10-Q 1 a2012q310q.htm 10-Q 2012 Q3 10Q

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

Commission File Number: 1-8182

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

Registrant’s telephone number, including area code: (210) 828-7689
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
   (Do not check if a small reporting company.)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x

As of October 19, 2012, there were 62,029,235 shares of common stock, par value $0.10 per share, of the registrant outstanding.
 




PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
(Audited)
 
(In thousands, except share data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,291

 
$
86,197

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
129,496

 
106,084

Unbilled receivables
35,976

 
31,512

Insurance recoveries
6,302

 
5,470

Income taxes
1,761

 
2,168

Deferred income taxes
16,109

 
15,433

Inventory
12,177

 
11,184

Prepaid expenses and other current assets
10,019

 
11,564

Total current assets
218,131

 
269,612

Property and equipment, at cost
1,631,847

 
1,336,926

Less accumulated depreciation
649,123

 
542,970

Net property and equipment
982,724

 
793,956

Intangible assets, net of accumulated amortization of $22,174 and $17,397
as of September 30, 2012 and December 31, 2011, respectively
46,020

 
52,680

Goodwill
41,683

 
41,683

Noncurrent deferred income taxes
373

 
735

Other long-term assets
14,253

 
14,088

Total assets
$
1,303,184

 
$
1,172,754

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
84,919

 
$
66,440

Current portion of long-term debt
872

 
872

Prepaid drilling contracts
2,880

 
3,966

Accrued expenses:
 
 
 
Payroll and related employee costs
27,464

 
29,057

Insurance premiums and deductibles
10,418

 
10,583

Insurance claims and settlements
6,302

 
5,470

Interest
1,842

 
12,283

Other
12,935

 
11,009

Total current liabilities
147,632

 
139,680

Long-term debt, less current portion
498,502

 
418,728

Noncurrent deferred income taxes
107,727

 
94,745

Other long-term liabilities
6,988

 
9,156

Total liabilities
760,849

 
662,309

Commitments and contingencies (Note 8)

 

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

 

Common stock $.10 par value; 100,000,000 shares authorized; 62,028,941 shares and 61,782,180 shares outstanding at September 30, 2012 and December 31, 2011, respectively
6,216

 
6,188

Additional paid-in capital
447,767

 
442,020

Treasury stock, at cost; 134,188 shares and 95,409 shares at September 30, 2012 and December 31, 2011, respectively
(1,261
)
 
(904
)
Accumulated earnings
89,613

 
63,141

Total shareholders’ equity
542,335

 
510,445

Total liabilities and shareholders’ equity
$
1,303,184

 
$
1,172,754

See accompanying notes to condensed consolidated financial statements.


2



PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Drilling services
$
125,662

 
$
108,764

 
$
369,014

 
$
315,043

Production services
104,111

 
78,887

 
322,561

 
197,242

Total revenues
229,773

 
187,651

 
691,575

 
512,285

Costs and expenses:
 
 
 
 
 
 
 
Drilling services
88,188

 
72,430

 
247,896

 
213,129

Production services
65,395

 
44,394

 
191,774

 
115,376

Depreciation and amortization
42,067

 
32,992

 
120,429

 
97,672

General and administrative
21,269

 
17,705

 
64,677

 
48,086

Bad debt (recovery) expense
(368
)
 
322

 
(515
)
 
377

Impairment of equipment

 
484

 
1,032

 
484

Total costs and expenses
216,551

 
168,327

 
625,293

 
475,124

Income from operations
13,222

 
19,324

 
66,282

 
37,161

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(9,453
)
 
(6,137
)
 
(26,658
)
 
(21,659
)
Other
307

 
(1,193
)
 
1,259

 
(6,956
)
Total other expense
(9,146
)
 
(7,330
)
 
(25,399
)
 
(28,615
)
Income before income taxes
4,076

 
11,994

 
40,883

 
8,546

Income tax expense
(1,461
)
 
(5,250
)
 
(14,411
)
 
(4,187
)
Net income
$
2,615

 
$
6,744

 
$
26,472

 
$
4,359

 
 
 
 
 
 
 
 
Income per common share—Basic
$
0.04

 
$
0.11

 
$
0.43

 
$
0.08

 
 
 
 
 
 
 
 
Income per common share—Diluted
$
0.04

 
$
0.11

 
$
0.42

 
$
0.08

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Basic
61,881

 
59,898

 
61,743

 
56,045

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Diluted
62,825

 
61,428

 
62,695

 
57,522


See accompanying notes to condensed consolidated financial statements.



