10-Q 1 h84414e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                     to                     
Commission file number 1-02199
ALLIS-CHALMERS ENERGY INC.
(Exact name of registrant as specified in its charter)
     
DELAWARE   27-33212
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
11125 Equity Drive, Suite 200, HOUSTON, TEXAS   77041
     
(Address of principal executive offices)   (Zip Code)
(713) 856-4222
Registrant’s telephone number, including area code
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 þ 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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 þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 26, 2011, all of the 1,000 issued and outstanding shares of Allis-Chalmers Energy Inc. are held by Archer Limited.
     Allis-Chalmers Energy Inc. meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
 
 

 


 

ALLIS-CHALMERS ENERGY INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2011
TABLE OF CONTENTS
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 EX-31.1
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 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except for share and per share amounts)
                 
    Successor     Predecessor  
    June 30,     December 31,  
    2011     2010  
 
  (unaudited)        
Assets
               
Cash and cash equivalents
  $ 13,416     $ 20,940  
Restricted cash
    3,784        
Trade receivables, net
    174,380       144,960  
Inventories
    50,026       42,140  
Deferred income tax asset
    1,104       81  
Prepaid expenses and other
    18,734       9,192  
 
           
Total current assets
    261,444       217,313  
 
               
Property and equipment, net
    675,581       723,234  
Goodwill
    267,428       46,333  
Other intangible assets, net
    94,890       33,899  
Debt issuance costs, net
          7,405  
Deferred income tax asset
          1,969  
Other assets
    5,251       8,116  
 
           
 
               
Total assets
  $ 1,304,594     $ 1,038,269  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current maturities of long-term debt
  $ 6,892     $ 15,215  
Trade accounts payable
    60,760       46,042  
Accrued salaries, benefits and payroll taxes
    35,525       32,790  
Accrued interest
    15,199       15,524  
Accrued expenses
    41,912       30,676  
 
           
Total current liabilities
    160,288       140,247  
 
               
Deferred income tax liability
    16,989       8,240  
Long-term debt, net of current maturities
    454,689       478,225  
Payable to parent
    74,403        
Other long-term liabilities
    32       233  
 
           
Total liabilities
    706,401       626,945  
 
               
Commitments and Contingencies
               
 
               
Stockholders’ Equity
               
Preferred stock, $0.01 par value (0 shares authorized, 0 issued and outstanding at June 30, 2011 and 25,000,000 authorized, 36,393 issued and outstanding at December 31, 2010)
          34,183  
Common stock, $0.01 par value (1,000 shares authorized, 1,000 issued and outstanding at June 30, 2011 and 200,000,000 authorized, 73,722,347 issued and outstanding at December 31, 2010)
          737  
Capital in excess of par value
    600,885       429,924  
Accumulated deficit
    (2,692 )     (53,520 )
 
           
Total stockholders’ equity
    598,193       411,324  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 1,304,594     $ 1,038,269  
 
           
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

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ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
                                         
    Successor     Predecessor  
    Three Months     Four Months     Two Months     Three Months     Six Months  
    Ended     Ended     Ended     Ended     Ended  
    June 30,     June 30,     February 28,     June 30,     June 30,  
    2011     2011     2011     2010     2010  
Revenues
  $ 220,138     $ 290,864     $ 126,885     $ 158,644     $ 299,014  
 
                                       
Operating costs and expenses:
                                       
Direct costs
    162,628       213,764       97,130       120,723       228,438  
Depreciation
    23,030       30,346       15,026       20,517       40,705  
Selling, general and administrative
    15,386       20,177       23,752       12,114       24,177  
Impairment of intangible assets
          5,100                    
Amortization
    4,357       5,810       811       1,156       2,312  
 
                             
Total operating costs and expenses
    205,401       275,197       136,719       154,510       295,632  
 
                             
 
                                       
Income (loss) from operations
    14,737       15,667       (9,834 )     4,134       3,382  
 
                             
 
                                       
Other income (expense):
                                       
Interest expense
    (10,067 )     (13,813 )     (7,854 )     (11,149 )     (22,105 )
Interest income
    8       11       5       299       454  
Other
    (34 )     (21 )     122       (303 )     (1,818 )
 
                             
Total other expense
    (10,093 )     (13,823 )     (7,727 )     (11,153 )     (23,469 )
 
                             
 
                                       
Income (loss) before income taxes
    4,644       1,844       (17,561 )     (7,019 )     (20,087 )
 
                                       
Income tax benefit (expense)
    (2,955 )     (4,536 )     (1,736 )     1,640       5,177  
 
                             
 
                                       
Net income (loss)
    1,689       (2,692 )     (19,297 )     (5,379 )     (14,910 )
 
                                       
Preferred stock dividend
                (375 )     (637 )     (1,274 )
 
                             
 
                                       
Net income (loss) attributed to common stockholders
  $ 1,689     $ (2,692 )   $ (19,672 )   $ (6,016 )   $ (16,184 )
 
                             
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

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ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(unaudited)
                                                         
                                    Capital in     Retained     Total  
    Preferred Stock     Common Stock     Excess of     Earnings     Stockholders’  
    Shares     Amount     Shares     Amount     Par Value     (Deficit)     Equity  
Predecessor
                                                       
 
Balances, December 31, 2010
    36,393     $ 34,183       73,722,347     $ 737     $ 429,924     $ (53,520 )   $ 411,324  
 
                                                       
Net loss
                                  (19,297 )     (19,297 )
Preferred stock dividend
                                  (375 )     (375 )
 
                                                       
Issuance of common stock:
                                                       
Issuance under stock plans, net of tax
                650,727       7       (1,828 )           (1,821 )
 
                                                       
Stock-based compensation
                            6,084             6,084  
 
                                         
 
                                                       
Balances, February 28, 2011
    36,393     $ 34,183       74,373,074     $ 744     $ 434,180     $ (73,192 )   $ 395,915  
 
Successor
                                                       
 
Capitalization at merger
        $       1,000     $     $ 600,885     $     $ 600,885  
 
                                                       
Net loss
                                  (2,692 )     (2,692 )
 
                                         
 
                                                       
Balances, June 30, 2011
        $       1,000     $     $ 600,885     $ (2,692 )   $ 598,193  
 
                                         
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

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ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
                         
    Successor     Predecessor  
    Four Months     Two Months     Six Months  
    Ended     Ended     Ended  
    June 30,     February 28,     June 30,  
    2011     2011     2010  
Cash Flows from Operating Activities:
                       
Net loss
  $ (2,692 )   $ (19,297 )   $ (14,910 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Depreciation and amortization
    36,156       15,837       43,017  
Amortization of deferred issuance costs
          366       1,106  
Debt premium amortization
    (1,050 )            
Stock-based compensation
          6,084       3,001  
Impairment of intangible assets
    5,100              
Allowance for bad debts
          195        
Deferred income taxes
    (939 )     140       (10,821 )
Loss on investment
                1,466  
Equity in loss of unconsolidated affiliates
                260  
Loss on sale of property and equipment
    171       416       807  
Changes in operating assets and liabilities, net of acquisitions:
                       
Increase in trade receivable
    (14,908 )     (15,944 )     (25,845 )
Increase in inventories
    (6,076 )     (1,810 )     (2,392 )
Decrease (increase) in prepaid expenses and other assets
    (10,154 )     550       8,838  
Decrease (increase) in other assets
    (256 )     674       799  
Increase in trade accounts payable
    1,764       12,954       10,753  
(Decrease) increase in accrued interest
    3,568       (3,893 )     148  
Increase in accrued expenses
    2,943       8,555       3,801  
Decrease in other liabilities
    (60 )     (141 )     (466 )
(Decrease) increase in accrued salaries, benefits and payroll taxes
    4,414       (1,679 )     1,945  
 
                 
Net cash provided by operating activities
    17,981       3,007       21,507  
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Decrease (increase) in restricted cash
    357       (4,141 )      
Purchases of investment interests
          (1,177 )      
Proceeds from sale of investments
                368  
Purchases of property and equipment
    (25,572 )     (22,758 )     (30,989 )
Deposits on asset commitments
    (46 )     82       (10,096 )
Proceeds from sale of property and equipment
    1,880       1,009       2,616  
 
                 
Net cash used in investing activities
    (23,381 )     (26,985 )     (38,101 )
 
                 
 
                       
Cash Flows from Financing Activities:
                       
Proceeds from issuance of long-term debt
                4,000  
Payments on long-term debt
    (5,772 )     (7,819 )     (9,446 )
Net borrowings (repayments) on lines of credit
          (36,500 )      
Proceeds from parent
    2,953       71,450          
Payment of preferred stock dividend
          (637 )     (1,274 )
Exercise of options and restricted stock awards, net of tax
          (1,821 )      
Debt issuance costs
                (189 )
 
                 
Net cash (used) provided by financing activities
    (2,819 )     24,673       (6,909 )
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
    (8,219 )     695       (23,503 )
Cash and cash equivalents at beginning of period
    21,635       20,940       41,072  
 
                 
Cash and cash equivalents at end of period
  $ 13,416     $ 21,635     $ 17,569  
 
                 
 
                       
Supplemental information:
                       
Interest paid (net of capitalized interest)
  $ 9,259     $ 10,991     $ 20,467  
Income taxes paid (refunds)
  $ 2,865     $ (580 )   $ 57  
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Allis-Chalmers Energy Inc. and subsidiaries (“Allis-Chalmers”, “we”, “our” or “us”) is a multi-faceted oilfield service company that provides services and equipment to oil and natural gas exploration and production companies throughout the United States including Texas, Louisiana, Pennsylvania, Arkansas, West Virginia, Oklahoma, Colorado, offshore in the Gulf of Mexico, and internationally, primarily in Argentina, Brazil, Bolivia and Mexico. We operate in two sectors of the oil and natural gas service industry: Well Services and Drilling Services.
We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service and rates per day for equipment and tools that we rent to our customers. The price we charge for our services depends upon several factors, including the level of oil and natural gas drilling activity and the competitive environment in the particular geographic regions in which we operate. Contracts are awarded based on price, quality of service and equipment and general reputation and experience of our personnel. The principal operating costs are direct and indirect labor and benefits, repairs and maintenance of our equipment, insurance, equipment rentals, fuel, depreciation and general and administrative expenses.
Basis of Presentation
On February 23, 2011, Allis-Chalmers Energy Inc., a Delaware corporation, completed its merger (the “Merger”) with and into Wellco Sub Company (“Wellco”), a Delaware corporation and wholly owned subsidiary of Seawell Limited (“Seawell”), with Wellco continuing as the surviving entity under the name Allis-Chalmers Energy Inc. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of August 10, 2010, by and among Allis-Chalmers, Seawell and Wellco, as amended by the Amendment Agreement, dated as of October 10, 2010, by and among Allis-Chalmers, Seawell and Wellco (as so amended, the “Merger Agreement”). Following the Merger, Seawell began operating under the name Archer Limited (“Archer” or “Parent”). As of the Merger date, our assets and liabilities have been adjusted to their fair values (see Note 2) based on the purchase price resulting in changes to depreciation, amortization and interest in the successor period; therefore, the financial information for the period subsequent to the Merger is not fully comparable. The financial statements and accompanying footnotes have been separated with a black line to present pre-merger activity as the “Predecessor” company and post-merger activity as the “Successor” company. “Predecessor” refers to the operations of Allis-Chalmers prior to the consummation of the Merger and “Successor” refers to the operations of Allis-Chalmers subsequent to the Merger. The Merger date for accounting purposes has been designated as March 1, 2011.
Our unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods. These unaudited consolidated condensed financial statements should be read in conjunction with our restated audited consolidated financial statements included in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on September 1, 2011 (the “Form 10-K/A”). The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be perceived with certainty. Accordingly, our accounting estimates require the exercise of judgment. While management believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts; recoverability of long-lived assets and intangibles; useful lives used in depreciation and amortization; stock-based compensation; income taxes and valuation allowances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained or as our operating environment changes.

