10-Q 1 form10q-q32017.htm 10-Q Document
 
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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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.)
 
 
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 16, 2017, there were 77,719,021 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,
2017
 
December 31,
2016
 
(unaudited)
 
(audited)
 
(in thousands, except share data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,852

 
$
10,194

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
71,634

 
38,764

Unbilled receivables
14,268

 
7,417

Insurance recoveries
13,491

 
17,003

Other receivables
3,411

 
8,939

Inventory
11,758

 
9,660

Assets held for sale
8,756

 
15,093

Prepaid expenses and other current assets
5,331

 
6,926

Total current assets
139,501

 
113,996

Property and equipment, at cost
1,100,513

 
1,058,261

Less accumulated depreciation
534,012

 
474,181

Net property and equipment
566,501

 
584,080

Other long-term assets
1,440

 
2,026

Total assets
$
707,442

 
$
700,102

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
32,008

 
$
19,208

Deferred revenues
783

 
1,449

Accrued expenses:
 
 
 
Payroll and related employee costs
19,298

 
14,813

Insurance premiums and deductibles
7,811

 
6,446

Insurance claims and settlements
13,084

 
13,667

Interest
912

 
5,395

Other
5,617

 
5,024

Total current liabilities
79,513

 
66,002

Long-term debt, less debt issuance costs
392,601

 
339,473

Deferred income taxes
8,615

 
8,180

Other long-term liabilities
5,185

 
5,049

Total liabilities
485,914

 
418,704

Commitments and contingencies (Note 9)

 

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

 

Common stock $.10 par value; 200,000,000 shares authorized at September 30, 2017; 77,719,021 and 77,146,906 shares outstanding at September 30, 2017 and December 31, 2016, respectively
7,835

 
7,766

Additional paid-in capital
545,032

 
541,823

Treasury stock, at cost; 630,688 and 515,546 shares at September 30, 2017 and December 31, 2016, respectively
(4,416
)
 
(3,883
)
Accumulated deficit
(326,923
)
 
(264,308
)
Total shareholders’ equity
221,528

 
281,398

Total liabilities and shareholders’ equity
$
707,442

 
$
700,102



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,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Production services
$
74,738

 
$
40,899

 
$
199,830

 
$
116,998

Drilling services
42,543

 
27,454

 
120,338

 
88,597

Total revenues
117,281

 
68,353

 
320,168

 
205,595

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Production services
58,304

 
31,912

 
156,678

 
95,503

Drilling services
28,386

 
19,776

 
81,841

 
51,989

Depreciation and amortization
24,623

 
28,663

 
74,355

 
87,409

General and administrative
17,528

 
14,312

 
51,342

 
46,078

Bad debt expense (recovery)
491

 
(359
)
 
(98
)
 
(302
)
Impairment charges

 
4,262

 
795

 
4,262

Gain on dispositions of property and
equipment, net
(1,159
)
 
(328
)
 
(2,251
)
 
(420
)
Total costs and expenses
128,173

 
98,238

 
362,662

 
284,519

Loss from operations
(10,892
)
 
(29,885
)
 
(42,494
)
 
(78,924
)
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
Interest expense, net of interest capitalized
(6,613
)
 
(6,678
)
 
(19,090
)
 
(19,307
)
Loss on extinguishment of debt

 

 

 
(299
)
Other (expense) income
295

 
245

 
224

 
574

Total other expense
(6,318
)
 
(6,433
)
 
(18,866
)
 
(19,032
)
 
 
 
 
 
 
 
 
Loss before income taxes
(17,210
)
 
(36,318
)
 
(61,360
)
 
(97,956
)
Income tax (expense) benefit
(17
)
 
1,698

 
(1,200
)
 
5,646

Net loss
$
(17,227
)
 
$
(34,620
)
 
$
(62,560
)
 
$
(92,310
)
 
 
 
 
 
 
 
 
Loss per common share—Basic
$
(0.22
)
 
$
(0.53
)
 
$
(0.81
)
 
$
(1.43
)
 
 
 
 
 
 
 
 
Loss per common share—Diluted
$
(0.22
)
 
$
(0.53
)
 
$
(0.81
)
 
$
(1.43
)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Basic
77,552

 
64,905

 
77,335

 
64,755

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Diluted
77,552

 
64,905

 
77,335

 
64,755











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,
 
2017
 
2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(62,560
)
 
$
(92,310
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
74,355

 
87,409

Allowance for doubtful accounts, net of recoveries
(98
)
 
(302
)
Write-off of obsolete inventory

 
21

Gain on dispositions of property and equipment, net
(2,251
)
 
(420
)
Stock-based compensation expense
3,225

 
2,998

Amortization of debt issuance costs
1,395

 
1,311

Loss on extinguishment of debt

 
299

Impairment charges
795

 
4,262

Deferred income taxes
434

 
(6,372
)
Change in other long-term assets
335

 
426

Change in other long-term liabilities
136

 
(833
)
Changes in current assets and liabilities:
 
 
 
Receivables
(38,848
)
 
20,910

Inventory
(2,098
)
 
855

Prepaid expenses and other current assets
1,594

 
2,726

Accounts payable
11,360

 
(2,425
)
Deferred revenues
(470
)
 
(4,353
)
Accrued expenses
1,434

 
(6,558
)
Net cash provided by (used in) operating activities
(11,262
)
 
7,644

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(52,806
)
 
(25,584
)
Proceeds from sale of property and equipment
10,407

 
2,743

Proceeds from insurance recoveries
3,119

 

Net cash used in investing activities
(39,280
)
 
(22,841
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Debt repayments
(13,267
)
 
(500
)
Proceeds from issuance of debt
65,000

 
12,000

Debt issuance costs

 
(819
)
Proceeds from exercise of options

 
183

Purchase of treasury stock
(533
)
 
(124
)
Net cash provided by financing activities
51,200

 
10,740

 
 
 
 
Net increase (decrease) in cash and cash equivalents
658

 
(4,457
)
Beginning cash and cash equivalents
10,194

 
14,160

Ending cash and cash equivalents
$
10,852

 
$
9,703

 
 
 
 
Supplementary disclosure:
 
 
 
Interest paid
$
22,928

 
$
22,849

Income tax paid
$
847

 
$
653

Noncash investing and financing activity:
 
 
 
Change in capital expenditure accruals
$
1,396

 
$
(1,592
)
 




See accompanying notes to condensed consolidated financial statements.