3



PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended September 30,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
26,472

 
$
4,359

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
120,429

 
97,672

Allowance for doubtful accounts
2

 
390

(Gain) loss on dispositions of property and equipment
(1,230
)
 
628

Stock-based compensation expense
5,541

 
5,314

Amortization of debt issuance costs, discount and premium
2,224

 
2,657

Impairment of equipment
1,032

 
484

Deferred income taxes
12,270

 
2,656

Change in other long-term assets
(1,964
)
 
2,136

Change in other long-term liabilities
(2,168
)
 
824

Changes in current assets and liabilities:
 
 
 
Receivables
(27,471
)
 
(49,035
)
Inventory
(993
)
 
(1,342
)
Prepaid expenses and other current assets
1,756

 
533

Accounts payable
4,769

 
3,339

Prepaid drilling contracts
(1,086
)
 
669

Accrued expenses
(10,271
)
 
4,921

Net cash provided by operating activities
129,312

 
76,205

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of production services businesses

 
(5,000
)
Purchases of property and equipment
(291,051
)
 
(140,565
)
Proceeds from sale of property and equipment
2,433

 
2,261

Proceeds from sale of auction rate securities

 
12,569

Net cash used in investing activities
(288,618
)
 
(130,735
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Debt repayments
(869
)
 
(113,158
)
Proceeds from issuance of debt
80,000

 
74,000

Debt issuance costs
(58
)
 
(3,220
)
Proceeds from exercise of options
684

 
2,344

Proceeds from common stock, net of offering costs of $5,707

 
94,340

Purchase of treasury stock
(357
)
 
(452
)
Excess tax benefit of stock option exercises

 
522

Net cash provided by financing activities
79,400

 
54,376

 
 
 
 
Net decrease in cash and cash equivalents
(79,906
)
 
(154
)
Beginning cash and cash equivalents
86,197

 
22,011

Ending cash and cash equivalents
$
6,291

 
$
21,857

 
 
 
 
Supplementary disclosure:
 
 
 
Interest paid
$
43,349

 
$
26,595

Income tax paid
$
88

 
$
592

 
See accompanying notes to condensed consolidated financial statements.


4



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


5



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


6



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.
2.
Acquisitions
On December 31, 2011, we acquired Go-Coil, L.L.C., a Louisiana limited liability company (“Go-Coil”) which provided coiled tubing services with a fleet of seven onshore units and three offshore units through its facilities in Louisiana, Texas, Oklahoma and Pennsylvania. The aggregate purchase price for the acquisition was approximately $110.4 million, which consisted of assets acquired of $114.9 million and liabilities assumed of $4.5 million. We funded the acquisition with cash on hand that was primarily generated from the proceeds of the Senior Notes issued in November 2011, as described in Note 3, Long-term Debt.


7



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

Other current assets
9,068

Property and equipment
30,103

Intangibles and other assets
33,695

Goodwill
41,683

Total assets acquired
$
114,862

Current liabilities
$
4,337

Long-term debt
131

Total liabilities assumed
$
4,468

Net assets acquired
$
110,394

The acquisition of the coiled tubing services business from Go-Coil was accounted for as an acquisition of a business in accordance with ASC Topic 805, Business Combinations. The purchase price allocation for the Go-Coil acquisition was finalized as of June 30, 2012. Goodwill was recognized as part of the Go-Coil acquisition, since the purchase price exceeded the estimated fair value of the assets acquired and liabilities assumed. We believe that the goodwill relates to the acquired workforce, future synergies between our existing service offerings and the ability to expand our service offerings.
3.
Long-term Debt
Long-term debt consists of the following (amounts in thousands):
 
September 30, 2012
 
December 31, 2011
Senior secured revolving credit facility
$
80,000

 
$

Senior notes
418,389

 
417,747

Other notes payable
985

 
1,853

 
499,374

 
419,600

Less current portion
(872
)
 
(872
)
 
$
498,502

 
$
418,728

Senior Secured Revolving Credit Facility
We have a credit agreement, as amended on June 30, 2011, with Wells Fargo Bank, N.A. and a syndicate of lenders which provides for a senior secured revolving credit facility, with sub-limits for letters of credit and swing-line loans, of up to an aggregate principal amount of $250 million, all of which matures on June 30, 2016 (the “Revolving Credit Facility”). The Revolving Credit Facility contains customary mandatory prepayments from the proceeds of certain asset dispositions or debt issuances, which are applied to reduce outstanding revolving and swing-line loans and letter of credit exposure, but in no event will reduce the borrowing availability under the Revolving Credit Facility to less than $250 million.
Borrowings under the Revolving Credit Facility bear interest, at our option, at the LIBOR rate or at the bank prime rate, plus an applicable per annum margin that ranges from 2.50% to 3.25% and 1.50% to 2.25%, respectively. The LIBOR margin and bank prime rate margin in effect at October 19, 2012 are 2.75% and 1.75%, respectively. The Revolving Credit Facility requires a commitment fee due quarterly based on the average daily unused amount of the commitments of the lenders, a fronting fee due for each letter of credit issued, and a quarterly letter of credit fee due based on the average undrawn amount of letters of credit outstanding during such period.
Our obligations under the Revolving Credit Facility are secured by substantially all of our domestic assets (including equity interests in Pioneer Global Holdings, Inc. and 65% of the outstanding equity interests of any first-tier foreign subsidiaries owned by Pioneer Global Holdings, Inc., but excluding any equity interest in, and any assets of, Pioneer Services Holdings, LLC) and are guaranteed by certain of our domestic subsidiaries, including Pioneer Global Holdings, Inc. Effective October 1, 2012, Pioneer Coiled Tubing Services, LLC (formerly Go-Coil, L.L.C.) was added as a subsidiary guarantor under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are available for acquisitions, working capital and other general corporate purposes.