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments
Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable and payable, and debt. The carrying value of cash and cash equivalents, restricted cash and accounts receivable and payable approximate fair value due to their short-term nature. Restricted cash relates to deposits at a financial institution to secure $3.8 million of outstanding letters of credit. We believe the fair values and the carrying value of our debt, excluding the senior notes, would not be materially different due to the instruments’ interest rates approximating market rates for similar borrowings at June 30, 2011. Our senior notes, in the approximate aggregate amount of $446.6 million, trade “over the counter” in limited amounts and on an infrequent basis. In connection with the Merger, the recorded fair value of our senior notes was increased by $19.3 million based on the traded value at Merger date. The price at which our senior notes trade is based on many factors such as the level of interest rates, the economic environment, the outlook for the oilfield services industry and the perceived credit risk.
Recent Accounting Pronouncements
We consider all newly issued but not yet adopted accounting pronouncements applicable to our operations and the preparation of our consolidated condensed financial statements. We do not believe that any issued accounting pronouncements not yet adopted by us will have a material impact on our consolidated condensed financial statements.
NOTE 2 — BUSINESS COMBINATIONS
Merger with Archer
Pursuant to the Merger, each outstanding share of common stock of Allis-Chalmers was converted into the right to receive either $4.25 cash or 1.15 fully paid and nonassessable Archer common shares. The fair value of total consideration was approximately $600.9 million with approximately 95% of Allis-Chalmers stockholders electing to receive 97.1 million Archer common shares in the Merger and the remainder receiving an aggregate of approximately $18 million in cash. The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the assets at Merger (in thousands):
         
Current assets
  $ 237,873  
Property and equipment
    682,406  
Intangible assets, including goodwill
    373,227  
Other long-term assets
    4,949  
 
     
Total assets acquired
    1,298,455  
Current liabilities
    148,360  
Long-term liabilities
    549,210  
 
     
Merger net assets
  $ 600,885  
 
     
Our historical property and equipment values were decreased by $47.1 million, our Senior Notes were increased by $19.3 million, other assets were decreased by $13.8 million and other long-term liabilities were increased by $8.6 million. The fair value assigned to the debt was based on actively traded prices and changes in other assets and liabilities were based on third-party valuations or other market based approaches. Goodwill of $267.4 million was recognized for this acquisition and was calculated as the excess of the consideration transferred over the fair value of the net assets acquired. It includes the expected synergies and other benefits that we believe will result from the combined operations and intangible assets that do not qualify for separate recognition such as assembled workforce. Other intangible assets included approximately $91.2 million assigned to customer lists, $6.7 million to trade name, $5.6 million to patents and $2.3 million to backlogs (see note 4). Goodwill is not tax deductible. The amortizable intangibles have a weighted-average useful life of 8.9 years. The allocation of the purchase price has been based upon preliminary fair values. Estimates and assumptions are subject to change upon management’s review of the final valuation.

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 2 — BUSINESS COMBINATIONS (Continued)
Acquisition of AWC
On July 12, 2010, we acquired American Well Control, Inc., or AWC, for a total consideration of approximately $19.2 million, which included approximately $17.2 million in cash and 1.0 million shares of our common stock. AWC is a leading manufacturer of premium high-pressure valves used in hydraulic fracturing in the unconventional gas shale plays. The following table summarizes the allocation of the purchase price to the estimated fair value of the assets acquired at the date of acquisition (in thousands):
         
Current assets
  $ 7,585  
Property and equipment
    2,756  
Intangible assets, including goodwill
    11,749  
Other long-term assets
    2  
 
     
Total assets acquired
    22,092  
Current liabilities
    1,527  
Long-term liabilities
    1,401  
 
     
Net assets acquired
  $ 19,164  
 
     
AWC’s historical property and equipment values were increased by approximately $27,000 based on third-party valuations. Goodwill of $5.7 million was recognized for this acquisition and was calculated as the excess of the consideration transferred over the fair value of the net assets acquired. It includes the expected synergies and other benefits that we believe will result from the combined operations and intangible assets that do not qualify for separate recognition such as assembled workforce. Other intangible assets included approximately $5.6 million assigned to customer lists, $400,000 to trade name and $55,000 to non-competes. Goodwill is not tax deductible. The amortizable intangibles have a weighted-average useful life of 9.9 years.
NOTE 3 — STOCK-BASED COMPENSATION
Under the Merger Agreement, holders of our outstanding stock options, whether or not then exercisable or vested, elected to receive, at the effective time of the Merger, either cash or fully exercisable and vested stock options to purchase Archer common shares. In addition, all restrictions on time-lapse and performance-based restricted stock awards were deemed to have lapsed and each restricted share was deemed to be an unrestricted share of our common stock. Our Incentive Stock Plans were terminated in connection with the Merger. Our net loss for the two months ended February 28, 2011 includes approximately $6.1 million of compensation costs related to share-based payments with approximately $5.4 million of this amount relating to the acceleration of stock based compensation expense associated with the Merger.
We recognize all share-based payments to employees and directors in the financial statements based on their grant-date fair values. We utilize the Black-Scholes model to determine fair value, which incorporates assumptions to value stock-based awards. The dividend yield on our common stock is assumed to be zero as we have historically not paid dividends and have no current plans to do so in the future. The expected volatility is based on historical volatility of our common stock. The risk-free interest rate is the related United States Treasury yield curve for periods within the expected term of the option at the time of grant. We estimate forfeiture rates based on our historical experience.
The following summarizes the Black-Scholes model assumptions used for the options granted in the three and six months ended June 30, 2010 (no options were granted during the three and six months ended June 30, 2011):
                 
    Three Months     Six Months  
    Ended     Ended  
    June 30,     June 30,  
    2010     2010  
Expected dividend yield
           
Expected price volatility
    88.54 %     89.81 %
Risk free interest rate
    1.51 %     1.41 %
Expected life of options
  5 years     5 years  
Weighted average fair value of options granted at market value
  $ 2.70     $ 2.63  

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 3 — STOCK-BASED COMPENSATION (Continued)
A summary of our stock option activity and related information is as follows:
                 
            Weighted  
    Shares     Average  
    Under     Exercise  
    Option     Price  
Balance at December 31, 2010
    1,751,018     $ 4.74  
Granted
           
Converted at Merger
    (1,750,018 )     4.74  
Exercised
    (1,000 )     1.23  
 
             
Outstanding at June 30, 2011
           
 
             
Restricted stock awards, or RSAs, activity during the three months ended June 30, 2011 is as follows:
                 
            Weighted  
            Average Grant-  
            Date Fair Value  
    Number of Shares     Per Share  
Nonvested at December 31, 2010
    1,702,067     $ 6.09  
Granted
           
Vested
    (1,702,067 )     6.09  
Forfeited
           
 
             
Nonvested at June 30, 2011
        $  
 
             
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
Goodwill and other intangible assets with infinite lives are not amortized, but tested for impairment annually or more frequently if circumstances indicate that impairment may exist. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized. Goodwill was $267.4 million and $46.3 million at June 30, 2011 and December 31, 2010, respectively.
Definite-lived intangible assets that continue to be amortized relate to our purchase of customer-related and marketing-related intangibles patents and backlogs. These intangibles have useful lives ranging from four months to twenty years. Amortization of intangible assets for the three and four months ended June, 2011 and two months ended February 28, 2011 was $4.4 million, $5.8 million and $811,000, respectively, compared to $1.2 million and $2.3 million for the three and six months ended June 30, 2010, respectively. In connection with the Merger, a $5.1 million value was assigned to the Allis-Chalmers tradename. Following the Merger, Seawell and its subsidiaries, including us, have begun operating under the name Archer. As a result, it was determined that there was no material remaining value associated with the Allis-Chalmers tradename and the results for the four months ended June 30, 2011 includes an intangible asset impairment charge of $5.1 million. At June 30, 2011, intangible assets totaled $94.9 million, net of $5.8 million of accumulated amortization. Future amortization of intangible assets at June 30, 2011 is approximately $5.9 million for the remainder of 2011 and an average of approximately $11.6 million during the years ended 2012 through 2015.

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5 — INVENTORIES
Inventories consisted of the following (in thousands):
                 
    Successor     Predecessor  
    June 30,     December 31,  
    2011     2010  
Manufactured
               
Finished goods
  $ 5,319     $ 4,238  
Work in process
    3,849       2,990  
Raw materials
    5,138       3,600  
 
           
Total manufactured
    14,306       10,828  
Rig parts and related inventory
    13,582       11,565  
Shop supplies and related inventory
    10,486       9,620  
Chemicals and drilling fluids
    5,621       4,814  
Rental supplies
    1,593       1,761  
Hammers
    2,604       2,380  
Coiled tubing and related inventory
    1,725       1,046  
Drive pipe
    109       126  
 
           
Total inventories
  $ 50,026     $ 42,140  
 
           
NOTE 6- INCOME TAXES
In accordance with generally accepted accounting principles, we estimate the full-year effective tax rate from continuing operations and apply this rate to our year-to-date income from continuing operations. In addition, we separately calculate the tax impact of unusual items, if any. The consolidated effective tax rate for the two months ended February 28, 2011, three and four months ended June 30, 2011 was (9.9)%, 63.6% and 246.0%, respectively, compared to 23.4% and 25.8% for the three and six months ended June 30, 2010. The fluctuations in the tax rates are principally the result of valuation allowances on losses generated in the United States and variances in withholding taxes from foreign operations as a percentage of pretax income (loss).
Income (loss) before income taxes which was subject to United States and non-United States income taxes was as follow (in thousands):
                                         
    Successor     Predecessor  
    Three Months     Four Months     Two Months     Three Months     Six Months  
    Ended     Ended     Ended     Ended     Ended  
    June 30,     June 30,     February 28,     June 30,     June 30,  
    2011     2011     2011     2010     2010  
           
United States
  $ 4,422     $ 1,118     $ (17,544 )   $ (13,414 )   $ (31,393 )
Outside United States
    222       726       (17 )     6,395       11,306  
 
                             
 
  $ 4,644     $ 1,844     $ (17,561 )   $ ( 7,019 )   $ ( 20,087 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 6- INCOME TAXES (Continued)
The income tax provision consists of the following (in thousands):
                                         
    Successor     Predecessor  
    Three Months     Four Months     Two Months     Three Months     Six Months  
    Ended     Ended     Ended     Ended     Ended  
    June 30,     June 30,     February 28,     June 30,     June 30,  
    2011     2011     2011     2010     2010  
           
Income tax expense (benefit):
                                       
United States
  $ 183     $ 240     $ 233     $ (4,408 )   $ (10,513 )
Outside United States
    2,772       4,296       1,503       2,768       5,336  
 
                             
 
  $ 2,955     $ 4,536     $ 1,736     $ (1,640 )   $ (5,177 )
 
                             
The following table reconciles the statutory tax rates to our actual tax rate:
                                         
    Successor     Predecessor  
    Three Months     Four Months     Two Months     Three Months     Six Months  
    Ended     Ended     Ended     Ended     Ended  
    June 30,     June 30,     February 28,     June 30,     June 30,  
    2011     2011     2011     2010     2010  
           
United States Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %     35.0 %     35.0 %
United States State income taxes, net of federal benefit
    1.2       1.2       0.7       2.2       2.2  
Non-United States income taxed at different rates
    10.9       42.7       0.3       12.5       7.8  
Valuation allowance, permanent differences and other
    16.5       167.1       (45.9 )     (26.3 )     (19.2 )
 
                             
Effective tax rate
    63.6 %     246.0 %     (9.9 )%     23.4 %     25.8 %
 
                             
NOTE 7- DEBT
Our long-term debt consisted of the following (in thousands):
                 
    Successor     Predecessor  
    June 30,     December 31,  
    2011     2010  
Senior notes
  $ 446,647     $ 430,238  
Revolving line of credit
          36,500  
Bank term loans
    14,934       25,723  
Insurance premium financing notes
          979  
 
