity with our company during the time such executive is employed by us. Termination by the executive for good reason will include a significant adverse change in the nature or scope of the powers, functions, titles or duties of the executive, a reduction in the annual base or annual incentive compensation, a reduction in benefits or relocation of the principal executive offices more than 50 miles from the location of such offices immediately prior to the change in control.

Upon such termination, each executive would be entitled to receive severance payments consisting of a lump-sum payment equal to his annual base salary, plus an amount equal to the highest annual aggregate bonuses or incentive payments of cash compensation (other than fixed or base compensation) paid to such executive for his services in any one of the last two full fiscal years immediately preceding the fiscal year in which the change in control occurs. Such severance payments will be reduced by the aggregate amount of severance payments received by the executive under any other policy or arrangement provided by us to such executive. We will also provide or arrange to provide to the executive

 

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the continuation of his health benefits for a period of one year following the termination date, provided that such benefits will be reduced to the extent comparable benefits are received by such executive from another employer during such one-year period or under any other policy or arrangement provided by us.

The key employee retention agreements and the agreements relating to grants of restricted stock and options under our 2007 Equity Incentive Plan also provide that if the executive’s employment is terminated by us without cause or by the executive for good reason within 12 months after the change in control, any shares of our restricted stock held by such executive on the date of termination will vest and any stock options held by such executive will be accelerated and remain exercisable during the remainder of their term, as of such termination date.

The foregoing benefits will also be available if the executive’s termination occurs within 12 months prior to the change in control after commencement by the company of substantive discussions with any third party which result in a change in control in which such third party has a significant involvement within one year after commencement of such discussions.

If Messrs. Straehla, DeFehr and Coulter are terminated under the circumstances described above, they would be entitled to $325,000, $175,000 and $215,000 in cash severance payments, respectively. In addition, the value of health benefits for Messrs. Straehla, DeFehr and Coulter would be $4,314, $1,671 and $4,716, respectively.

Limitations on Liability and Indemnification of Officers and Directors

Certificate of Incorporation and Bylaws

Our certificate of incorporation provides that no director shall be personally liable to us or any of our stockholders for monetary damages resulting from breaches of their fiduciary duty as directors, except to the extent such limitation on or exemption from liability is not permitted under the Delaware General Corporation Law, or DGCL. The effect of this provision of our certificate of incorporation is to eliminate our rights and those of our stockholders (through stockholders’ derivative suits on our behalf) to recover monetary damages against a director for breach of the fiduciary duty of care as a director, including breaches resulting from negligent or grossly negligent behavior, except, as restricted by the DGCL:

 

   

for any breach of the director’s duty of loyalty to the company or its stockholders;

 

   

for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

 

   

in respect of certain unlawful dividend payments or stock redemptions or repurchases; and

 

   

for any transaction from which the director derives an improper personal benefit.

This provision does not limit or eliminate our rights or the rights of any stockholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director’s duty of care.

Our certificate of incorporation also provides that we will, to the fullest extent permitted by Delaware law, indemnify our directors and officers against losses that they may incur in investigations and legal proceedings resulting from their service.

Our bylaws include provisions relating to advancement of expenses and indemnification rights consistent with those provided in our certificate of incorporation. In addition, our bylaws provide:

 

   

for a right of indemnitee to bring a suit in the event a claim for indemnification or advancement of expenses is not paid in full by us within a specified period of time; and

 

   

permit us to purchase and maintain insurance, at our expense, to protect us and any of our directors, officers and employees against any loss, whether or not we would have the power to indemnify that person against that loss under Delaware law.

Indemnification Agreements

We will enter into indemnification agreements with each of our current directors and executive officers effective upon the closing of this offering. These agreements require us to indemnify these individuals to the fullest extent permitted

 

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under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers.

Liability Insurance

We intend to provide liability insurance for our directors and officers, including coverage for public securities matters. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification from us is sought, nor have we been threatened with litigation that may result in claims for indemnification from us. However, some of our affiliates are involved in pending litigation and it is possible that the plaintiffs in these proceedings, as well as other potential claimants, may bring one or more actions against our company and/or certain of our officers and directors. See “Risk Factors—One of our affiliated companies was involved in an incident in the offshore waters of Louisiana. Certain of our officers and one of our directors served as officers of this affiliated company at the time of the incident. Those with potential claims related to this incident may attempt to pursue their claims against us and these officers and directors.”

 

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Related Party Transactions

Since our inception in September 2005, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeded or exceeds $120,000 and in which any of our directors, executive officers, holders of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, other than compensation and indemnification arrangements with directors and executive officers, which are described where required under the “Management” section of this prospectus, and the transactions described below.

Shared Services Agreement

Historically, we have outsourced management and administrative services to Gulfport Energy Corporation pursuant to a shared services agreement and reimbursed Gulfport for its dedicated employee time and related general and administrative costs based on the proportionate amount of time its employees spent performing services for us. In 2005 and 2006, we paid Gulfport approximately $338,000 and $1,018,000, respectively, under this agreement. Although we believe the fees we paid to Gulfport for its services were reasonable, it is possible that unrelated third parties could have provided comparable services at a lower cost. Gulfport ceased providing management services to us in March 2006 and administering benefit plans for our employees in June 2006. Our Chairman of the Board, Mike Liddell, is the Chairman of the Board of Gulfport and Scott Streller, one of our director nominees, is a director of Gulfport. Our principal stockholder, Services LLC, is controlled by Wexford. The Chairman and controlling member of Wexford also beneficially owned approximately 42% of the outstanding common stock of Gulfport as of March 31, 2007.

We provide certain completion and production services on an arm’s length basis to Gulfport. For the year ended December 31, 2006, we generated approximately $900,000 of revenue from Gulfport for such services and had outstanding accounts receivable of approximately $354,000. We provided no such services in 2005.

Leases

We currently lease office space for our corporate headquarters from an unrelated third party. Caliber Development Company LLC, an entity controlled by Wexford, is constructing a new building and, upon its completion, we intend to lease approximately 15,000 square feet in the new building for our corporate headquarters. It is expected that construction will be completed in or about July 2007 and that our rent will be $28,750 per month.

We lease a property in Cresson, Texas, from Caliber Texas Properties, L.P., an entity controlled by Wexford, for our stimulation and pumping operations in North Texas. The property consists of approximately 17 acres. Improvements made on the property to our specifications consist of offices, storage and maintenance facilities, material storage silos and a rail spur. The lease commenced on July 1, 2006 and has a term of 20 years with an option for a five-year extension of the term. We have no purchase options or rights of first refusal under the lease. During the period July 1, 2006 through October 31, 2006, we paid Caliber Texas $4,333 per month in rent, which rent was fixed during the term, subject to increases only if improvements we request are made. During the period from November 1, 2006 to March 31, 2007, we paid Caliber Texas $17,046 per month in rent as certain improvements requested by us were completed. Effective April 1, 2007, our rent increased to $49,148 per month as all improvements requested by us were completed.

We lease a property in Oklahoma City, Oklahoma, from Caliber Development for our drilling technology services and applications operations. The property consists of approximately two acres. Improvements are presently being constructed on the property and will consist of offices and repair facilities. The lease commenced on July 1, 2006 and has a term of 20 years with an option for a five-year extension of the term. We have no purchase options or rights of first refusal under the lease. We pay Caliber Development $1,519 per month in rent, which rent is fixed during the term, subject to increases only if additional improvements we request are made.

We lease a property in Mills, Wyoming from Caliber Wyoming Properties LLC, an entity controlled by Wexford, for our drilling technology services and applications operations. The property consists of approximately 1.5 acres.

