10-Q 1 a201310qq3.htm 10-Q 2013 10Q Q3

 
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, 2013
or
o
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: (855) 884-0575
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
o
Accelerated filer
x
 
 
 
 
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 25, 2013, there were 62,459,486 shares of common stock, par value $0.10 per share, of the registrant outstanding.
 





PART 1. FINANCIAL INFORMATION
Item 1.
Financial Statements
PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
(Audited)
 
(In thousands, except share data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,085

 
$
23,733

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
124,836

 
115,070

Unbilled receivables
45,048

 
35,140

Insurance recoveries
8,774

 
6,518

Income taxes and other
3,431

 
2,116

Deferred income taxes
12,597

 
11,058

Inventory
12,732

 
12,111

Prepaid expenses and other current assets
5,709

 
13,040

Total current assets
230,212

 
218,786

Property and equipment, at cost
1,707,706

 
1,698,517

Less accumulated depreciation
748,214

 
684,177

Net property and equipment
959,492

 
1,014,340

Intangible assets, net of accumulated amortization of
$30.8 million and $24.4 million at September 30, 2013 and December 31, 2012, respectively
34,326

 
43,843

Goodwill

 
41,683

Noncurrent deferred income taxes
1,335

 
5,519

Assets held for sale
6,718

 

Other long-term assets
19,518

 
15,605

Total assets
$
1,251,601

 
$
1,339,776

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
47,642

 
$
83,823

Current portion of long-term debt
23

 
872

Deferred revenues
906

 
3,880

Accrued expenses:
 
 
 
Payroll and related employee costs
25,989

 
27,991

Insurance premiums and deductibles
10,707

 
9,708

Insurance claims and settlements
8,665

 
6,348

Interest
1,820

 
12,343

Other
10,601

 
11,585

Total current liabilities
106,353

 
156,550

Long-term debt, less current portion
534,421

 
518,725

Noncurrent deferred income taxes
85,278

 
108,838

Other long-term liabilities
6,677

 
7,983

Total liabilities
732,729

 
792,096

Commitments and contingencies (Note 7)

 

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

 

Common stock $.10 par value; 100,000,000 shares authorized;
62,436,990 and 62,032,517 shares outstanding at
September 30, 2013 and December 31, 2012, respectively
6,266

 
6,217

Additional paid-in capital
454,742

 
449,554

Treasury stock, at cost; 218,883 and 134,612 shares at
September 30, 2013 and December 31, 2012, respectively
(1,892
)
 
(1,264
)
Accumulated earnings
59,756

 
93,173

Total shareholders’ equity
518,872

 
547,680

Total liabilities and shareholders’ equity
$
1,251,601

 
$
1,339,776

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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Drilling services
$
131,033

 
$
125,662

 
$
402,357

 
$
369,014

Production services
112,946

 
104,111

 
319,646

 
322,561

Total revenues
243,979

 
229,773

 
722,003

 
691,575

Costs and expenses:
 
 
 
 
 
 
 
Drilling services
89,350

 
88,188

 
267,630

 
247,896

Production services
71,910

 
65,395

 
202,662

 
191,774

Depreciation and amortization
47,414

 
42,067

 
141,047

 
120,429

General and administrative
23,896

 
21,269

 
70,872

 
64,677

Bad debt expense (recovery)
35

 
(368
)
 
453

 
(515
)
Impairment charges
9,504

 

 
54,292

 
1,032

Total costs and expenses
242,109

 
216,551

 
736,956

 
625,293

Income (loss) from operations
1,870

 
13,222

 
(14,953
)
 
66,282

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(12,324
)
 
(9,453
)
 
(36,117
)
 
(26,658
)
Other
610

 
307

 
(1,460
)
 
1,259

Total other expense
(11,714
)
 
(9,146
)
 
(37,577
)
 
(25,399
)
Income (loss) before income taxes
(9,844
)
 
4,076

 
(52,530
)
 
40,883

Income tax benefit (expense)
3,614

 
(1,461
)
 
19,113

 
(14,411
)
Net income (loss)
$
(6,230
)
 
$
2,615

 
$
(33,417
)
 
$
26,472

 
 
 
 
 
 
 
 
Income (loss) per common share—Basic
$
(0.10
)
 
$
0.04

 
$
(0.54
)
 
$
0.43

 
 
 
 
 
 
 
 
Income (loss) per common share—Diluted
$
(0.10
)
 