8



As of October 19, 2012, we had $100.0 million outstanding under our Revolving Credit Facility and $9.0 million in committed letters of credit, which resulted in borrowing availability of $141.0 million under our Revolving Credit Facility. There are no limitations on our ability to access this borrowing capacity other than maintaining compliance with the covenants under the Revolving Credit Facility. At September 30, 2012, we were in compliance with our financial covenants. Our total consolidated leverage ratio was 2.0 to 1.0, our senior consolidated leverage ratio was 0.4 to 1.0, and our interest coverage ratio was 7.4 to 1.0. The financial covenants contained in our Revolving Credit Facility include the following:
A maximum total consolidated leverage ratio that cannot exceed 4.00 to 1.00;
A maximum senior consolidated leverage ratio, which excludes unsecured and subordinated debt, that cannot exceed 2.50 to 1.00;
A minimum interest coverage ratio that cannot be less than 2.50 to 1.00; and
If our senior consolidated leverage ratio is greater than 2.00 to 1.00 at the end of any fiscal quarter, our minimum asset coverage ratio cannot be less than 1.00 to 1.00.
The Revolving Credit Facility does not restrict capital expenditures as long as (a) no event of default exists under the Revolving Credit Facility or would result from such capital expenditures, (b) after giving effect to such capital expenditures there is availability under the Revolving Credit Facility equal to or greater than $25 million and (c) the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is less than 2.00 to 1.00. If the senior consolidated leverage ratio as of the last day of the most recent reported fiscal quarter is equal to or greater than 2.00 to 1.00, then capital expenditures are limited to $100 million for the fiscal year. The capital expenditure threshold may be increased by any unused portion of the capital expenditure threshold from the immediate preceding fiscal year up to $30 million.
At September 30, 2012, our senior consolidated leverage ratio was not greater than 2.00 to 1.00 and therefore, we were not subject to the capital expenditure threshold restrictions listed above.
The Revolving Credit Facility has additional restrictive covenants that, among other things, limit the incurrence of additional debt, investments, liens, dividends, acquisitions, redemptions of capital stock, prepayments of indebtedness, asset dispositions, mergers and consolidations, transactions with affiliates, hedging contracts, sale leasebacks and other matters customarily restricted in such agreements. In addition, the Revolving Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, judgment defaults in excess of specified amounts, failure of any guaranty or security document supporting the credit agreement and change of control.
Senior Notes
On March 11, 2010, we issued $250 million of unregistered senior notes with a coupon interest rate of 9.875% that are due in 2018 (the “2010 Senior Notes”). The 2010 Senior Notes were sold with an original issue discount of $10.6 million that was based on 95.75% of their face value, which will result in an effective yield to maturity of approximately 10.677%. On March 11, 2010, we received $234.8 million of net proceeds from the issuance of the 2010 Senior Notes after deductions were made for the $10.6 million of original issue discount and $4.6 million for underwriters’ fees and other debt offering costs. The net proceeds were used to repay a portion of the borrowings outstanding under our Revolving Credit Facility.
On November 21, 2011, we issued $175 million of unregistered Senior Notes (the “2011 Senior Notes”). The 2011 Senior Notes have the same terms and conditions as the 2010 Senior Notes. The 2011 Senior Notes were sold with an original issue premium of $1.8 million that was based on 101% of their face value, which will result in an effective yield to maturity of approximately 9.66%. On November 21, 2011, we received $172.7 million of net proceeds from the issuance of the 2011 Senior Notes, including the original issue premium, and after $4.1 million of deductions were made for underwriters' fees and other debt offering costs. A portion of the net proceeds were used to fund the acquisition of Go-Coil in December 2011, as described in Note 2, Acquisitions.
In accordance with a registration rights agreement with the holders of both our 2010 Senior Notes and 2011 Senior Notes, we filed exchange offer registration statements on Form S-4 with the Securities and Exchange Commission that became effective on September 2, 2010 and July 13, 2012, respectively. These exchange offer registration statements enabled the holders of both our 2010 Senior Notes and 2011 Senior Notes to exchange their senior notes for publicly registered notes with substantially identical terms. References to the “2010 Senior Notes” and “2011 Senior Notes” herein include the senior notes issued in the exchange offers.
The 2010 and 2011 Senior Notes (the “Senior Notes”) are reflected on our condensed consolidated balance sheet at September 30, 2012 with a total carrying value of $418.4 million, which represents the $425.0 million total face value net of the