           
Total debt
    461,581       493,440  
Less: current maturities of long-term debt
    6,892       15,215  
 
           
Long-term debt
  $ 454,689     $ 478,225  
 
           
Senior notes, bank loans and line of credit agreements
In January 2006 and August 2006, we closed on private offerings, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $160.0 and $95.0 million aggregate principal amount of our senior notes, respectively. The senior notes are due January 15, 2014 and bear interest at 9.0%. The proceeds were used to fund the acquisitions of Specialty Rental Tools, Inc. and DLS, to repay existing debt and for general corporate purposes. In June 2009, we closed on a tender offer in which we purchased $30.6 million aggregate principal of our 9.0% senior notes for a total consideration of $650 per $1,000 principal amount. In connection with the Merger and based on actively traded prices of our senior notes, we increased the fair value of the 9.0% senior notes to $1,022 per $1,000 principal amount. In May 2011, pursuant to the terms of change of

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 7 — DEBT (Continued)
control provisions in the indentures governing the senior notes and as a result of the Merger, holders had the right to require us to purchase, all or a portion of such holders’ Notes. We purchased $1.8 million aggregate principal of our 9.0% senior notes for a total consideration of $1,010 per $1,000 principal amount.
In January 2007, we closed on a private offering, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $250.0 million principal amount of 8.5% senior notes due 2017. The proceeds of the senior notes offering, together with a portion of the proceeds of our concurrent common stock offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility which we incurred to finance our acquisition of substantially all the assets of Oil & Gas Rental Services, Inc. On June 29, 2009, we closed on a tender offer in which we purchased $44.2 million aggregate principal of our 8.5% senior notes for a total consideration of $600 per $1,000 principal amount. In connection with the Merger and based on actively traded prices of our senior notes, we increased the fair value of the 8.5% senior notes to $1,070 per $1,000 principal amount. In May 2011, pursuant to the terms of change of control provisions in the indentures governing the senior notes and as a result of the Merger, we purchased $92,000 aggregate principal of our 8.5% senior notes for a total consideration of $1,010 per $1,000 principal amount.
We had a $90.0 million revolving line of credit with a final maturity date of April 26, 2012 pursuant to a revolving credit agreement that contained customary events of default and financial covenants and limited our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. Effective December 31, 2009, we amended the leverage and interest coverage ratio covenants of the revolving credit agreement. This amendment relaxed the required financial ratios for the quarter ended December 31, 2009 and for each of the quarters in 2010. Our obligations under the amended and restated credit agreement are secured by substantially all of our assets located in the United States. We were in compliance with all debt covenants as of December 31, 2010. As of December 31, 2010, we had $36.5 million of borrowings outstanding and $4.1 million in outstanding letters of credit under our revolving credit facility. The weighted-average interest rate was 7.8% at December 31, 2010. The revolving line of credit was repaid and terminated in connection with the Merger.
As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from 2 to 5 years. The weighted average interest rate on these loans was 2.0% as of December 31, 2010. The outstanding amount due under these bank loans as of June 30, 2011 and December 31, 2010 was $0 and $350,000, respectively.
On February 15, 2008, through our DLS subsidiary in Argentina, we entered into a $25.0 million import finance facility with a bank. Borrowings under this facility were used to fund a portion of the purchase price of the new drilling and service rigs ordered for our Drilling Services segment. The loan is repayable over four years in equal semi-annual installments beginning one year after each disbursement with the final principal payment due not later than March 15, 2013. The import finance facility is unsecured and contains customary events of default and financial covenants and limits DLS’ ability to incur additional indebtedness, make capital expenditures, create liens and sell assets. We were in compliance with all debt covenants as of June 30, 2011 and December 31, 2010. The bank loan rates are based on LIBOR plus a margin. The weighted average interest rate was 4.2% at June 30, 2011 and December 31, 2010. The outstanding amount under the import finance facility as of June 30, 2011 and December 31, 2010 was $11.5 million and $14.4 million, respectively.
As part of our acquisition of BCH, we assumed a $23.6 million term loan credit facility with a bank. The credit agreement was dated June 2007 and contained customary events of default and financial covenants which were based on BCH’s stand-alone financial statements. The facility was repayable in quarterly principal installments plus interest and was to mature in August 2012. Obligations under the facility were secured by substantially all of the BCH assets. The bank waived certain financial ratio covenants for the December 31, 2010 measurement period and we classified the entire outstanding balance of the loan in the current portion of long-term debt. The interest rates were based on LIBOR plus a margin and the interest rate was 3.5% at December 31, 2010. The outstanding amount of the loan as of December 31, 2010 was $7.0 million. The term loan credit facility was paid in full in connection with the Merger.
On February 9, 2010, through our DLS subsidiary, we entered into a $4.0 million term loan facility. The loan is repayable in semi-annual installments beginning April 14, 2011 and bears interest at 8.5% per annum. The final maturity date is April 14, 2014 and the loan is unsecured. The outstanding amount under the term loan facility as of June 30, 2011 and December 31, 2010 was $3.4 million and $4.0 million, respectively

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 7 — DEBT (Continued)
Notes payable
In 2010, we obtained insurance premium financings in the aggregate amount of $2.9 million with a fixed weighted-average interest rate of 4.8%. Under terms of the agreements, amounts outstanding are paid over eight and 11 month repayment schedules. The outstanding balance of these notes was approximately $0 and $1.0 million at June 30, 2011 and December 31, 2010, respectively.
NOTE 8 — STOCKHOLDERS’ EQUITY
During the two months ended February 28, 2011, we had option exercises and certain vesting in restricted stock grants which resulted in the issuance of 933,083 shares of our common stock. We retained 282,356 shares from employees in connection with the settlement of tax obligations arising from the vesting of restricted stock grants. We recognized approximately $6.1 million of compensation expense related to share-based payments during the two months ended February 28, 2011 that was recorded as capital in excess of par value (see Note 3).
Pursuant to the Merger, each share of our convertible preferred stock was converted to common stock and each outstanding share of common stock of Allis-Chalmers was converted into the right to receive either $4.25 cash or 1.15 fully paid and nonassessable Archer common shares. Holders of our outstanding stock options, whether or not then exercisable or vested, elected to receive, at the effective time of the merger, either cash or fully exercisable and vested stock options to purchase Archer common shares. In addition, all restrictions on time-lapse and performance-based restricted stock awards were deemed to have lapsed and each restricted share was deemed to be an unrestricted share of our common stock. Subsequent to the Merger, we have 1,000 shares authorized all of which have been issued to Archer Limited at a par value of $0.01 per share.
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Set forth on the following pages are the condensed consolidating financial statements of (i) Allis-Chalmers Energy Inc., (ii) its subsidiaries that are guarantors of the senior notes and revolving credit facility and (iii) the subsidiaries that are not guarantors of the senior notes and revolving credit facility (in thousands):

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2011 (Successor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Assets
                                       
Cash and cash equivalents
  $     $ 9,286     $ 4,130     $     $ 13,416  
Restricted cash
          3,784                   3,784  
Trade receivables, net
          102,949       103,193       (31,762 )     174,380  
Inventories
          26,981       23,045             50,026  
Intercompany receivables
          87,640             (87,640 )      
Note receivable from affiliate
    21,085                   (21,085 )      
Prepaid expenses and other
    12       5,638       14,188             19,838  
 
                             
Total current assets
    21,097       236,278       144,556       (140,487 )     261,444  
Property and equipment, net
          406,223       269,358             675,581  
Goodwill
          179,697       87,731             267,428  
Other intangible assets, net
          57,540       37,350             94,890  
Note receivable from affiliates
    1,500                   (1,500 )      
Investments in affiliates
    1,170,166                   (1,170,166 )      
Other assets
          4,869       382             5,251  
 
                             
Total assets
  $ 1,192,763     $ 884,607     $ 539,377     $ (1,312,153 )   $ 1,304,594  
 
                             
 
                                       
Liabilities and Stockholders’ Equity
                                       
Current maturities of long-term debt
  $     $     $ 6,892     $     $ 6,892  
Trade accounts payable
          21,814       70,708       (31,762 )     60,760  
Accrued salaries, benefits and payroll taxes
          5,465       30,060             35,525  
Accrued interest
    15,020             179             15,199  
Accrued expenses
    570       16,882       24,460             41,912  
Intercompany payables
    57,930             29,710       (87,640 )      
Note payable to affiliate
                21,085       (21,085 )      
 
                             
Total current liabilities
    73,520       44,161       183,094       (140,487 )     160,288  
Long-term debt, net of current maturities
    446,647             8,042             454,689  
Note payable to affiliate
                1,500       (1,500 )      
Payable to parent
    74,403                         74,403  
Other long-term liabilities
                17,021             17,021  
 
                             
Total liabilities
    594,570       44,161       209,657       (141,987 )     706,401  
 
                                       
Commitments and Contingencies
                                       
 
                                       
Stockholders’ Equity
                                       
Common stock
          3,527       42,963       (46,490 )      
Capital in excess of par value
    600,885       823,395       290,090       (1,113,485 )     600,885  
Retained earnings (deficit)
    (2,692 )     13,524       (3,333 )     (10,191 )     (2,692 )
 
                             
Total stockholders’ equity
    598,193       840,446       329,720       (1,170,166 )     598,193  
 
                             
Total liabilities and stockholders’ equity
  $ 1,192,763     $ 884,607     $ 539,377     $ (1,312,153 )   $ 1,304,594  
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2011 (Successor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Revenues
  $     $ 96,934     $ 123,446     $ (242 )   $ 220,138  
 
                                       
Operating costs and expenses:
                                       
Direct costs
          57,986       104,884       (242 )     162,628  
Depreciation `
          15,843       7,187             23,030  
Selling, general and administrative
    65       7,995       7,326             15,386  
Amortization
          1,592       2,765             4,357  
 
                             
Total operating costs and expenses
    65       83,416       122,162       (242 )     205,401  
 
                             
Income (loss) from operations
    (65 )     13,518       1,284             14,737  
 
                                       
Other income (expense):
                                       
Equity earnings in affiliates, net of tax
    11,067                   (11,067 )      
Interest, net
    (9,326 )     (1 )     (732 )           (10,059 )
Other
    13       107       (154 )           (34 )
 
                             
Total other expense
    1,754       106       (886 )     (11,067 )     (10,093 )
 
                             
 
                                       
Net income (loss) before income taxes
    1,689       13,624       398       (11,067 )     4,644  
 
                                       
Provision for income taxes
          (183 )     (2,772 )           (2,955 )
 
                             
 
                                       
Net income (loss)
  $ 1,689     $ 13,441     $ (2,374 )   $ (11,067 )   $ 1,689  
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Four Months Ended June 30, 2011 (Successor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Revenues
  $     $ 130,882     $ 160,271     $ (289 )   $ 290,864  
 
                                       
Operating costs and expenses:
                                       
Direct costs
          78,879       135,174       (289 )     213,764  
Depreciation
          20,797       9,549             30,346  
Selling, general and administrative
    100       10,997       9,080             20,177  
Impairment of intangible assets
          4,400       700             5,100  
Amortization
          2,123       3,687             5,810  
 
                             
Total operating costs and expenses
    100       117,196       158,190       (289 )     275,197  
 
                             
Income (loss) from operations
    (100 )     13,686       2,081             15,667  
 
                                       
Other income (expense):
                                       
Equity earnings in affiliates, net of tax
    10,191                   (10,191 )      
Interest, net
    (12,801 )     (2 )     (999 )           (13,802 )
Other
    18       80       (119 )           (21 )
 
                             
Total other expense
    (2,592 )     78       (1,118 )     (10,191 )     (13,823 )
 
                             
 
                                       
Net income (loss) before income taxes
    (2,692 )     13,764       963       (10,191 )     1,844  
 
                                       
Provision for income taxes
          (240 )     (4,296 )           (4,536 )
 
                             
 
