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EX-32.2 - EXHIBIT 32.2 - PIONEER ENERGY SERVICES CORPexhibit3222q2018.htm
EX-32.1 - EXHIBIT 32.1 - PIONEER ENERGY SERVICES CORPexhibit3212q2018.htm
EX-31.2 - EXHIBIT 31.2 - PIONEER ENERGY SERVICES CORPexhibit3122q2018.htm
EX-31.1 - EXHIBIT 31.1 - PIONEER ENERGY SERVICES CORPexhibit3112q2018.htm
EX-10.1 - EXHIBIT 10.1 - PIONEER ENERGY SERVICES CORPexhibit101indemnificationa.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________________________________ 
FORM 10-Q
______________________________________________ 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-8182
PIONEER ENERGY SERVICES CORP.
(Exact name of registrant as specified in its charter)
_____________________________________________ 
TEXAS
 
74-2088619
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
1250 N.E. Loop 410, Suite 1000
San Antonio, Texas
 
78209
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (855) 884-0575
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
   (Do not check if a small reporting company.)
 
 
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No x
As of July 13, 2018, there were 78,214,550 shares of common stock, par value $0.10 per share, of the registrant outstanding.
 



PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
(audited)
 
(in thousands, except share data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
61,517

 
$
73,640

Restricted cash
2,000

 
2,008

Receivables:
 
 
 
Trade, net of allowance for doubtful accounts
84,591

 
79,592

Unbilled receivables
22,951

 
16,029

Insurance recoveries
15,014

 
13,874

Other receivables
4,270

 
3,510

Inventory
17,719

 
14,057

Assets held for sale
6,433

 
6,620

Prepaid expenses and other current assets
6,710

 
6,229

Total current assets
221,205

 
215,559

Property and equipment, at cost
1,100,291

 
1,093,635

Less accumulated depreciation
567,014

 
544,012

Net property and equipment
533,277

 
549,623

Other noncurrent assets
2,562

 
1,687

Total assets
$
757,044

 
$
766,869

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,014

 
$
29,538

Deferred revenues
1,921

 
905

Accrued expenses:
 
 
 
Payroll and related employee costs
29,315

 
21,023

Insurance claims and settlements
14,702

 
13,289

Insurance premiums and deductibles
6,238

 
6,742

Interest
6,361

 
6,624

Other
7,732

 
6,793

Total current liabilities
104,283

 
84,914

Long-term debt, less unamortized discount and debt issuance costs
463,072

 
461,665

Deferred income taxes
3,429

 
3,151

Other noncurrent liabilities
3,569

 
7,043

Total liabilities
574,353

 
556,773

Commitments and contingencies (Note 10)

 

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

 

Common stock $.10 par value; 200,000,000 shares authorized; 78,214,550 and 77,719,021 shares outstanding at June 30, 2018 and December 31, 2017, respectively
7,900

 
7,835

Additional paid-in capital
548,461

 
546,158

Treasury stock, at cost; 789,532 and 630,688 shares at June 30, 2018 and December 31, 2017, respectively
(4,965
)
 
(4,416
)
Accumulated deficit
(368,705
)
 
(339,481
)
Total shareholders’ equity
182,691

 
210,096

Total liabilities and shareholders’ equity
$
757,044

 
$
766,869


See accompanying notes to condensed consolidated financial statements.

2




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Revenues
$
154,782

 
$
107,130

 
$
299,260

 
$
202,887

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Operating costs
114,197

 
79,059

 
216,963

 
151,787

Depreciation and amortization
23,287

 
24,740

 
47,034

 
49,732

General and administrative
24,829

 
16,112

 
44,023

 
33,856

Bad debt recovery, net of expense
(370
)
 
(226
)
 
(422
)
 
(589
)
Impairment
2,368

 
795

 
2,368

 
795

Gain on dispositions of property and equipment, net
(726
)
 
(621
)
 
(1,061
)
 
(1,092
)
Total costs and expenses
163,585

 
119,859

 
308,905

 
234,489

Loss from operations
(8,803
)
 
(12,729
)
 
(9,645
)
 
(31,602
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net of interest capitalized
(9,642
)
 
(6,418
)
 
(19,155
)
 
(12,477
)
Other income (expense), net
44

 
73

 
548

 
(71
)
Total other expense, net
(9,598
)
 