4




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Business
Pioneer Energy Services Corp. (formerly called “Pioneer Drilling Company”) provides land-based drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies in the United States and internationally in Colombia. We also provide two of our services (coiled tubing and wireline services) offshore in the Gulf of Mexico.
Our Drilling Services Segment provides contract land drilling services through our four domestic divisions which are located in the Marcellus/Utica, Eagle Ford, Permian Basin and Bakken regions, and internationally in Colombia. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. Our drilling rig fleet is 100% pad-capable and consists of the following:
 
Multi-well, Pad-capable
 
AC rigs
SCR rigs
Total
U.S. rigs
16


16
Colombia rigs

8

8
 
 
 
24
Our Production Services Segment provides a range of services to a diverse group of exploration and production companies, with our operations 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, 2017, our production services fleets are as follows:
 
550 HP
600 HP
Total
Well servicing rigs, by horsepower (HP) rating
113

12

125

 
Onshore
Offshore
Total
Wireline units
111
6

117

Coiled tubing units
10

4

14

Revenues and Cost Recognition
Drilling ContractsOur drilling contracts generally provide for compensation on a daywork basis. Spot market contracts generally provide for the drilling of a single well and typically permit the client to terminate on short notice. We typically enter into longer-term drilling contracts for our newly constructed rigs and/or during periods of high rig demand. We recognize revenues on daywork contracts for the days completed based on the dayrate specified in each contract.
With most drilling contracts, we receive payments contractually designated for the mobilization of rigs and other equipment. Payments received, and costs incurred for the mobilization services are deferred and recognized on a straight line basis over the related contract term. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. Reimbursements that we receive for out-of-pocket expenses are recorded as revenues and the out-of-pocket expenses for which they relate are recorded as operating costs.
Amortization of deferred revenues and costs during the three and nine months ended September 30, 2017 and 2016 (amounts in thousands) were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Deferred revenues
$
562

 
$
597

 
$
1,859

 
$
1,177

Deferred costs
1,311

 
795

 
3,997

 
1,947


5




Our current and long-term deferred revenues and costs as of September 30, 2017 and December 31, 2016 were as follows (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Current:
 
 
 
Deferred revenues
$
783

 
$
1,449

Deferred costs
1,360

 
2,290

Long-term:
 
 
 
Deferred revenues
$
391

 
$
202

Deferred costs
162

 
212

As of September 30, 2017, all 16 of our domestic drilling rigs are earning revenues, 13 of which are under term contracts. Of the eight rigs in Colombia, five are earning revenues, four of which are under term contracts, and an additional rig is under contract, pending operations. The term contracts in Colombia are cancelable by our clients without penalty, although the contract would still require payment for demobilization services and 30 days notice. We are actively marketing our idle drilling rigs in Colombia to various operators and we are evaluating other options, including the possibility of the sale of some or all of our assets in Colombia.
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 billed. We typically bill our clients at 15-day intervals during the performance of daywork drilling contracts and upon completion of the daywork contract. Our unbilled receivables as of September 30, 2017 and December 31, 2016 were as follows (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Daywork drilling contracts in progress
$
13,391

 
$
7,042

Production services
877

 
375

 
$
14,268

 
$
7,417

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.
Other Long-Term Assets
Other long-term assets consist of cash deposits related to the deductibles on our workers’ compensation insurance policies, deferred compensation plan investments, the long-term portion of deferred mobilization costs, and intangible assets.
Other Current Liabilities
Our other accrued expenses include accruals for items such as property tax, sales tax, and professional and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit.
Other Long-Term Liabilities
Our other long-term liabilities consist of the noncurrent portion of liabilities associated with our long-term compensation plans, deferred lease liabilities, and the long-term portion of deferred mobilization revenues.
Related-Party Transactions
During the nine months ended September 30, 2017 and 2016, the Company paid approximately $0.1 million in each period for trucking and equipment rental services, which represented arms-length transactions, to Gulf Coast Lease Service. Joe Freeman, our Senior Vice President of Well Servicing, serves as the President of Gulf Coast Lease Service, which is owned