 

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Improvements consist of offices and repair facilities. The lease commenced on November 1, 2006 and has a term of 20 years with an option for a five-year extension of the term. We have no purchase option or rights of first refusal under the lease. We pay Caliber Wyoming $5,650 per month in rent, which rent is fixed during the term, subject to increases only if additional improvements we request are made.

In December 2006, we sold certain real estate and improvements located in Marlow and Sweetwater, Oklahoma to Caliber Development for an aggregate of $3.0 million. We then leased these properties back from Caliber Development for our stimulation and pumping services and fluid logistics and well-site services in Oklahoma. The Marlow property consists of approximately 24 acres with a cementing bulk plant, truck wash bays and office facilities, some of which are currently under construction. The Sweetwater property consists of approximately 10 acres with truck yard, repair and maintenance facilities and an office building, all of which are currently under construction. The lease for each property commenced on December 15, 2006 and has a term of 20 years. We have an option to extend the lease for up to two additional five-year periods. We have no purchase options or rights of first refusal under these leases. We have agreed to pay Caliber Development $12,101 and $6,259 per month in rent for the Marlow and Sweetwater properties, respectively. The rent for each lease is fixed during the term, subject to increases only if improvements we request are made. Our sale price for the Marlow and Sweetwater properties was based on our recent acquisitions cost of the property and the cost of improvements constructed or to be constructed.

In December 2006, we also sold certain real estate and improvements located in Countyline, Oklahoma and Tolar, Texas to Caliber Development and Caliber Texas, respectively, for an aggregate of $870,000, with the value established by an independent third-party appraiser. The Countyline and Tolar properties consist of an aggregate of approximately 13 acres and the improvements consist of truck yards, repair and maintenance facilities and office space. We then leased them back from these entities under leases with 20-year terms, with an option to extend the leases for up to two additional five-year periods. We have agreed to pay the rent for the initial 20-year term of $3,505 per month for the Countyline property and $3,750 per month for the Tolar property.

Although we believe the terms of our leases with related parties are reasonable, it is possible that we could have negotiated more favorable terms for such transactions with unrelated third parties.

Bronco Drilling Company, Inc.

Bronco Drilling Company, Inc. drilled our disposal well located in Bono, Texas on an arm’s length basis. The well was completed in June 2006 and $0.8 million was paid to Bronco during the second quarter of 2006. Mike Liddell, our Chairman of the Board, is also the Chairman of the Board of Bronco. Wexford beneficially owned approximately 31% of the outstanding common stock of Bronco as of December 31, 2006. As of March 31, 2007, Wexford beneficially owned less than 1% of Bronco’s outstanding common stock and, as a result, Bronco is no longer an affiliate of ours.

Windsor Energy Group, L.L.C.

We provide certain well-site services and drilling technology services and applications to Windsor Energy Group, L.L.C. on an arm’s length basis. During the one-month period ended December 31, 2005 following our acquisition of Quantum Drilling Motors and the year ended December 31, 2006, revenues of approximately $46,000 and $4.7 million, respectively, were recognized for such services. We had outstanding accounts receivable of approximately $184,000 and $1.1 million as of December 31, 2005 and 2006, respectively. Our Chairman of the Board, Mike Liddell, is also the Chairman of the Board of Windsor Energy. Wexford is the controlling member of Windsor Energy.

Kappa Investors Loan

In July and August of 2006, we borrowed an aggregate of $21.0 million from Kappa Investors LLC, an entity controlled by Wexford, under the terms of a $25.0 million subordinated unsecured revolving credit facility. Of this amount, $7.0 million was repaid by us on August 30, 2006 with borrowings under the Fortis credit facility, and $22.0 million was outstanding as of March 31, 2007 (with additional availability of $3.0 million). The loan matures on the earlier of July 5, 2007 and the closing of this offering. Borrowings under this loan bear interest at a rate of LIBOR plus 4%, which

 

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we refer to as the borrowing rate. Kappa Investors has the right to increase the interest rate applicable to the outstanding principal under this facility to a rate that is 2% in excess of the borrowing rate in the event we default on the payment of interest or principal. The default rate will continue until all events of default have been cured. The loan provides for certain restrictions on merger or consolidation, sale, lease or other disposal of all or any substantial part of our business or assets and our ability to incur additional indebtedness. We paid Kappa Investors a commitment fee of $250,000.

Transfer and Merger

The oilfield service operations described in this prospectus were previously owned and operated by ten directly-owned subsidiaries of Services LLC, a limited liability company controlled by Wexford. Effective as of December 31, 2006, these subsidiaries were transferred to Diamondback Holdings, our parent, which will be merged with us immediately prior to the closing of this offering. In the merger, Services LLC will be issued shares of our common stock representing 100% of our common stock then outstanding. Mike Liddell is the operating member of Services LLC. See note 2 under the caption “Principal Stockholders.”

Other

We have purchased workover rigs from Taylor Rig, L.L.C. and other equipment from Diamondback-Special LLC. Taylor and Special are each wholly-owned subsidiaries of Services LLC, a company controlled by Wexford. During the year ended December 31, 2006, our aggregate purchases from Taylor and Special were $2.1 million and $4.0 million, respectively. Mike Liddell is the operating member of Services LLC. See note 2 under the caption “Principal Stockholders.” These purchases were made at prices that approximated the manufacturers’ costs. It is anticipated that purchases made after the transfer will be on an arm’s length basis.

Policies and Procedures for Review and Approval of Conflicting Activities

Pursuant to a Code of Business Conduct and Ethics, or Code of Conduct, which we intend to adopt prior to the closing of this offering, our board of directors or our audit committee will review and approve all relationships and transactions in which we and our directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. In approving or rejecting such proposed relationships and transactions, the audit committee or board of directors, as applicable, shall consider the relevant facts and circumstances available and deemed relevant to the audit committee or board of directors, as applicable. We will designate a compliance officer to generally oversee compliance with the Code of Conduct.

All of the transactions described above were approved by our equity sponsor.

 

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Principal Stockholders

The following table sets forth certain information with respect to the beneficial ownership of our common stock by:

 

   

each stockholder known by us to be the beneficial owner of more than five percent of the outstanding shares of our common stock;

 

   

each of our directors and nominees for director;

 

   

each of our named executive officers; and

 

   

all of our directors and executive officers as a group.

Except as otherwise indicated, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

 


 

          Percentage of Shares
Beneficially Owned (1)

Name

  

Number of Shares

Beneficially
Owned (1)

  

Prior to

Offering

   After
Offering

5% Stockholder:

        

Diamondback Energy Services LLC (2)(3)

      100%   

Wexford Capital LLC (3)

      100%   

Charles E. Davidson (3)

      100%   

Joseph M. Jacobs (3)

      100%   

Executive Officers, Directors and Director Nominees:

        

Arty Straehla

      *    *      

Grant DeFehr

      *    *      

Cale Coulter

      *    *      

Mike Liddell (2)

      *    *      

Gilbert Gibson

      *    *      

Craig Groeschel

      *    *      

Scott Streller

      *    *      

All executive officers, directors and director nominees as a group (eight persons)

        

 


 

* Less than one percent.

 

(1) Percentage of beneficial ownership is based upon              shares of common stock outstanding as of             , 2006, and              shares of common stock outstanding after the offering. The table assumes no exercise of the underwriters’ over-allotment option. Pursuant to Rule 13d-3 under the Exchange Act, a person or group of persons is deemed to have “beneficial ownership” of any shares which such person has the right to acquire within 60 days. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above, any security which such person or group of persons has the right to acquire within 60 days is deemed to be outstanding for the purpose of computing the percentage ownership for such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. As a result, the denominator used in calculating the beneficial ownership among our stockholders may differ.