                                       
Net income (loss) attributed to common stockholders
  $ (2,692 )   $ 13,524     $ (3,333 )   $ (10,191 )   $ (2,692 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Two Months Ended February 28, 2011 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Revenues
  $     $ 59,044     $ 67,923     $ (82 )   $ 126,885  
 
                                       
Operating costs and expenses:
                                       
Direct costs
          37,335       59,877       (82 )     97,130  
Depreciation
          10,174       4,852             15,026  
Selling, general and administrative
    5,998       15,034       2,720             23,752  
Amortization
    8       678       125             811  
 
                             
Total operating costs and expenses
    6,006       63,221       67,574       (82 )     136,719  
 
                             
Income (loss) from operations
    (6,006 )     (4,177 )     349             (9,834 )
 
                                       
Other income (expense):
                                       
Equity earnings in affiliates, net of tax
    (6,057 )                 6,057        
Interest, net
    (7,253 )     (8 )     (588 )           (7,849 )
Other
    19       (232 )     335             122  
 
                             
Total other expense
    (13,291 )     (240 )     (253 )     6,057       (7,727 )
 
                             
 
                                       
Net income (loss) before income taxes
    (19,297 )     (4,417 )     96       6,057       (17,561 )
 
                                       
Provision for income taxes
          (233 )     (1,503 )           (1,736 )
 
                             
 
                                       
Net loss
    (19,297 )     (4,650 )     (1,407 )     6,057       (19,297 )
 
                                       
Preferred stock dividend
    (375 )                       (375 )
 
                             
 
                                       
Net loss attributed to common stockholders
  $ (19,672 )   $ (4,650 )   $ (1,407 )   $ 6,057     $ (19,672 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Four Months Ended June 30, 2011 (Successor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Cash Flows from Operating Activities:
                                       
Net income (loss)
  $ (2,692 )   $ 13,524     $ (3,333 )   $ (10,191 )   $ (2,692 )
Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities:
                                       
Depreciation and amortization
          22,920       13,236             36,156  
Debt premium amortization
    (1,050 )                       (1,050 )
Equity earnings in affiliates
    (10,191 )                 10,191        
Impairment of intangible assets
          4,400       700             5,100  
Deferred income taxes
          1       (940 )           (939 )
Loss on sale of equipment
          94       77             171  
Changes in operating assets and liabilities, net of acquisitions:
                                       
Increase in trade receivables
          (1,342 )     (13,566 )           (14,908 )
Increase in inventories
          (3,481 )     (2,595 )           (6,076 )
Increase in prepaid expenses and other current assets
    (1 )     (2,655 )     (7,498 )           (10,154 )
Decrease (increase) in other assets
          (322 )     66             (256 )
(Decrease) increase in trade accounts payable
          (5,455 )     7,219             1,764  
(Decrease) increase in accrued interest
    3,741             (173 )           3,568  
(Decrease) increase in accrued expenses
    (345 )     (485 )     3,773             2,943  
(Decrease) increase in accrued salaries, benefits and payroll taxes
          (3,501 )     7,915             4,414  
Decrease in other long- term liabilities
                (60 )           (60 )
 
                             
Net cash (used) provided by operating activities
    (10,538 )     23,698       4,821             17,981  
 
                             
 
                                       
Cash Flows from Investing Activities:
                                       
Notes receivable from affiliates
    (2,312 )                 2,312        
Decrease in restricted cash
          357                   357  
Deposits on asset commitments
                (46 )           (46 )
Proceeds from sale of property and equipment
          1,827       53             1,880  
Purchases of property and equipment
          (17,479 )     (8,093 )           (25,572 )
 
                             
Net cash used in investing activities
    (2,312 )     (15,295 )     (8,086 )     2,312       (23,381 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Four Months Ended June 30, 2011 (Successor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Cash Flows from Financing Activities:
                                       
Accounts receivable from affiliates
          (15,631 )           15,631        
Accounts payable to affiliates
    11,782             3,849       (15,631 )      
Note payable to affiliate
                2,312       (2,312 )      
Payments on long-term debt
    (1,885 )     (350 )     (3,537 )           (5,772 )
Proceeds from Parent
    2,953                         2,953  
 
                             
Net cash (used) provided by financing activities
    12,850       (15,981 )     2,624       (2,312 )     (2,819 )
 
                             
 
                                       
Net change in cash and cash equivalents
          (7,578 )     (641 )           (8,219 )
Cash and cash equivalents at beginning of year
          16,864       4,771             21,635  
 
                             
Cash and cash equivalents at end of period
  $     $ 9,286     $ 4,130     $     $ 13,416  
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Two Months Ended February 28, 2011 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Cash Flows from Operating Activities:
                                       
Net loss
  $ (19,297 )   $ (4,650 )   $ (1,407 )   $ 6,057     $ (19,297 )
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
                                       
Depreciation and amortization
    8       10,852       4,977             15,837  
Amortization of deferred issuance costs
    366                         366  
Stock based compensation
    6,084                         6,084  
Equity earnings in affiliates
    6,057                   (6,057 )      
Allowance for bad debts
          195                   195  
Deferred income taxes
          34       106             140  
Loss on sale of equipment
          352       64             416  
Changes in operating assets and liabilities, net of acquisitions:
                                       
Increase in trade receivables
          (3,714 )     (12,230 )           (15,944 )
Increase in inventories
          (1,434 )     (376 )           (1,810 )
Decrease (increase) in prepaid expenses and other current assets
    2,057       235       (1,742 )           550  
Decrease in other assets
          432       242             674  
Increase in trade accounts payable
          8,417       4,537             12,954  
(Decrease) increase in accrued interest
    (4,031 )           138             (3,893 )
(Decrease) increase in accrued expenses
    (15 )     (1,137 )     9,707             8,555  
Decrease in accrued salaries, benefits and payroll taxes
          (17 )     (1,662 )           (1,679 )
Decrease in other long- term liabilities
                (141 )           (141 )
 
                             
Net cash (used) provided by operating activities
    (8,771 )     9,565       2,213             3,007  
 
                             
 
                                       
Cash Flows from Investing Activities:
                                       
Notes receivable from affiliates
    (114 )                 114        
Increase in restricted cash
          (4,141 )                 (4,141 )
Purchases of investment interests
          (1,177 )                 (1,177 )
Deposits on asset commitments
                82             82  
Proceeds from sale of property and equipment
          924       85             1,009  
Purchase of property and equipment
          (16,931 )     (5,827 )           (22,758 )
 
                             
Net cash used in investing activities
    (114 )     (21,325 )     (5,660 )     114       (26,985 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Two Months Ended February 28, 2011 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Cash Flows from Financing Activities:
                                       
Accounts receivable from affiliates
          12,811             (12,811 )      
Accounts payable to affiliates
    (23,607 )           10,796       12,811        
Note payable to affiliate
                114       (114 )      
Payments on long-term debt
          (567 )     (7,252 )           (7,819 )
Net borrowings (repayments) on line of credit
    (36,500 )                       (36,500 )
Proceeds from Parent
    71,450                         71,450  
Payment of preferred stock dividend
    (637 )                       (637 )
Exercise of options and restricted stock awards, net of tax
    (1,821 )                       (1,821 )
 
                             
Net cash provided by financing activities
    8,885       12,244       3,658       (114 )     24,673  
 
                             
 
                                       
Net change in cash and cash equivalents
          484       211             695  
Cash and cash equivalents at beginning of year
          16,380       4,560             20,940  
 
                             
Cash and cash equivalents at end of period
  $     $ 16,864     $ 4,771     $     $ 21,635  
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2010 (Predecessor)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Assets                                        
Cash and cash equivalents
  $     $ 16,380     $ 4,560     $     $ 20,940  
Trade receivables, net
          79,100       77,397       (11,537 )     144,960  
Inventories
          22,066       20,074             42,140  
Intercompany receivables
          84,766             (84,766 )      
Note receivable from affiliate
    18,359                   (18,359 )      
Prepaid expenses and other
    2,068       3,280       3,925             9,273  
 
                             
Total current assets
    20,427       205,592       105,956       (114,662 )     217,313  
Property and equipment, net
          461,187       262,047             723,234  
Goodwill
          28,944       17,389             46,333  
Other intangible assets, net
    414       27,278       6,207             33,899  
Debt issuance costs, net
    7,405                         7,405  
Note receivable from affiliates
    1,800                   (1,800 )      
Investments in affiliates
    934,274                   (934,274 )      
Other assets
          7,390       2,695             10,085  
 
                             
 
                                       
Total assets
  $ 964,320     $ 730,391     $ 394,294     $ (1,050,736 )   $ 1,038,269  
 
                             
 
                                       
Liabilities and Stockholders’ Equity
                                       
Current maturities of long-term debt
  $     $ 979     $ 14,236     $     $ 15,215  
Trade accounts payable
          18,634       38,945       (11,537 )     46,042  
Accrued salaries, benefits and payroll taxes
          8,983       23,807             32,790  
Accrued interest
    15,310             214             15,524  
Accrued expenses
    1,192       18,504       10,980             30,676  
Intercompany payables
    69,756             15,010       (84,766 )      
Note payable to affiliate
                18,359       (18,359 )      
 
                             
Total current liabilities
    86,258       47,100       121,551       (114,662 )     140,247  
Long-term debt, net of current maturities
    466,738             11,487             478,225  
Note payable to affiliate
                1,800       (1,800 )      
Other long-term liabilities
                8,473             8,473  
 
                             
Total liabilities
    552,996       47,100       143,311       (116,462 )     626,945  
 
                                       
Commitments and contingencies
                                       
 
                                       
Stockholders’ Equity
                                       
Preferred Stock
    34,183                         34,183  
Common stock
    737       3,527       42,963       (46,490 )     737  
Capital in excess of par value
    429,924       589,676       137,439       (727,115 )     429,924  
Retained earnings (deficit)
    (53,520 )     90,088       70,581       (160,669 )     (53,520 )
 
                             
Total stockholders’ equity
    411,324       683,291       250,983       (934,274 )     411,324  
 
                             
 
                                       
Total liabilities and stock holders’ equity
  $ 964,320     $ 730,391     $ 394,294     $ (1,050,736 )   $ 1,038,269  
 
                             

23


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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2010 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Revenues
  $     $ 62,760     $ 96,337     $ (453 )   $ 158,644  
 
                                       
Operating costs and expenses
                                       
Direct costs
          42,300       78,876       (453 )     120,723  
Depreciation
          14,198       6,319             20,517  
Selling, general and administrative
    1,365       7,156       3,593             12,114  
Amortization
    11       959       186             1,156  
 
                             
Total operating costs and expenses
    1,376       64,613       88,974       (453 )     154,510  
 
                             
Income (loss) from operations
    (1,376 )     (1,853 )     7,363             4,134  
 
                                       
Other income (expense):
                                       
Equity earnings in affiliates, net of tax
    6,396                   (6,396 )      
Interest, net
    (10,415 )     141       (576 )           (10,850 )
Other
    16       (254 )     (65 )           (303 )
 
                             
Total other income (expense)
    (4,003 )     (113 )     (641 )     (6,396 )     (11,153 )
 
                             
 
                                       
Net income (loss) before income taxes
    (5,379 )     (1,966 )     6,722       (6,396 )     (7,019 )
 
                                       
Provision for income taxes
          4,408       (2,768 )           1,640  
 
                             
 
                                       
Net income (loss)
    (5,379 )     2,442       3,954       (6,396 )     (5,379 )
 
                                       
Preferred stock dividend
    (637 )                       (637 )
 
                             
 
                                       
Net income (loss) attributed to common stockholders
  $ (6,016 )   $ 2,442     $ 3,954     $ (6,396 )   $ (6,016 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2010 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Subsidiary     Consolidating     Consolidated  
    (Guarantor)     Guarantors     Non-Guarantors     Adjustments     Total  
Revenues
  $     $ 114,642     $ 185,700     $ (1,328 )   $ 299,014  
 