6




and operated by Mr. Freeman’s two sons. Mr. Freeman does not receive compensation from Gulf Coast Lease Service, and he serves primarily in an advisory role to his sons.
Comprehensive Income
We have not reported comprehensive income due to the absence of items of other comprehensive income in the periods presented.
Recently Issued Accounting Standards
Changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”) are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). We consider the applicability and impact of all ASUs; any ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on our consolidated financial position and results of operations.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The standard outlines a single comprehensive model for revenue recognition based on the core principle that a company will recognize revenue when promised goods or services are transferred to clients, in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.
We have substantially completed our scoping and assessment of the impact of this new standard, although our assessment is still under evaluation. We do not currently expect that the adoption of this standard will have a material impact on our financial position or our results of operations, though we anticipate that it may affect the timing for the recognition of certain types of revenues derived from drilling contracts, and the timing for recognizing certain costs that are incurred to fulfill those contracts. We are continuing to evaluate the requirements of this standard as we work towards finalizing our assessment, and we continue to perform other implementation activities such as establishing new policies, procedures and controls, quantifying the adoption date adjustments and drafting disclosures.
We are required to apply this new standard beginning January 1, 2018. Two methods of transition are permitted under this standard: the full retrospective method, in which the standard would be applied retrospectively to each prior reporting period presented, subject to certain allowable exceptions; or the modified retrospective method, in which the standard would be applied to all contracts existing as of the date of initial application, with the cumulative effect of applying the standard recognized in retained earnings (the adoption date adjustments). We anticipate adopting this standard using the modified retrospective method.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases, which among other things, requires lessees to recognize substantially all leases on the balance sheet, with expense recognition that is similar to the current lease standard, and aligns the principles of lessor accounting with the principles of the FASB’s new revenue guidance (referenced above). This ASU is effective for us beginning January 1, 2019 and requires a modified retrospective application, although certain practical expedients are permitted.
We have performed a scoping and preliminary assessment of the impact of this new standard. As a lessor, we expect the adoption of this new standard will apply to our drilling contracts and as a result, we expect to have a lease component and a service component of our revenues derived from drilling contracts. We have not yet determined the impact this standard may have on our production services businesses. As a lessee, this standard will impact us in situations where we lease real estate and office equipment, for which we will recognize a right-of-use asset and a corresponding lease liability on our consolidated balance sheet.
We continue to evaluate the impact of this guidance and have not yet determined its impact on our financial position and results of operations. Although, the future minimum lease payments disclosed in the Liquidity and Capital Resources section included in Part I, Item 2, of this Quarterly Report on Form 10-Q provides some insight to the estimated impact of adoption for us as a lessee.
Stock-Based Compensation. In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects

7




of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
We adopted this ASU as of January 1, 2017 and we recognized a $3.1 million deferred tax asset for previously unrecognized tax benefits, which was then fully reserved by a valuation allowance (see Note 3, Valuation Allowances on Deferred Tax Assets). Additionally, we elected to prospectively account for forfeitures as they occur, rather than estimating future forfeitures. The total cumulative-effect impact of adoption, net of valuation allowances, was approximately $55,000 relating to our change in accounting for forfeitures, and was recognized as a reduction to retained earnings. The adoption of this ASU also results in the presentation of any excess tax benefits resulting from the exercise of stock options as operating cash flows in the statement of cash flows, which we apply retrospectively for any comparative periods affected.
Reclassifications
Certain amounts in the unaudited condensed consolidated financial statements for the prior years have been reclassified to conform to the current year’s presentation.
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 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 unaudited 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 year ended December 31, 2016.
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 estimate of the allowance for doubtful accounts, our determination of depreciation and amortization expenses, our estimates of projected cash flows and fair values for impairment evaluations, our estimate of the valuation allowance for deferred tax assets, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, our estimate of compensation related accruals and our estimate of sales tax audit liability.
In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after September 30, 2017, through the filing of this Form 10-Q, for inclusion as necessary.
2.    Property and Equipment
Capital Expenditures—Our capital expenditures were $54.2 million and $24.0 million, during the nine months ended September 30, 2017 and 2016, respectively, which includes $0.4 million and $0.2 million, respectively, of capitalized interest costs incurred. Capital expenditures during 2017 primarily related to the acquisition of 20 well servicing rigs and expansion of our wireline fleet, upgrades to certain domestic drilling rigs, routine capital expenditures necessary to deploy rigs that were previously idle in Colombia, and other new drilling equipment. Capital expenditures during 2016 consisted primarily of routine capital expenditures to maintain our drilling and production services fleets.
At September 30, 2017, capital expenditures incurred for property and equipment not yet placed in service was $6.5 million, primarily related to routine capital expenditures on domestic drilling equipment, installments on the purchase of two wireline units, and scheduled refurbishments on production services equipment. At December 31, 2016, property and equipment not yet placed in service was $9.0 million, primarily related to new drilling equipment that was ordered in 2014 which required a long lead-time for delivery, as well as deposits for the 20 well servicing rigs and four new wireline units that were on order for delivery in 2017.

8




During the nine months ended September 30, 2017, we recognized a net gain of $2.3 million on the disposition of various property and equipment, including sales of certain coiled tubing equipment and vehicles, as well as the loss of drill pipe in operation, for which we were reimbursed by the client, and the disposal of two cranes that were damaged, for which we expect to receive insurance proceeds of $0.4 million.
Assets Held for SaleAs of September 30, 2017, our condensed consolidated balance sheet reflects assets held for sale of $8.8 million, which primarily represents the fair value of three domestic SCR drilling rigs and one domestic mechanical drilling rig, as well as other drilling equipment and two coiled tubing units. During the nine months ended September 30, 2017, we recognized impairment charges of $0.8 million to adjust the carrying values of certain of these assets to their estimated fair values, based on expected sales prices, which are classified as Level 3 inputs as defined by Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures.
During the three and nine months ended September 30, 2016, we recognized $3.3 million of impairment charges to reduce the carrying values of assets placed as held for sale to their estimated fair values, based on expected sales prices, and an additional $0.9 million of impairment charges to reduce the carrying value of a portion of the steel that was on hand for the construction of drilling rigs, which we determined was not likely to be used.
ImpairmentsWe evaluate for potential impairment of long-lived assets when indicators of impairment are present, which may include, among other things, significant adverse changes in industry trends (including revenue rates, utilization rates, oil and natural gas market prices, and industry rig counts). Beginning in late 2014, oil prices declined significantly resulting in a downturn in our industry that persisted through 2016, affecting both drilling and production services. Despite the modest recovery in commodity prices that began in late 2016, we continue to monitor all indicators of potential impairments in accordance with ASC Topic 360, Property, Plant and Equipment.
In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of the assets grouped at the lowest level that independent 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 and coiled tubing). For our Drilling Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for individual domestic drilling rig assets and for our Colombian drilling rig assets as a group. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we determine the fair value of the asset group. The amount of an impairment charge is measured as the difference between the carrying amount and the fair value of the assets.
Due to continued performance at levels lower than anticipated and a decline in our projected cash flows for the coiled tubing reporting unit, we performed an impairment evaluation of our coiled tubing business as of June 30, 2017 and concluded that no impairment was present.
If any of our assets become or remain idle for an extended amount of time, then our estimated cash flows may further decrease, and therefore the probability of a near term sale may increase. If any of the foregoing were to occur, we may incur additional impairment charges. The assumptions used in the impairment evaluation are inherently uncertain and require management judgment.
The following table summarizes impairment charges recognized during the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Assets held for sale
$