 

(2)

Wexford Capital LLC is the sole manager of Diamondback Energy Services LLC, or Services LLC, and controls four entities that own membership interests in Services LLC. We refer to these four entities as the Wexford members. The remaining membership interests are owned by Mike Liddell. The Wexford members have the exclusive authority to appoint the manager of Services LLC. As manager of Services LLC, Wexford has the exclusive authority to, among other things, purchase, hold and dispose of its assets, including the shares of our common stock that will be owned by Services LLC. Mr. Liddell is the operating member of Services LLC with responsibility for managing its day-to-day operations, subject to the right of Wexford or the Wexford members to assume responsibility for such operations.

 

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Mr. Liddell has no power or authority to make decisions with respect to the shares of our common stock that will be owned by Services LLC. All distributions made by Services LLC are first paid to the Wexford members pro rata until they have received amounts equal to their capital contributions in Services LLC, which currently aggregate approximately $            million. Thereafter, distributions are to be made 90% to the Wexford members and 10% to Mr. Liddell.

 

(3) Wexford may, by reason of its status as manager of Services LLC, be deemed to own beneficially the shares of our common stock with respect to which Services LLC will possess beneficial ownership. Each of Charles E. Davidson and Joseph M. Jacobs may, by reason of his status as a controlling person of Wexford, be deemed to beneficially own such shares of our common stock. Each of Charles E. Davidson, Joseph M. Jacobs and Wexford will share the power to vote and to dispose of the shares of our common stock beneficially owned by Services LLC. Each of Messrs. Davidson and Jacobs disclaims beneficial ownership of such shares of our common stock. The address for each such beneficial holder is Wexford Plaza, 411 West Putnam Avenue, Greenwich, Connecticut 06830.

 

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Description of Capital Stock

We will amend and restate our certificate of incorporation and bylaws in connection with this offering. The following description of our common stock, certificate of incorporation and our bylaws are summaries thereof and are qualified by reference to our certificate of incorporation and our bylaws as so amended and restated, copies of which will be filed with the SEC as exhibits to the registration statement of which this prospectus is a part.

Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share. We have applied to have our shares of common stock quoted on The NASDAQ Global Market.

Common Stock

Holders of shares of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Shares of common stock do not have cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of the board of directors can elect all the directors to be elected at that time, and, in such event, the holders of the remaining shares will be unable to elect any directors to be elected at that time. Our certificate of incorporation does not grant stockholders any preemptive rights to acquire or subscribe for any stock, obligation, warrant or other securities of ours. Holders of shares of our common stock have no redemption or conversion rights nor are they entitled to the benefits of any sinking fund provisions.

In the event of our liquidation, dissolution or winding up, holders of shares of common stock shall be entitled to receive, pro rata, all the remaining assets of our company available for distribution to our stockholders after payment of our debts and after there shall have been paid to or set aside for the holders of capital stock ranking senior to common stock in respect of rights upon liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled.

Holders of record of shares of common stock are entitled to receive dividends when and if declared by the board of directors out of any assets legally available for such dividends, subject to both the rights of all outstanding shares of capital stock ranking senior to the common stock in respect of dividends and to any dividend restrictions contained in debt agreements. All outstanding shares of common stock and any shares sold and issued in this offering will be fully paid and nonassessable by us.

Preferred Stock

Our board of directors is authorized to issue up to 1,000,000 shares of preferred stock in one or more series. The board of directors may fix for each series:

 

   

the distinctive serial designation and number of shares of the series;

 

   

the voting powers and the right, if any, to elect a director or directors;

 

   

the terms of office of any directors the holders of preferred shares are entitled to elect;

 

   

the dividend rights, if any;

 

   

the terms of redemption, and the amount of and provisions regarding any sinking fund for the purchase or redemption thereof;

 

   

the liquidation preferences and the amounts payable on dissolution or liquidation;

 

   

the terms and conditions under which shares of the series may or shall be converted into any other series or class of stock or debt of the corporation; and

 

   

any other terms or provisions which the board of directors is legally authorized to fix or alter.

We do not need stockholder approval to issue or fix the terms of the preferred stock. The actual effect of the authorization of the preferred stock upon your rights as holders of common stock is unknown until our board of directors determines the specific rights of owners of any series of preferred stock. Depending upon the rights granted to

 

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any series of preferred stock, your voting power, liquidation preference or other rights could be adversely affected. Preferred stock may be issued in acquisitions or for other corporate purposes. Issuance in connection with a stockholder rights plan or other takeover defense could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of our company. We have no present plans to issue any shares of preferred stock.

Related Party Transactions and Corporate Opportunities

Subject to the limitations of applicable law, our certificate of incorporation, among other things:

 

   

permits us to enter into transactions with entities in which one or more of our officers or directors are financially or otherwise interested so long as it has been approved by our board of directors;

 

   

permits any of our stockholders, officers or directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and

 

   

provides that if any director or officer of one of our affiliates who is also one of our officers or directors becomes aware of a potential business opportunity, transaction or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as our director or officer), that director or officer will have no duty to communicate or offer that opportunity to us, and will be permitted to communicate or offer that opportunity to such affiliates and that director or officer will not be deemed to have (i) acted in a manner inconsistent with his or her fiduciary or other duties to us regarding the opportunity or (ii) acted in bad faith or in a manner inconsistent with our best interests.

Anti-takeover Effects of Provisions of Our Certificate of Incorporation and Our Bylaws

Some provisions of our certificate of incorporation and our bylaws contain provisions that could make it more difficult to acquire us by means of a merger, tender offer, proxy contest or otherwise, or to remove our incumbent officers and directors. These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging such proposals because negotiation of such proposals could result in an improvement of their terms.

Undesignated preferred stock. The ability to authorize and issue undesignated preferred stock may enable our board of directors to render more difficult or discourage an attempt to change control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, the board of directors were to determine that a takeover proposal is not in our best interest, the board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group.

Stockholder meetings. Our certificate of incorporation and bylaws provide that a special meeting of stockholders may be called only by the Chairman of the Board, the Chief Executive Officer or by a resolution adopted by a majority of our board of directors.

Requirements for advance notification of stockholder nominations and proposals. Our bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors.

Stockholder action by written consent. Our bylaws provide that, except as may otherwise be provided with respect to the rights of the holders of preferred stock, no action that is required or permitted to be taken by our stockholders at any annual or special meeting may be effected by written consent of stockholders in lieu of a meeting of stockholders, unless the action to be effected by written consent of stockholders and the taking of such action by such written consent have expressly been approved in advance by our board. This provision, which may not be amended except by the affirmative vote of at least 66 2/3% of the voting power of all then outstanding shares of capital stock entitled to vote generally in the

 

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election of directors, voting together as a single class, makes it difficult for stockholders to initiate or effect an action by written consent that is opposed by our board.

Amendment of the bylaws. Under Delaware law, the power to adopt, amend or repeal bylaws is conferred upon the stockholders. A corporation may, however, in its certificate of incorporation also confer upon the board of directors the power to adopt, amend or repeal its bylaws. Our certificate of incorporation and bylaws grant our board the power to adopt, amend and repeal our bylaws at any regular or special meeting of the board on the affirmative vote of a majority of the directors then in office. Our stockholders may adopt, amend or repeal our bylaws but only at any regular or special meeting of stockholders by an affirmative vote of holders of at least 66 2/3% of the voting power of all then outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class.