                                       
Operating costs and expenses
                                       
Direct costs
          77,376       152,390       (1,328 )     228,438  
Depreciation
          28,316       12,389             40,705  
Selling, general and administrative
    2,532       14,356       7,289             24,177  
Amortization
    23       1,916       373             2,312  
 
                             
Total operating costs and expenses
    2,555       121,964       172,441       (1,328 )     295,632  
 
                             
Income (loss) from operations
    (2,555 )     (7,322 )     13,259             3,382  
 
                                       
Other income (expense):
                                       
Equity earnings in affiliates, net of tax
    8,267                   (8,267 )      
Interest, net
    (20,652 )     214       (1,213 )           (21,651 )
Other
    30       (1,778 )     (70 )           (1,818 )
 
                             
Total other income (expense)
    (12,355 )     (1,564 )     (1,283 )     (8,267 )     (23,469 )
 
                             
 
                                       
Net income (loss) before income taxes
    (14,910 )     (8,886 )     11,976       (8,267 )     (20,087 )
 
                                       
Provision for income taxes
          10,512       (5,335 )           5,177  
 
                             
 
                                       
Net income (loss)
    (14,910 )     1,626       6,641       (8,267 )     (14,910 )
 
                                       
Preferred stock dividend
    (1,274 )                       (1,274 )
 
                             
 
                                       
Net income (loss) attributed to common stockholders
  $ (16,184 )   $ 1,626     $ 6,641     $ (8,267 )   $ (16,184 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 2010 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Other Subsidiaries     Consolidating     Consolidated  
    (Guarantor)     Guarantors     (Non-Guarantors)     Adjustments     Total  
Cash Flows from Operating Activities:
                                       
Net income (loss)
  $ (14,910 )   $ 1,626     $ 6,641     $ (8,267 )   $ (14,910 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                       
Depreciation and amortization
    23       30,232       12,762             43,017  
Amortization and write-off of debt issuance costs
    1,094       12                   1,106  
Stock based compensation
    3,001                         3,001  
Equity earnings in affiliates
    (8,267 )                 8,267        
Deferred taxes
    (10,954 )           133             (10,821 )
Loss (gain) on sale of equipment
          965       (158 )           807  
Loss on investment
          1,466                   1,466  
Equity in losses of unconsolidated affiliates
          260                   260  
Changes in operating assets and liabilities:
                                       
(Increase) in trade receivables
          (2,962 )     (22,883 )           (25,845 )
(Increase) in inventories
          (744 )     (1,648 )           (2,392 )
Decrease in prepaid expenses and other current assets
          2,778       6,060             8,838  
Decrease in other assets
          127       672             799  
Increase in trade accounts payable
          1,285       9,468             10,753  
(Decrease) increase in accrued interest
    76       (16 )     88             148  
(Decrease) increase in accrued expenses
    (58 )     2,243       1,616             3,801  
(Decrease) increase in accrued salaries, benefits and payroll taxes
          (195 )     2,140             1,945  
(Decrease) in other long- term liabilities
                (466 )           (466 )
 
                             
Net Cash Provided By (Used In) Operating Activities
    (29,995 )     37,077       14,425             21,507  
 
                             
 
                                       
Cash Flows from Investing Activities:
                                       
Notes receivable from affiliates
    3,293                   (3,293 )      
Deposits on asset commitments
          (10,000 )     (96 )           (10,096 )
Proceeds from sale of investments
          368                   368  
Proceeds from sale of property and equipment
          2,416       200             2,616  
Purchase of property and equipment
          (18,069 )     (12,920 )           (30,989 )
 
                             
Net Cash Provided By (Used In) Investing Activities
    3,293       (25,285 )     (12,816 )     (3,293 )     (38,101 )
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 2010 (Predecessor)
(unaudited)
                                         
    Allis-Chalmers     Subsidiary     Other Subsidiaries     Consolidating     Consolidated  
    (Guarantor)     Guarantors     (Non-Guarantors)     Adjustments     Total  
Cash Flows from Financing Activities:
                                       
Accounts receivable from affiliates
          (27,210 )     (955 )     28,165        
Accounts payable to affiliates
    28,165                   (28,165 )      
Note payable to affiliate
                (3,293 )     3,293        
Proceeds from long-term debt
                4,000             4,000  
Payments on long-term debt
          (3,116 )     (6,330 )           (9,446 )
Payment of preferred stock dividend
    (1,274 )                       (1,274 )
Debt issuance costs
    (189 )                       (189 )
 
                             
Net Cash Provided By (Used In) Financing Activities
    26,702       (30,326 )     (6,578 )     3,293       (6,909 )
 
                             
 
                                       
Net change in cash and cash equivalents
          (18,534 )     (4,969 )           (23,503 )
Cash and cash equivalents at beginning of period
          31,858       9,214             41,072  
 
                             
Cash and cash equivalents at end of period
  $     $ 13,324     $ 4,245     $     $ 17,569  
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 10 — SEGMENT INFORMATION
In conjunction with the Merger, we reviewed the presentation of our operating segments. Based on this review, we determined that our operational performance would be segmented and reviewed by the Drilling Services and Well Services segments. The split of our organization and aggregation of our business into two segments was based on differences in management structure and reporting, economic characteristics, customer base, asset class and contract structure. The Drilling Services segment includes our international and domestic drilling, directional drilling, underbalanced drilling, tubular services and rental services operations. The Well Services segment includes our production services and valve manufacturing operations. As a result, we realigned our financial reporting segments and now report the Drilling Services and Well Services operations as separate, distinct reporting segments. Our historical segment data previously reported for the three and six months ended June 30, 2010 and as of December 31, 2010 have been restated to conform to the new presentation.
All of our segments provide services to the energy industry. Indirect general and administrative expenses are allocated to each segment based on estimated use. The revenues, operating income (loss), depreciation and amortization, capital expenditures and assets of each of the reporting segments are reported below (in thousands):
                                         
    Successor     Predecessor  
    Three Months
Ended
    Four Months
Ended
    Two Months
Ended
    Three Months
Ended
    Six Months
Ended
 
    June 30,     June 30,     February 28,     June 30,     June 30,  
    2011     2011     2011     2010     2010  
Revenues:
                                       
Drilling Services
  $ 187,969     $ 247,277     $ 106,050     $ 146,913     $ 277,441  
Well Services
    32,169       43,587       20,835       11,731       21,573  
 
                             
Total revenues
  $ 220,138     $ 290,864     $ 126,885     $ 158,644     $ 299,014  
 
                             
 
                                       
Operating Income (Loss):
                                       
Drilling Services
  $ 8,084     $ 8,488     $ (9,943 )   $ 4,551     $ 4,307  
Well Services
    6,653       7,179       109       (417 )     (925 )
 
                             
Total income (loss) from operations
  $ 14,737     $ 15,667     $ (9,834 )   $ 4,134     $ 3,382  
 
                             
 
                                       
Depreciation and Amortization Expense:
                                       
Drilling Services
  $ 24,023     $ 31,777     $ 13,792     $ 19,393     $ 38,581  
Well Services
    3,364       4,379       2,045       2,280       4,436  
 
                             
Total depreciation and amortization expense
  $ 27,387     $ 36,156     $ 15,837     $ 21,673     $ 43,017  
 
                             
 
                                       
Capital Expenditures:
                                       
Drilling Services
  $ 17,012     $ 21,619     $ 19,939     $ 17,417     $ 27,187  
Well Services
    1,493       3,953       2,819       1,814       3,802  
 
                             
Total capital expenditures
  $ 18,505     $ 25,572     $ 22,758     $ 19,231     $ 30,989  
 
                             
 
                                       
Revenues:
                                       
United States
  $ 93,595     $ 126,735     $ 57,651     $ 59,795     $ 106,923  
Argentina
    106,100       137,318       57,458       76,640       149,025  
Brazil
    9,306       12,004       5,250       10,502       20,002  
Other international
    11,137       14,807       6,526       11,707       23,064  
 
                             
Total revenues
  $ 220,138     $ 290,864     $ 126,885     $ 158,644     $ 299,014  
 
                             

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 10 — SEGMENT INFORMATION (Continued)
                 
    Successor     Predecessor  
    June 30,     December 31,  
    2011     2010  
Goodwill:
               
Drilling Services
  $ 206,441     $ 40,639  
Well Services
    60,987       5,694  
 
           
Total goodwill
  $ 267,428     $ 46,333  
 
           
 
               
Assets:
               
Drilling Services
  $ 1,145,427     $ 940,481  
Well Services
    159,167       97,788  
 
           
Total assets
  $ 1,304,594     $ 1,038,269  
 
           
 
               
Long Lived Assets:
               
United States
  $ 623,198     $ 501,117  
Argentina
    293,721       167,137  
Brazil
    65,456       86,949  
Other international
    60,775       65,753  
 
           
Total long lived assets
  $ 1,043,150     $ 820,956  
 
           
NOTE 11 — LEGAL MATTERS
We are named from time to time in legal proceedings related to our activities prior to our bankruptcy in 1988. However, we believe that we were discharged from liability for all such claims in the bankruptcy and believe the likelihood of a material loss relating to any such legal proceeding is remote.
We are also involved in litigation or proceedings that have arisen in our ordinary business activities. We insure against these risks to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. If there is a claim, dispute or pending litigation in which we believe a negative outcome is probable and a loss by the Company can be reasonably estimated, we record a liability for the expected loss but at this time any such expected loss are immaterial to our financial condition and results of operations. In addition we have certain claims, disputes and pending litigation in which we do not believe a negative outcome is probable or for which the loss cannot be reasonably estimated.
Shortly following the announcement of the merger agreement with Seawell (now Archer) in August 2010, ten putative stockholder class-action petitions and complaints were filed against various combinations of us, members of our board of directors and the Archer parties to the merger agreement. Seven of the lawsuits were filed in Texas and three lawsuits were filed in Delaware. These lawsuits had challenged the proposed merger and generally allege, among other things, that our directors have breached their fiduciary duties owed to our public stockholders by approving the merger and failing to take steps to maximize our value to our public stockholders. The lawsuits generally sought, among other things, compensatory damages, attorneys’ and experts’ fees, declaratory and injunctive relief concerning the alleged breaches of fiduciary duties, and injunctive relief prohibiting the defendants from consummating the merger. In February 2011, the plaintiffs’ request for an injunction was denied by the Delaware court and the merger closed on February 23, 2011. In July 2011, plaintiffs and defendants jointly filed a stipulation and order for the dismissal of all claims as moot with the plaintiffs reserving only their application for attorney’s fees and expenses, which the Company and other defendants oppose. The proposed stipulation and order is pending before the court.
The case of Nexen Petroleum U.S.A., Inc. et al v. Allis-Chalmers Rental Services, LLC, Cameron, Hydril and Tri-City Pipe & Machine, Cause No. 88810 in the 15th Judicial District, State of Louisiana is presently scheduled for trial in September 2011. The case involves a blow out on a well operated by Nexen in Vermilion Parish. During drilling operations, Nexen lost control