 
$
3,344

 
$
795

 
$
3,344

Domestic drilling rigs and equipment

 
918

 

 
918

 
$

 
$
4,262

 
$
795

 
$
4,262

3.
Valuation Allowances on Deferred Tax Assets
As of September 30, 2017, we had $157.1 million of deferred tax assets related to domestic and foreign net operating losses that are available to reduce future taxable income. In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate

9




realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
In performing this analysis as of September 30, 2017 in accordance with ASC Topic 740, Income Taxes, we assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. A significant piece of negative evidence evaluated is the cumulative loss incurred during previous years. Such negative evidence limits the ability to consider other positive evidence that is subjective, such as projections for taxable income in future years. As a result, we may recognize a benefit only to the extent that reversals of deferred income tax liabilities are expected to generate taxable income in each relevant jurisdiction in future periods which would offset our deferred tax assets.
Our domestic net operating losses have a 20 year carryforward period and can be used to offset future domestic taxable income until their expiration, beginning in 2030, with the latest expiration in 2037. The majority of our foreign net operating losses have an indefinite carryforward period. However, we have a valuation allowance that fully offsets our foreign deferred tax assets and mostly offsets our domestic deferred tax assets as of September 30, 2017.
During the three and nine months ended September 30, 2017, the impact of valuation allowance adjustments on deferred tax assets was $5.9 million and $19.1 million, respectively. During the three and nine months ended September 30, 2016, the impact of valuation allowance adjustments on deferred tax assets was $11.8 million and $31.6 million, respectively. The valuation allowance is the primary factor causing our effective tax rate to be significantly lower than the statutory rate of 35%. The amount of the deferred tax asset considered realizable, however, would increase if cumulative losses are no longer present and additional weight is given to subjective evidence in the form of projected future taxable income.
4.     Debt
Our debt consists of the following (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Senior secured revolving credit facility
$
97,733

 
$
46,000

Senior notes
300,000

 
300,000

 
397,733

 
346,000

Less unamortized debt issuance costs
(5,132
)
 
(6,527
)
 
$
392,601

 
$
339,473

Senior Secured Revolving Credit Facility
We have a credit agreement, as most recently amended on June 30, 2016, 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 a current aggregate commitment amount of $150 million, subject to availability under a borrowing base comprised of certain eligible cash, certain eligible receivables, certain eligible inventory, and certain eligible equipment of ours and certain of our subsidiaries, all of which matures in March 2019 (the “Revolving Credit Facility”).
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 of 5.50% and 4.50%, 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.
The Revolving Credit Facility contains customary mandatory prepayments from the proceeds of certain asset dispositions or equity or debt issuances, which are applied to reduce outstanding revolving and swing-line loans and to cash-collateralize letter of credit exposure, and in certain cases, also reduce the commitment amount available. Additionally, the Revolving Credit Facility requires that if on the last business day of each week, our aggregate amount of cash at the end of the preceding day (as calculated pursuant to the Revolving Credit Facility) exceeds $20 million, we pay down the outstanding principal balance by the amount of such excess.

10




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 voting equity interests, and 100% of non-voting 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. Borrowings under the Revolving Credit Facility are available for selective acquisitions, working capital and other general corporate purposes.
As of October 31, 2017, we had $101.7 million outstanding under our Revolving Credit Facility and $11.8 million in committed letters of credit, which resulted in borrowing availability of $36.6 million under our Revolving Credit Facility. There are no limitations on our ability to access the borrowing capacity provided there is no default, all representations and warranties are true and correct, and compliance with financial covenants under the Revolving Credit Facility is maintained. At September 30, 2017, we were in compliance with our financial covenants under the Revolving Credit Facility.
The financial covenants contained in our Revolving Credit Facility include the following:
A maximum senior consolidated leverage ratio, calculated as senior consolidated debt at the period end, which excludes unsecured and subordinated debt, divided by EBITDA for the trailing twelve month period at each quarter end, as defined in the Revolving Credit Facility. The senior consolidated leverage ratio cannot exceed the maximum amounts as follows:
w
4.00

to 1.00
on
December 31, 2017
w
3.50

to 1.00
on
March 31, 2018
w
3.25

to 1.00
on
June 30, 2018
w
2.50

to 1.00
at any time after June 30, 2018
A minimum interest coverage ratio, calculated as EBITDA for the trailing twelve month period at each quarter end, as defined in the Revolving Credit Facility, divided by interest expense for the same period. The interest coverage ratio cannot be less than the minimum amounts as follows:
w
1.25