$
0.04

 
$
(0.54
)
 
$
0.42

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Basic
62,325

 
61,881

 
62,158

 
61,743

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Diluted
62,325

 
62,825

 
62,158

 
62,695


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,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(33,417
)
 
$
26,472

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
141,047

 
120,429

Allowance for doubtful accounts
534

 
2

Gain on dispositions of property and equipment
(865
)
 
(1,230
)
Stock-based compensation expense
4,692

 
5,541

Amortization of debt issuance costs, discount and premium
2,309

 
2,224

Impairment charges
54,292

 
1,032

Deferred income taxes
(21,153
)
 
12,270

Change in other long-term assets
(5,554
)
 
(1,964
)
Change in other long-term liabilities
(1,306
)
 
(2,168
)
Changes in current assets and liabilities:
 
 
 
Receivables
(21,353
)
 
(27,471
)
Inventory
(620
)
 
(993
)
Prepaid expenses and other current assets
7,330

 
1,756

Accounts payable
(379
)
 
4,769

Deferred revenues
(2,973
)
 
(1,086
)
Accrued expenses
(12,509
)
 
(10,271
)
Net cash provided by operating activities
110,075

 
129,312

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(137,945
)
 
(291,051
)
Proceeds from sale of property and equipment
6,898

 
2,433

Net cash used in investing activities
(131,047
)
 
(288,618
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Debt repayments
(25,868
)
 
(869
)
Proceeds from issuance of debt
40,000

 
80,000

Debt issuance costs
(13
)
 
(58
)
Proceeds from exercise of options
833

 
684

Purchase of treasury stock
(628
)
 
(357
)
Net cash provided by financing activities
14,324

 
79,400

 
 
 
 
Net decrease in cash and cash equivalents
(6,648
)
 
(79,906
)
Beginning cash and cash equivalents
23,733

 
86,197

Ending cash and cash equivalents
$
17,085

 
$
6,291

 
 
 
 
Supplementary disclosure:
 
 
 
Interest paid
$
45,273

 
$
43,349

Income tax paid
$
2,508

 
$
88

 
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
Pioneer Energy Services provides drilling services and production services to a diverse group of independent and large 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. We also provide coiled tubing and wireline services offshore in the Gulf of Mexico.
Our Drilling Services Segment provides contract land drilling services with its fleet of 62 drilling rigs which are currently assigned to the following divisions:
Drilling Division
Rig Count
South Texas
13

East Texas
1

West Texas
18

North Dakota
11

Utah
7

Appalachia
4

Colombia
8

 
62

In early 2011, we began construction of ten new-build AC drilling rigs that are fit for purpose for domestic shale plays, based on term contracts. We deployed seven of these new-build drilling rigs during 2012, and deployed the final three in early 2013. All of our new-build drilling rigs are currently operating in shale or unconventional plays under long-term drilling contracts.
During the second quarter of 2013, we sold two mechanical drilling rigs that were previously idle in our East Texas division, for which we recognized an associated gain of approximately $0.8 million. In September 2013, we decided to sell eight of our mechanical drilling rigs, for which we recognized an impairment charge of $9.2 million dollars during the third quarter. All eight drilling rigs are classified as held for sale at September 30, 2013 and were sold in late October 2013.
As of September 30, 2013, 56 of our 62 drilling rigs are earning revenues under drilling contracts, 42 of which are under term contracts. All except one of our drilling rigs in Colombia are currently under contract, six of which are working under term contracts that expire at the end of 2013. We are currently in negotiations to renew the contracts for our rigs in Colombia and we are actively marketing all of 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 September 30, 2013, we have a fleet of 109 well servicing rigs consisting of ninety-nine 550 horsepower rigs and ten 600 horsepower rigs, all of which are currently operating or are being actively marketed. We currently provide wireline services and coiled tubing services with a fleet of 116 wireline units and 13 coiled tubing units, and we provide rental services with a gross book value of $17.2 million in fishing and rental tools.
Basis of Presentation
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


5



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. 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, 2012.
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 determination of depreciation and amortization expense, our estimates of fair value for impairment evaluations, our estimate of deferred taxes, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, and our estimate of compensation related accruals.
In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after September 30, 2013, through the filing of this Form 10-Q, for inclusion as necessary.
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. Spot contracts generally 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 September 30, 2013, we have 42 drilling rigs operating under term contracts, which if not renewed at the end of their terms, will expire as follows:
 
