W-H ENERGY SERVICES INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

[ ] 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: 000-31721

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W-H ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)

TEXAS 76-0281502
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

10370 RICHMOND AVENUE
SUITE 990
HOUSTON, TEXAS 77042
(Address of principal executive offices and zip code)

(713) 974-9071
(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, as amended (the "Act") during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

As of May 5, 2003 there were outstanding 27,072,503 shares of common stock,
par value $0.0001 per share, of the registrant.
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W-H ENERGY SERVICES, INC.

INDEX

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

W-H ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying notes are an integral part of these
consolidated financial statements.

1

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying notes are an integral part of these
consolidated financial statements.

2

W-H ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated financial statements.

3

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS ORGANIZATION

DESCRIPTION OF COMPANY

W-H Energy Services, Inc., a Texas corporation, and its subsidiaries
(collectively, W-H) is a diversified oilfield service company that provides
products and services used primarily for the drilling, completion and production
of oil and natural gas wells. W-H has the following three primary lines of
business: (i) drilling related products and services, which include
logging-while-drilling (LWD), measurement-while-drilling (MWD), directional
drilling, rental tools (including drill pipe), downhole drilling motors and
drilling fluids; (ii) completion and workover related products and services,
which include cased-hole wireline logging, perforating and associated rental
equipment, polymers and specialty chemicals, rental tools (including tubing) and
coiled tubing; and (iii) maintenance and safety related products and services,
which include waste management and safety equipment and services.

BASIS OF PRESENTATION

The unaudited Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Rule 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included in W-H's Annual
Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission. In the opinion of management, all necessary
adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.

ACCOUNTING POLICIES AND PROCEDURES

Effective January 1, 2003, W-H adopted Financial Accounting Standards Board
("FASB") No. 143, "Accounting for Asset Retirement Obligations." This statement
requires that legal obligations associated with the retirement of long-lived
assets be recorded at fair value when incurred. The adoption of this statement
did not have a material impact on W-H's consolidated financial position as of
March 31, 2003, or its results of operations or cash flows for the three months
then ended.

W-H adopted FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FASB Interpretation 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation applies to guarantees
issued or modified after December 31, 2002 and has had no impact on our
consolidated results of operations or consolidated balance sheet.

Other than as described above, W-H has not added to or changed its
accounting policies since December 31, 2002. For a description of these
policies, refer to Note 2 of the consolidated financial statements in W-H's
Annual Report on Form 10-K for the year ended December 31, 2002.

2. EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is computed
considering the dilutive effect of stock options and warrants. For the three
months ended March 31, 2003 and 2002, shares of 896,390 and 1,654,200,
respectively, resulting from the assumed exercise of outstanding options and
warrants, were added to the denominator because the inclusion of such

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W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares would be dilutive. For the three months ended March 31, 2003 and 2002,
shares of 1,590,074 and 787,400, respectively, were excluded from the
computation of earnings per common share, because the inclusion of such shares
would be anti-dilutive.

3. DEBT

CREDIT FACILITY

In the first quarter of 2003, W-H obtained an additional revolving loan
commitment of $10.0 million and a supplemental Term B loan of $5.0 million under
its existing credit facility. As so amended, the credit facility consists of
Term A and Term B loan facilities in the amounts of $40.0 million and $85.0
million, respectively. Additionally, the credit facility has a $55.0 million
revolving loan facility of which $32.7 million was outstanding at March 31,
2003. The Term A loan facility matures on October 16, 2005 and requires payments
escalating from zero in the first year to $14.0 million in the fifth year. The
Term B loan facility matures on April 16, 2007 and requires principal payments
of $0.85 million in each of the first six years with the outstanding balance
being due on the maturity date. The revolving loan facility matures on October
16, 2005. At W-H's option, amounts borrowed under the credit facility bear
interest at either a variable rate equal to the reserve-adjusted LIBOR or an
alternate base rate, plus in each case, an applicable margin. The applicable
margin ranges from 1.75% to 3.00% in the case of a LIBOR based loan under the
revolving loan facility or the Term A loan facility and is 3.25% in the case of
a LIBOR based loan under the Term B loan facility. For alternate base rate
loans, the applicable margin ranges from 0.75% to 2.00% under the revolving loan
facility and the Term A loan facility and is 2.25% under the Term B loan
facility. The foregoing margins are subject to adjustment based on a debt
service coverage ratio and a leverage ratio. The credit facility, among other
things, contains covenants that require that W-H maintain certain financial
ratios and limits the amount of capital expenditures that may be made, the
amount of debt that may be incurred outside of the credit facility, the amount
of future investments and its ability to pay dividends. At March 31, 2003, W-H
was in compliance with these restrictive covenants.