to 1.00
for the quarterly period ending
December 31, 2017
w
1.50

to 1.00
at any time after December 31, 2017
The Revolving Credit Facility restricts capital expenditures to the following amounts during each forthcoming fiscal year as follows:
w
$35 million
in fiscal year 2017
w
$50 million
in fiscal year 2018
w
$50 million
in fiscal year 2019
The capital expenditure threshold for each of the fiscal years above may be increased by up to 50% of the unused portion of the capital expenditure threshold for the immediate preceding fiscal year, limited to a maximum of $5 million in 2017, and $7.5 million in each of the years 2018 and 2019. In addition to the above requirements, additional capital expenditures may be made up to the amount of net proceeds from equity issuances, or if the following conditions are satisfied:
the aggregate outstanding commitments under the Revolving Credit Facility do not exceed $150 million;
the pro forma senior leverage and total leverage ratios, calculated as defined in the Revolving Credit Facility, are less than 2.00 to 1.00 and 4.50 to 1.00, respectively.
Pursuant to the terms above, our capital expenditures are limited to a total of $101.7 million for the fiscal year 2017.
The Revolving Credit Facility has additional restrictive covenants that, among other things, limit our ability to:
incur additional debt or make prepayments of existing debt;
create liens on or dispose of our assets;
pay dividends on stock or repurchase stock;
enter into acquisitions, mergers, consolidations, sale leaseback transactions, or hedging contracts;
make other restricted investments;
conduct transactions with affiliates; and

11




limits our use of the net proceeds of any offering of our equity securities to the repayment of debt outstanding under the Revolving Credit Facility.
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
In 2014, we issued $300 million of unregistered senior notes at face value, with a coupon interest rate of 6.125% that are due in 2022 (the “Senior Notes”). The Senior Notes will mature on March 15, 2022 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, 2017 in each case at the redemption price specified in the Indenture dated March 18, 2014 (the “Indenture”) plus any accrued and unpaid interest and any additional interest (as defined in the Indenture) thereon to the date of redemption.
In accordance with a registration rights agreement with the holders of our Senior Notes, we filed an exchange offer registration statement on Form S-4 with the Securities and Exchange Commission that became effective on October 2, 2014. The exchange offer registration statement enabled the holders of our Senior Notes to exchange their senior notes for publicly registered notes with substantially identical terms. References to the “Senior Notes” herein include the senior notes issued in the exchange offer.
If we experience a change of control (as defined in the Indenture), we will be required to make an offer to each holder of the Senior Notes to repurchase all or any part of the Senior Notes at a purchase price equal to 101% of the principal amount of each Senior Note, plus accrued and unpaid interest, if any, to the date of repurchase. If we engage in certain asset sales, within 365 days of such sale we will be required to use the net cash proceeds from such sale, to the extent we do not reinvest those proceeds in our business, to make an offer to repurchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, plus accrued and unpaid interest to the repurchase date.
The Indenture, among other things, limits us and certain of our subsidiaries in our ability to:
pay dividends on stock, repurchase stock, redeem subordinated indebtedness or make other restricted payments and investments;
incur, assume or guarantee additional indebtedness or issue preferred or disqualified stock;
create liens on our or their assets;
enter into sale and leaseback transactions;
sell or transfer assets;
borrow, pay dividends, 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 any other person;
enter into transactions with affiliates; and
enter into new lines of business.
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. (See Note 10, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements.)
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 March 2019. Costs incurred in connection with

12




the issuance of our Senior Notes were capitalized and are being amortized using the straight-line method (which approximates amortization using the interest method) over the term of the Senior Notes which mature in March 2022.
5.
Fair Value of Financial Instruments
The FASB’s Accounting Standards Codification (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, 2017 and December 31, 2016, our financial instruments consist primarily of cash, trade and other receivables, trade payables, phantom stock unit awards 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. At September 30, 2017 and December 31, 2016, the aggregate estimated fair value of our phantom stock unit awards was $4.6 million and $7.0 million, respectively, for which the vested portion recognized as a liability in our condensed consolidated balance sheets was $2.4 million and $2.0 million, respectively. The phantom stock unit awards, and the measurement of fair value for these awards, are described in more detail in Note 7, Stock-Based Compensation Plans.
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 supplemental fair value information about our long-term debt at September 30, 2017 and December 31, 2016 (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Total debt, net of debt issuance costs
$
392,601

 
$
341,234

 
$
339,473

 
$
326,249

6.
Earnings (Loss) Per Common Share
The following table presents a reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations (amounts in thousands, except per share data):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator (both basic and diluted):
 
 
 
 
 
 
 
Net loss
$
(17,227
)
 
$
(34,620
)
 
$
(62,560
)
 
$
(92,310
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares (denominator for basic earnings (loss) per share)
77,552

 
64,905

 
77,335

 
64,755

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

 

 

 

Denominator for diluted earnings (loss) per share
77,552

 
64,905

 
77,335

 
64,755

Loss per common share—Basic
$
(0.22
)
 
$
(0.53
)
 
$
(0.81
)
 
$
(1.43
)
Loss per common share—Diluted
$
(0.22
)
 
$
(0.53
)
 
$
(0.81
)
 
$
(1.43
)
Potentially dilutive securities excluded as anti-dilutive
4,612

 
4,550

 
5,167

 
4,985


13




7.
Stock-Based Compensation Plans
We grant stock option and restricted stock awards with vesting based on time of service conditions. We grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. In 2016, we granted phantom stock unit awards with vesting based on time of service, performance and market conditions, which are classified as liability awards under ASC Topic 718, Compensation—Stock Compensation since we expect to settle the awards in cash when they become vested.
We recognize compensation cost for our stock-based compensation awards based on the fair value estimated in accordance with ASC Topic 718. 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. We adopted ASU 2016-09 in the first quarter of 2017 and elected to prospectively recognize forfeitures when they occur, rather than estimating future forfeitures.
The following table summarizes the stock-based compensation expense recognized, by award type, and the compensation expense recognized for phantom stock unit awards during the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock option awards
$
249