 
 
 
Term Contract Expiration by Period
 
 
Total
Term Contracts
 
Within
6 Months
 
6 Months
to 1 Year
 
1 Year to
18 Months
 
18 Months
to 2 Years
 
2 to 4 Years
United States
 
36

 
22

 
3

 
5

 

 
6

Colombia
 
6

 
6

 

 

 

 

 
 
42

 
28

 
3

 
5

 

 
6

Unbilled Accounts Receivable
The asset “unbilled receivables” represents revenues we have recognized in excess of amounts billed on drilling contracts and production services completed but not yet invoiced. We typically invoice our clients at 15-day intervals during the performance of daywork drilling contracts and upon completion of the daywork contract. Turnkey and footage drilling contracts are invoiced upon completion of the contract.
Our unbilled receivables totaled $45.0 million at September 30, 2013, of which $0.7 million related to turnkey drilling contract revenues, $39.4 million represented revenue recognized but not yet billed on daywork drilling contracts in progress at September 30, 2013 and $4.9 million related to unbilled receivables for our Production Services Segment.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include items such as insurance, rent deposits and fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Prepaid expenses and other current assets also include the current portion of deferred mobilization costs for certain drilling contracts that are recognized on a straight-line basis over the contract term.


6



Property and Equipment
As of September 30, 2013 and December 31, 2012, we had incurred $21.3 million and $134.9 million, respectively, in construction costs for ongoing projects. The balance at December 31, 2012 primarily related to our new-build drilling rigs. During the nine months ended September 30, 2013 and 2012, we capitalized $0.9 million and $8.4 million, respectively, of interest costs incurred during the construction periods of new-build drilling rigs and other drilling equipment.
We recorded gains on disposition of our property and equipment of $0.9 million and $1.2 million for the nine months ended September 30, 2013 and 2012, respectively, in our drilling and production services costs and expenses. During the second quarter of 2013, we sold two mechanical drilling rigs that were previously idle in our East Texas division, for which we recognized an associated gain of approximately $0.8 million. Additionally, during the third quarter of 2013, we disposed of two wireline units and other wireline equipment.
We recorded impairment charges on our property and equipment of $9.5 million and $1.0 million for the nine months ended September 30, 2013 and 2012, respectively. During the third quarter of 2013, we decided to place eight of our mechanical drilling rigs as held for sale, and we recognized an impairment charge of $9.2 million to reduce the carrying value of these assets to their estimated fair value, based on their sales price. The sales of all eight drilling rigs were completed in late October 2013 and we did not incur any additional gain or loss upon the sale of these rigs. We also recorded an impairment charge of $0.3 million during the third quarter of 2013 in association with our decision to sell certain production services equipment. In March 2012, we retired two mechanical drilling rigs, with most of their components to be used as spare parts, as well as two wireline units and other wireline equipment, and recognized an associated impairment charge of $1.0 million.
We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include significant declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts for drilling rigs and well servicing rigs. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified. For our Production Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for the individual reporting units (well servicing, wireline, coiled tubing and fishing and rental services). For our Drilling Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for individual drilling rig assets. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we would determine the fair value of the asset group. The amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of these assets. The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management judgment.
In September 2013, we evaluated the drilling rigs in our fleet and decided to place eight of our mechanical drilling rigs as held for sale and recognized an impairment charge to reduce the carrying value of these assets to their estimated fair value, which was based on their sales price. The decision to sell these drilling rigs was primarily due to a decrease in demand for non-top drive mechanical rigs that drill vertical oil and gas wells. Our remaining drilling rig fleet includes mechanical rigs that are currently working, but which may have reduced utilization if demand for vertical drilling continues to soften. We performed an impairment evaluation on the remaining drilling rigs in our fleet which are similar to those that we decided to sell. In order to estimate our future undiscounted cash flows from the use and eventual disposition of these assets, we incorporated probabilities of selling these rigs in the near term, versus working them through the end of their remaining useful lives. Our analysis led us to conclude that no impairment exists as of September 30, 2013 for the remaining similar drilling rigs. If the demand for vertical drilling continues to soften and these remaining mechanical rigs become idle for an extended amount of time, then the probability of a near term sale may increase, which would likely result in an impairment charge, based on the current market value of these drilling rigs. Although we believe the assumptions and estimates used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions.