The credit facility is secured by a lien on all of W-H's property and
assets, a pledge of all of the capital stock of W-H's material domestic
subsidiaries and a pledge of not greater than 65% of the capital stock of each
of W-H's foreign subsidiaries. In addition, the credit facility is guaranteed by
all of W-H's material domestic subsidiaries.

CONVERTIBLE SUBORDINATED NOTES

In connection with its acquisition of Coil Tubing Services, L.L.C. ("CTS")
in May 2001, W-H issued $4.5 million in convertible subordinated notes (the
"Notes") to eight individuals (the "Sellers") as partial consideration for the
acquisition. The Notes bear interest at 9% per annum, payment of which is due
quarterly. The principal and accrued interest matures on December 31, 2003. The
Sellers may convert the Notes into shares of W-H common stock within 30 days of
maturity at a rate of 0.0331 shares of common stock for each $1.00 of principal,
subject to adjustment based upon various factors. W-H may redeem the Notes at
its discretion at any time prior to maturity with no prepayment penalty.
However, the Sellers would have the option to exercise the conversion feature
prior to redemption. W-H has no present intention to exercise the redemption
feature.

PROMISSORY NOTES

In connection with its acquisition of U.S. Clay, L.P. in April 2002, W-H
issued a total of $1.8 million in promissory notes to the sellers as partial
consideration for the acquisition. The notes were paid in full on April 25,
2003.

5

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. STOCK OPTIONS

A summary of W-H's stock options as of March 31, 2003 and December 31, 2002
is as follows:

The fair value of each option was estimated on the date of grant using the
Black-Scholes option valuation model. The following assumptions were used for
the historical option grants: risk-free interest rates of between 3.6%-7.0%;
dividend rates of zero; average expected lives of between 6.9 and 8.6 years and
expected volatilities of 59.2%-65.9%. The 3,216,633 options outstanding as of
March 31, 2003 have a remaining contractual life of between 4.6 and 7.4 years.

The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions,
including the expected stock price volatility. W-H's stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate.

Had compensation expense for the stock options granted to employees and
directors been determined using the fair value method, net income and diluted
net income per share for the three months ended March 31, 2003 and 2002,
respectively would have been reduced to the following pro forma amounts:

5. SEGMENTS

Management has elected to organize segments based on differences in each
segment's customers and the products and services offered without aggregating
operating segments. All segments that meet a threshold of 10% of revenues,
reported profit or loss, or combined assets are defined as significant segments.
Based on these requirements, management has identified three reportable
segments: drilling related products and services, completion and workover
related products and services and maintenance and safety related products and
services.

6

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DRILLING RELATED PRODUCTS AND SERVICES

The drilling related products and services segment provides products and
services used by oil and natural gas companies, drilling contractors and other
oilfield service companies for the drilling of oil and natural gas wells. These
products and services are used primarily throughout North America, Brazil and in
selected areas of the Eastern Hemisphere. This segment consists of the following
business lines: (i) LWD; (ii) MWD; (iii) directional drilling; (iv) downhole
drilling motors; (v) rental tools (including drill pipe); and (vi) drilling
fluids.

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

The completion and workover related products and services segment provides
products and services primarily to customers onshore in the Gulf Coast region
and offshore in the Gulf of Mexico. These products include: (i) cased-hole
wireline logging, perforating and associated rental equipment; (ii) polymers and
specialty chemicals; (iii) rental tools (including tubing); and (iv) coiled
tubing.

MAINTENANCE AND SAFETY RELATED PRODUCTS AND SERVICES

The maintenance and safety related products and services segment provides
products and services primarily for refinery and petrochemical plant
applications and major and independent oil and natural gas companies, including:
(i) waste management and (ii) safety equipment and services.