 
$
192

 
$
726

 
$
573

Restricted stock awards
116

 
116

 
345

 
306

Restricted stock unit awards
525

 
625

 
2,154

 
2,119

 
$
890

 
$
933

 
$
3,225

 
$
2,998

Phantom stock unit awards
$
878

 
$
307

 
$
397

 
$
1,033

Stock Option Awards
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 option pricing model. The following table summarizes the assumptions used in the Black-Scholes option pricing model based on a weighted-average calculation for the options granted during the nine months ended September 30, 2017 and 2016:
 
Nine months ended September 30,
 
2017
 
2016
Expected volatility
76
%
 
70
%
Risk-free interest rates
2.1
%
 
1.5
%
Expected life in years
5.86

 
5.70

Options granted
268,185
 
905,966
Grant-date fair value
$4.28
 
$0.80

14




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.
Restricted Stock and Restricted Stock Unit Awards
We grant restricted stock awards that vest over a one-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.
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.
The following table summarizes the number and weighted-average grant-date fair value of the restricted stock and restricted stock unit awards granted during the nine months ended September 30, 2017 and 2016:
 
Nine months ended September 30,
 
2017
 
2016
Restricted Stock:
 
 
 
Restricted stock awards granted
167,272

 
166,664

Weighted-average grant-date fair value
$
2.75

 
$
2.76

Time-based RSUs:
 
 
 
Time-based RSUs granted
96,728

 
260,334

Weighted-average grant-date fair value
$
5.61

 
$
1.48

Performance-based RSUs:
 
 
 
Performance-based RSUs granted
563,469

 

Weighted-average grant-date fair value
$
7.75

 
$

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 half of the performance-based RSUs outstanding are subject to a market condition based on relative total shareholder return, as compared to that of our predetermined peer group, and therefore the fair value of these awards is measured using a Monte Carlo simulation model. Compensation expense for equity awards with a market condition is reduced only for actual forfeitures; no adjustment to expense is otherwise made, regardless of the number of shares issued. The remaining performance-based RSUs are subject to performance conditions, based on our EBITDA and EBITDA return on capital employed, relative to our predetermined peer group, 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.
In April 2017, we determined that 121% of the target number of shares granted during 2014 were actually earned based on the Company’s achievement of the performance measures as described above. As of September 30, 2017, we estimate that

15




the weighted average achievement level for our outstanding performance-based RSUs granted in 2015 and 2017 will be approximately 94% of the predetermined performance conditions.
Phantom Stock Unit Awards
In 2016, we granted 1,268,068 phantom stock unit awards with a weighted-average grant-date fair value of $1.35 per share. These awards cliff-vest after 39 months from the date of grant, with vesting based on time of service, performance and market conditions. The number of units ultimately awarded will be based upon the Company’s achievement in certain performance conditions, as compared to a predefined peer group, over the three-year performance period, and each unit awarded will entitle the employee to a cash payment equal to the stock price of our common stock on the date of vesting, subject to a maximum of $8.08 (which is four times the stock price on the date of grant).
The fair value of these awards is measured using inputs that are defined as Level 3 inputs under ASC Topic 820, Fair Value Measurements and Disclosures. Approximately half of the phantom stock unit awards granted are subject to a market condition based on relative total shareholder return, as compared to that of our predetermined peer group, and therefore the fair value of these awards is measured using a Monte Carlo simulation model. The remaining phantom stock unit awards are subject to performance conditions, based on our EBITDA and EBITDA return on capital employed, relative to our predetermined peer group, and the fair value of these awards is measured using a Black-Scholes pricing model. As of September 30, 2017, our achievement level for the awards granted during 2016 is estimated to be approximately 130%. The final payout percentage will be based on our performance versus the performance of our peer group, over the three year period ending December 31, 2018.
These awards are classified as liability awards under ASC Topic 718, Compensation—Stock Compensation, because we expect to settle the awards in cash when they vest, and are remeasured at fair value at the end of each reporting period until they vest. The change in fair value is recognized as a current period compensation expense in our statement of operations. Therefore, changes in the inputs used to measure fair value can result in volatility in our compensation expense. This volatility increases as the phantom stock awards approach the vesting date. We estimate that a hypothetical increase of $1 in the market price of our common stock as of September 30, 2017, if all other inputs were unchanged, would result in an increase in cumulative compensation expense of $0.8 million, which represents the hypothetical increase in fair value of the liability which would be recognized as compensation expense in our statement of operations.
8.
Segment Information
We have two operating segments referred to as the Production Services Segment and the Drilling Services Segment which is the basis management uses for making operating decisions and assessing performance.
Our Production Services Segment provides a range of services, including well servicing, wireline services and coiled tubing services, to a diverse group of exploration and production companies, with our operations 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.
Our Drilling Services Segment provides contract land drilling services to a diverse group of exploration and production companies through our four drilling divisions in the US and internationally in Colombia. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs.

16




The following table sets forth certain financial information for our two operating segments and corporate as of and for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
As of and for the three months ended September 30,
 
As of and for the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Production Services Segment:
 
 
 
 
 
 

Revenues
$
74,738

 
$
40,899

 
$
199,830

 
$
116,998

Operating costs
58,304

 
31,912

 
156,678

 
95,503

Segment margin
$
16,434

 
$
8,987

 
$
43,152

 
$
21,495

Identifiable assets
$
252,010

 
$
246,610

 
$
252,010

 
$
246,610

Depreciation and amortization
11,621

 
12,849

 
34,753

 
39,851

Capital expenditures
7,164

 
2,070

 
31,282

 
8,312

 
 
 
 
 
 
 
 
Drilling Services Segment:
 
 
 
 
 
 

Revenues
$
42,543

 
$
27,454

 
$
120,338

 
$
88,597

Operating costs
28,386

 
19,776

 
81,841

 
51,989

Segment margin
$
14,157

 
$
7,678

 
$
38,497

 
$
36,608

Identifiable assets
$
440,392

 
$
463,621

 
$
440,392

 
$
463,621

Depreciation and amortization
12,689

 
15,511

 
38,681

 
46,597

Capital expenditures
4,818

 
7,785

 
22,313

 
15,330

 
 