7



Intangible Assets
Substantially all of our intangible assets were recorded in connection with the acquisitions of production services businesses and are subject to amortization. We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include significant declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts for drilling rigs and well servicing rigs. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified. For our Production Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for the individual reporting units (well servicing, wireline, coiled tubing and fishing and rental services). If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we would determine the fair value of the asset group. The amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of these assets. The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management judgment.
Due to several significant adverse factors affecting our coiled tubing services reporting unit, including increased competition in certain coiled tubing markets, turnover of key personnel and lower than anticipated utilization, all of which contributed to a decline in our projected cash flows for the coiled tubing reporting unit, we performed an impairment analysis of our long-lived tangible and intangible assets as of June 30, 2013. We determined that the sum of the estimated future undiscounted net cash flows for our coiled tubing services reporting unit was less than the carrying amount at June 30, 2013. We then performed a valuation of the assets which resulted in a non-cash impairment charge of $3.1 million to reduce our intangible asset carrying value of client relationships. This impairment charge did not have an impact on our liquidity or debt covenants; however, it was a reflection of the increased competition in certain coiled tubing markets where we operate and a decline in our projected cash flows for the coiled tubing reporting unit.
The most significant inputs used in our impairment analysis include the projected utilization and pricing of our coiled tubing services, which are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures. An increase of 1% in either the utilization or pricing assumptions would have resulted in a decrease to our impairment charge for our long-lived intangible assets of approximately $1 million. Similarly, a decrease of 1% in either of these assumptions would have led to an approximate $1 million increase to our impairment charge. Although we believe the assumptions and estimates used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating fair values and performing the impairment test are inherently uncertain and require management judgment.
Our impairment analysis did not result in any impairment charges to our coiled tubing tangible long-lived assets, substantially all of which was related to the 13 coiled tubing units. As discussed further below, we also recorded a non-cash impairment charge to reduce the carrying value of goodwill to zero.
Goodwill
Goodwill results from business acquisitions and represents the excess of acquisition costs over the fair value of the net assets acquired. In connection with the acquisition of the production services business from Go-Coil, we recorded $41.7 million of goodwill at December 31, 2011, all of which was allocated to the coiled tubing services reporting unit within our Production Services Segment.
We perform a qualitative assessment of goodwill annually as of December 31 or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include a significant adverse change in the economic or business climate, a significant adverse change in legal factors, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel and the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of. In addition, these circumstances could lead to our net book value exceeding our market capitalization which is another indicator of a potential impairment of goodwill.
If our qualitative assessment of goodwill indicates a possible impairment, we test for goodwill impairment using a two-step process. First, the fair value of each reporting unit with goodwill is compared to its carrying value to determine whether an indication of impairment exists. Second, if impairment is indicated, then the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination on the impairment test date. The amount of impairment for goodwill is measured as the excess of the carrying value of the reporting unit over its fair value.


8



When estimating fair values of a reporting unit for our goodwill impairment test, we use an income approach which provides an estimated fair value based on the reporting unit’s anticipated cash flows that are discounted using a weighted average cost of capital rate. The primary assumptions used in the income approach are estimated cash flows and weighted average cost of capital. Estimated cash flows are primarily based on projected revenues, operating costs and capital expenditures and are discounted at a rate that is based on our weighted average cost of capital and estimated industry average rates for cost of capital. To ensure the reasonableness of the estimated fair value of our reporting units, we consider current industry market multiples and we perform a reconciliation of our total market capitalization to the total estimated fair value of all our reporting units.
Due to several significant adverse factors affecting our coiled tubing services reporting unit, including increased competition in certain coiled tubing markets, turnover of key personnel and lower than anticipated utilization, all of which contributed to a decline in our projected cash flows for the coiled tubing reporting unit, we performed an impairment analysis of our goodwill as of June 30, 2013. We determined that the fair value of our coiled tubing services reporting unit was less than its carrying value, including goodwill, and therefore, we performed the second step of the goodwill impairment test which led us to conclude that there would be no remaining implied fair value attributable to goodwill. Accordingly, we recorded a non-cash impairment charge of $41.7 million to reduce the carrying value of our goodwill to zero. This impairment charge did not have an impact on our liquidity or debt covenants; however, it was a reflection of the increased competition in certain coiled tubing markets where we operate and a decline in our projected cash flows for the coiled tubing reporting unit.
The most significant inputs used in our impairment analysis include the projected utilization and pricing of our coiled tubing services and the weighted average cost of capital (discount rate) used in order to calculate the discounted cash flows for the reporting unit. These inputs are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures. We assumed a 13% discount rate to estimate the fair value of the coiled tubing services reporting unit. A decrease in this assumption of 5% would have resulted in a decrease to our goodwill impairment charge of approximately $3.5 million. An increase of 1% in either the utilization or pricing assumptions would have resulted in a decrease to our goodwill impairment charge of approximately $2 million or $3 million, respectively. Although we believe the assumptions and estimates used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating fair values of reporting units and performing the goodwill impairment test are inherently uncertain and require management judgment.
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.
Other Current Liabilities
Our other accrued expenses include accruals for items such as property tax, sales tax, professional and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Our other accrued expenses also consist of the current portion of the Colombian net equity tax and the current portion of deferred mobilization revenues for certain drilling contracts that are recognized on a straight-line basis over the contract term.
Other Long-Term Liabilities
Our other long-term liabilities consist of the noncurrent portion of deferred mobilization revenues, liabilities associated with our long-term compensation plans, the noncurrent portion of the Colombia net equity tax and other deferred liabilities.
Reclassifications
Certain amounts in the financial statements for the prior years have been reclassified to conform to the current year’s presentation.


