Organization and Summary of Significant Accounting Policies

Business and Principles of Consolidation

On July 30, 2012, we changed our company name from "Pioneer Drilling Company" to "Pioneer Energy Services Corp." Our common stock will continue to trade on the New York Stock Exchange, but our ticker symbol has changed from "PDC" to "PES." Our company name change reinforces our strategy to expand our service offerings beyond drilling services, which has been our core, legacy business. Pioneer Energy Services provides drilling services and production services to independent and major oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia.

Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies with its fleet of 68 drilling rigs which are currently assigned to the following divisions:



Drilling Division		Rig Count
South Texas		13
East Texas		4
West Texas		22
North Dakota		12
Utah		5
Appalachia		4
Colombia		8
		68

Drilling revenues and rig utilization have steadily improved since late 2009, primarily due to increased demand for drilling services in domestic shale plays and oil or liquid rich regions. We capitalized on this trend by moving drilling rigs in our fleet to these higher demand regions from lower demand regions. As a result, we closed our Oklahoma and North Texas drilling divisions during 2011 and established our West Texas drilling division in early 2011.

In 2011, we began construction, based on term contracts, of ten new-build AC drilling rigs that are fit for purpose for domestic shale plays. Construction has been completed for six of these new-build drilling rigs which are currently operating in the shale plays. We expect one more new-build drilling rig to be completed and working under term contract by the end of 2012 and two more during the first quarter of 2013. Currently, one of our new-build drilling rigs is no longer under term contract due to construction delays. We are actively marketing this new-build drilling rig, which is scheduled to be completed during the first quarter of 2013.

As of October 19, 2012, 58 drilling rigs are operating under drilling contracts, 46 of which are under term contracts. In addition, one of the two currently idle drilling rigs in Colombia is now under contract to begin working in the fourth quarter of 2012. We are actively marketing all our idle drilling rigs. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with existing or potential clients. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed.

Our Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services, coiled tubing services, and fishing and rental services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore.

As of October 19, 2012, we have a fleet of 105 well servicing rigs consisting of ninety-five 550 horsepower rigs and ten 600 horsepower rigs. All our well servicing rigs are currently operating or are being actively marketed. We currently provide wireline services and coiled tubing services with a fleet of 120 wireline units and 11 coiled tubing units, and we provide rental services with approximately $15.6 million of fishing and rental tools. We plan to add another three well servicing rigs and two coiled tubing units by the end of 2012.

The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Energy Services Corp. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to our recognition of revenues and costs for turnkey contracts, our estimate of the allowance for doubtful accounts, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, our estimate of asset impairments, our estimate of deferred taxes, our estimate of compensation related accruals and our determination of depreciation and amortization expense. The condensed consolidated balance sheet as of December 31, 2011 has been derived from our audited financial statements. We suggest that you read these condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2011.

In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after September 30, 2012, through the filing of this Form 10-Q, for inclusion as necessary.

Recently Issued Accounting Standards

Fair Value Measurement. In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies existing guidance about how fair value should be applied where it already is required or permitted and provides wording changes that align this standard with International Financial Reporting Standards (IFRS). We are required to apply this guidance prospectively beginning with our first quarterly filing in 2012. The adoption of this new guidance has not had an impact on our financial position or results of operations.

Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update increases the prominence of other comprehensive income in financial statements, eliminating the option of presenting other comprehensive income in the statement of changes in equity, and instead, requiring the components of net income and comprehensive income to be presented in either one or two consecutive financial statements. We are required to comply with this guidance prospectively beginning with our first quarterly filing in 2012. The adoption of this new guidance has not had an impact on our financial position or results of operations.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update delays the effective date of the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.

Intangibles–Goodwill and Other. In September 2011, the FASB issued ASU No. 2011-08, Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update allows entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step one of the two-step goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this new guidance has not had an impact on our financial position or results of operations.

Drilling Contracts

Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed. Generally, our contracts provide for the drilling of a single well and typically permit the client to terminate on short notice. During periods of high rig demand, or for our newly constructed rigs, we enter into longer-term drilling contracts. Currently, we have contracts with terms of six months to four years in duration. As of October 19, 2012, we have 46 drilling rigs operating under term contracts, including six of the new-build AC drilling rigs. Of these 46 term contracts, if not renewed at the end of their terms, 29 will expire by April 19, 2013 (which includes six drilling rigs in Colombia which will expire on December 31, 2012), ten will expire by October 19, 2013, two will expire by April 19, 2014, two will expire by October 19, 2014 and three will expire by October 19, 2016. We currently have term contracts for another three new-build AC drilling rigs that are fit for purpose for domestic shale plays, one of which we expect to begin working by the end of 2012 and the remaining two to be working during the first quarter of 2013.

Restricted Cash

As of September 30, 2012, we had restricted cash in the amount of $0.7 million held in an escrow account to be used for a future payment due March 2013 to a former shareholder of a previously acquired production services business. Restricted cash of $0.7 million is recorded in other current assets and the associated obligation of $0.7 million is recorded in accrued expenses.

Investments

At December 31, 2010, we held $15.9 million (par value) of auction rate preferred securities (“ARPSs”), which were variable-rate preferred securities with a long-term maturity that were classified as held for sale. On January 19, 2011, we entered into an agreement with a financial institution to sell the ARPSs for $12.6 million, which represented 79% of the par value, plus accrued interest. Under the ARPSs sales agreement, we retained the unilateral right for a period ending January 7, 2013 to: (a) repurchase all the ARPSs that were sold at the $12.6 million price at which they were initially sold to the financial institution; and (b) if not repurchased, receive additional proceeds from the financial institution upon redemption of the ARPSs by the original issuer of these securities (collectively, the “ARPSs Call Option”). Upon origination, the fair value of the ARPSs Call Option was estimated to be $0.6 million and was recognized as other income in our consolidated statement of operations for 2011. We are required to assess the value of the ARPSs Call Option at the end of each reporting period, with any changes in fair value recorded within our consolidated statement of operations. On October 1, 2012, we received proceeds of $0.6 million from the redemption of certain ARPSs by the original issuer of the securities. As of September 30, 2012, the ARPSs Call Option had an estimated fair value of $0.6 million, and was included in our other current assets in our condensed consolidated balance sheet.

Other Long-Term Assets

Other long-term assets consist of cash deposits related to the deductibles on our workers’ compensation insurance policies, the long-term portion of deferred mobilization costs, debt issuance costs, net of amortization, and noncurrent prepaid taxes in Colombia which are creditable against future income taxes. Debt issuance costs are described in more detail in Note 3, Long-term Debt.

Property and Equipment

We recorded a total of $1.0 million of impairment expense in March 2012 associated with the retirement of two drilling rigs and two wireline units. We evaluated the drilling rigs in our fleet that had remained idle and decided to retire two mechanical drilling rigs that were assigned to our East Texas drilling division, with most of their components to be used for spare equipment. We recognized an impairment charge of $0.6 million in association with our decision to retire these two drilling rigs. Also in March 2012, we decided to retire two older wireline units and certain wireline equipment resulting in an impairment charge of approximately $0.4 million.

As of September 30, 2012, we have incurred $148.0 million in construction costs for ongoing projects, primarily for our new-build drilling rigs. During the nine months ended September 30, 2012, we capitalized $8.4 million of interest costs, primarily related to the new-build drilling rigs.