Removal of Director. Our certificate of incorporation and bylaws provide that members of our board of directors may only be removed by the affirmative vote of holders of at least 66 2/3% of the voting power of all then outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class.

Amendment of the Certificate of Incorporation. Our certificate of incorporation provides that, in addition to any other vote that may be required by law or any preferred stock designation, the affirmative vote of the holders of at least 66 2/3% of the voting power of all then outstanding shares of capital stock entitled to vote generally in the election of directors, voting together as a single class, is required to amend, alter or repeal, or adopt any provision as part of our certificate of incorporation inconsistent with the provisions of our certificate of incorporation dealing with distributions on our common stock, related party transactions, our board of directors, our bylaws, meetings of our stockholders or amendment of our certificate of incorporation.

The provisions of our certificate of incorporation and bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests.

Transfer Agent and Registrar

American Stock Transfer & Trust Company will be the transfer agent and registrar for our common stock.

 

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Shares Eligible for Future Sale

Prior to this offering, there has been no market for our common stock. Future sales in the public markets of substantial amounts of common stock, including shares issued upon exercise of outstanding options, could adversely affect prevailing market prices from time to time for our common stock and impair our ability to raise capital through future sales of equity securities.

Upon completion of this offering, we will have outstanding an aggregate of              shares of common stock, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options. All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, or the Securities Act, except for shares, if any, which may be acquired by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Persons who may be deemed to be affiliates generally include individuals or entities that control, are controlled by, or are under common control with, us and may include our directors and officers as well as our significant stockholders, if any.

Lock-up Agreements

In connection with this offering, we, our executive officers and directors and Services LLC have agreed to enter into lock-up agreements in favor of the underwriters that prohibit us and these other individuals or entities, directly or indirectly, from selling or otherwise disposing of any shares or securities convertible into shares for a period of 180 days from the date of this prospectus, without the prior written consent of                     , subject to limited exceptions. Immediately following this offering, persons subject to lock-up agreements will own shares, representing approximately         % of the then outstanding shares, or approximately         % if the underwriters’ over-allotment option is exercised in full.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year is entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

   

1% of the number of shares of our common stock then outstanding, which will equal approximately              shares immediately after this offering; and

 

   

the average weekly trading volume of our common stock on The NASDAQ Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Registration Rights

We have entered into a registration rights agreement with Services LLC. Under the registration rights agreement, Services LLC has three demand registration rights, as well as “piggyback” registration rights. The demand rights enable Services LLC to require us to register its shares of our common stock with the SEC at any time, subject to the 180-day lock-up agreement it has entered into in connection with our initial public offering. The piggyback rights will allow Services LLC to register the shares of our common stock that it owns along with any shares that we register with the SEC. These registration rights are subject to customary conditions and limitations, including the right of the underwriters of an offering to limit the number of shares.

 

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2007 Equity Incentive Plan

An aggregate of 1,750,000 shares of our common stock have be reserved for issuance pursuant to our equity incentive plan, of which              shares of restricted stock will be outstanding immediately after this offering. We intend to file a registration statement on Form S-8 with respect to the issuance of all shares issuable under the plan. Accordingly, shares issued pursuant to this plan will be freely tradable, except for any shares held by our affiliates, as such term is defined by the SEC.

Stock Purchase Agreement

We are a party to that certain stock purchase agreement, dated as of January 31, 2006, between us and Packers & Service Tools, Inc. entered into in connection with our acquisition of that entity. Under the stock purchase agreement, we are obligated to issue shares of our common stock with an aggregate value of $2.8 million within ten days after the closing of this offering to certain former stockholders of Packers & Service Tools, Inc. If we fail to complete an initial public offering within 18 months after the January 31, 2006 closing date of the stock purchase agreement, we must pay the sellers $2.8 million plus interest from the closing date. The shares to be issued under the stock purchase agreement will not be registered under the Securities Act or the securities laws of any jurisdiction and may not be transferred, except pursuant to an exemption from registration under the Securities Act and the applicable state securities laws or pursuant to an effective registration statement.

 

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Underwriting

Under the terms and subject to the conditions contained in an underwriting agreement dated                     , 2007, we have agreed to sell to the underwriters named below, for whom                      and                      are acting as representatives, the following respective numbers of shares of common stock:

 


 

Underwriter

  

Number of Shares

  
  
  
  
  
  
  
  
  
  
    

Total

  
    

 


The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to              additional shares of common stock at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $             per share. The underwriters and selling group members may allow a discount of $             per share on sales to other broker/dealers. After the initial public offering the representatives may change the public offering price and concession and discount to broker/dealers.

We estimate that our out of pocket expenses for this offering will be approximately $            .

 


     Per Share    Total
    

Without

Over-

allotment

  

With

Over-

allotment

  

Without

Over-

allotment

  

With

Over-

allotment

Underwriting discounts and commissions paid by us

   $                    $                    $                    $                

Expenses paid by us

   $    $    $    $

 


The representatives have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.

The underwriters and their affiliates may provide in the future, investment banking and other financial services for us in the ordinary course of business, for which they will receive customary compensation.

Services LLC and our directors and officers have agreed that, subject to certain exceptions, we and they will not, without the prior written consent of                      (which consent may be withheld at the sole discretion of                     ), directly or indirectly, sell (including, without limitation, any short sale), offer, contract or grant any option to sell, pledge, transfer or establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Exchange

 

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Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of our common stock, options, rights or warrants to acquire shares of our common stock or securities exchangeable or exercisable for or convertible into shares of our common stock or publicly announce the intention to do any of the foregoing during the period commencing on and including the date of this prospectus and ending on and including the 180th day following the date of this prospectus, which is referred to as the Lock-up Period, provided, however, that we may issue shares of our common stock or options to purchase shares of our common stock, or issue shares of our common stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in this prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such Lock-up Period without the prior written consent of                      (which consent may be withheld at the sole discretion of                     ).

Notwithstanding the foregoing, if (i) during the last 17 days of the Lock-up Period, we issue an earnings release or material news or a material event relating to us occurs or (ii) prior to the expiration of the Lock-up Period, we announce that we will release earnings results during the 16-day period beginning on the last day of the Lock-up Period, then in each case the Lock-up Period will be extended until the expiration of the 18-day period beginning on the date of the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless                      waives, in writing, such extension (which waiver may be withheld at the sole discretion of                     ), except that such extension will not apply if, (i) within three business days prior to the 15th calendar day before the last day of the Lock-up Period, we deliver a certificate, signed by our Chief Financial Officer or Chief Executive Officer, certifying on our behalf that (i) shares of our common stock are “actively traded securities” (as defined in Regulation M), (ii) we meet the applicable requirements of paragraph (a)(1) of Rule 139 under the Securities Act in the manner contemplated by NASD Conduct Rule 2711(f)(4), and (iii) the provisions of NASD Conduct Rule 2711(f)(4) are not applicable to any research reports relating to us published or distributed by any of the underwriters during the 15 days before or after the last day of the Lock-up Period (before giving effect to such extension).                      has advised us that it does not currently have any intention, agreement or understanding with respect to the early release of any of the locked-up shares.

The underwriters have reserved for sale at the initial public offering price up to     % of the total shares of our common stock offered hereby (excluding any shares to be sold pursuant to the over-allotment option) for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.

We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

We have applied for the quotation of our common stock on The NASDAQ Global Market.