9



2.
Long-Term Debt
Long-term debt consists of the following (amounts in thousands):
 
September 30, 2013
 
December 31, 2012
Senior secured revolving credit facility
$
115,000

 
$
100,000

Senior notes
419,332

 
418,617

Other notes payable
112

 
980

 
534,444

 
519,597

Less current portion
(23
)
 
(872
)
 
$
534,421

 
$
518,725

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 currently in effect 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.

As of September 30, 2013, we had $115.0 million outstanding under our Revolving Credit Facility and $8.9 million in committed letters of credit, which resulted in borrowing availability of $126.1 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, 2013, we were in compliance with our financial covenants under the Revolving Credit Facility. Our total consolidated leverage ratio was 2.2 to 1.0, our senior consolidated leverage ratio was 0.5 to 1.0, and our interest coverage ratio was 5.5 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.


10



At September 30, 2013, 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.
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, 2013 with a total carrying value of $419.3 million, which represents the $425.0 million total face value net of the $7.0 million unamortized portion of original issue discount and $1.3 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.
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.


11



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, 2013. 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 8, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements.)
Other Notes Payable
Our other debt 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 $8.0 million and $9.6 million as of September 30, 2013 and December 31, 2012, respectively. We recognized $1.6 million and $1.6 million of associated amortization during the nine months ended September 30, 2013 and 2012, respectively.
3.
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, 2013 and December 31, 2012, our financial instruments consist primarily of cash, trade and other receivables, trade payables, and long-term debt. The carrying value of cash, trade and other receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.
The fair value of our long-term debt 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, 2013 and December 31, 2012 (amounts in thousands):
 
September 30, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt
$
534,444

 
$
575,365

 
$
519,597

 
$
565,257



12



4.
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,
 
2013
 
2012
 
2013
 
2012
Basic
 
 
 
 
 
 
 
Net income (loss)
$
(6,230
)
 
$
2,615

 
$
(33,417
)
 
$
26,472

Weighted-average shares
62,325

 
61,881

 
62,158

 
61,743

Income (loss) per share
$
(0.10
)
 
$
0.04

 
$
(0.54
)
 
$
0.43

Diluted
 
 
 
 
 
 
 
Net income (loss)
$
(6,230
)
 
$
2,615

 
$
(33,417
)
 
$
26,472

Weighted average shares:
 
 
 
 
 
 
 
Outstanding
62,325

 
61,881

 
62,158

 
61,743

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

 
944

 

 
952

 
62,325

 
62,825

 
62,158

 
62,695

Income (loss) per share
$
(0.10
)
 
$
0.04

 
$
(0.54
)
 
$
0.42

Potentially dilutive stock options, restricted stock and restricted stock unit awards representing a total of 5,510,520 and 5,467,291 shares of common stock for the three and nine months ended September 30, 2013, respectively, and 4,225,796 and 4,275,623 for the three and nine months ended September 30, 2012, respectively, were excluded from the computation of diluted weighted average shares outstanding due to their antidilutive effect.
5.
Equity Transactions and Stock-Based Compensation Plans
Stock-based Compensation Plans
We grant stock option and restricted stock awards with vesting based on time of service conditions. We also 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.
The following table summarizes the compensation expense recognized for stock option, restricted stock and restricted stock unit awards during the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Stock option awards
$
412

 
$
669

 
$
1,359

 
$
2,277

Restricted stock awards
157

 
133

 
420

 
556

Restricted stock unit awards
1,059

 
1,069

 
2,913

 
2,708

 
$
1,628

 
$
1,871

 
$
4,692

 
$
5,541

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.