9



$8.1 million unamortized portion of original issue discount and $1.5 million unamortized portion of original issue premium. The original issue discount and premium are being amortized over the term of the Senior Notes based on the effective interest method.
The Senior Notes will mature on March 15, 2018 with interest due semi-annually in arrears on March 15 and September 15 of each year. We have the option to redeem the Senior Notes, in whole or in part, at any time on or after March 15, 2014 in each case at the redemption price specified in the Indenture dated March 11, 2010 (the “Indenture”) together with any accrued and unpaid interest to the date of redemption. Prior to March 15, 2014, we may also redeem the Senior Notes, in whole or in part, at a “make-whole” redemption price specified in the Indenture, together with any accrued and unpaid interest to the date of redemption. In addition, prior to March 15, 2013, we may, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Notes at a redemption price of 109.875% of the principal amount, plus any accrued and unpaid interest to the redemption date, with the net proceeds of certain equity offerings, if at least 65% of the aggregate principal amount of the Senior Notes remains outstanding after such redemption and the redemption occurs within 120 days of the closing of the equity offering.
Upon the occurrence of a change of control, holders of the Senior Notes will have the right to require us to purchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase. Under certain circumstances in connection with asset dispositions, we will be required to use the excess proceeds of asset dispositions to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, together with any accrued and unpaid interest to the date of purchase.
The Indenture contains certain restrictions generally on our and certain of our subsidiaries’ ability to:
pay dividends on stock;
repurchase stock or redeem subordinated debt or make other restricted payments;
incur, assume or guarantee additional indebtedness or issue disqualified stock;
create liens on our assets;
enter into sale and leaseback transactions;
pay dividends, engage in loans, or transfer other assets from certain of our subsidiaries;
consolidate with or merge with or into, or sell all or substantially all of our properties to another person;
enter into transactions with affiliates; and
enter into new lines of business.
We were in compliance with these covenants as of September 30, 2012. The Senior Notes are not subject to any sinking fund requirements. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing domestic subsidiaries and by certain of our future domestic subsidiaries. Effective October 1, 2012, Pioneer Coiled Tubing Services, LLC (formerly Go-Coil, L.L.C.) was added as a subsidiary guarantor under the Indenture. (See Note 9, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements.)
Other Notes Payable
We have two notes payable to certain employees that are former shareholders of production services businesses which we have acquired. These notes payable have interest rates of 6% and 14%, require annual payments of principal and interest and have final maturity dates in March and April 2013. We have other debt of $0.1 million as of September 30, 2012 which represents a capital lease obligation for equipment, with monthly payments due through November 2016.
Debt Issuance Costs
Costs incurred in connection with the Revolving Credit Facility were capitalized and are being amortized using the straight-line method over the term of the Revolving Credit Facility which matures in June 2016. Costs incurred in connection with the issuance of our Senior Notes were capitalized and are being amortized using the straight-line method (which approximates the use of the interest method) over the term of the Senior Notes which mature in March 2018. Capitalized debt costs related to the issuance of our long-term debt were approximately $10.1 million and $11.6 million as of September 30, 2012 and December 31, 2011, respectively. We recognized approximately $1.6 million and $1.3 million of associated amortization during the nine months ended September 30, 2012 and 2011, respectively. In June 2011, we recognized additional amortization expense related to the write-off of $0.6 million of debt issuance costs, representing the portion of unamortized debt issuance costs associated with certain syndicate lenders who are no longer participating in the Revolving Credit Facility as amended on June 30, 2011.


10



4.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value.
At September 30, 2012 and December 31, 2011, our financial instruments consist primarily of cash, trade receivables, trade payables, long-term debt, and our ARPSs Call Option. The carrying value of cash, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.
At September 30, 2012, our ARPSs Call Option is reported at an amount that reflects our current estimate of fair value. To estimate the value of our ARPSs Call Option as of September 30, 2012, we used inputs defined by ASC Topic 820 as level 3 inputs, which are significant unobservable inputs. The fair value of the ARPSs Call Option was estimated using a modified Black-Scholes model, based on an analysis of recent historical transactions for securities with similar characteristics to the underlying ARPSs, and an analysis of the probability that the options would be exercisable as a result of the underlying ARPSs being redeemed or traded in a secondary market at an amount greater than the option price before the expiration date. As of September 30, 2012, the ARPSs Call Option had an estimated fair value of $0.6 million, and was included in our prepaid expenses and other current assets in our condensed consolidated balance sheet. Future changes in the fair values of the ARPSs Call Option will be reflected in other income (expense) in our condensed consolidated statements of operations.
The fair value of our long-term debt at September 30, 2012 and December 31, 2011 is estimated using a discounted cash flow analysis, based on rates that we believe we would currently pay for similar types of debt instruments. This discounted cash flow analysis is based on inputs defined by ASC Topic 820 as level 2 inputs, which are observable inputs for similar types of debt instruments. The following table presents the supplemental fair value information about long-term debt at September 30, 2012 and December 31, 2011 (amounts in thousands):
 
September 30, 2012
 
December 31, 2011
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt
$
499,374

 
$
561,197

 
$
419,600

 
$
443,309

5.
Earnings Per Common Share
The following table presents a reconciliation of the numerators and denominators of the basic income per share and diluted income per share computations (amounts in thousands, except per share data):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Basic
 