Prior to this offering, there has been no public market for our common stock. The initial public offering price has been determined by a negotiation between us and the representatives and will not necessarily reflect the market price of our common stock following the offering. The principal factors that were considered in determining the public offering price included:

 

   

the information presented in this prospectus and otherwise available to the underwriters;

 

   

the history of and prospects for the industry in which we compete;

 

   

our past and present operations;

 

   

the ability of our management;

 

   

the prospects for our future earnings;

 

   

the present state of our development and current financial condition;

 

   

the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and

 

   

the general condition of the securities markets at the time of this offering.

 

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In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, and penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934.

 

   

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

   

Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.

 

   

Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

   

Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

   

In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for, or purchases of, our common stock until the time, if any, at which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The NASDAQ Global Market or otherwise and, if commenced, may be discontinued at any time.

A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.

The shares are offered for sale in those jurisdictions in the United States and elsewhere where it is lawful to make such offers.

Each of the underwriters has represented and agreed that it has not offered, sold or delivered and will not offer, sell or deliver any of the shares directly or indirectly, or distribute this prospectus or any other offering material relating to the shares, in or from any jurisdiction except under circumstances that will result in compliance with the applicable laws and regulations thereof and that will not impose any obligations on us except as set forth in the underwriting agreement.

 

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Notice to Canadian Residents

Resale Restrictions

The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of the common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock.

Representations of Purchasers

By purchasing the common stock in Canada and accepting a purchase confirmation a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:

 

   

the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws,

 

   

where required by law, that the purchaser is purchasing as principal and not as agent,

 

   

the purchaser has reviewed the text above under Resale Restrictions, and

 

   

the purchaser acknowledges and consents to the provision of specified information concerning its purchase of the common stock to the regulatory authority that by law is entitled to collect the information.

Rights of Action – Ontario Purchasers Only

Under Ontario securities legislation, certain purchasers who purchase a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the common stock, for rescission against us in the event that this prospectus contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the common stock. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the common stock were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

Canadian purchasers of the common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation.

 

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Legal Matters

The validity of the shares of common stock that are offered hereby by us will be passed upon by Akin Gump Strauss Hauer & Feld LLP. Certain legal matters in connection with the offering will be passed upon for the underwriters by Vinson & Elkins L.L.P.

Experts

The consolidated financial statements of Diamondback Energy Services and subsidiaries as of December 31, 2006 and 2005 and for the year ended December 31, 2006 and for the period from September 29, 2005 (inception) through December 31, 2005, the financial statements of Quantum Drilling Motors, L.L.C. as of November 30, 2005 and December 31, 2004 and for the eleven months ended November 30, 2005 and for the years ended December 31, 2004 and 2003 and the combined financial statements of Sooner Trucking & Oilfield Services, Inc. and affiliates as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 appearing in this prospectus and registration statement have been audited by Grant Thornton LLP, independent registered public accounting firm, as set forth in its reports thereon appearing elsewhere herein, and are included in reliance upon the authority of such firm as experts in accounting and auditing.

The financial statements of Pioneer Oilfield Services, Inc. as of February 28, 2006 and December 31, 2005, and the related statements of income and retained earnings and cash flows for the periods then ended appearing in this prospectus and registration statement have been audited by Tullius Taylor Sartain & Sartain LLP, independent registered public accounting firm, as set forth in its report thereon appearing elsewhere herein, and are included in reliance upon the authority of such firm as experts in accounting and auditing.

Where You Can Find More Information

We have filed with the SEC a registration statement on Form S-1 under the Securities Act covering the securities offered by this prospectus. This prospectus, which constitutes a part of that registration statement, does not contain all of the information that you can find in that registration statement and its exhibits. Certain items are omitted from this prospectus in accordance with the rules and regulations of the SEC. For further information about us and the common stock offered by this prospectus, reference is made to the registration statement and the exhibits filed with the registration statement. Statements contained in this prospectus and any prospectus supplement as to the contents of any contract or other document referred to are not necessarily complete and in each instance such statement is qualified by reference to each such contract or document filed as part of the registration statement. When we complete this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read any materials we file with the SEC free of charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of these documents may be obtained from such office upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov. The registration statement, including all exhibits thereto and amendments thereof, has been filed electronically with the SEC.

 

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Glossary of Oil and Natural Gas Terms

Acidizing. The pumping of acid into the wellbore to remove near-well formation damage and other damaging substances.

Bbl(s). Barrel(s) of oil. Each barrel is 42 U.S. gallons.

Blowout. An uncontrolled flow of reservoir fluids into the wellbore, and sometimes catastrophically to the surface. A blowout may consist of salt water, oil, natural gas or a mixture of these. Blowouts can occur in all types of exploration and production operations, not just during drilling operations. If reservoir fluids flow into another formation and do not flow to the surface, the result is called an underground blowout. If the well experiencing a blowout has significant openhole intervals, it is possible that the well will bridge over (or seal itself with rock fragments from collapsing formations) downhole and intervention efforts will be averted.

Casing. Large-diameter pipe lowered into an openhole wellbore and cemented in place.

Cementing. To prepare and pump cement into place in a wellbore.

Completion. A generic term used to describe the assembly of downhole tubulars and equipment required to enable safe and efficient production from an oil or gas well. The point at which the completion process begins may depend on the type and design of the well.

Downhole. Pertaining to or in the wellbore (as opposed to being on the surface).

Downhole motor. A drilling motor located in the drill string above the drilling bit powered by the flow of drilling mud. Downhole motors are used to increase the speed and efficiency of the drill bit or can be used to steer the bit in directional drilling operations. Drilling motors have become very popular because of horizontal and directional drilling applications and the increase of day rates for drilling rigs.

Drill collar. A component of the drillstring that provides weight on the bit for drilling. Drill collars are thick-walled tubular pieces machined from solid bars of steel, usually plain carbon steel but sometimes of nonmagnetic nickel-copper alloy or other nonmagnetic premium alloys. The bars of steel are drilled from end to end to provide a passage to pumping drilling fluids through the collars. The outside diameter of the steel bars may be machined slightly to ensure roundness, and in some cases may be machined with helical grooves (“spiral collars”). Finally, threaded connections, male on one end and female on the other, are cut so multiple collars can be screwed together along with other downhole tools to make a bottomhole assembly (BHA). Gravity acts on the large mass of the collars to provide the downward force needed for the bits to efficiently break rock.

Frac tanks. A tank used to hold fluid during a frac job. Capacity of such tanks are from 400 to 600 bbls.

Gamma. Gamma technology uses an advanced processing of sensor data combined with an oriented “window” through which natural gamma ray formation measurements are recorded. This allows the operator to monitor formation changes adjacent to the borehole, enabling the operators to adjust the well path and focus on the productive zones of the well.

Hydrocarbon. A naturally occurring organic compound comprising hydrogen and carbon. Hydrocarbons can be as simple as methane, but many are highly complex molecules, and can occur as gases, liquids or solids. Petroleum is a complex mixture of hydrocarbons. The most common hydrocarbons are natural gas, oil and coal.

Manifold. An arrangement of piping or valves designed to control, distribute and often monitor fluid flow. Manifolds are often configured for specific functions, such as a choke or kill manifold used in well-control operations and a squeeze manifold used in squeeze-cementing work.

Mcf. One thousand cubic feet of natural gas measured at standard pressure and temperature conditions.

 

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Measurement-while drilling (MWD). The evaluation of physical properties, usually including pressure, temperature and wellbore trajectory in three-dimensional space, while extending a wellbore. MWD is now standard practice in offshore directional wells, where the tool cost is offset by rig time and wellbore stability considerations if other tools are used. The measurements are made downhole, stored in solid-state memory for some time and later transmitted to the surface. Data transmission methods vary from company to company, but usually involve digitally encoding data and transmitting to the surface as pressure pulses in the mud system. These pressures may be positive, negative or continuous sine waves. Some MWD tools have the ability to store data if the transmission link fails. MWD tools that measure formation parameters (resistivity, porosity, sonic velocity, gamma ray) are referred to as logging-while-drilling (LWD) tools. LWD tools use similar data storage and transmission systems, with some having more solid-state memory to provide higher resolution logs after the tool is tripped out than is possible with the relatively low bandwith, mud-pulse data transmission system.