13



We estimate the fair value of each option grant on the date of grant using a Black-Scholes option pricing model. There were no stock options granted during the three months ended September 30, 2013 or 2012. The following table summarizes the assumptions used in the Black-Scholes option pricing model based on a weighted-average calculation for the stock options granted during the nine months ended September 30, 2013 and 2012:
 
 
Nine months ended September 30,
 
2013
 
2012
Expected volatility
66
%
 
70
%
Risk-free interest rates
1.0
%
 
0.8
%
Expected life in years
5.53

 
5.12

Options granted
220,656
 
530,156
Grant-date fair value
$4.36
 
$5.02
The assumptions used in the Black-Scholes option pricing model 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.
During the three and nine months ended September 30, 2013, 11,600 and 174,467 stock options were exercised at a weighted-average exercise price of $3.84 and $4.77, respectively. 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. 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.
Restricted Stock
Historically, we have generally granted 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. However, beginning in 2013, we began granting restricted stock awards with a vesting period of one year. 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. We did not grant any restricted stock awards during the three months ended September 30, 2013 or 2012. During the nine months ended September 30, 2013 and 2012, we granted 61,248 and 49,748 shares of restricted stock awards, with a weighted-average grant-date fair value of $7.57 and $8.04, respectively.
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.


14



There were no restricted stock unit awards granted during the three months ended September 30, 2013 or 2012. The following table summarizes the number and weighted-average grant-date fair value of the restricted stock unit awards granted during the nine months ended September 30, 2013 and 2012:
 
Nine months ended September 30,
 
2013
 
2012
Time-based RSUs:
 
 
 
Time-based RSUs granted
406,027

 
356,813

Weighted-average grant-date fair value
$
7.59

 
$
8.21

 
 
 
 
Performance-based RSUs:
 
 
 
Performance-based RSUs granted
346,731

 
221,495

Weighted-average grant-date fair value
$
8.34

 
$
9.85

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.
Our performance-based RSUs generally cliff vest after 39 months from the date of grant and 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. The number of shares of common stock awarded will be based upon the Company’s achievement in certain performance conditions, as compared to a predefined peer group, over the performance period, generally three years. 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. As of September 30, 2013, we estimated that our actual achievement level for the performance-based RSUs granted during 2011, 2012 and 2013 will be approximately 130%, 120% and 100% of the predetermined performance conditions, respectively.
6.
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 62 drilling rigs which are currently assigned to the following divisions:
Drilling Division
 
Rig Count
South Texas
 
13

East Texas
 
1

West Texas
 
18

North Dakota
 
11

Utah
 
7

Appalachia
 
4

Colombia
 
8

 
 
62

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 109 well servicing rigs consisting of ninety-nine 550 horsepower rigs and ten 600 horsepower rigs. We currently provide wireline services and coiled


15



tubing services with a fleet of 116 wireline units and 13 coiled tubing units, and we provide rental services with a gross book value of $17.2 million in 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, 2013 and 2012 (amounts in thousands):
 
As of and for the three months ended September 30, 2013
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
818,161

 
$
401,609

 
$
31,831

 
$
1,251,601

Revenues
$
131,033

 
$
112,946

 
$

 
$
243,979

Operating costs
89,350

 
71,910

 

 
161,260

Segment margin
$
41,683

 
$
41,036

 
$

 
$
82,719

Depreciation and amortization
$
30,993

 
$
16,127

 
$
294

 
$
47,414

Capital expenditures
$
17,417

 
$
9,661

 
$
357

 
$
27,435

 
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

 
As of and for the nine months ended September 30, 2013
 
Drilling
Services
Segment
 
Production
Services
Segment
 
Corporate
 
Total
Identifiable assets
$
818,161

 
$
401,609

 
$
31,831

 
$
1,251,601

Revenues
$
402,357

 
$
319,646

 
$

 
$
722,003

Operating costs
267,630

 
202,662

 