(6,345
)
 
(18,607
)
 
(12,548
)
 
 
 
 
 
 
 
 
Loss before income taxes
(18,401
)
 
(19,074
)
 
(28,252
)
 
(44,150
)
Income tax (expense) benefit
249

 
(1,135
)
 
(1,039
)
 
(1,183
)
Net loss
$
(18,152
)
 
$
(20,209
)
 
$
(29,291
)
 
$
(45,333
)
 
 
 
 
 
 
 
 
Loss per common share - Basic
$
(0.23
)
 
$
(0.26
)
 
$
(0.38
)
 
$
(0.59
)
 
 
 
 
 
 
 
 
Loss per common share - Diluted
$
(0.23
)
 
$
(0.26
)
 
$
(0.38
)
 
$
(0.59
)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Basic
77,944

 
77,377

 
77,776

 
77,225

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—Diluted
77,944

 
77,377

 
77,776

 
77,225
















See accompanying notes to condensed consolidated financial statements.

3




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six months ended June 30,
 
2018
 
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(29,291
)
 
$
(45,333
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
47,034

 
49,732

Allowance for doubtful accounts, net of recoveries
(422
)
 
(589
)
Gain on dispositions of property and equipment, net
(1,061
)
 
(1,092
)
Stock-based compensation expense
2,356

 
2,335

Amortization of debt issuance costs and discount
1,422

 
930

Impairment
2,368

 
795

Deferred income taxes
273

 
768

Change in other noncurrent assets
(199
)
 
299

Change in other noncurrent liabilities
(3,480
)
 
(1,563
)
Changes in current assets and liabilities:
 
 
 
Receivables
(12,368
)
 
(27,687
)
Inventory
(3,662
)
 
(2,151
)
Prepaid expenses and other current assets
(785
)
 
(403
)
Accounts payable
5,858

 
7,441

Deferred revenues
619

 
(244
)
Accrued expenses
8,463

 
465

Net cash provided by (used in) operating activities
17,125

 
(16,297
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(31,485
)
 
(40,032
)
Proceeds from sale of property and equipment
2,225

 
7,748

Proceeds from insurance recoveries
541

 
3,119

Net cash used in investing activities
(28,719
)
 
(29,165
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Debt repayments

 
(12,305
)
Proceeds from issuance of debt

 
55,000

Proceeds from exercise of options
12

 

Purchase of treasury stock
(549
)
 
(533
)
Net cash provided by (used in) financing activities
(537
)
 
42,162

 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
(12,131
)
 
(3,300
)
Beginning cash, cash equivalents and restricted cash
75,648

 
10,194

Ending cash, cash equivalents and restricted cash
$
63,517

 
$
6,894

 
 
 
 
Supplementary disclosure:
 
 
 
Interest paid
$
18,073

 
$
11,971

Income tax paid
$
1,789

 
$
630

Noncash investing and financing activity:
 
 
 
Change in capital expenditure accruals
$
2,440

 
$
1,952

 







See accompanying notes to condensed consolidated financial statements.

4




PIONEER ENERGY SERVICES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Business
Pioneer Energy Services Corp. provides land-based drilling services and production services to a diverse group of oil and gas exploration and production companies in the United States and internationally in Colombia.
Our drilling services business segments provide contract land drilling services through three domestic divisions which are located in the Marcellus/Utica, Permian Basin and Eagle Ford, and Bakken regions, and internationally in Colombia. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. All of our rigs are equipped with 1,500 horsepower or greater drawworks. Our drilling rig fleet is 100% pad-capable and offers the latest advancements in pad drilling. The following table summarizes our current rig fleet count and composition for each drilling services business segment:
 
Multi-well, Pad-capable
 
AC rigs
 
SCR rigs
 
Total
Domestic drilling
16

 

 
16
International drilling

 
8

 
8
 
 
 
 
 
24
In July 2018, we entered into a three-year term contract for the construction of a new 1,500 horsepower, AC pad-optimal rig which we expect to deploy in early 2019 to the Permian Basin.
Our production services business segments provide a range of well, wireline and coiled tubing services to a diverse group of exploration and production companies, with our operations concentrated in the major domestic onshore oil and gas producing regions in the Gulf Coast, Mid-Continent and Rocky Mountain states. The following table summarizes our current fleet count and composition for each of our production services business segments, including one coiled tubing unit which was delivered in early July:
 