Plugging and Abandonment. The process of permanently closing oil and gas wells no longer capable of producing in economic quantities. Plugging and abandonment work can be performed with a well servicing rig along with wireline and cementing equipment; however, this service is typically provided by companies that specialize in plugging and abandonment work.

Plugs. A downhole packer assembly used in a well to seal off or isolate a particular formation for testing, acidizing, cementing, etc.; also a type of plug used to seal off a well temporarily while the wellhead is removed.

Pressure pumping. Services that include the pumping of liquids under pressure.

Producing Formation. An underground rock formation from which oil, natural gas or water is produced. Any porous rock will contain fluids of some sort, and all rocks at considerable distance below the Earth’s surface will initially be under pressure, often related to the hydrostatic column of ground waters above the reservoir. To produce, rocks must also have permeability, or the capacity to permit fluids to flow through them.

Drilling rig. The machine used to drill a wellbore.

Shale. A fine-grained, fissile, sedimentary rock formed by consolidation of clay- and silt-sized particles into thin, relatively impermeable layers.

Shock Sub. Designed to be compact and efficient, the purpose of a shock sub is to isolate the shock created by the impact of the downhole hammer from the rotary head. Using a shock sub eliminates metal-to metal contact. The shock is absorbed internally by the 90 durometer rubber and grease packing.

Tight sands. A type of unconventional tight reservoir. Tight reservoirs are those which have low permeability, often quantified as less than 0.1 millidarcies.

Wellbore. The physical conduit from surface into the hydrocarbon reservoir.

 

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Index to Financial Statements

 

     Page

Diamondback Energy Services and Subsidiaries

  

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of December 31, 2006 and December 31, 2005

   F-3

Consolidated Statements of Operations for the year ended December 31, 2006 and for the Period from September 29, 2005 (inception) through December 31, 2005

   F-4

Consolidated Statement of Carve-out Equity for the Period from September 29, 2005 (inception) through December 31, 2005 and the year ended December 31, 2006

   F-5

Consolidated Statements of Cash Flows for the year ended December 31, 2006 and for the Period from September 29, 2005 (inception) through December 31, 2005

   F-6

Notes to Consolidated Financial Statements

   F-8

Quantum Drilling Motors, L.L.C.

  

Report of Independent Registered Public Accounting Firm

   F-31

Balance Sheets as of November 30, 2005 and December 31, 2004

   F-32

Statements of Earnings for the Eleven Month Period Ended November 30, 2005 and for the Years Ended December 31, 2004 and 2003

   F-33

Statements of Members’ Equity for the Eleven Month Period Ended November 30, 2005 and for the Years Ended December 31, 2004 and 2003

   F-34

Statements of Cash Flows for the Eleven Months Ended November 30, 2005 and for the Years Ended December 31, 2004 and 2003

   F-35

Notes to Consolidated Financial Statements

   F-36

Sooner Trucking & Oilfield Services, Inc. and Affiliates

  

Report of Independent Registered Public Accounting Firm

   F-44

Combined Balance Sheets as of December 31, 2005 and December 31, 2004

   F-45

Combined Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003

   F-46

Combined Statement of Changes in Owners’ Equity for the Years Ended December 31, 2005, 2004 and 2003

   F-47

Combined Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003

   F-48

Notes to Combined Financial Statements for the Years Ended December 31, 2005, 2004 and 2003

   F-50

Pioneer Oilfield Services, Inc.

  

Independent Auditors’ Report

   F-59

Balance Sheets as of February 28, 2006 and December 31, 2005

   F-60

Statements of Income and Retained Earnings for Periods Ended February 28, 2006 and December 31, 2005

   F-61

Statements of Cash Flows for Periods Ended February 28, 2006 and December 31, 2005

   F-62

Notes to Financial Statements

   F-63

 

F-1


Table of Contents
Index to Financial Statements

Report of Independent Registered Public Accounting Firm

Members

Diamondback Energy Services LLC

We have audited the accompanying consolidated balance sheets of Diamondback Energy Services (as defined in Note A to the consolidated financial statements) and Subsidiaries (collectively, the “Company”) as of December 31, 2006 and 2005 and the related consolidated statements of operations, carve-out equity, and cash flows for the year ended December 31, 2006 and the period from September 29, 2005 (inception) to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamondback Energy Services and Subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for the year ended December 31, 2006 and the period from September 29, 2005 (inception) to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Oklahoma City, Oklahoma

April 25, 2007

 

F-2


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Consolidated Balance Sheets

 


 

     December 31,
2006
  

December 31,

2005

ASSETS      

Current assets

     

Cash and cash equivalents

   $ 7,194,972    $ 663,834

Accounts receivable (net of allowance of $864,513 at December 31, 2006)

     39,006,722      5,015,756

Receivable from former owners

          492,860

Inventories

     4,397,445      333,288

Prepaid expenses and other

     1,000,708      169,387
             

Total current assets

     51,599,847      6,675,125

Property and equipment, net

     139,981,421      7,606,630

Other assets

     1,606,104      66,125

Deposits under business purchase agreements

          8,600,000

Trade names, net

     126,471     

Non-compete agreement, net

     218,750      293,750

Customer relationships, net

     39,039,120      13,160,633

Goodwill

     39,908,164      4,827,611
             
   $ 272,479,877    $ 41,229,874
             
LIABILITIES AND CARVE-OUT EQUITY      

Current liabilities

     

Accounts payable

   $ 11,349,666    $ 3,384,739

Accrued and other current liabilities

     12,666,218      1,559,775

Obligations under business purchase agreements

     3,323,128      638,126

Deferred income tax liabilities

     152,168     

Lines of credit

     14,000,000     

Current portion of capital lease obligations

     151,331     

Current portion of long-term debt

     23,689      12,553
             

Total current liabilities

     41,666,200      5,595,193

Deferred income tax liabilities

     4,102,896     

Lines of credit

     44,900,000     

Capital lease obligations, net of current maturities

     2,698,590     

Long-term debt, net of current maturities

     89,873      60,411

Asset retirement obligations

     100,004     
             

Total liabilities

     93,557,563      5,655,604

Minority interests in variable interest entities

     7,613,216     

COMMITMENTS AND CONTINGENCIES (NOTES D, G, H and I)

     

CARVE-OUT EQUITY (NOTE A)

     171,309,098      35,574,270
             
   $ 272,479,877    $ 41,229,874
             

 


The accompanying notes are an integral part of these statements.