 
470,292

Segment margin
$
134,727

 
$
116,984

 
$

 
$
251,711

Depreciation and amortization
$
92,080

 
$
48,139

 
$
828

 
$
141,047

Capital expenditures
$
64,761

 
$
35,895

 
$
1,489

 
$
102,145

 
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



16



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, 2013 and 2012 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Segment margin
$
82,719

 
$
76,190

 
$
251,711

 
$
251,905

Depreciation and amortization
(47,414
)
 
(42,067
)
 
(141,047
)
 
(120,429
)
General and administrative
(23,896
)
 
(21,269
)
 
(70,872
)
 
(64,677
)
Bad debt recovery (expense)
(35
)
 
368

 
(453
)
 
515

Impairment charges
(9,504
)
 

 
(54,292
)
 
(1,032
)
Income (loss) from operations
$
1,870

 
$
13,222

 
$
(14,953
)
 
$
66,282

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, 2013 and 2012 (amounts in thousands):
 
As of and for the three months ended September 30,
 
As of and for the nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Identifiable assets
$
153,287

 
$
153,309

 
$
153,287

 
$
153,309

Revenues
$
29,959

 
$
24,405

 
$
91,361

 
$
70,706

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.
7.
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 $35.0 million relating to our performance under these bonds as of September 30, 2013.
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.
8.
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, 2013, 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.



17




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
September 30, 2013
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
17,588

 
$
(3,145
)
 
$
2,642

 
$

 
$
17,085

Receivables, net of allowance
961

 
137,099

 
44,477

 
(448
)
 
182,089

Intercompany receivable (payable)
(24,835
)
 
49,364

 
(24,529
)
 

 

Deferred income taxes
937

 
7,369

 
4,291

 

 
12,597

Inventory

 
6,872

 
5,860

 

 
12,732

Prepaid expenses and other current assets
1,138

 
2,875

 
1,696

 

 
5,709

Total current assets
(4,211
)
 
200,434

 
34,437

 
(448
)
 
230,212

Net property and equipment
4,134

 
867,958

 
88,150

 
(750
)
 
959,492

Investment in subsidiaries
980,404

 
120,077

 

 
(1,100,481
)
 

Intangible assets, net of accumulated amortization
72

 
34,254

 

 

 
34,326

Noncurrent deferred income taxes
71,779

 

 
1,335

 
(71,779
)
 
1,335

Assets held for sale

 
6,718

 

 

 
6,718

Other long-term assets
8,025

 
2,134

 
9,359

 

 
19,518

Total assets
$
1,060,203

 
$
1,231,575

 
$
133,281

 
$
(1,173,458
)
 
$
1,251,601

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
907

 
$
42,695

 
$
4,488

 
(448
)
 
$
47,642

Current portion of long-term debt

 
23

 

 

 
23

Deferred revenues

 
906

 

 

 
906

Accrued expenses
5,050

 
45,219

 
7,513

 

 
57,782

Total current liabilities
5,957

 
88,843

 
12,001

 
(448
)
 
106,353

Long-term debt, less current portion
534,333

 
88

 

 

 
534,421

Noncurrent deferred income taxes

 
157,057

 

 
(71,779
)
 
85,278

Other long-term liabilities
291

 
5,183

 
1,203

 

 
6,677

Total liabilities
540,581

 
251,171

 
13,204

 
(72,227
)
 
732,729

Total shareholders’ equity
519,622

 
980,404

 
120,077

 
(1,101,231
)
 
518,872

Total liabilities and shareholders’ equity
$
1,060,203

 
$
1,231,575

 
$
133,281

 
$
(1,173,458
)
 
$
1,251,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
18,479

 
$
(5,401
)
 
$
10,655

 
$

 
$
23,733

Receivables, net of allowance
440

 
129,570

 
29,128

 
(294
)
 
158,844

Intercompany receivable (payable)
(124,516
)
 
146,652

 
(22,136
)
 

 

Deferred income taxes
869

 
8,162

 
2,027

 

 
11,058

Inventory

 
5,956

 
6,155

 

 
12,111

Prepaid expenses and other current assets
655

 
9,163

 
3,222

 

 
13,040

Total current assets
(104,073
)
 
294,102

 
29,051

 
(294
)
 
218,786

Net property and equipment
3,474

 
921,393

 
90,223

 
(750
)
 
1,014,340

Investment in subsidiaries
1,122,814

 
114,416

 

 
(1,237,230
)
 

Intangible assets, net of accumulated amortization
68

 
43,775

 