SUMMARY INFORMATION

W-H recognizes revenues, cost of revenues, selling, general and
administrative expense, research and development expense and depreciation and
amortization expense by segment. Interest expense and other income (expense) are
not monitored by segment. Summarized information for W-H's reportable segments
is contained in the following tables (in thousands):

As of and for the three months ended March 31, 2003 (unaudited):

As of and for the three months ended March 31, 2002 (unaudited):

7

W-H ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

W-H operates in the United States, the North Sea and other geographic
regions. The following is summary information by geographic region (in
thousands) (unaudited):

REVENUES

OPERATING INCOME

LONG-LIVED ASSETS

8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The following discussion and analysis may contain forward-looking
statements. The words "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may," and similar expressions are intended to
identify forward-looking statements. Actual results may differ materially from
the results discussed in the forward-looking statements as a result of important
risk factors including, but not limited to, the current and expected future
prices of crude oil and natural gas, capital expenditures by customers, activity
levels in the oil and natural gas exploration and production industry, the
development and implementation of new technologies, weather conditions in
offshore markets, risks associated with the occurrence of personal injuries,
loss of life, damage or destruction of property, equipment or the environment
and suspension of operations, our ability to attract and retain skilled workers,
the loss of key members of management, competition in our industry, compliance
with and developments in environmental and other governmental regulations, the
loss of the use of certain technologies, the concentration of customers in the
energy industry, our ability to successfully integrate future acquisitions,
political and economic risks, an impairment of goodwill and restrictions on our
ability to raise additional funds. For additional discussion of these risks,
please see the discussion set forth under the heading "Factors That May Affect
Future Results and Accuracy of Forward Looking Statements" contained in our most
recent Annual Report filed on Form 10-K with the Securities and Exchange
Commission.

OVERVIEW OF THE MARKETS FOR OUR PRODUCTS AND SERVICES

We are a diversified oilfield service company that provides drilling
related products and services, completion and workover related products and
services and maintenance and safety related products and services. Our customers
include major and independent oil and natural gas companies, other oilfield
service companies and refining and petrochemical companies.

Prices for oil and natural gas are subject to large fluctuations in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of other factors. Any prolonged
increase or decrease in oil and natural gas prices affects the levels of
exploration, development and production activity as well as the entire health of
the oil and natural gas industry. Demand for our drilling related products and
services is directly affected by the level of exploration, development and
production activity of, and the corresponding capital spending by, oil and
natural gas companies. Demand for our completion and workover related products
and services depends more on oil and natural gas production activity, which is
less immediately affected by changes in oil and natural gas prices. Demand for
our maintenance and safety related products and services is affected by the rate
of plant overhauls and maintenance turnarounds as well as the overall health of
the refining and petrochemical industries and, to a lesser extent, by the level
of oil and gas exploration, development and production activity.

DRILLING RELATED PRODUCTS AND SERVICES

Revenue from our drilling related products and services segment constituted
approximately 59% of our first quarter 2003 consolidated revenue. Approximately
15% of our first quarter 2003 drilling segment revenue was generated in various
international locations which include Canada, Brazil, Europe, North Africa and
the Middle East. However, the most significant portion of our drilling segment
revenues is generated in the United States, including the Gulf of Mexico. In
July 2001, exploration and development activity levels in the United States
peaked and began to decline primarily as a result of lower natural gas prices.
This decline continued through April 2002, at which point the United States
drilling rig count levels reached a low of 738. Rig count levels modestly
recovered during the remainder of 2002 and the first quarter of 2003, but
remained well below the average activity level of 2001. According to statistics
published by Baker Hughes, the average number of rotary rigs operating in the
United States was 1,156, 830 and 897 for 2001, 2002 and the three months ended
March 31, 2003, respectively. The decline in exploration and development
activity levels in the United States has significantly impacted our revenue and
earnings generated in this key market.

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Natural gas prices increased during 2002 and this increase became more
pronounced during early 2003 due to the colder winter when compared to last
year. However, the increased price level of natural gas has yet to result in a
meaningful increase in drilling activity. We believe that concerns about the
United States economy and the war in the Middle East are among the factors that
have delayed the recovery. We believe that the overall outlook for natural gas
exploration and development activity remains positive as natural gas production
continues to decline and natural gas storage levels are now near record low
levels which should continue to keep natural gas prices at relatively high
levels. However, the extent and timing of a recovery in drilling activity
remains difficult to predict as it may depend on how the factors mentioned above
are resolved.

Outside of the United States, the North Sea remains our largest drilling
segment market, particularly for LWD, MWD and directional drilling services.
However, due to the unexpected enactment of a United Kingdom tax law imposing a
10% supplementary tax on oil and natural gas profits derived from the North Sea,
many of our customers have reduced drilling activity in this region. According
to statistics published by Baker Hughes, the number of rotary rigs operating in
the North Sea declined from an average of 67 in January 2002 to an average of 42
in March 2003. We do not expect any marked increase in activity levels in the
North Sea in the near term.