 

F-3


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Consolidated Statements of Operations

 


 

    For the
year ended
December 31,
2006
    For the period
from September 29,  

2005 (inception)
through
December 31,

2005
 

Revenue

   

Drilling technology services and applications

  $ 52,132,218     $ 2,501,295  

Stimulation and pumping services

    28,540,920        

Fluid logistics and well-site services

    65,739,849        

Completion and production services

    9,486,819        
               

Total revenue

    155,899,806       2,501,295  

Costs and expenses

   

Cost of revenues, exclusive of depreciation, amortization and accretion

   

Drilling technology services and applications

    34,423,602       1,676,879  

Stimulation and pumping services

    16,469,664        

Fluid logistics and well-site services

    41,834,083        

Completion and production services

    6,257,832        

Selling, general and administrative

    22,704,214       733,111  

Depreciation, amortization and accretion

    18,555,168       204,977  
               

Total costs and expenses

    140,244,563       2,614,967  
               

Operating income (loss)

    15,655,243       (113,672 )

Other income (expense)

   

Interest income

    253,351        

Other income

    193,465       797  

Gain on sale or disposition of assets

    29,348        

Interest expense

    (2,160,842 )     (81,857 )
               
    (1,684,678 )     (81,060 )
               

Income (loss) before income taxes and minority interest

    13,970,565       (194,732 )

Provision for income taxes

    1,568,752        
               

Income (loss) before minority interest

    12,401,813       (194,732 )

Income attributable to minority interests in variable interest entities

    61,585        
               

Net income (loss)

  $ 12,340,228     $ (194,732 )
               

PRO FORMA INFORMATION (Unaudited)

   

Historical income (loss) before income taxes and minority interest

  $ 13,970,565     $ (194,732 )
               

Pro forma provision (benefit) for income taxes

  $ 5,272,491     $ (73,492 )
               

Pro forma net income (loss)

  $ 8,636,489     $ (121,240 )
               

Pro forma income (loss) per common share, basic and diluted

  $                  $               
               

Weighted average pro forma common shares outstanding, basic and diluted

  $                  $               
               

 


The accompanying notes are an integral part of these statements.

 

F-4


Table of Contents
Index to Financial Statements

Diamondback Energy Services

Consolidated Statement Of Carve-Out Equity

For the period from September 29, 2005 (inception) through December 31, 2005 and

the year ended December 31, 2006

 


 

Balance at September 29, 2005

   $  

Capital contributions

     35,769,002  

Net loss

     (194,732 )
        

Balance at December 31, 2005

     35,574,270  

Capital contributions

     123,394,600  

Net income

     12,340,228  
        

Balance at December 31, 2006

   $ 171,309,098  
        

 


The accompanying notes are an integral part of this statement.

 

F-5


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Consolidated Statements of Cash Flows

 


 

     For the year
ended
December 31,
2006
    For the
period from
September 29,
2005 (inception)
through
December 31,
2005
 

Increase (Decrease) in Cash and Cash Equivalents

    

Cash flows from operating activities

    

Net income (loss)

   $ 12,340,228     $ (194,732 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Income attributable to minority interest in variable interest entities

     61,585        

Depreciation, amortization and accretion

     18,555,168       204,977  

Deferred income tax benefit

     (898,447 )      

Accretion of discount on obligations under business purchase agreements

     170,971        

Provision for doubtful accounts

     841,451        

Gain on sale or disposal of assets

     (29,348 )      

Gain on sales of equipment involuntarily damaged or lost down-hole

     (776,445 )      

Write-off of obsolete equipment

     1,718,081       99,698  

Change in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     (23,939,998 )     (541,941 )

Inventories

     (3,187,316 )     120,914  

Prepaid expenses and other

     110,486       47,490  

Other assets

     (876,465 )     409,508  

Accounts payable and accrued and other current liabilities

     15,162,661       (256,348 )
                

Net cash provided by (used in) operating activities

     19,252,612       (110,434 )

Cash flows from investing activities

    

Proceeds from sales of equipment involuntarily damaged or lost down-hole and assets disposed

     2,419,796        

Additions to property and equipment

     (116,764,123 )     (930,720 )

Deposits under business purchase agreements

           (8,600,000 )

Amounts paid for prior business acquisitions

     (638,126 )      

Businesses acquired, net of cash acquired

     (84,724,905 )     (25,464,014 )
                

Net cash used in investing activities

     (199,707,358 )     (34,994,734 )

Cash flows from financing activities

    

Loan fees

     (843,717 )      

Payments on capital lease obligations

     (22,549 )      

Advances on lines of credit

     73,251,513        

Payments on lines of credit

     (14,351,513 )      

Additions to notes payable

     534,149        

Payments on notes payable

     (2,528,230 )      

Capital contributions

     123,394,600       35,769,002  

Capital contributed by minority interest in variable interest entities

     7,551,631        
                

Net cash provided by financing activities

     186,985,884       35,769,002  
                

Net increase in cash and cash equivalents

     6,531,138       663,834  

Cash and cash equivalents at beginning of period

     663,834        
                

Cash and cash equivalents at end of period

   $ 7,194,972     $ 663,834  
                

Cash paid during the period for interest

   $ 1,310,296     $ 105,309  
                

 


The accompanying notes are an integral part of these statements.

 

F-6


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Consolidated Statements of Cash Flows—Continued

 


 

     For the year
ended
December 31,
2006
    For the period
from
September 29,
2005 (inception)
through
December 31,
2005
 

Supplemental schedule of non cash investing and financing activities:

    

The Company acquired all of the outstanding equity or substantially all assets of multiple entities in the periods ended December 31, 2006 and December 31, 2005. In conjunction with the acquisitions, liabilities were assumed as follows:

   

Fair value of assets acquired

   $ 107,684,359     $ 30,632,314  

Cash paid

     (84,724,905 )     (25,464,014 )

Purchase price payable at acquisition date

     (3,152,157 )     (484,259 )

Application of deposits under purchase agreements

     (8,600,000 )      
                

Liabilities assumed

   $ 11,207,297     $ 4,684,041  
                

 

Asset retirement costs and related liabilities of approximately $69,000 were recorded during the year ended December 31, 2006.

The Company entered into capital leases of $2,872,470 during the year ended December 31, 2006.

 

The accompanying notes are an integral part of these statements.

 

F-7


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Notes to Consolidated Financial Statements

NOTE A – NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

Diamondback Energy Services LLC (the “LLC”) was formed on September 29, 2005 as a Delaware limited liability company and commenced operations in October 2005 through the acquisition of Taylor Rig, L.L.C. Through December 31, 2006, the LLC completed a total of 20 acquisitions. A list of the acquisitions, including dates of acquisition, are as follows:

 

Acquisitions

  

Date Acquired

Taylor Rig, L.L.C. (1)

   October 1, 2005

Quantum Drilling Motors, L.L.C.

   December 16, 2005

Sooner Trucking & Oilfield Services, Inc.

   January 10, 2006

Total Oilfield Services of Oklahoma, L.L.C.

   January 10, 2006

PJ Trucking, a general partnership

   January 10, 2006

PL Trucking, a general partnership

   January 10, 2006

Hi Pressure Partners, a general partnership

   January 10, 2006

Peach Street Partners, LLC

   January 10, 2006

J&T Construction, a general partnership

   January 10, 2006

Countyline Disposal, Inc.

   January 10, 2006

Cementing Services, L.L.C.

   January 10, 2006

PDQ Business Travel, L.L.C.

   January 10, 2006

Total Oilfield Services, LP

   January 10, 2006

Total Pumping Services, LP

   January 10, 2006

Tolar Disposal Systems, LP

   January 10, 2006

Athena Construction, L.L.C. (1)

   January 31, 2006

Athena Construction, a division of Hellenic, Inc. (1)

   January 31, 2006

Packers & Service Tools, Inc

   January 31, 2006

Special Equipment Manufacturing, Inc. (1)

   February 17, 2006

Pioneer Oilfield Services, Inc.

   March 23, 2006

  (1) The equity interests in or the assets acquired from this entity have not been and will not be transferred to the newly formed entity described below.