550 HP
 
600 HP
 
Total
Well servicing rigs, by horsepower (HP) rating
113
 
12

 
125

 
 
 
 
 
 
 
Onshore
 
Offshore
 
Total
Wireline services units
104
 

 
104

Coiled tubing services units
9
 
2

 
11

Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Energy Services Corp. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. We suggest that you read these unaudited condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the year ended December 31, 2017.
Use of Estimates In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to our estimates of certain variable revenues and amortization periods of certain deferred revenues and costs associated with drilling daywork contacts, our estimates of projected cash flows and fair values for

5




impairment evaluations, our estimate of the valuation allowance for deferred tax assets, our estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance and our estimate of compensation related accruals.
Subsequent Events In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after June 30, 2018, through the filing of this Form 10-Q, for inclusion as necessary.
Reclassifications Certain amounts in the unaudited condensed consolidated financial statements for the prior year periods have been reclassified to conform to the current year’s presentation.
We have five operating segments, comprised of two drilling services business segments (domestic and international drilling) and three production services business segments (well servicing, wireline services and coiled tubing services). We revised our segments as of December 31, 2017 to reflect changes in the basis used by management in making decisions regarding our business for resource allocation and performance assessment. These changes reflect our current operating focus as is required by ASC Topic 280, Segment Reporting. See Note 9, Segment Information for this revised presentation.
Change in Accounting Principle and Recently Issued Accounting Standards
Changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”) are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). We consider the applicability and impact of all ASUs; any ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on our consolidated financial position and results of operations.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, a comprehensive new revenue recognition standard that supersedes nearly all pre-existing revenue recognition guidance. The standard, and its related amendments, collectively referred to as ASC Topic 606, outlines a single comprehensive model for revenue recognition based on the core principle that a company will recognize revenue when promised goods or services are transferred to clients, in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.
We adopted this standard effective January 1, 2018 using the modified retrospective method, in which the standard has been applied to all contracts existing as of the date of initial application, with the cumulative effect of applying the standard recognized in retained earnings. Accordingly, revenues for reporting periods ending after January 1, 2018 are presented under ASC Topic 606, while prior period amounts have not been adjusted and continue to be reported under the previous revenue recognition guidance. In accordance with ASC Topic 606, we also adopted ASC Subtopic 340-40, Other Assets and Deferred Costs, Contracts with Customers, effective January 1, 2018, which requires that the incremental costs of obtaining or fulfilling a contract with a customer be recognized as an asset if the costs are expected to be recovered.
The adoption of these standards resulted in a cumulative effect adjustment of $0.1 million after applicable income taxes, which consists of the impact of the timing difference related to recognition of mobilization revenues and costs. Mobilization costs incurred are deferred and amortized over the expected period of benefit under ASC Subtopic 340-40, but were amortized over the initial contract term under the previous accounting guidance. The recognition of both mobilization revenues and costs begins when mobilization activity is completed under ASC Topic 606, but were recognized during the period of initial mobilization under the previous accounting guidance. Additionally, the opening balances of deferred mobilization costs were reclassified in accordance with ASC Subtopic 340-40, which requires classification of the entire deferred balance according to the duration of the original contract to which it relates, rather than bifurcating the asset into current and noncurrent portions.
For more information about the accounting under ASC Topic 606, and disclosures under the new standard, see Note 2, Revenue from Contracts with Customers.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases, which among other things, requires lessees to recognize substantially all leases on the balance sheet, with expense recognition that is similar to the current lease standard, and aligns the principles of lessor accounting with the principles of the FASB’s new revenue guidance (referenced above). This ASU is effective for us beginning January 1, 2019 and requires a modified retrospective application, although certain practical expedients are permitted. We have performed a scoping and preliminary assessment of the impact of this new standard.