 

 
43,843

Goodwill

 
41,683

 

 

 
41,683

Noncurrent deferred income taxes
51,834

 

 
5,519

 
(51,834
)
 
5,519

Other long-term assets
9,582

 
2,340

 
3,683

 

 
15,605

Total assets
$
1,083,699

 
$
1,417,709

 
$
128,476

 
$
(1,290,108
)
 
$
1,339,776

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
1,558

 
$
76,828

 
$
5,437

 
$

 
$
83,823

Current portion of long-term debt

 
872

 

 

 
872

Deferred revenues

 
1,954

 
1,926

 

 
3,880

Accrued expenses
14,905

 
48,892

 
4,472

 
(294
)
 
67,975

Total current liabilities
16,463

 
128,546

 
11,835

 
(294
)
 
156,550

Long-term debt, less current portion
518,618

 
107

 

 

 
518,725

Noncurrent deferred income taxes
(4
)
 
160,676

 

 
(51,834
)
 
108,838

Other long-term liabilities
192

 
5,566

 
2,225

 

 
7,983

Total liabilities
535,269

 
294,895

 
14,060

 
(52,128
)
 
792,096

Total shareholders’ equity
548,430

 
1,122,814

 
114,416

 
(1,237,980
)
 
547,680

Total liabilities and shareholders’ equity
$
1,083,699

 
$
1,417,709

 
$
128,476

 
$
(1,290,108
)
 
$
1,339,776



18



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)

 
Three months ended September 30, 2013
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
214,020

 
$
29,959

 
$

 
$
243,979

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
138,961

 
22,299

 

 
161,260

Depreciation and amortization
294

 
43,794

 
3,326

 

 
47,414

General and administrative
7,052

 
16,110

 
872

 
(138
)
 
23,896

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt expense (recovery)

 
35

 

 

 
35

Impairment charges

 
9,504

 

 

 
9,504

Total costs and expenses
7,346

 
207,189

 
27,712

 
(138
)
 
242,109

Income (loss) from operations
(7,346
)
 
6,831

 
2,247

 
138

 
1,870

Other income (expense):
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
6,377

 
1,845

 

 
(8,222
)
 

Interest expense
(12,320
)
 
(13
)
 
9

 

 
(12,324
)
Other
3

 
568

 
177

 
(138
)
 
610

Total other income (expense)
(5,940
)
 
2,400

 
186

 
(8,360
)
 
(11,714
)
Income (loss) before income taxes
(13,286
)
 
9,231

 
2,433

 
(8,222
)
 
(9,844
)
Income tax expense (benefit)
7,056

 
(2,854
)
 
(588
)
 

 
3,614

Net income (loss)
$
(6,230
)
 
$
6,377

 
$
1,845

 
$
(8,222
)
 
$
(6,230
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 expense (recovery)

 
(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 income (expense)
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

 
 
 
 
 
 
 
 
 
 



19



 
Nine months ended September 30, 2013
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
630,642

 
$
91,361

 
$

 
$
722,003

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
406,806

 
63,486

 

 
470,292

Depreciation and amortization
828

 
130,241

 
9,978

 

 
141,047

General and administrative
18,563

 
50,272

 
2,451

 
(414
)
 
70,872

Intercompany leasing

 
(3,645
)
 
3,645

 

 

Bad debt expense (recovery)
67

 
386

 

 

 
453

Impairment charges

 
54,292

 

 

 
54,292

Total costs and expenses
19,458

 
638,352

 
79,560

 
(414
)
 
736,956

Income (loss) from operations
(19,458
)
 
(7,710
)
 
11,801

 
414

 
(14,953
)
Other (expense) income:
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
2,111

 
5,698

 

 
(7,809
)
 

Interest expense
(36,110
)
 
(33
)
 
26

 

 
(36,117
)
Other
5

 
1,425

 
(2,476
)
 
(414
)
 
(1,460
)
Total other (expense) income
(33,994
)
 
7,090

 
(2,450
)
 
(8,223
)
 
(37,577
)
Income (loss) before income taxes
(53,452
)
 
(620
)
 
9,351

 
(7,809
)
 
(52,530
)
Income tax (expense) benefit
20,035

 
2,731

 
(3,653
)
 

 
19,113

Net income (loss)
$
(33,417
)
 
$
2,111

 
$
5,698

 
$
(7,809
)
 
$
(33,417
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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