COMPLETION AND WORKOVER RELATED PRODUCTS AND SERVICES

This sector is our second largest business segment and provided
approximately 33% of our total first quarter 2003 consolidated revenue. Revenues
provided by the completion and workover segment are almost exclusively derived
from the United States and the Gulf of Mexico. Although activity levels in the
completion and workover of existing oil and natural gas wells are linked to
commodity prices, our completion segment is less commodity price sensitive than
our drilling segment. As a result, our completion and workover segment has and
continues to provide stability during prolonged downturns in drilling activity.
We have increased our revenue capacity in this segment through capital spending
which, when combined with our acquisitions, has strengthened and further
diversified our completion and workover segment.

MAINTENANCE AND SAFETY RELATED PRODUCTS AND SERVICES

Our maintenance and safety segment provided approximately 8% of our first
quarter 2003 consolidated revenue and is focused entirely in and along the Gulf
Coast region of the United States. Although somewhat seasonal in nature, with
higher activity levels in the early and late portions of the year, this segment
is primarily dependent upon the maintenance activity levels of refineries and
petrochemical plants and, to a lesser extent, on the level of exploration,
development and production activity.

RESULTS OF OPERATIONS

The following information should be read in conjunction with our
Consolidated Financial Statements and the accompanying notes presented elsewhere
in this Form 10-Q.

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002

Revenues. Revenues increased by $18.3 million, or approximately 24%, to
$94.7 million for the three months ended March 31, 2003 from $76.4 million for
the three months ended March 31, 2002. This increase was attributable to higher
demand for certain of our products and services, particularly
drilling/completion fluids, rental tools, cased-hole wireline and coiled tubing,
as well as the revenue contributions of Boyd's Rental Tools, which was acquired
in August 2002 and E.M. Hobbs, which was acquired in November 2002.

Revenues from our drilling related products and services increased by $4.2
million, or approximately 8%, to $56.0 million for the three months ended March
31, 2003 from $51.8 million for the three months ended March 31, 2002. This
increase was primarily attributable to higher utilization of our rental tool
fleet, as well as enhanced demand for our drilling fluids products.

Revenues from our completion and workover related products and services
increased by $13.8 million, or approximately 80%, to $31.1 million for the three
months ended March 31, 2003 from $17.3 million for the

10

three months ended March 31, 2002. This increase was the result of higher
utilization of our coiled tubing and cased-hole wireline fleet, demand for our
completion fluids, as well as the impact of the acquisitions that we consummated
after the first quarter of 2002.

Revenues from our maintenance and safety related products and services
increased by $0.3 million, or approximately 4%, to $7.5 million for the three
months ended March 31, 2003 from $7.2 million for the three months ended March
31, 2002, due primarily to increased sales of our safety products.

Cost of Revenues. Cost of revenues increased by $11.1 million, or
approximately 27% to $52.2 million for the three months ended March 31, 2003
from $41.1 million for the three months ended March 31, 2002. As a percentage of
revenues, cost of revenues increased to 55.1% for the three months ended March
31, 2003 from 53.9% for the three months ended March 31, 2002. The increase in
cost of revenues as a percentage of revenues was due to the continued effects of
softness in pricing, increased insurance costs and our revenue mix, particularly
sales increases in our lower margin fluids products. In addition, our cost of
revenues as a percentage of revenues was impacted by our strategy of maintaining
an optimal level of staffing and infrastructure to ensure that we are capable of
benefiting from future increases in industry activity levels.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.4 million, or approximately 22%, to
$19.2 million for the three months ended March 31, 2003 from $15.8 million for
the three months ended March 31, 2002. The increase was primarily attributable
to the operating expenses of Boyd's and E.M. Hobbs, which were acquired
after the first quarter of 2002, as well as increased insurance costs. As a
percentage of revenues, selling, general and administrative expenses decreased
to 20.3% for the three months ended March 31, 2003 from 20.6% for the three
months ended March 31, 2002.

Research and Development Expenses. Research and development expenses
increased by $0.6 million, or approximately 30%, to $2.6 million for the three
months ended March 31, 2003 from $2.0 million for the three months ended March
31, 2002. This increase was the result of increased research and development
spending on our MWD/LWD and related technologies. We believe it is necessary to
maintain our investment in developing new technologies during the current
downturn in drilling to ensure that we are capable of benefiting fully from
future increases in industry activity levels.