6




As a lessee, this standard will impact us in situations where we lease real estate and office equipment, for which we will recognize a right-of-use asset and a corresponding lease liability on our consolidated balance sheet. The future lease obligations disclosed in Note 4, Leases, included in Part II, Item 8, of our Annual Report on Form 10-K for the year ended December 31, 2017, provides some insight to the estimated impact of adoption for us as a lessee.
As a lessor, we expect the adoption of this new standard will apply to our drilling contracts and as a result, we expect to have a lease component and a service component of our revenues derived from these contracts. However, recent FASB tentative decisions indicate that additional practical expedients may be adopted by the FASB which, if adopted, we expect would allow us to continue to recognize and present our revenues from drilling contracts (both lease and service components) as one revenue stream in our consolidated statements of operations. We have not yet determined the impact this standard may have on our production services businesses. We continue to evaluate the impact of this guidance and have not yet determined its impact on our financial position and results of operations.
Additional Detail of Account Balances and Related-Party Transactions
Cash and Cash Equivalents — As of June 30, 2018, we had $50.1 million of cash equivalents, consisting of investments in highly-liquid money-market mutual funds. We had no cash equivalents at December 31, 2017.
Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets include items such as insurance, rent deposits and fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Prepaid expenses and other current assets also include deferred mobilization costs for short-term drilling contracts.
Other Noncurrent Assets — Other noncurrent assets consist of cash deposits related to the deductibles on our workers’ compensation insurance policies, deferred compensation plan investments, deferred mobilization costs on long-term drilling contracts, and intangible assets.
Other Accrued Expenses — Our other accrued expenses include accruals for items such as property taxes, sales taxes, and professional and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit.
Other Noncurrent Liabilities — Our other noncurrent liabilities consist of the noncurrent portion of liabilities associated with our long-term compensation plans, deferred lease liabilities, and the noncurrent portion of deferred mobilization revenues.
Related-Party Transactions — During the six months ended June 30, 2018 and 2017, the Company paid approximately $120,000 and $70,000, respectively, for trucking and equipment rental services, which represented arms-length transactions, to Gulf Coast Lease Service. Joe Freeman, our Senior Vice President of Well Servicing, serves as the President of Gulf Coast Lease Service, which is owned and operated by Mr. Freeman’s two sons. Mr. Freeman does not receive compensation from Gulf Coast Lease Service, and he serves primarily in an advisory role to his sons.

2.    Revenue from Contracts with Customers
Our production services business segments earn revenues for well servicing, wireline services and coiled tubing services pursuant to master services agreements based on purchase orders or other contractual arrangements with the client. Production services jobs are generally short-term (less than 30 days) and are charged at current market rates for the labor, equipment and materials necessary to complete the job. Production services jobs are varied in nature, but typically represent a single performance obligation, either for a particular job, a series of distinct jobs, or a period of time during which we stand ready to provide services as our client needs them. Revenue is recognized for these services over time, as the services are performed.
Our drilling services business segments earn revenues by drilling oil and gas wells for our clients under daywork contracts. We provide the drilling rig, crew and supplies necessary to operate the rig. Contract modifications that extend the term of a dayrate contract are generally accounted for prospectively as a separate dayrate contract. We account for our services provided under daywork contracts as a single performance obligation comprised of a series of distinct time increments which are satisfied over time. Accordingly, dayrate revenues are recognized in the period during which the services are performed.