Each of the acquisitions was of a discrete business contained in a separate entity. Upon completion of an acquisition, the entity acquired or, in the case of an asset acquisition, the assets acquired remained substantially intact and continued to be operated in substantially the same manner. As of December 31, 2006, however, the LLC had organized the assets and operations acquired and its newly-established business operations into thirteen direct, wholly-owned subsidiaries and twelve indirect subsidiaries.

In total, nine of the LLC’s direct, wholly-owned subsidiaries and all of the indirect subsidiaries were transferred to a newly-formed entity, Diamondback Holdings, LLC, on December 31, 2006 in contemplation of an initial public offering (“IPO”). The accompanying financial statements have been prepared on a carve-out basis to include the assets, liabilities, revenues and expenses of these entities as well as certain allocated activities of the LLC. More specifically, these carve-out financial statements, which are referred to as the financial statements of Diamondback Energy Services and Subsidiaries (“Diamondback” or the “company”), are comprised of the financial activities of Quantum Drilling Motors, L.L.C.;

 

F-8


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

 

Sooner Trucking & Oilfield Services, Inc.; Total Oilfield Services of Oklahoma, L.L.C.; PJ Trucking, a general partnership; PL Trucking, a general partnership; Hi Pressure Partners, a general partnership; Peach Street Partners, LLC; J&T Construction, a general partnership; Countyline Disposal, Inc.; Cementing Services, L.L.C.; PDQ Business Travel, L.L.C.; Total Oilfield Services, LP; Total Pumping Services, LP; Tolar Disposal Systems, LP; Packers & Service Tools, Inc.; Pioneer Oilfield Services, Inc.; Diamondback Pumping Service LLC; Diamondback Pumping Service LP, Diamondback-Well Service, LLC; Diamondback-PST LLC; Diamondback-Completions LLC, Diamondback-Total Pumping GP LLC; Diamondback-Total Pumping, L.P.; and Diamondback Pumping GP LLC since acquisition or formation by the LLC, as applicable. (See Note B describing the acquisitions).

Substantially all management, administrative, and corporate functions of the LLC were transferred to the newly formed entity. As such, substantially all corporate expenses have been allocated to Diamondback in these carve-out financial statements. In addition, all borrowings against the LLC’s line of credit were allocated to Diamondback as the line of credit was retired in August 2006 by financing that remained with the newly formed entity (see Note D).

Diamondback is a diversified oilfield service company focused on providing technology-driven solutions to maximize the recovery and present value of oil and nature gas streams. Diamondback operates in four reportable business segments: (i) drilling technology services and applications; (ii) stimulation and pumping services; (iii) fluid logistics and well-site services; and (iv) completion and production services. Diamondback’s business is focused in both proven oil and natural gas basins and emerging high-growth resource plays in Texas, Oklahoma, Louisiana and the Rocky Mountains. The majority of the company’s operations are located in the Barnett Shale in North Texas and the Anadarko Basin, the Woodford Shale and other basins across Oklahoma.

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

1. Principles of Consolidation

The consolidated carve-out financial statements include the allocated activities of the LLC and the accounts of the following direct, wholly-owned subsidiaries: Diamondback-Quantum LLC; Diamondback Pumping GP LLC; Diamondback-Pioneer LLC; Diamondback-Well Service LLC; Diamondback-PST LLC; Diamondback-Total Services LLC; Diamondback-Cementing Services LLC; Diamondback-Pumping Service LLC; and Packers & Service Tools, Inc. and their nine consolidated subsidiaries; and two variable interest entities (“VIE’s”) in which Diamondback was determined to be the primary beneficiary; and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All material intercompany accounts and transactions have been eliminated in consolidation.

2. Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less when acquired are considered cash equivalents.

3. Accounts Receivable

Accounts receivable include amounts due from customers for services performed and are recorded as the work progresses. Diamondback grants credit to customers in the ordinary course of business and generally does not require collateral. Customer balances are considered delinquent if unpaid by the 30th day following the invoice date and credit privileges may be revoked if balances remain unpaid.

Diamondback regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, Diamondback makes judgments regarding its

 

F-9


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

 

customers’ ability to make required payments, economic events, and other factors. As the financial condition of customers change, circumstances develop, or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. In the event Diamondback was to determine that a customer may not be able to make required payments, Diamondback would increase the allowance through a charge to income in the period in which that determination is made. Uncollectible accounts receivable are periodically charged against the allowance for doubtful accounts once final determination is made of their uncollectibility.

The following is a rollforward of the allowance for doubtful accounts:

 


 

     December 31,
2006
   December 31,
2005

Balance, beginning of period

   $    $

Allowance for doubtful accounts recognized through acquisitions

     23,062     

Deductions for uncollectible receivables written off

         

Additions charged to expense

     841,451     
             

Balance, end of period

   $ 864,513    $
             

 


4. Inventories

Inventories are stated at the lower of cost or market, determined on a first-in, first-out or average cost basis. Inventories consist of cement, chemicals, sand, repair parts, and purchased goods available for sale. Diamondback assesses the realizability of its inventories based upon specific usage and future utility. A charge to results of operations is taken when factors that would result in a need for a reduction in the valuation, such as excess or obsolete inventory, are determined.

 

F-10


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

 

5. Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized while minor replacements, maintenance, and repairs, which do not improve or extend the life of such assets, are charged to operations as incurred. Disposals are removed at cost, less accumulated depreciation, and any resulting gain or loss is reflected in operations. Proceeds from customers for rental equipment that is involuntarily damaged or lost down-hole are reflected in drilling technology services and applications revenues, with the carrying value of the related rental equipment charged to cost of drilling technology services and applications revenues.

Proceeds from sales of involuntarily damaged or lost down-hole equipment are reported as cash inflows from investing activities in the consolidated statements of cash flows. For the periods ended December 31, 2006 and December 31, 2005, proceeds from sales of equipment involuntarily damaged or lost down-hole were $1,090,523 and $0, respectively, and the gain on sales of equipment involuntarily damaged or lost down-hole was $776,445 and $0, respectively.

Depreciation is calculated using the straight-line method over the estimated useful lives of the depreciable assets. The useful lives of the major classes of property and equipment are as follows:

 


 

Office equipment, furniture, and fixtures

   3 - 7 years

Vehicles, trailers, and tanks

   3 - 7 years

Other machinery and equipment

   5 - 10 years

Pressure pumping equipment

   3 - 10 years

Well-site construction equipment

   3 - 5 years

Rental equipment

   5 - 7 years

Directional drilling equipment

   5 years

Disposal wells and related equipment

   5 -15 years

Buildings and improvements

   15 - 30 years

Aircraft

   10 years

Workover rigs and related equipment

   5 - 15 years

 


 

F-11


Table of Contents
Index to Financial Statements

Diamondback Energy Services and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

 

6. Intangible Assets

Intangible assets subject to amortization include customer relationships, trade names, and a non-compete agreement. Customer relationships are amortized based on an estimated attrition factor over their estimated useful life of 11 to 16 years, trade names are amortized straight line over their estimated useful life of 3 to 20 years, and the non-compete agreement is amortized straight line over the 4-year term of the agreement. Intangible assets are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

The table below provides a summary of Diamondback’s intangible assets as of December 31, 2006 and December 31, 2005 and amortization expense for the periods then ended.

 


 

    

Gross carrying

amount

  

Accumulated

amortization

   

Amortization

expense

Amortized intangible assets—December 31, 2006

       

Non-compete agreement

   $ 300,000    $ (81,250 )   $ 75,000

Trade names

     144,400      (17,929 )     17,929

Customer relationships

     43,104,241      (4,065,121 )     3,988,754
                     

Balance at December 31, 2006

   $ 43,548,641    $ (4,164,300 )   $ 4,081,683