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	14
West Texas	18
North Dakota	11
Utah	7
Appalachia	4
Colombia	8
	62

As of March 31, 2014, 54 of our 62 drilling rigs are earning revenues under drilling contracts, 41 of which are under term contracts, and we are actively marketing all of our idle drilling rigs. All eight of our drilling rigs in Colombia are currently under term contracts that extend through the end of 2014, six of which are currently earning revenues with the remaining two rigs expected to be operating by early May 2014.

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 March 31, 2014, 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 120 wireline units and 13 coiled tubing units, and we provide rental services with a gross book value of $17.4 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 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, 2013.

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 expenses, 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 March 31, 2014, 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 market 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 original terms of six months to four years in duration. As of March 31, 2014, we have 43 drilling rigs 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	35	21	8	—	4	2
Colombia	8	—	8	—	—	—
	43	21	16	—	4	2

Restricted Cash

Our restricted cash balance represents funds committed for the redemption of 2010 and 2011 Senior Notes in May 2014. (See Note 2, Debt.)

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 $44.8 million at March 31, 2014, of which $0.5 million related to turnkey drilling contract revenues, $38.7 million represented revenue recognized but not yet billed on daywork drilling contracts in progress at March 31, 2014 and $5.6 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.

Property and Equipment

As of March 31, 2014 and December 31, 2013, we had incurred $36.3 million and $19.4 million, respectively, in construction costs for ongoing projects. During the three months ended March 31, 2014 and 2013, we capitalized $48,000 and $0.8 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 $1.4 million and gains of $0.3 million for the three months ended March 31, 2014 and 2013, respectively, in our drilling and production services costs and expenses. In February 2014, we completed the sale of our trucking assets for a sales price of $4.5 million which included a fleet of 40 trucks and related transportation equipment that we used to transport our drilling rigs to and from drilling sites. By owning our own trucks, we have historically been able to reduce the overall cost and downtime between rig moves. However, with the industry trend toward pad drilling, we have upgraded a number of our drilling rigs in recent years to equip them with walking or skidding systems, which enable the drilling rigs to move between wells in pad drilling, and thus operating our own trucking fleet has become less beneficial. The net book value of the trucking assets sold was $3.4 million, for which we recognized a total gain of $1.1 million in our condensed consolidated statement of operations for the first quarter of 2014.

As of March 31, 2014, we have identified certain real estate properties and other production services equipment which are currently held for sale. The total value of these properties, which are recorded at the lower of cost or fair market value and which is included in property and equipment in our condensed consolidated balance sheet, is approximately $0.9 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. 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.

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. 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.

Other Long-Term Assets

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

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.

Other Long-Term Liabilities

Our other long-term liabilities consist of the noncurrent portion of liabilities associated with our long-term compensation plans, deferred mobilization revenues, 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.