7




With most drilling contracts, we also receive payments contractually designated for the mobilization and demobilization of drilling rigs and other equipment to and from the client’s drill site. Revenues associated with the mobilization and demobilization of our drilling rigs to and from the client’s drill site do not relate to a distinct good or service and are recognized ratably over the related contract term.
The amount of demobilization revenue that we ultimately collect is dependent upon the specific contractual terms, most of which include provisions for reduced (or no) payment for demobilization when, among other things, the contract is renewed or extended with the same client, or when the rig is subsequently contracted with another client prior to the termination of the current contract. Since revenues associated with demobilization activity are typically variable, at each period end, they are estimated at the most likely amount, and constrained when the likelihood of a significant reversal is probable. Any change in the expected amount of demobilization revenue is accounted for with the net cumulative impact of the change in estimate recognized in the period during which the revenue estimate is revised.
The upfront costs that we incur to mobilize the drilling rig to our client’s initial drilling site are capitalized and recognized ratably over the term of the related contract, including any contracted renewal or extension periods, which is our estimate of the period during which we expect to benefit from the cost of mobilizing the rig. Costs associated with the final demobilization at the end of the contract term are expensed when incurred, when the demobilization activity is performed.
We also act as a principal for certain reimbursable services and auxiliary equipment provided by us to our clients, for which we incur costs and earn revenues, many of which are variable, or dependent upon the activity that is actually performed each day under the related contract. Accordingly, reimbursements that we receive for out-of-pocket expenses are recorded as revenues and the out-of-pocket expenses for which they relate are recorded as operating costs during the period to which they relate within the series of distinct time increments.
All of our revenues are recognized net of sales taxes, when applicable.
Contract Asset and Liability Balances and Contract Cost Assets
Contract asset and contract liability balances relate to demobilization and mobilization revenues, respectively. Demobilization revenue that we expect to receive is recognized ratably over the related contract term, but invoiced upon completion of the demobilization activity. Mobilization revenue which is typically collected upon the completion of the initial mobilization activity is deferred and recognized ratably over the related contract term. Contract asset and liability balances are netted at the contract level, with the net current and noncurrent portions separately classified in our condensed consolidated balance sheets, and referred to herein as “deferred revenues.”
Contract cost assets represent the costs associated with the initial mobilization required in order to fulfill the contract, which are deferred and recognized ratably over the period during which we expect to benefit from the mobilization, or the period during which we expect to satisfy the performance obligations of the related contract. Contract cost assets are presented as either current or noncurrent, according to the duration of the original contract to which it relates, and referred to herein as “deferred costs.”
Our current and noncurrent deferred revenues and costs as of June 30, 2018 and January 1, 2018 were as follows (amounts in thousands):
 
June 30, 2018
 
January 1, 2018
Current deferred revenues
$
1,921

 
$
1,287

Current deferred costs
633

 
1,072

 
 
 
 
Noncurrent deferred revenues
$
964

 
$
564

Noncurrent deferred costs
1,425

 
1,177


8




The changes in deferred revenue and cost balances during the three and six months ended June 30, 2018 are primarily related to the increase in deferred mobilization revenue and cost balances for the deployment of one international rig under a new term contract in the first quarter of 2018, an increase in deferred revenues associated with a prepayment made by one of our international clients, and decreases related to the amortization of deferred revenues and costs during the period. Amortization of deferred revenues and costs during the three and six months ended June 30, 2018 and 2017 were as follows (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Amortization of deferred revenues
$
542

 
$
521

 
$
1,041

 
$
1,297

Amortization of deferred costs
486

 
1,219

 
949

 
2,686

As of June 30, 2018, all 16 of our domestic drilling rigs are operating under daywork contracts, 14 of which are term contracts, and seven of our eight international drilling rigs are operating under term daywork contracts. The term contracts for our international drilling rigs are cancelable by our clients without penalty, although the contracts require 30 days notice and payment for demobilization services. The spot contracts for our domestic drilling rigs are also terminable by our client with 30 days notice, but typically do not include a required payment for demobilization services. Revenues associated with the initial mobilization and/or demobilization of drilling rigs under cancelable contracts are deferred and recognized ratably over the anticipated duration of the original contract, which is the period during which we expect our client to benefit from the mobilization of the rig, and represents a separate performance obligation because the payment for mobilization and/or demobilization creates a material right to our client during the cancelable period, for which the transaction price is allocated to the optional goods and services expected to be provided.
Remaining Performance Obligations
We have elected to apply the practical expedients in ASC Topic 606 which allow entities to omit disclosure of (i) the transaction price allocated to the remaining performance obligations associated with short-term contracts, and (ii) the estimated variable consideration related to wholly unsatisfied performance obligations, or to distinct future time increments within a series of performance obligations. Therefore, we have not disclosed the remaining amount of fixed mobilization revenue (or estimated future variable demobilization revenue) associated with short-term contracts, and we have not disclosed an estimate of the amount of future variable dayrate drilling revenue. However, the amount of fixed mobilization revenue associated with remaining performance obligations is reflected in the net unamortized balance of deferred mobilization revenues, which is presented in both current and noncurrent portions in our condensed consolidated balance sheet.
Disaggregation of Revenue
ASC Topic 606 requires disclosure of the disaggregation of revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. We believe the disclosure of revenues by operating segment achieves the objective of this disclosure requirement. See Note 9, Segment Information, for the disaggregation of revenues by operating segment, which reflects the disaggregation of revenues by the type of services provided and by geography (international versus domestic).
Impact of ASC Topic 606 on Financial Statement Line Items and Disclosures
Our revenue recognition pattern under ASC Topic 606 is similar to revenue recognition under the previous accounting guidance, except for: (i) the timing of recognition of demobilization revenues which are estimated and recognized ratably over the term of the related contract under ASC Topic 606, and constrained when appropriate, but were previously not recognized until the activity was performed under previous guidance; (ii) the timing of recognition of mobilization revenues and costs which are recognized over the applicable amortization period beginning when the initial mobilization of the rig is completed, but which, under previous guidance, we recognized over the related contract term beginning when the initial mobilization activity commenced, (iii) the timing of recognition of mobilization costs which are deferred and recognized ratably over the expected period of benefit, but which, under previous guidance, we recognized ratably over the term of the initial contract; and (iv) presentation of mobilization costs which are presented as either current or noncurrent according to the duration of the original contract to which it relates under ASC Topic 606, but which we bifurcated and presented both current and noncurrent portions in separate line items under previous guidance.