 
 
 
 
 
 
Net income
$
2,615

 
$
6,744

 
$
26,472

 
$
4,359

Weighted-average shares
61,881

 
59,898

 
61,743

 
56,045

Income per share
$
0.04

 
$
0.11

 
$
0.43

 
$
0.08

Diluted
 
 
 
 
 
 
 
Net income
$
2,615

 
$
6,744

 
$
26,472

 
$
4,359

Effect of dilutive securities

 

 

 

Net income available to common shareholders after assumed conversion
$
2,615

 
$
6,744

 
$
26,472

 
$
4,359

Weighted average shares:
 
 
 
 
 
 
 
Outstanding
61,881

 
59,898

 
61,743

 
56,045

Diluted effect of stock options, restricted stock, and restricted stock unit awards
944

 
1,530

 
952

 
1,477

 
62,825

 
61,428

 
62,695

 
57,522

Income per share
$
0.04

 
$
0.11

 
$
0.42

 
$
0.08

Potentially dilutive stock options, restricted stock and restricted stock unit awards representing a total of 4,225,796 and 2,348,086 shares of common stock for the three months ended September 30, 2012 and 2011, respectively, and 4,275,623 and 2,895,148 for the nine months ended September 30, 2012 and 2011, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect.


11



6.
Equity Transactions and Stock Based Compensation Plans
Stock-based Compensation Plans
We grant stock option awards with vesting based on time of service conditions and we grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. We recognize compensation cost for stock option, restricted stock and restricted stock unit awards based on the fair value estimated in accordance with ASC Topic 718, Compensation—Stock Compensation. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
Stock Options
We grant stock option awards which generally become exercisable over a three-year period and expire ten years after the date of grant. Our stock-based compensation plans require that all stock option awards have an exercise price that is not less than the fair market value of our common stock on the date of grant. We issue shares of our common stock when vested stock option awards are exercised.
We estimate the fair value of each option grant on the date of grant using a Black-Scholes options-pricing model. There were no stock options granted during the three months ended September 30, 2012 or 2011. The following table summarizes the assumptions used in the Black-Scholes option-pricing model based on a weighted-average calculation for the nine months ended September 30, 2012 and 2011:
 
 
Nine months ended September 30,
 
2012
 
2011
Expected volatility
70
%
 
65
%
Risk-free interest rates
0.8
%
 
1.5
%
Expected life in years
5.12

 
4.33

Options granted
530,156
 
602,298
Grant-date fair value
$5.02
 
$4.69
The assumptions above are based on multiple factors, including historical exercise patterns of homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and volatility of our stock price. As we have not declared dividends since we became a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an optionee actually realizes will be at or near the value we have estimated using the Black-Scholes options-pricing model.
The following table summarizes the compensation expense recognized for stock option awards during the three and nine months ended September 30, 2012 and 2011 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
General and administrative expense
$
665

 
$
919

 
$
2,221

 
$
2,812

Operating costs
4

 
79

 
56

 
216

 
$
669

 
$
998

 
$
2,277

 
$
3,028


During the three and nine months ended September 30, 2012, 6,750 and 170,016 stock options were exercised at a weighted-average exercise price of $4.27 and $4.02, respectively. During the three and nine months ended September 30, 2011, 25,233 and 337,045 stock options were exercised at a weighted-average exercise price of $10.02 and $6.95, respectively. We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of our stock on the date of exercise over the exercise price of the options. In accordance with ASC Topic 718, we reported all excess tax benefits resulting from the exercise of stock options as financing cash flows in our condensed consolidated statement of cash flows.


12



Restricted Stock
We grant restricted stock awards that vest over a three-year period with a fair value based on the closing price of our common stock on the date of the grant. When restricted stock awards are granted, or when restricted stock unit awards are converted to restricted stock, shares of our common stock are considered issued, but subject to certain restrictions. During the nine months ended September 30, 2012 and 2011, we granted 49,748 and 32,360 shares of restricted stock awards, with a weighted-average grant-date price of $8.04 and $12.36, respectively. In May 2011, we issued an additional 166,918 shares of restricted stock upon the conversion of performance-based RSU awards.
The following table summarizes the compensation expense recognized for restricted stock awards during the three and nine months ended September 30, 2012 and 2011 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
General and administrative expense
$
131

 
$
296

 
$
526

 
$
747

Operating costs
2

 
38

 
30

 
79

 
$
133

 
$
334

 
$
556

 
$
826

Restricted Stock Units
We grant restricted stock unit awards with vesting based on time of service conditions only (“time-based RSUs”), and we grant restricted stock unit awards with vesting based on time of service which are also subject to performance and market conditions (“performance-based RSUs”). Shares of our common stock are issued to recipients of restricted stock units only when they have satisfied the applicable vesting conditions.
Our time-based RSUs generally vest over a three-year period, with fair values based on the closing price of our common stock on the date of grant. There were no time-based RSUs granted during the three months ended September 30, 2012. The following table summarizes the number and weighted-average grant-date fair value of the time-based RSUs granted during the nine months ended September 30, 2012 and the three and nine months ended September 30, 2011:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2011
 