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ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 11 — LEGAL MATTERS (Continued)
of the well, activated and closed ‘blow out preventers’ rented from Allis-Chalmers Rental Services, LLC (ACRS) thereby sealing the well. Nexen then re-opened the blow out preventers to attempt an unsuccessful dynamic kill. Nexen alleges that it then again attempted to reseal the well using the blow out preventers but was unable to obtain a complete seal. The well allegedly then flowed uncontrolled for up to a day causing damage to the rig and other equipment, and the hole. The blow out preventers were manufactured by Cameron and Hydril and some of the components of the Cameron equipment were machined by Tri-City. Nexen alleges that the blow out preventers failed due to the fault of the defendants. ACRS contends that Nexen actions in specifying the equipment for the well, designing the well, and operating the well including its acts and omissions for the well control event caused any failure of the equipment rented to Nexen by ACRS. There is conflicting evidence and expert testimony affecting several aspects of this case. It is impossible to predict the outcome with any degree of certainty. ACRS and its insurers are treating this case as highly defensible and continue to vigorously contest it.
NOTE 12 — TRANSACTIONS WITH PARENT
In connection with the Merger, we received approximately $71.4 million in funding from our Parent. The proceeds were mainly used to pay off debt, debt related interest and merger related expenses. The merger related expenses were primarily for legal and professional fees and change of control provisions. The three and four months ended June 30, 2011 includes Parent allocations of interest charges of approximately $969,000 and $1.3 million, respectively, and other administrative charges of approximately $1.8 million. Parent administrative charges are allocated proportional to the average EBIT and revenue contribution. The allocation method used is considered reasonable by management and our estimated costs that would have been incurred on a stand alone basis would not have been materially different. The amount due to Parent was approximately $74.4 million at June 30, 2011 and balance is classified as a long-term liability. The interest rate used for allocation of interest charges was 5.3% as of June 30, 2011.
NOTE 13 — SUBSEQUENT EVENT
In July 2011, we purchased $125.0 million aggregate principal of our 9.0% senior notes for a total consideration of $1,023 per $1,000 principal amount. In connection with this purchase we have drawn $130.0 million on our Parent’s $550 million Multicurrency Term and Revolving Facility. The $550 million facility has a final maturity date of November 11, 2015 and interest rate is based on LIBOR plus a margin.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such differences include, but are not limited to, the general condition of the oil and natural gas drilling industry, demand for our oil and natural gas service and rental products, and competition. For more information on forward-looking statements please refer to the section entitled “Forward-Looking Statements” on page 39.
Overview of Our Business
We are a multi-faceted oilfield service company that provides services and equipment to oil and natural gas exploration and production companies, throughout the United States including Texas, Louisiana, Pennsylvania, Arkansas, West Virginia, Oklahoma, Colorado, offshore in the Gulf of Mexico and internationally primarily in Argentina, Brazil, Bolivia and Mexico. We operate in two sectors of the oil and natural gas service industry: Well Services and Drilling Services.
We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service and rates per day for equipment and tools that we rent to our customers. The price we charge for our services depends upon several factors, including the level of oil and natural gas drilling activity and the competitive environment in the particular geographic regions in which we operate. Contracts are awarded based on price, quality of service and equipment and the general reputation and experience of our personnel. The demand for drilling services has historically been volatile and is affected by the capital expenditures of oil and natural gas exploration and development companies, which can fluctuate based upon the prices of oil and natural gas, or the expectation for the prices of oil and natural gas.
Our operating costs do not fluctuate in direct proportion to changes in revenues. Our operating expenses consist principally of our labor costs and benefits, equipment rentals, maintenance and repairs of our equipment, depreciation, insurance and fuel. Because many of our costs are fixed, our operating income as a percentage of revenues is generally affected by our level of revenues.
Merger with Archer
On February 23, 2011, we merged with and into Wellco Sub Company, a wholly owned subsidiary of Archer, and each share of our common stock was converted into the right to receive either 1.15 Archer common shares or $4.25 in cash. In connection with the Merger, Wellco Sub Company changed its name to Allis-Chalmers Energy Inc.
We recorded approximately $14.7 million, $1.6 million and $2.5 million of costs related to the merger during the two months ended February 28, 2011 and the three and four months ended June 30, 2011, respectively, which are included in selling, general and administrative expense on our Consolidated Condensed Statements of Operations. Approval of the merger resulted in certain of our contractual obligations being triggered or accelerated under the “change of control” provisions of such contractual arrangements. Examples of such arrangements include stock-based compensation awards, severance and retirement plan agreements applicable to executive officers, directors and certain employees and certain other debt obligations, including our senior notes.

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Results of Operations
In July 2010, we acquired all of the outstanding stock of American Well Control, Inc., or AWC, which is reported as part of our Well Services segment. We consolidated the results of this transaction from the date it was effective.
In connection with the Merger with Archer, our assets and liabilities have been adjusted to their fair values based on the purchase price resulting in changes to depreciation, amortization and interest in the successor period.
The foregoing business combinations affect the comparability from period to period of our historical results, and our historical results may not be indicative of our future results.
Comparison of Three Months Ended June 30, 2011 and 2010
Our revenues for the three months ended June 30, 2011 were $220.1 million, an increase of 38.8% compared to $158.6 million for the three months ended June 30, 2010. The increase in revenues is due to the increase in revenues in both of our operating segments. Our Drilling Services segment revenues increased 27.9% to $188.0 million for the three months ended June 30, 2011 compared to $146.9 million for the three months ended June 30, 2010 due to increased utilization and rig rates in Argentina and Bolivia and increased utilization of our equipment and improved pricing domestically. Revenues for our Well Services segment increased 174.2% to $32.2 million for the three months ended June 30, 2011 compared to $11.7 million for the three months ended June 30, 2010 due to $9.7 million of revenues from AWC in the current period, along with an increased utilization of our equipment and improved pricing.
Our direct costs for the three months ended June 30, 2011 increased 34.7% to $162.6 million, or 73.9% of revenues, compared to $120.7 million, or 76.1%, of revenues for the three months ended June 30, 2010. Our direct costs in all of our segments increased in absolute dollars in the three months ended June 30, 2011 compared to the three months ended June 30, 2010. Our Drilling Services segment revenues for the three months ended June 30, 2011 increased 27.9% from revenues for the three months ended June 30, 2010 and direct costs increased 27.8% over that same period. Our Well Services segment revenues for the three months ended June 30, 2011 increased 174.2% from revenues for the three months ended June 30, 2010, while direct costs increased 122.6% over that same period. The improvement in gross margin is due to improved utilization of equipment and pricing which was slightly offset by the impact of the acquisition of AWC. AWC provided $9.7 million of revenues during the three months ended June 30, 2011 and it also increased direct costs by $6.0 million for the same period for an effective gross margin as a percentage of revenues of 38.3%. AWC’s gross margin as a percentage of revenues is less than our overall Well Services gross margin percentage as AWC’s manufacturing operation has a higher labor component. Gross margin as a percentage of revenues for our Well Services segment for the three months ended June 30, 2011 was 39.5% compared to 25.5% for the three months ended June 30, 2010.
Depreciation expense increased 12.2% to $23.0 million for the three months ended June 30, 2011 from $20.5 million for the three months ended June 30, 2010. The primary increase in depreciation expense is due to our capital expenditure programs for our Drilling Services segment. Depreciation expense as a percentage of revenues decreased to 10.5% for the second quarter of 2011, compared to 12.9% for the second quarter of 2010, due to the noted increases in revenues.
Selling, general and administrative expense was $15.4 million for the three months ended June 30, 2011 compared to $12.1 million for the three months ended June 30, 2010. Selling, general and administrative expense increased primarily due to an increase in severance expense and other professional fees for the three months ended June 30, 2011 compared to the same period of the prior year all due principally to the Merger and a general increase relating to additional operational activities which was partially offset by a reduction in stock based compensation. The three months ended June 30, 2011 includes approximately $1.6 million of severance expense and other professional fees relating to the Merger and $1.7 million of allocated general and administrative expenses from our Parent. Stock based compensation for the three months ended June 30, 2010 was $1.6 million with no related expense for the three months ended June 30, 2011 due to the acceleration of stock based compensation expense as of the Merger date. As a percentage of revenues, selling, general and administrative expense was 7.0% for the three months ended June 30, 2011 compared to 7.6% for the same period in the prior year.

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Amortization expense for the three months ended June 30, 2011 increased $3.2 million to $4.4 million compared to $1.2 million for the three months ended June 30, 2010. The increase is primarily related to the amortization of intangibles recorded in connection with the Merger.
We had income from operations of $14.7 million for the three months ended June 30, 2011, compared to income from operations of $4.1 million for the three months ended June 30, 2010. The increase in income from operations was mainly due to the increase in revenues and improved margins which was partially offset by the increases in depreciation, amortization and selling, general and administrative expenses.
Our interest expense was $10.1 million for the three months ended June 30, 2011, compared to $11.1 million for the three months ended June 30, 2010. Approximately $51.5 million of our debt was paid in connection with the Merger. Interest expense for the three months ended June 30, 2011 was reduced by approximately $1.1 million in connection with debt premium amortization and interest expense for the three months ended June 20, 2010 includes amortization expense of deferred financing costs of $554,000. Interest expense for the three months ended June 30, 2011 included approximately $969,000 of allocated interest charges from our Parent.
Income tax expense for the three months ended June 30, 2011 was $3.0 million or 63.6% of our income before income taxes compared to an income tax benefit of $1.6 million or 23.4% of our net loss before income taxes from 2010. The change in the tax rate is principally the result of valuation allowances on losses generated in the United States and variances in withholding taxes from foreign operations as a percentage of pretax income (loss).
We had net income of $1.7 million for the three months ended June 30, 2011, compared to net loss of $5.4 million for the three months ended June 30, 2010 due to the foregoing reasons.
The net loss attributed to common stockholders for the three months ended June 30, 2010 was $6.0 million after $637,000 in preferred stock dividends. The preferred stock dividend related to our 36,393 shares of $1,000 par value preferred shares at 7.0%.
The following table compares revenues and income (loss) from operations for each of our business segments for the quarter ended June 30, 2011 and 2010. Income (loss) from operations consists of our revenues less direct costs, selling, general and administrative expenses, depreciation and amortization:
                                                 
    Revenues     Income (Loss) from Operations  
    Successor     Predecessor             Successor     Predecessor        
    Three Months
Ended
    Three Months
Ended
            Three Months
Ended
    Three Months
Ended
       
    June 30,     June 30,             June 30,     June 30,        
    2011     2010     Change     2011     2010     Change  
            (in thousands)              
Revenues:
                                               
Drilling Services
  $ 187,969     $ 146,913     $ 41,056     $ 8,084     $ 4,551     $ 3,533  
Well Services
    32,169       11,731       20,438       6,653       (417 )     7,070  
 
                                   
Total
  $ 220,138     $ 158,644     $ 61,494     $ 14,737     $ 4,134     $ 10,603  
 
                                   
Drilling Services
Revenues for the quarter ended June 30, 2011 for the Drilling Services segment were $188.0 million, an increase of 27.9% compared to $146.9 million in revenues for the quarter ended June 30, 2010. Income from operations increased $3.5 million and resulted in income from operations of $8.1 million for the quarter ended June 30, 2011 compared to income from operations of $4.6 million in the three months ended June 30, 2010. The revenue increase was due to our investment in new equipment, increased utilization and rig rates in Argentina and Bolivia and improved pricing and utilization for our directional drilling services, underbalanced services, rental services and tubular services domestically. The increase in income from operations was mainly due to the noted revenue increases which were partially offset by: (1) allocations of merger related costs consisting of severance expense and other professional fees of $1.2 million for the three months ended June 30, 2011; (2) allocations of $1.3 million of Parent general and administration charges; (3) decrease in utilization and pricing for our land drilling services in Brazil; and (4) an increase of $4.6 million, or 23.9%, in depreciation and amortization in the second quarter of 2011 compared to the second quarter of 2010. The increase in depreciation and amortization expense was the result of capital expenditure programs and Merger related adjustments to the fair value of intangible assets.