9




These differences have not had a material impact on our condensed consolidated financial position or results of operations as of and for the three and six months ended June 30, 2018. Additionally, we have determined that any disclosures required by ASC Topic 606 which are not presented herein are either not applicable, or are not material.
3.    Property and Equipment
Capital Expenditures — Our capital expenditures were $33.9 million and $42.0 million during the six months ended June 30, 2018 and 2017, respectively, which includes $0.1 million and $0.3 million, respectively, of capitalized interest costs incurred. Capital expenditures during the six months ended June 30, 2018 primarily related to various routine expenditures to maintain our fleets and purchase new support equipment, as well as the expansion of our wireline and coiled tubing fleets, vehicle fleet upgrades in all business segments, and capital projects to upgrade and refurbish certain of our international and domestic drilling rigs. Capital expenditures during the six months ended June 30, 2017 primarily related to the acquisition of 20 well servicing rigs, expansion of our wireline fleet, upgrades to drilling rigs and other new drilling equipment.
At June 30, 2018, capital expenditures incurred for property and equipment not yet placed in service was $14.4 million, primarily related to installments of $5.6 million on the purchase of two coiled tubing units, one of which was put into service in early July, as well as refurbishments and upgrades of various drilling and production services equipment. At December 31, 2017, property and equipment not yet placed in service was $6.8 million, primarily related to routine refurbishments on one international drilling rig in preparation for its deployment in 2018, installments on the purchase of three wireline units and one coiled tubing unit, and scheduled refurbishments on drilling and production services equipment.
Gain/Loss on Disposition of Property — During the six months ended June 30, 2018, we recognized net gains of $1.1 million on the disposition of various property and equipment, including the sale of six wireline units and one drilling rig, which was previously held for sale. During the six months ended June 30, 2017, we recognized a net gain of $1.1 million on the disposition of property and equipment which was primarily related to the loss of drill pipe in operation, for which we were reimbursed by the client, gains on sales of vehicles which were used in our production services segments’ operations, and a gain on the disposal of two cranes that were damaged.
Assets Held for Sale — As of June 30, 2018, our condensed consolidated balance sheet reflects assets held for sale of $6.4 million, which primarily represents the fair value of two domestic SCR drilling rigs and one domestic mechanical drilling rig, as well as other drilling equipment, six offshore wireline units and five coiled tubing units. All of the wireline units and three of the coiled tubing units were subsequently sold in July 2018. During the six months ended June 30, 2018 and 2017, we recognized impairment charges of $2.4 million and $0.8 million, respectively, to reduce the carrying values of assets which were classified as held for sale, to their estimated fair values, based on expected sales prices which are classified as Level 3 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures.
As of December 31, 2017, our condensed consolidated balance sheet reflects assets held for sale of $6.6 million, which primarily represents the fair value of three domestic SCR drilling rigs and one domestic mechanical drilling rig, as well as other drilling equipment, two offshore wireline units and one coiled tubing unit and other spare equipment.
Impairments We evaluate for potential impairment of long-lived assets when indicators of impairment are present, which may include, among other things, significant adverse changes in industry trends (including revenue rates, utilization rates, oil and natural gas market prices, and industry rig counts). Beginning in late 2014, oil prices declined significantly resulting in a downturn in our industry that persisted through 2016, affecting both drilling and production services. Despite the recovery in commodity prices that began in late 2016 and continued through 2017, we continued to monitor all indicators of potential impairments in accordance with ASC Topic 360, Property, Plant and Equipment, and concluded there are no triggers present that require impairment testing as of June 30, 2018. The assumptions we use in the evaluation for impairment are inherently uncertain and require management judgment.
4.
Valuation Allowances on Deferred Tax Assets and Recently Enacted Tax Reform
Valuation Allowances on Deferred Tax Assets
As of June 30, 2018, we had $95.2 million and $11.8 million of deferred tax assets related to domestic and foreign net operating losses, respectively, that are available to reduce future taxable income. In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be