Depreciation and Amortization. Depreciation and amortization increased by
$2.3 million, or approximately 32%, to $9.4 million for the three months ended
March 31, 2003 from $7.1 million for the three months ended March 31, 2002. This
increase was the result of depreciation associated with our continued capital
expenditures, as well as additional depreciation and amortization due to our
acquisitions.

Interest and Other Expense. Interest and other expense for the three
months ended March 31, 2003 was $1.8 million, an increase of $0.3 million, or
approximately 20% from $1.5 million for the three months ended March 31, 2002.
This increase was primarily due to an overall increase in debt.

Net Income. Net income for the three months ended March 31, 2003 was $5.9
million, an increase of $0.4 million, or approximately 7%, from the $5.5 million
reported for the three months ended March 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses for cash are working capital, capital expenditures,
acquisitions, and principal and interest payments on indebtedness. Our strategy
during the current downturn has been to increase our inventory, fixed assets,
research and development expenditures, and personnel to ensure that we are
capable of benefiting from future increases in industry activity levels. To the
extent our cash requirements for working capital, capital expenditures,
acquisitions and principal and interest payments on indebtedness exceed cash
flow from operations, we must fund our cash requirements primarily through debt
and equity financing activities.

Working capital was $81.4 million as of March 31, 2003 and $73.9 million as
of December 31, 2002. Net cash provided by operating activities was $7.3 million
and $9.7 million for the three months ended March 31, 2003 and 2002,
respectively. The increase in working capital and decrease in cash flow from
operating

11

activities are principally attributable to higher operating levels resulting in
more accounts receivable at March 31, 2003.

Net cash used in investing activities was $10.0 million and $8.7 million
for the three months ended March 31, 2003 and 2002, respectively. Net cash used
in investing activities was principally the result of capital expenditures,
offset by proceeds from lost-in-hole revenue.

Net cash provided by financing activities was $3.2 million for the three
months ended March 31, 2003. Net cash used in financing activities was $1.5
million for the three months ended March 31, 2002. Net cash provided by
financing activities was primarily the result of borrowings from our credit
facility. Net cash used in financing activities was primarily the result of
repayments on our debt obligations.

With the exception of operating leases on real property and automobiles, we
have no off-balance sheet debt or other off-balance sheet financing
arrangements. We have not entered into derivative or other financial instruments
for trading or speculative purposes.

In the first quarter of 2003, we obtained an additional revolving loan
commitment of $10.0 million and a supplemental Term B loan of $5.0 million under
our existing credit facility. As so amended, our credit facility includes the
following features:

- a $40.0 million Term A loan facility that amortizes over five years,
matures on October 16, 2005 and requires that we make annual principal
repayments ranging from 0% of the original loan amount in the first year
of the credit facility to 35% of the original loan amount on October 16,
2005;

- an $85.0 million Term B loan facility that amortizes over six and
one-half years, matures on April 16, 2007 and requires that we make
annual principal repayments of 1% of the original loan amount in each of
the first six years of the credit facility with the outstanding balance
due on April 16, 2007; and

- a $55.0 million revolving loan facility that may be borrowed, prepaid and
reborrowed from time to time and matures on October 16, 2005.

At our option, amounts borrowed under the credit facility bear interest at
either a variable rate equal to the reserve-adjusted LIBOR or an alternate base
rate, plus, in each case, an applicable margin. The applicable margin ranges
from 1.75% to 3.00% in the case of a LIBOR based loan under the revolving loan
facility or the Term A loan facility and is 3.25% in the case of a LIBOR based
loan under the Term B loan facility. For alternate base rate loans, the
applicable margin ranges from 0.75% to 2.00% under the revolving loan facility
and the Term A loan facility and is 2.25% under the Term B loan facility. The
foregoing margins are subject to adjustment based on a debt service coverage
ratio and a leverage ratio.

Our credit facility is secured by a lien on all of our property and assets,
a pledge of all of the capital stock of our material domestic subsidiaries and a
pledge of not greater than 65% of the capital stock of each of our foreign
subsidiaries. In addition, our credit facility is guaranteed by all of our
material domestic subsidiaries. The credit facility, among other things,
requires that we maintain certain financial ratios and limits the amount of
capital expenditures we may make, the amount of debt we may incur outside of the
credit facility, the amount of future investments and our ability to pay
dividends. At March 31, 2003, we were in compliance with these restrictive
covenants. As of March 31, 2003 and December 31, 2002, we had outstanding
borrowings under our credit facility of $145.9 million and $142.8 million,
respectively, of which $32.7 million and $32.4 million, respectively, were
outstanding under the revolving credit facility.