 
 
 
 
 
 
Corporate:
 
 
 
 
 
 

Identifiable assets
$
15,040

 
$
12,566

 
$
15,040

 
$
12,566

Depreciation and amortization
313

 
303

 
921

 
961

Capital expenditures
236

 
175

 
607

 
350

Total:
 
 
 
 
 
 

Revenues
$
117,281

 
$
68,353

 
$
320,168

 
$
205,595

Operating costs
86,690

 
51,688

 
238,519

 
147,492

Consolidated margin
$
30,591

 
$
16,665

 
$
81,649

 
$
58,103

Identifiable assets
$
707,442

 
$
722,797

 
$
707,442

 
$
722,797

Depreciation and amortization
24,623

 
28,663

 
74,355

 
87,409

Capital expenditures
12,218

 
10,030

 
54,202

 
23,992

The following table reconciles the consolidated margin of our two operating segments and corporate reported above to income (loss) from operations as reported on the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Consolidated margin
$
30,591

 
$
16,665

 
$
81,649

 
$
58,103

Depreciation and amortization
(24,623
)
 
(28,663
)
 
(74,355
)
 
(87,409
)
General and administrative
(17,528
)
 
(14,312
)
 
(51,342
)
 
(46,078
)
Bad debt (expense) recovery
(491
)
 
359

 
98

 
302

Impairment charges

 
(4,262
)
 
(795
)
 
(4,262
)
Gain on dispositions of property and equipment, net
1,159

 
328

 
2,251

 
420

Loss from operations
$
(10,892
)
 
$
(29,885
)
 
$
(42,494
)
 
$
(78,924
)

17




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, 2017 and 2016 (amounts in thousands):
 
As of and for the three months ended September 30,
 
As of and for the nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
7,403

 
$
622

 
$
26,379

 
$
1,979

Identifiable assets (1)
32,340

 
37,444

 
32,340

 
37,444

(1)
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.
9.
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 $43.4 million relating to our performance under these bonds as of September 30, 2017.
We are currently undergoing sales and use tax audits for multi-year periods and we are working to resolve all relevant issues. As of September 30, 2017 and December 31, 2016, our accrued liability was $1.1 million and $0.6 million, respectively, based on our estimate of the sales and use tax obligations that are expected to result from these audits. Due to the inherent uncertainty of the audit process, we believe that it is reasonably possible that we may incur additional tax assessments with respect to one or more of the audits in excess of the amount accrued. We believe that such an outcome would not have a material adverse effect on our results of operations or financial position. Because certain of these audits are in a preliminary stage, an estimate of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot reasonably be made.
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.
10.
Guarantor/Non-Guarantor Condensed Consolidating Financial Statements
Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all existing 100% owned domestic subsidiaries, except for Pioneer Services Holdings, LLC. 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, 2017, 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 consolidating balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries.

18




CONDENSED CONSOLIDATING BALANCE SHEETS
(unaudited, in thousands)
 
September 30, 2017
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,780

 
$
(1,225
)
 
$
1,297

 
$

 
$
10,852

Receivables, net of allowance
5

 
87,786

 
15,055

 
(42
)
 
102,804

Intercompany receivable (payable)
(24,836
)
 
47,186

 
(22,350
)
 

 

Inventory

 
6,216

 
5,542

 

 
11,758

Assets held for sale

 
8,704

 
52

 

 
8,756

Prepaid expenses and other current assets
1,589

 
2,043

 
1,699

 

 
5,331

Total current assets
(12,462
)
 
150,710

 
1,295

 
(42
)
 
139,501

Net property and equipment
2,185

 
539,286

 
25,030

 

 
566,501

Investment in subsidiaries
573,721

 
20,198

 

 
(593,919
)
 

Deferred income taxes
58,545

 

 

 
(58,545
)
 

Other long-term assets
481

 
797

 
162

 

 
1,440

Total assets
$
622,470

 
$
710,991

 
$
26,487

 
$
(652,506
)
 
$
707,442

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
467

 
$
28,858

 
$
2,683

 
$

 
$
32,008

Deferred revenues

 
302

 
481

 

 
783

Accrued expenses
5,526

 
38,548

 
2,690

 
(42
)
 
46,722

Total current liabilities
5,993

 
67,708

 
5,854

 
(42
)
 
79,513

Long-term debt, less debt issuance costs
392,601

 

 

 

 
392,601

Deferred income taxes

 
67,160

 

 
(58,545
)
 
8,615

Other long-term liabilities
2,348

 
2,402

 
435

 

 
5,185

Total liabilities
400,942

 
137,270

 
6,289

 
(58,587
)
 
485,914

Total shareholders’ equity
221,528

 
573,721

 
20,198

 
(593,919
)
 
221,528

Total liabilities and shareholders’ equity
$
622,470

 
$
710,991

 
$
26,487

 
$
(652,506
)
 
$
707,442

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
9,898

 
$
(764
)
 
$
1,060

 
$

 
$
10,194

Receivables, net of allowance
480

 
64,946

 
7,210

 
(513
)
 
72,123

Intercompany receivable (payable)
(24,836
)
 
35,427

 
(10,591
)
 

 

Inventory

 
5,659

 
4,001

 

 
9,660

Assets held for sale

 
15,035

 
58

 

 
15,093

Prepaid expenses and other current assets
1,280

 
4,014

 
1,632

 

 
6,926

Total current assets
(13,178
)
 
124,317

 
3,370

 
(513
)
 
113,996

Net property and equipment
2,501

 
556,062

 
25,517

 

 
584,080

Investment in subsidiaries
577,965

 
24,270

 