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Well Services
Revenues for the quarter ended June 30, 2011 for the Well Services segment were $32.2 million, an increase of 174.2% compared to $11.7 million in revenues for the quarter ended June 30, 2010. Income from operations increased $7.1 million and resulted in income from operations of $6.7 million for the quarter ended June 30, 2011 compared to a loss from operations of $417,000 in the three months ended June 30, 2010. The acquisition of AWC provided our Well Services segment with $9.7 million of additional revenues and $2.6 million of additional operating income during the second quarter of 2011. We also had improved utilization and pricing for our coil tubing units. Partially offsetting the improved results in the three months ended June 30, 2011 were: (1) allocations of merger related costs consisting of severance expense and other professional fees of $400,000 for the three months ended June 30, 2011; (2) allocations of $400,000 of Parent general and administration charges and (3) an increase of $1.1 million, or 47.6%, in depreciation and amortization in the second quarter of 2011 compared to the second quarter of 2010. The increase in depreciation and amortization expense was the result of capital expenditure programs and Merger related adjustments to the fair value of intangible assets.
Comparison of Six Months Ended June 30, 2011 and 2010
Our revenues for the six months ended June 30, 2011 were $417.7 million, an increase of 39.7% compared to $299.0 million for the six months ended June 30, 2010. The increase in revenues is due to the increase in revenues in both of our operating segments. Our Drilling Services segment revenues increased 27.4% to $353.3 million for the six months ended June 30, 2011 compared to $277.4 million for the six months ended June 30, 2010 due to our investment in new equipment, increased utilization and rig rates in Argentina and Bolivia and increased utilization of our equipment and improved pricing domestically. Revenues for our Well Services segment increased 198.6% to $64.4 million for the six months ended June 30, 2011 compared to $21.6 million for the six months ended June, 2010 due to $19.8 million of revenues from AWC in the current period, along with an increased utilization of our equipment and improved pricing.
Our direct costs for the six months ended June 30, 2011 increased 36.1% to $310.9 million, or 74.4% of revenues, compared to $228.4 million, or 76.4%, of revenues for the six months ended June 30, 2010. Our direct costs in all of our segments increased in absolute dollars in the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Our Drilling Services segment revenues for the six months ended June 30, 2011 increased 27.4% from revenues for the six months ended June 30, 2010, while direct costs increased 27.9% over that same period, resulting in a minor reduction in gross margin as a percentage of revenues to 23.0% for the six months ended June 30, 2011 compared to 23.4% for the six months ended June 30, 2010. Our Drilling Services segment began to realize price increases starting in the later part of the first quarter of 2010 with the related improvement being offset by a decrease in utilization and pricing for our land drilling services in Brazil. Our Well Services segment revenues for the six months ended June 30, 2011 increased 198.6% from revenues for the six months ended June 30, 2010, while direct costs increased 145.0% over that same period. The improvement in gross margin is due to improved utilization of equipment and pricing which was partially offset by the impact of the acquisition of AWC. AWC provided $19.8 million of revenues during the six months ended June 30, 2011 and it also increased direct costs by $13.0 million for the same period for an effective gross margin as a percentage of revenues of 34.4%. AWC’s gross margin as a percentage of revenues is less than our overall Well Services gross margin percentage as AWC’s manufacturing operation has a higher labor component. Gross margin as a percentage of revenues for our Well Services segment for the six months ended June 30, 2011 was 39.6% compared to 26.3% for the six months ended June 30, 2010.
Depreciation expense increased 11.5% to $45.4 million for the six months ended June 30, 2011 from $40.7 million for the six months ended June 30, 2010. The primary increase in depreciation expense is due to our capital expenditure programs for our Drilling Services segment. Depreciation expense as a percentage of revenues decreased to 10.9% for the first half of 2011, compared to 13.6% for the first half of 2010, due to the noted increases in revenues.
Selling, general and administrative expense was $43.9 million for the six months ended June 30, 2011 compared to $24.2 million for the six months ended June 30, 2010. Selling, general and administrative expense increased primarily due to an increase in stock based compensation expense, severance expenses and professional and other fees for the six months ended June 30, 2011 compared to the same period of the prior year all due principally to the Merger. Stock based compensation for the six months ended June 30, 2011 was $6.1 million with approximately $5.4 million of this amount relating to the acceleration of stock based compensation expense associated with the Merger and was $3.0 million in the same period of the prior year. The six months ended June 30, 2011 includes approximately $4.6 million of severance expense relating to the separation of certain executives after the Merger. Professional and other fees for the six months ended June 30, 2011 included $7.1 million of costs related to the Merger. The six months ended June 30, 2011 also includes $1.7 million of allocated general and administrative expenses from our Parent and other increases related to additional operating activities. As a percentage of revenues, selling, general and administrative expense was 10.5% for the six months ended June 30, 2011 compared to 8.1% for the same period in the prior year.

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During the six months ended June 30, 2011, we recorded a $5.1 million loss on the impairment of intangible assets. In connection with the Merger, a $5.1 million value was assigned to the Allis-Chalmers tradename. Following the Merger, Seawell and its subsidiaries, including us, have begun operating under the name Archer. As a result, it was determined that there was no material remaining value associated with the Allis-Chalmers tradename.
Amortization expense for the six months ended June 30, 2011 increased $4.3 million to $6.6 million compared to $2.3 million for the six months ended June 30, 2010. The increase is primarily related to the amortization of intangibles recorded in connection with the merger.
Income from operations was $5.8 million for the six months ended June 30, 2011 compared to $3.4 million for the six months ended June 30, 2010. The increase in income from operations was mainly due to the increase in revenues and improved margins which was partially offset by the impairment of intangible assets and increases in depreciation, amortization and selling, general and administrative expenses.
Our interest expense was $21.7 million for the six months ended June 30, 2011, compared to $22.1 million for the six months ended June 30, 2010. Approximately $51.5 million of our debt was paid in connection with the Merger. Interest expense includes amortization expense of deferred financing costs of $366,000 and $1.1 million for the six months ended June 30, 2011 and 2010, respectively. Interest expense for the six months ended June 30, 2011 included approximately $1.3 million of allocated interest charges from our Parent and was reduced by approximately $1.1 million in connection with debt premium amortization.
Other income was $101,000 for the six months ended June 30, 2011 compared to other expense of $1.8 million for the six months ended June 30, 2010. Results for the first half of 2010 include a pre-tax non-cash loss of $1.5 million on the sale of an investment in a private oil and gas company that was assumed as part of an acquisition in 2006.
Income tax expense for the six months ended June 30, 2011 was $6.3 million or (39.9)% of our net loss before income taxes compared to an income tax benefit of $5.2 million or 25.8% of our net loss before income taxes from 2010. The change in the tax rate is principally the result of valuation allowances on losses generated in the United States and variances in withholding taxes from foreign operations as a percentage of pretax income (loss).
We had a net loss of $22.0 million for the six months ended June 30, 2011, compared to net loss of $14.9 million for the six months ended June 30, 2010 due to the foregoing reasons.
The net loss attributed to common stockholders for the six months ended June 30, 2011 and 2010 was $22.4 and $16.2 million after $375,000 and $1.3 million in preferred stock dividends, respectively. The preferred stock dividend related to our 36,393 shares of $1,000 par value preferred shares at 7.0%.
The following table compares revenues and income (loss) from operations for each of our business segments for the six months ended June 30, 2011 and 2010. Income (loss) from operations consists of our revenues less direct costs, selling, general and administrative expenses, impairment of intangible assets, depreciation and amortization:
                                         
    Successor     Predecessor                    
    Four Months     Two Months                    
    Ended     Ended                    
    June 30,     February 28,     Combined      Predecessor         
    2011     2011     2011     2010     Change  
Revenues:
                                       
Drilling Services
  $ 247,277     $ 106,050     $ 353,327     $ 277,441     $ 75,886  
Well Services
    43,587       20,835       64,422       21,573       42,849  
 
                             
Total
  $ 290,864     $ 126,885     $ 417,749     $ 299,014     $ 118,735  
 
                             
 
                                       
Income (Loss) from Operations:
                                       
Drilling Services
  $ 8,488     $ (9,943 )   $ (1,455 )   $ 4,307     $ (5,762 )
Well Services
    7,179       109       7,288       (925 )     8,213  
 
                             
Total
  $ 15,667     $ (9,834 )   $ 5,833     $ 3,382     $ 2,451  
 
                             
Drilling Services
Revenues for the Drilling Services segment for the six months ended June 30, 2011 were $353.3 million, an increase of 27.4% compared to $277.4 million in revenues for the six months ended June 30, 2010. Loss from operations was $1.5 million compared to income from operations of $4.3 million in the six months ended June 30, 2010. The revenue increase was due to

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our investment in new equipment, increased utilization and rig rates in Argentina and Bolivia and improved pricing and utilization for our directional drilling services, underbalanced services, rental services and tubular services domestically. The increase in loss from operations was mainly due to: (1) allocations of merger related costs consisting of accelerated stock based compensation expense of $3.9 million, severance expense of $3.4 million and professional and other fees of $5.1 million for the six months ended June 30, 2011; (2) allocations of $1.3 million of Parent general and administration charges; (3) decrease in utilization and pricing for our land drilling services in Brazil; (4) a $2.9 million non-cash loss recorded in the six months ended June 30, 2011 on an intangible asset impairment and (5) an increase of $7.0 million, or 18.1%, in depreciation and amortization for the six months ended 2011 compared to the same period of the prior year. The increase in depreciation and amortization expense was the result of capital expenditure programs and Merger related adjustments to the fair value of intangible assets.
Well Services
Revenues for the Well Services segment for the six months ended June 30, 2011 were $64.4 million, an increase of 198.6% compared to $21.6 million in revenues for the six months ended June 30, 2010. Income from operations increased $8.2 million and resulted in income from operations of $7.3 million for the six months ended June 30, 2011 compared to a loss from operations of $925,000 in the six months ended June 30, 2010. The acquisition of AWC provided our Well Services segment with $19.8 million of additional revenues and $4.0 million of additional operating income during the first half of 2011. We also had improved utilization and pricing for our coil tubing units. Partially offsetting the improved results in the six months ended June 30, 2011 were: (1) allocations of merger related costs consisting of accelerated stock based compensation expense of $1.5 million, severance expense of $1.2 million and professional and other fees of $2.0 million for the six months ended June 30, 2011; (2) allocations of $400,000 of Parent general and administration charges (3) a $2.2 million non-cash loss recorded in the six months ended June 30, 2011 on an intangible asset impairment and (4) an increase of $2.0 million, or 44.8%, in depreciation and amortization in the first half of 2011 compared to the first half of 2010. The increase in depreciation and amortization expense was the result of capital expenditure programs and Merger related adjustments to the fair value of intangible assets.
Liquidity
Our on-going capital requirements arise primarily from our need to service our debt, to acquire and maintain equipment, to fund our working capital requirements and to complete acquisitions. Our primary sources of liquidity are proceeds from Parent contributions and cash flows from operations. Cash flows from operations are expected to be our primary source of liquidity in fiscal 2011. We had cash and cash equivalents and restricted cash of $17.2 million at June 30, 2011 compared to $20.9 million at December 31, 2010.
Operating Activities
During the six months ended June 30, 2011, our operating activities provided $21.0 million in cash. Our net loss for the six months ended June 30, 2011 was $22.0 million. Non-cash expenses totaled $62.5 million during the first six months of 2011 consisting of $52.0 million of depreciation and amortization, $5.1 million on an impairment of intangible assets, $6.1 million for share based compensation expense, $366,000 in amortization of deferred financing fees, $587,000 loss on sale of property and equipment net of $1.1 million of debt premium amortization and $799,000 for deferred income taxes related to timing differences.
During the six months ended June 30, 2011, changes in operating assets and liabilities used $19.5 million in cash, principally due to an increase in accounts receivable of $30.9 million, an increase in inventories of 7.9 million, an increase in prepaid expenses and other assets of $9.6 million, offset by an increase in accounts payable of $14.7 million, an increase in accrued expenses of $11.5 million and an increase in accrued salaries, benefits and payroll taxes of $2.7 million. Accounts receivable, inventory, accounts payable, accrued expense and accrued salaries, benefits and payroll taxes increases primarily related to the increase in our activity in the first six months of 2011. The increase in prepaid expenses primarily relates to additional prepaid taxes in Argentina and Brazil.
During the six months ended June 30, 2010, our operating activities provided $21.5 million in cash. Our net loss for the six months ended June 30, 2010 was $14.9 million. Non-cash expenses totaled $38.8 million during the first six months of 2010 consisting of $43.0 million of depreciation and amortization, $3.0 million for share based compensation expense, $1.1 million in amortization of debt issuance costs, $1.5 million loss on the sale of an investment, $0.8 million of losses from asset disposals, $260,000 equity in loss of unconsolidated affiliates, partly offset by deferred income tax benefit of $10.8 million related to timing differences.
During the six months ended June 30, 2010, changes in operating assets and liabilities used $2.4 million in cash, principally