In connection with the CTS acquisition in 2001, we issued $4.5 million in
convertible subordinated notes (the "Notes") to eight individuals (the
"Sellers") as partial consideration for the acquisition. The Notes bear interest
at 9% per annum, payment of which is due quarterly. The principal and accrued
interest matures on December 31, 2003. The Sellers may convert the Notes into
shares of common stock within 30 days of maturity at a rate of 0.0331 shares of
common stock for each $1.00 of principal, subject to adjustment based upon
various factors. We may redeem the Notes at our discretion at any time prior to
maturity with no prepayment penalty. However, the Sellers would have the option
to exercise the conversion feature prior to redemption. We have no present
intention to exercise the redemption feature.

12

In connection with the U.S. Clay acquisition in 2002, we issued a total of
$1.8 million in promissory notes to the sellers as partial consideration for the
acquisition. The notes were paid in full on April 25, 2003.

For the three months ended March 31, 2003, we made capital expenditures of
$14.3 million, primarily for rental tool inventory, LWD and MWD tools, wireline
equipment and coil tubing units, including expenditures for the replacement of
equipment lost in hole. In addition, we incurred $2.6 million in research and
development expenses for the three months ended March 31, 2003. Management
believes that cash generated from operations, cash on-hand and amounts available
under our revolving credit facility will provide sufficient funds for our
identified capital projects, debt service and working capital requirements.
However, part of our strategy involves the acquisition of companies that have
products and services complementary to our existing strategic base of
operations. Depending on the size of any future acquisitions, we may require
additional debt financing, possibly in excess of the limits of the credit
facility, or additional equity financing.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk. Market risk is the potential loss arising
from adverse changes in market prices and rates. We have not entered into
derivative or other financial instruments for trading or speculative purposes.
Our market risk could arise from changes in interest rates and foreign currency
exchange rates.

Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates. Assuming our current level of borrowings, a 100 basis
point increase in interest rates under these borrowings would have increased our
interest expense by approximately $387,000 for the three months ended March 31,
2003.

Foreign Currency Exchange Risk. Our earnings and financial position are
affected by foreign exchange rate fluctuations. We currently do not hedge
against foreign currency translation risks, and we believe that foreign currency
exchange risk is not significant to our operations.

Stock Price Volatility. Our ability to raise capital at a reasonable cost
of capital is, in part, affected by the price of our stock. The market price of
our stock may be influenced by many factors including variations in our
earnings, variations in oil and natural gas prices, investor perceptions of us
and other oilfield service companies and the liquidity of the market for our
common stock.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Within 90 days before
the filing of this quarterly report on Form 10-Q, our principal executive
officer and principal financial officer evaluated the effectiveness of our
disclosure controls and procedures. Based on the evaluation, our principal
executive officer and principal financial officer believe that:

- our disclosure controls and procedures are designed to ensure that
information we are required to disclose in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms; and

- our disclosure controls and procedures were effective to ensure that
material information was accumulated and communicated to our management,
including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.

(b) Changes in internal controls. There have been no significant changes in
our internal controls or in other factors that could significantly affect our
internal controls subsequent to their evaluation, nor have there been any
corrective actions with regard to significant deficiencies or material
weaknesses.

13

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

The documents listed on the Exhibit Index following the signature pages
hereto are filed with this Quarterly Report on Form 10-Q, and the contents of
such Exhibit Index are hereby incorporated herein by reference.

b. Reports on Form 8-K

None

14

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.

W-H ENERGY SERVICES, INC.

By: /s/ JEFFREY L. TEPERA
------------------------------------
Jeffrey L. Tepera
Vice President and
Chief Financial Officer
Date: May 9, 2003 (Principal Financial Officer)

By: /s/ ERNESTO BAUTISTA, III
------------------------------------
Ernesto Bautista, III
Vice President and
Corporate Controller
Date: May 9, 2003 (Principal Accounting Officer)

15

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kenneth T. White, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of W-H Energy
Services, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

/s/ KENNETH T. WHITE, JR.
- --------------------------------------
Name: Kenneth T. White, Jr.
Title: Chairman, President and Chief
Executive Officer

16

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey L. Tepera, certify that:

1. I have reviewed this quarterly report on Form 10-Q of W-H Energy
Services, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

/s/ JEFFREY L. TEPERA
- --------------------------------------
Name: Jeffrey L. Tepera
Title: Vice President and Chief
Financial Officer

17

EXHIBIT INDEX