 
(602,235
)
 

Deferred income taxes
65,041

 

 

 
(65,041
)
 

Other long-term assets
583

 
1,029

 
414

 

 
2,026

Total assets
$
632,912

 
$
705,678

 
$
29,301

 
$
(667,789
)
 
$
700,102

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
546

 
$
16,317

 
$
2,345

 
$

 
$
19,208

Deferred revenues

 
680

 
769

 

 
1,449

Accrued expenses
9,316

 
34,765

 
1,777

 
(513
)
 
45,345

Total current liabilities
9,862

 
51,762

 
4,891

 
(513
)
 
66,002

Long-term debt, less debt issuance costs
339,473

 

 

 

 
339,473

Deferred income taxes

 
73,249

 
(28
)
 
(65,041
)
 
8,180

Other long-term liabilities
2,179

 
2,702

 
168

 

 
5,049

Total liabilities
351,514

 
127,713

 
5,031

 
(65,554
)
 
418,704

Total shareholders’ equity
281,398

 
577,965

 
24,270

 
(602,235
)
 
281,398

Total liabilities and shareholders’ equity
$
632,912

 
$
705,678

 
$
29,301

 
$
(667,789
)
 
$
700,102


19




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)

 
Three months ended September 30, 2017
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
109,878

 
$
7,403

 
$

 
$
117,281

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
80,075

 
6,615

 

 
86,690

Depreciation and amortization
313

 
22,882

 
1,428

 

 
24,623

General and administrative
5,737

 
11,424

 
505

 
(138
)
 
17,528

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt recovery

 
491

 

 

 
491

Gain on dispositions of property and equipment, net

 
(1,159
)
 

 

 
(1,159
)
Total costs and expenses
6,050

 
112,498

 
9,763

 
(138
)
 
128,173

Income (loss) from operations
(6,050
)
 
(2,620
)
 
(2,360
)
 
138

 
(10,892
)
Other (expense) income:
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(4,650
)
 
(2,393
)
 

 
7,043

 

Interest expense
(6,614
)
 
1

 

 

 
(6,613
)
Other (expense) income
9

 
220

 
204

 
(138
)
 
295

Total other (expense) income
(11,255
)
 
(2,172
)
 
204

 
6,905

 
(6,318
)
Income (loss) before income taxes
(17,305
)
 
(4,792
)
 
(2,156
)
 
7,043

 
(17,210
)
Income tax (expense) benefit 1
78

 
142

 
(237
)
 

 
(17
)
Net income (loss)
$
(17,227
)
 
$
(4,650
)
 
$
(2,393
)
 
$
7,043

 
$
(17,227
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2016
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
67,731

 
$
622

 
$

 
$
68,353

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
50,061

 
1,627

 

 
51,688

Depreciation and amortization
303

 
26,659

 
1,701

 

 
28,663

General and administrative
5,046

 
9,017

 
387

 
(138
)
 
14,312

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt expense

 
(359
)
 

 

 
(359
)
Impairment charges

 
4,262

 

 

 
4,262

Gain on dispositions of property and equipment, net

 
(325
)
 
(3
)
 

 
(328
)
Total costs and expenses
5,349

 
88,100

 
4,927

 
(138
)
 
98,238

Income (loss) from operations
(5,349
)
 
(20,369
)
 
(4,305
)
 
138

 
(29,885
)
Other (expense) income:
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(23,794
)
 
(4,587
)
 

 
28,381

 

Interest expense
(6,661
)
 
(14
)
 
(3
)
 

 
(6,678
)
Other (expense) income
14

 
217

 
152

 
(138
)
 
245

Total other (expense) income
(30,441
)
 
(4,384
)
 
149

 
28,243

 
(6,433
)
Income (loss) before income taxes
(35,790
)
 
(24,753
)
 
(4,156
)
 
28,381

 
(36,318
)
Income tax (expense) benefit 1
1,170

 
959

 
(431
)
 

 
1,698

Net income (loss)
$
(34,620
)
 
$
(23,794
)
 
$
(4,587
)
 
$
28,381

 
$
(34,620
)
 
 
 
 
 
 
 
 
 
 
1  The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings (losses) of subsidiaries.


20




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)
 
Nine months ended September 30, 2017
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
293,788

 
$
26,380

 
$

 
$
320,168

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
218,344

 
20,175

 

 
238,519

Depreciation and amortization
921

 
69,027

 
4,407

 

 
74,355

General and administrative
16,507

 
33,818

 
1,431

 
(414
)
 
51,342

Intercompany leasing

 
(3,645
)
 
3,645

 

 

Bad debt recovery

 
(98
)
 

 

 
(98
)
Impairment charges

 
795

 

 

 
795

Loss (gain) on dispositions of property and equipment, net
2

 
(2,126
)
 
(127
)
 

 
(2,251
)
Total costs and expenses
17,430

 
316,115

 
29,531

 
(414
)
 
362,662

Income (loss) from operations
(17,430
)
 
(22,327
)
 
(3,151
)
 
414

 
(42,494
)
Other (expense) income:
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(19,518
)
 
(3,924
)
 

 
23,442

 

Interest expense
(19,110
)
 
20

 

 

 
(19,090
)
Other (expense) income
37

 
678

 
(77
)
 
(414
)
 
224

Total other (expense) income
(38,591
)
 
(3,226
)
 
(77
)
 
23,028

 
(18,866
)
Income (loss) before income taxes
(56,021
)
 
(25,553
)
 
(3,228
)
 
23,442

 
(61,360
)
Income tax (expense) benefit 1
(6,539
)
 
6,035

 
(696
)
 

 
(1,200
)
Net income (loss)
$
(62,560
)
 
$
(19,518
)
 
$
(3,924
)
 
$
23,442

 
$
(62,560
)