10




realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
In performing this analysis as of June 30, 2018 in accordance with ASC Topic 740, Income Taxes, we assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. A significant piece of negative evidence evaluated is the cumulative loss incurred during previous years. Such negative evidence limits the ability to consider other positive evidence that is subjective, such as projections for taxable income in future years. As a result, we would recognize a benefit only to the extent that reversals of deferred income tax liabilities are expected to generate taxable income in each relevant jurisdiction in future periods which would offset our deferred tax assets.
Our domestic federal net operating losses generated through 2017 have a 20 year carryforward period and can be used to offset future domestic taxable income until their expiration, beginning in 2030, with the latest expiration in 2037. Losses generated after 2017 have an unlimited carryforward period and are limited in usage to 80% of taxable income (pursuant to the Tax Reform Act mentioned below). The majority of our foreign net operating losses generated through 2016 have an indefinite carryforward period, while losses generated after 2016 have a carryforward period of 12 years. As of June 30, 2018, we have a valuation allowance that fully offsets our foreign and domestic federal deferred tax assets.
During the three and six months ended June 30, 2018, we provided valuation allowance adjustments on deferred tax assets of $1.5 million and $5.7 million, respectively. During the three and six months ended June 30, 2017, we provided valuation allowance adjustments on deferred tax assets of $3.5 million and $13.2 million, respectively. The valuation allowance is the primary factor causing our effective tax rate to be significantly lower than the statutory rate. The amount of the deferred tax asset considered realizable, however, would increase if cumulative losses are no longer present and additional weight is given to subjective evidence in the form of projected future taxable income.
Recently Enacted Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was enacted. The legislation significantly changes U.S. tax law by, among other things, permanently reducing the U.S. corporate income tax rate from a maximum of 35% to a flat rate of 21%, repealing the alternative minimum tax (AMT), implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries, limiting the current deductibility of net interest expense in excess of 30% of adjusted taxable income, and limiting net operating losses generated after 2017 to 80% of taxable income.
Territorial Tax SystemTo minimize tax base erosion with a territorial tax system, beginning in 2018, the Tax Reform Act provides for a new global intangible low-taxed income (GILTI) provision. Under the GILTI provision, certain foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets are included in U.S. taxable income. We are now subject to GILTI, but have not yet triggered an income inclusion as of June 30, 2018. Any future inclusion is expected to be offset by net operating loss carry forwards in the U.S. We are still evaluating, pending further interpretive guidance, whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.
Limitation on Interest Expense DeductionThe new limitation on interest expense resulted in a $14.1 million disallowance for the period ended June 30, 2018; however, this adjustment is offset fully by our net operating loss carry forwards. The disallowed interest has an indefinite carry forward period and any limitations on the utilization of this interest expense carryforward have been factored into our valuation allowance analysis.
Limitation on Future Net Operating Losses DeductionNet operating losses generated after 2017 are carried forward indefinitely and are limited to 80% of taxable income. Net operating losses generated prior to 2018 continue to be carried forward for 20 years and have no 80% limitation on utilization.
Measurement PeriodGiven the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available,

11




prepared or analyzed. SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Reform Act.
Our accounting is complete as of June 30, 2018 and December 31, 2017 as related to the re-measurement of deferred taxes to the new tax rate of 21%, repeal of the AMT, mandatory repatriation, limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, and limitation of net operating losses generated after 2017 to 80% of taxable income. With respect to the new GILTI provision, we are awaiting further interpretive guidance regarding the possible application of deferred taxes to GILTI.
5.     Debt
Our debt consists of the following (amounts in thousands):
 