2012
 
2011
Time-based RSUs granted
12,750

 
356,813

 
246,223

Weighted-average grant-date fair value
$
15.50

 
$
8.21

 
$
11.20

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

 
146,479

Weighted-average grant-date fair value
$
9.85

 
$
10.23

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


13



The following table summarizes the compensation expense recognized for restricted stock unit awards during the three and nine months ended September 30, 2012 and 2011 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
General and administrative expense
$
979

 
$
409

 
$
2,381

 
$
1,231

Operating costs
90

 
93

 
327

 
229

 
$
1,069

 
$
502

 
$
2,708

 
$
1,460

7.
Segment Information
We have two operating segments referred to as the Drilling Services Segment and the Production Services Segment which is the basis management uses for making operating decisions and assessing performance.
Drilling Services Segment—Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies with its fleet of 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

Production Services SegmentOur Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services, coiled tubing services, and fishing and rental services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. We currently have a fleet of 105 well servicing rigs consisting of ninety-five 550 horsepower rigs and ten 600 horsepower rigs. 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.
The following tables set forth certain financial information for our two operating segments and corporate as of and for the three and nine months ended September 30, 2012 and 2011 (amounts in thousands):
 
As of and for the three months ended September 30, 2012
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
837,887

 
$
441,791

 
$
23,506

 
$
1,303,184

Revenues
$
125,662

 
$
104,111

 
$

 
$
229,773

Operating costs
88,188

 
65,395

 

 
153,583

Segment margin
$
37,474

 
$
38,716

 
$

 
$
76,190

Depreciation and amortization
$
27,467

 
$
14,399

 
$
201

 
$
42,067

Capital expenditures
$
56,734

 
$
26,269

 
$
402

 
$
83,405



14



 
As of and for the three months ended September 30, 2011
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
645,104

 
$
269,080

 
$
32,704

 
$
946,888

Revenues
$
108,764

 
$
78,887

 
$

 
$
187,651

Operating costs
72,430

 
44,394

 

 
116,824

Segment margin
$
36,334

 
$
34,493

 
$

 
$
70,827

Depreciation and amortization
$
24,405

 
$
8,388

 
$
199

 
$
32,992

Capital expenditures
$
44,597

 
$
15,241

 
$

 
$
59,838

 
As of and for the nine months ended September 30, 2012
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
837,887

 
$
441,791

 
$
23,506

 
$
1,303,184

Revenues
$
369,014

 
$
322,561

 
$

 
$
691,575

Operating costs
247,896

 
191,774

 

 
439,670

Segment margin
$
121,118

 
$
130,787

 
$

 
$
251,905

Depreciation and amortization
$
79,263

 
$
40,508

 
$
658

 
$
120,429

Capital expenditures
$
217,926

 
$
85,457

 
$
1,375

 
$
304,758

 
As of and for the nine months ended September 30, 2011
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
645,104

 
$
269,080

 
$
32,704

 
$
946,888

Revenues
$
315,043

 
$
197,242

 
$

 
$
512,285

Operating costs
213,129

 
115,376

 

 
328,505

Segment margin
$
101,914

 
$
81,866

 
$

 
$
183,780

Depreciation and amortization
$
73,594

 
$
23,393

 
$
685

 
$
97,672

Capital expenditures
$
110,352

 
$
47,986

 
$

 
$
158,338

The following table reconciles the segment profits reported above to income from operations as reported on the consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Segment margin
$
76,190

 
$
70,827

 
$
251,905

 
$
183,780

Depreciation and amortization
(42,067
)
 
(32,992
)
 
(120,429
)
 
(97,672
)
General and administrative
(21,269
)
 
(17,705
)
 
(64,677
)
 
(48,086
)
Bad debt recovery (expense)
368

 
(322
)
 
515

 
(377
)
Impairment of equipment

 
(484
)
 
(1,032
)
 
(484
)
Income from operations
$
13,222

 
$
19,324

 
$
66,282

 
$
37,161



15



The following table sets forth certain financial information for our international operations in Colombia as of and for the three and nine months ended September 30, 2012 and 2011 which is included in our Drilling Services Segment (amounts in thousands):
 
As of and for the three months ended September 30,
 
As of and for the nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
Identifiable assets
$
153,309