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due to an increase in accounts receivable of $25.8 million, an increase in inventory of $2.4 million and a decrease in other long-term liabilities of $466,000, offset in part by an increase in accounts payable of $10.8 million, a decrease in prepaid expenses and other current assets of $8.8 million, an increase in accrued expenses of $3.8 million, an increase in accrued salaries, benefits and payroll taxes of $1.9 million and a decrease in other assets of $0.8 million. Accounts receivable, inventory, accounts payable, accrued expenses and accrued salaries, benefits and payroll taxes increased primarily due to the increase in our activity in the first six months of 2010. The decrease in prepaid expense assets was the result of current operations in Argentina utilizing the prepaid taxes that existed at December 31, 2009.
Investing Activities
During the six months ended June 31, 2011, we used $50.4 million in investing activities, consisting of $48.3 million for capital expenditures, $3.8 million increase in restricted cash relating to deposits at a financial institution to secure outstanding letters of credit and a $1.2 million cash contribution into our investment in our Saudi Arabia joint venture, offset by $2.9 million of proceeds from equipment sales. Included in the $48.3 million for capital expenditures were $41.5 million for additional equipment in our Drilling Services segment and $6.8 million for additional equipment in our Well Services segment. A majority of our equipment sales relate to items “lost in hole” or “damaged beyond repair” by our customers.
During the six months ended June 30, 2010, we used $38.1 million in investing activities, consisting of $31.0 million for capital expenditures, $10.1 million for other assets, offset by $2.6 million of proceeds from equipment sales and $368,000 from the sale of an investment. Included in the $31.0 million for capital expenditures were $27.2 million for our Drilling Services segment and $3.8 million for additional equipment in our Well Services segment. The increase in other assets was primarily due to $10.0 million of advance payments made toward the construction of a drilling rig. A majority of our equipment sales relate to items “lost in hole” or “damaged beyond repair” by our customers.
Financing Activities
During the six months ended June 30, 2011, financing activities provided $21.9 million in cash. In connection with the Merger, we received approximately $71.4 million in funding from our Parent. Proceeds were mainly used to pay off debt, debt related interest and merger related expenses. The merger related expenses were primarily for legal and professional fees and change of control provisions. An additional $3.0 million in funding was subsequently received from our Parent. We repaid $50.1 million in borrowings under long-term debt facilities. We had a net cash outlay of $1.8 million related to the payment of payroll taxes as a result of net exercises of restricted stock vestings and paid $637,000 in preferred stock dividends.
During the six months ended June 30, 2010, financing activities used $6.9 million in cash. We borrowed $4.0 million under a long-term debt facility and repaid $9.4 million in borrowings under long-term debt facilities. We also incurred $189,000 in debt issuance costs related to an amendment to our revolving credit facility to modify our loan covenants and we paid $1.3 million in preferred stock dividends. In addition, we financed our renewal of $2.4 million in insurance policy premiums in non-cash transactions.
At June 30, 2011, we had $461.6 million in outstanding indebtedness, of which $454.7 million was long-term debt and $6.9 million is due within one year.
In January 2006 and August 2006, we closed on private offerings, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $160.0 and $95.0 million aggregate principal amount of our senior notes, respectively. The senior notes are due January 15, 2014 and bear interest at 9.0%. The proceeds were used to fund the acquisitions of Specialty Rental Tools, Inc. and DLS, to repay existing debt and for general corporate purposes. In June 2009, we closed on a tender offer in which we purchased $30.6 million aggregate principal of our 9.0% senior notes for a total consideration of $650 per $1,000 principal amount. In connection with the Merger and based on actively traded prices of our senior notes, we increased the fair value of the 9.0% senior notes to $1,022 per $1,000 principal amount. In May 2011, pursuant to the terms of change of control provisions in the indentures governing the senior notes and as a result of the Merger, holders had the right to require us to purchase, all or a portion of such holders’ notes. We purchased $1.8 million aggregate principal of our 9.0% senior notes for a total consideration of $1,010 per $1,000 principal amount.
In January 2007, we closed on a private offering, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $250.0 million principal amount of 8.5% senior notes due 2017. The proceeds of the senior notes offering, together with a portion of the proceeds of our concurrent common stock offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility which we incurred to finance our acquisition of substantially all the assets of Oil & Gas Rental Services, Inc. On June 29, 2009, we closed on a tender offer in which we purchased $44.2 million aggregate principal of our 8.5% senior notes for a total consideration of $600 per $1,000 principal amount. In connection with the

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Merger and based on actively traded prices of our senior notes, we increased the fair value of the 8.5% senior notes to $1,070 per $1,000 principal amount. In May 2011, pursuant to the terms of change of control provisions in the indentures governing the senior notes and as a result of the Merger, we purchased $92,000 aggregate principal of our 8.5% senior notes for a total consideration of $1,010 per $1,000 principal amount.
We had a $90.0 million revolving line of credit with a final maturity date of April 26, 2012 pursuant to a revolving credit agreement that contained customary events of default and financial covenants and limited our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. Effective December 31, 2009, we amended the leverage and interest coverage ratio covenants of the revolving credit agreement. This amendment relaxed the required financial ratios for the quarter ended December 31, 2009 and for each of the quarters in 2010. Our obligations under the amended and restated credit agreement are secured by substantially all of our assets located in the United States. We were in compliance with all debt covenants as of December 31, 2010. As of December 31, 2010, we had $36.5 million of borrowings outstanding and $4.1 million in outstanding letters of credit under our revolving credit facility. The weighted-average interest rate was 7.8% at December 31, 2010. The revolving line of credit was repaid and terminated in connection with the Merger.
As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from 2 to 5 years. The weighted average interest rate on these loans was 2.0% as of December 31, 2010. The outstanding amount due under these bank loans as of June 30, 2011 and December 31, 2010 was $0 and $350,000, respectively.
On February 15, 2008, through our DLS subsidiary in Argentina, we entered into a $25.0 million import finance facility with a bank. Borrowings under this facility were used to fund a portion of the purchase price of the new drilling and service rigs ordered for our Drilling Services segment. The loan is repayable over four years in equal semi-annual installments beginning one year after each disbursement with the final principal payment due not later than March 15, 2013. The import finance facility is unsecured and contains customary events of default and financial covenants and limits DLS’ ability to incur additional indebtedness, make capital expenditures, create liens and sell assets. We were in compliance with all debt covenants as of June 30, 2011 and December 31, 2010. The bank loan rates are based on LIBOR plus a margin. The weighted average interest rate was 4.2% at June 30, 2011 and December 31, 2010. The outstanding amount under the import finance facility as of June 30, 2011 and December 31, 2010 was $11.5 million and $14.4 million, respectively.
As part of our acquisition of BCH, we assumed a $23.6 million term loan credit facility with a bank. The credit agreement was dated June 2007 and contained customary events of default and financial covenants which were based on BCH’s stand-alone financial statements. The facility was repayable in quarterly principal installments plus interest and was to mature in August 2012. Obligations under the facility were secured by substantially all of the BCH assets. The bank waived certain financial ratio covenants for the December 31, 2010 measurement period and we classified the entire outstanding balance of the loan in the current portion of long-term debt. The interest rates were based on LIBOR plus a margin and the interest rate was 3.5% at December 31, 2010. The outstanding amount of the loan as of December 31, 2010 was $7.0 million. The term loan credit facility was paid in full in connection with the Merger.
On February 9, 2010, through our DLS subsidiary, we entered into a $4.0 million term loan facility. The loan is repayable in semi-annual installments beginning April 14, 2011 and bears interest at 8.5% per annum. The final maturity date is April 14, 2014 and the loan is unsecured. The outstanding amount under the term loan facility as of June 30, 2011 and December 31, 2010 was $3.4 million and $4.0 million, respectively
In 2010, we obtained insurance premium financings in the aggregate amount of $2.9 million with a fixed weighted-average interest rate of 4.8%. Under terms of the agreements, amounts outstanding are paid over eight and 11 month repayment schedules. The outstanding balance of these notes was approximately $0 and $1.0 million at June 30, 2011 and December 31, 2010, respectively.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements, other than normal operating leases and employee contracts, that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. We have $3.8 million of outstanding letters of credit that are secured by deposits at a financial institution. We do not guarantee obligations of any unconsolidated entities.
Critical Accounting Policies
Please see our Form 10-K/A for a description of other policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such

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policies affect our reported and expected financial results. No material changes to such information have occurred during the six months ended June 30, 2011.
Recently Issued Accounting Standards
For a discussion of new accounting standards, see the applicable section in Note 1 to our Unaudited Consolidated Condensed Financial Statements included in “Item 1. Financial Statements.”
Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, regarding our business, financial condition, results of operations and prospects. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements. However, these are not the exclusive means of identifying forward-looking statements. Although such forward-looking statements reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. These factors include, but are not limited to, the following:
    the impact of the weak economic conditions and the future impact of such conditions on the oil and gas industry and demand for our services;
 
    unexpected future capital expenditures (including the amount and nature thereof);
 
    unexpected difficulties in integrating our operations as a result of any significant acquisitions;
 
    adverse weather conditions in certain regions;
 
    the impact of political disturbances, war, or terrorist attacks and changes in global trade policies;
 
    the availability (or lack thereof) of capital to fund our business strategy and/or operations;
 
    the potential impact of the loss of one or more key employees;
 
    the effect of environmental liabilities that are not covered by an effective indemnity or insurance;
 
    the impact of current and future laws;
 
    the impact of customer defaults and related bad debt expense;
 
    the potential impairment in the carrying value of goodwill and other acquired intangible assets;
 
    the risks associated with doing business outside the United States, including currency exchange rates; the effects of competition; and
 
    the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a competitive disadvantage compared to competitors that have less debt, and could have other adverse consequences
Further information about the risks and uncertainties that may impact us are described under “Item 1A—Risk Factors” in our Form 10-K/A. You should read those sections carefully. You should not place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. We undertake no obligation to update publicly any forward-looking statements in order to reflect any event or circumstance occurring after the date of this quarterly report or currently unknown facts or conditions or the occurrence of unanticipated events.

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ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this quarterly report, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d — 15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Management recognizes that any disclosure controls and procedures no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on this evaluation, these officers concluded that, for the period ending June 30, 2011, our disclosure controls and procedures were not effective to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles because of a material weakness in our internal control over financial reporting described below.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based on this assessment, management has concluded that we did not maintain effective internal control over financial reporting for the period ending June 30, 2011, because of a material weakness relating to accounting for income taxes. Specifically, we did not maintain effective controls over the identification and proper accounting treatment of the calculation and valuation of deferred tax assets. This material weakness resulted in a material misstatement of our income tax expense, deferred tax asset, net loss and accumulated deficit with accompanying notes and the restatement of our consolidated financial statements for the year ended December 31, 2010 as discussed in Note 2 to the consolidated financial statements included in our Form 10-K/A. Additionally, this deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.
Plan for Remediation of Material Weakness
Management has developed a plan to remediate the material weakness noted above. Controls over the preparation of tax calculations and associated deferred tax balances have been enhanced through the implementation of external advisory services from an independent source, under the oversight of management. In the third quarter the Company has hired a dedicated employee with tax expertise to oversee this area, along with enhanced procedural and review controls.
(b) Changes in Internal Control Over Financial Reporting.
Except as described above, there were not any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) The exhibits listed on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q are filed as part of this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 31, 2011.
         
     
  Allis-Chalmers Energy Inc.    
  (Registrant)   
     
  /s/ Christoph Bausch    
  Christoph Bausch   
  Chief Financial Officer   

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EXHIBIT INDEX
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1*   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS*   XBRL Instance Document
 
101.SCH*   XBRL Taxonomy Extension Schema Document
 
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
 
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
 
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
 
*   Filed herewith

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