 
$
154,255

 
$
153,309

 
$
154,255

Revenues
$
24,405

 
$
27,990

 
$
70,706

 
$
81,465

Identifiable assets for our international operations in Colombia include five drilling rigs that are owned by our Colombia subsidiary and three drilling rigs that are owned by one of our domestic subsidiaries and leased to our Colombia subsidiary.
8.
Commitments and Contingencies
In connection with our operations in Colombia, our foreign subsidiaries have obtained bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. We have guaranteed payments of $37.9 million relating to our performance under these bonds.
The Colombian government enacted a tax reform act which, among other things, adopted a one-time, net-worth tax for all Colombian entities, which was assessed on January 1, 2011 and is payable in eight semi-annual installments from 2011 through 2014. Based on our Colombian operations’ net equity, measured on a Colombian tax basis as of January 1, 2011, our total net-worth tax obligation is approximately $7.3 million, which is not deductible for tax purposes. We recognized this tax obligation in full during the first quarter of 2011 in other expense in our condensed consolidated statement of operations. As of September 30, 2012, we have a remaining obligation of $3.8 million, which is recorded in other accrued expenses and other long-term liabilities on our condensed consolidated balance sheet.
Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations.
9.
Guarantor/Non-Guarantor Condensed Consolidated Financial Statements
Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all existing domestic subsidiaries, except for Pioneer Services Holdings, LLC, and certain of our future domestic subsidiaries. Effective October 1, 2012, the Indenture was supplemented to add Pioneer Coiled Tubing Services, LLC (formerly Go-Coil, L.L.C.) as a subsidiary guarantor. The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Notes, the guarantees or the Indenture.
In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary will pay the holders of its debt and other liabilities, including its trade creditors, before it will be able to distribute any of its assets to us. In the future, any non-U.S. subsidiaries, immaterial subsidiaries and subsidiaries that we designate as unrestricted subsidiaries under the Indenture will not guarantee the Senior Notes. As of September 30, 2012, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of the guarantee arrangements, we are presenting the following condensed consolidated balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries.



16




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
September 30, 2012
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8,663

 
$
(3,648
)
 
$
1,276

 
$

 
$
6,291

Receivables, net of allowance
6

 
132,086

 
44,976

 
(3,533
)
 
173,535

Intercompany receivable (payable)
(125,111
)
 
143,717

 
(18,606
)
 

 

Deferred income taxes
751

 
7,245

 
8,113

 

 
16,109

Inventory

 
5,265

 
6,912

 

 
12,177

Prepaid expenses and other current assets
1,403

 
6,490

 
2,126

 

 
10,019

Total current assets
(114,288
)
 
291,155

 
44,797

 
(3,533
)
 
218,131

Net property and equipment
2,502

 
846,828

 
134,144

 
(750
)
 
982,724

Investment in subsidiaries
1,099,973

 
223,520

 

 
(1,323,493
)
 

Intangible assets, net of accumulated amortization
66

 
15,636

 
30,318

 

 
46,020

Goodwill

 

 
41,683

 

 
41,683

Noncurrent deferred income taxes
47,649

 

 
373

 
(47,649
)
 
373

Other long-term assets
10,114

 
1,423

 
2,716

 

 
14,253

Total assets
$
1,046,016

 
$
1,378,562

 
$
254,031

 
$
(1,375,425
)
 
$
1,303,184

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
761

 
$
70,738

 
$
13,420

 

 
$
84,919

Current portion of long-term debt

 
850

 
22

 

 
872

Prepaid drilling contracts

 
2,207

 
673

 

 
2,880

Accrued expenses
3,630

 
45,728

 
13,136

 
(3,533
)
 
58,961

Total current liabilities
4,391

 
119,523

 
27,251

 
(3,533
)
 
147,632

Long-term debt, less current portion
498,389

 

 
113

 

 
498,502

Noncurrent deferred income taxes

 
154,351

 
1,025

 
(47,649
)
 
107,727

Other long-term liabilities
151

 
4,715

 
2,122

 

 
6,988

Total liabilities
502,931

 
278,589

 
30,511

 
(51,182
)
 
760,849

Total shareholders’ equity
543,085

 
1,099,973

 
223,520

 
(1,324,243
)
 
542,335

Total liabilities and shareholders’ equity
$
1,046,016

 
$
1,378,562

 
$
254,031

 
$
(1,375,425
)
 
$
1,303,184

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

 
$
(13,879
)
 
$
8,144

 
$

 
$
86,197

Receivables, net of allowance
(2
)
 
112,531

 
32,724

 
(19
)
 
145,234

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

 
(9,033
)
 

 

Deferred income taxes
1,408

 
8,644

 
5,381

 

 
15,433

Inventory

 
4,533

 
6,651

 

 
11,184

Prepaid expenses and other current assets
285

 
6,304

 
4,975

 

 
11,564

Total current assets
(28,929
)
 
249,718

 
48,842

 
(19
)
 
269,612

Net property and equipment
1,605

 
675,679

 
117,422

 
(750
)
 
793,956

Investment in subsidiaries
932,237

 
221,201

 

 
(1,153,438
)
 

Intangible assets, net of accumulated amortization
171

 
18,829

 
33,680

 

 
52,680

Goodwill

 

 
41,683

 

 
41,683

Noncurrent deferred income taxes
30,835

 

 
735

 
(30,835
)
 
735

Other long-term assets
11,949

 
2,124

 
15

 

 
14,088

Total assets
$
947,868

 
$
1,167,551

 
$
242,377

 
$
(1,185,042
)
 
$
1,172,754

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

 
$
57,150

 
$
8,200

 
$

 
$
66,440

Current portion of long-term debt

 
850

 
22

 

 
872

Prepaid drilling contracts

 
1,297

 
2,669

 

 
3,966

Accrued expenses
16,779

 
45,012

 
6,631

 
(20
)
 
68,402

Total current liabilities
17,869

 
104,309

 
17,522

 
(20
)
 
139,680

Long-term debt, less current portion
417,747

 
850

 
131

 

 
418,728

Noncurrent deferred income taxes
921

 
124,659

 

 
(30,835
)
 
94,745

Other long-term liabilities
137

 
5,496

 
3,523

 

 
9,156

Total liabilities
436,674

 
235,314

 
21,176

 
(30,855
)
 
662,309

Total shareholders’ equity
511,194

 
932,237

 
221,201

 
(1,154,187
)
 
510,445

Total liabilities and shareholders’ equity
$
947,868

 
$
1,167,551

 
$
242,377

 
$
(1,185,042
)
 
$
1,172,754



17



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

 
$
191,753

 
$
38,020

 
$

 
$
229,773

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
125,295

 
28,288

 

 
153,583

Depreciation and amortization
201

 
35,727

 
6,139

 

 
42,067

General and administrative
5,653

 
12,780

 
2,974

 
(138
)
 
21,269

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt (recovery) expense

 
(412
)
 
44

 

 
(368
)
Total costs and expenses
5,854

 
172,175

 
38,660

 
(138
)
 
216,551

Income (loss) from operations
(5,854
)
 
19,578

 
(640
)
 
138

 
13,222

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
11,274

 
(441
)
 

 
(10,833
)
 

Interest expense
(9,440
)
 
(26
)
 
13

 

 
(9,453
)
Other
477

 
210

 
(242
)
 
(138
)
 
307

Total other expense (income)
2,311

 
(257
)
 
(229
)
 
(10,971
)
 
(9,146
)
Income (loss) before income taxes
(3,543
)
 
19,321

 
(869
)
 
(10,833
)
 
4,076

Income tax expense (benefit)
6,158

 
(8,047
)
 
428

 

 
(1,461
)
Net income (loss)
$
2,615

 
$
11,274

 
$
(441
)
 
$
(10,833
)
 
$
2,615

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

 
$
159,662

 
$
27,989

 
$

 
$
187,651

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
95,021

 
21,803

 

 
116,824

Depreciation and amortization
198

 
29,653

 
3,141

 

 
32,992

General and administrative
4,983

 
12,132

 
698

 
(108
)
 
17,705

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt (recovery) expense

 
322

 

 

 
322

Impairment of equipment

 
484

 

 

 
484

Total costs and expenses
5,181

 
136,397

 
26,857

 
(108
)
 
168,327

Income (loss) from operations
(5,181
)
 
23,265

 
1,132

 
108

 
19,324

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
13,663

 
(642
)
 

 
(13,021
)
 

Interest expense
(6,083
)
 
(58
)
 
4

 

 
(6,137
)
Other
(73
)
 
220

 
(1,232
)
 
(108
)
 
(1,193
)
Total other income (expense)
7,507

 
(480
)
 
(1,228
)
 
(13,129
)
 
(7,330
)
Income (loss) before income taxes
2,326

 
22,785

 
(96
)
 
(13,021
)
 
11,994

Income tax expense (benefit)
4,418

 
(9,122
)
 
(546
)
 

 
(5,250
)
Net income (loss)
$
6,744

 
$
13,663

 
$
(642
)
 
$
(13,021
)
 
$
6,744

 
 
 
 
 
 
 
 
 
 

















18





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

 
$
575,927

 
$
115,648

 
$

 
$
691,575

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
356,880

 
82,790

 

 
439,670

Depreciation and amortization
658

 
102,216

 
17,555

 

 
120,429

General and administrative
16,713

 
40,151

 
8,227

 
(414
)
 
64,677

Intercompany leasing

 
(3,645
)
 
3,645

 

 

Bad debt (recovery) expense

 
(687
)
 
172

 

 
(515
)
Impairment of equipment

 
1,032

 

 

 
1,032

Total costs and expenses
17,371

 
495,947

 
112,389

 
(414
)
 
625,293

Income (loss) from operations
(17,371
)
 
79,980

 
3,259

 
414

 
66,282

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
52,794

 
3,820

 

 
(56,614
)
 

Interest expense
(26,648
)
 
(23
)
 
13

 

 
(26,658
)
Other
337

 
710

 
626

 
(414
)
 
1,259

Total other expense (income)
26,483

 
4,507

 
639

 
(57,028
)
 
(25,399
)
Income (loss) before income taxes
9,112

 
84,487

 
3,898

 
(56,614
)
 
40,883

Income tax expense (benefit)
17,360

 
(31,693
)
 
(78
)
 

 
(14,411
)
Net income (loss)
$
26,472

 
$
52,794

 
$
3,820

 
$
(56,614
)
 
$
26,472

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2011
 
Parent