June 30, 2018
 
December 31, 2017
Senior secured term loan
$
175,000

 
$
175,000

Senior notes
300,000

 
300,000

 
475,000

 
475,000

Less unamortized discount (based on imputed interest rate of 10.46%)
(3,036
)
 
(3,387
)
Less unamortized debt issuance costs
(8,892
)
 
(9,948
)
 
$
463,072

 
$
461,665

Senior Secured Term Loan
Our senior secured term loan (the “Term Loan”) entered into on November 8, 2017 provided for one drawing in the amount of $175 million, net of a 2% original issue discount. Proceeds from the issuance of the Term Loan were used to repay the entire outstanding balance under our Revolving Credit Facility, plus fees and accrued and unpaid interest, as well as the fees and expenses associated with entering into the Term Loan and ABL Facility, which is further described below. The remainder of the proceeds are available to be used for other general corporate purposes.
The Term Loan is not subject to amortization payments of principal. Interest on the principal amount accrues at the LIBOR rate or the base rate as defined in the agreement, at our option, plus an applicable margin of 7.75% and 6.75%, respectively. The Term Loan is set to mature on November 8, 2022, or earlier, subject to certain circumstances as described in the agreement, and including an earlier maturity date if the outstanding balance of the Senior Notes exceeds $15.0 million on December 14, 2021, at which time the Term Loan would then mature. However, the Term Loan may be prepaid, at our option, at any time, in whole or in part, subject to a minimum of $5 million, and subject to a declining call premium as defined in the agreement.
The Term Loan contains a financial covenant requiring the ratio of (i) the net orderly liquidation value of our fixed assets (based on appraisals obtained as required by our lenders), on a consolidated basis, in which the lenders under the Term Loan maintain a first priority security interest, plus proceeds of asset dispositions not required to be used to effect a prepayment of the Term Loan to (ii) the outstanding principal amount of the Term Loan, to be at least equal to 1.50 to 1.00 as of any June 30 or December 31 of any calendar year through maturity.
The Term Loan contains customary mandatory prepayments from the proceeds of certain transactions including certain asset dispositions and debt issuances, and has additional customary restrictions that, among other things, and subject to certain exceptions, limit our ability to:
incur additional debt;
incur or permit liens on assets;
make investments and acquisitions;
consolidate or merge with another company;
engage in asset sales; and
pay dividends or make distributions.

12




In addition, the Term Loan contains customary events of default, upon the occurrence and during the continuation of any of which the applicable margin would increase by 2% per year, including without limitation:
payment defaults;
covenant defaults;
material breaches of representations or warranties;
event of default under, or acceleration of, other material indebtedness;
bankruptcy or insolvency;
material judgments against us;
failure of any security document supporting the Term Loan; and
change of control.
Our obligations under the Term Loan are guaranteed by our wholly-owned domestic subsidiaries, and are secured by substantially all of our domestic assets, in each case, subject to certain exceptions and permitted liens.
Asset-based Lending Facility
In addition to entering into the Term Loan, on November 8, 2017, we also entered into a senior secured revolving asset-based credit facility (the “ABL Facility”) providing for borrowings in the aggregate principal amount of up to $75 million, subject to a borrowing base and including a $30 million sub-limit for letters of credit. The ABL Facility bears interest, at our option, at the LIBOR rate or the base rate as defined in the ABL Facility, plus an applicable margin ranging from 1.75% to 3.25%, based on average availability on the ABL Facility. The ABL Facility requires a commitment fee due monthly based on the average monthly unused amount of the commitments of the lenders, a fronting fee due for each letter of credit issued, and a monthly letter of credit fee due based on the average undrawn amount of letters of credit outstanding during such period. The ABL Facility is generally set to mature 90 days prior to the maturity of the Term Loan, subject to certain circumstances, including the future repayment, extinguishment or refinancing of our Term Loan and/or Senior Notes prior to their respective maturity dates. Availability under the ABL Facility is determined by reference to a borrowing base as defined in the agreement, generally comprised of a percentage of our accounts receivable and inventory.
We have not drawn upon the ABL Facility to date. As of June 30, 2018, we had $9.7 million in committed letters of credit, which, after borrowing base limitations, resulted in borrowing availability of $62.0 million. Borrowings available under the ABL Facility are available for general corporate purposes and there are no limitations on our ability to access the borrowing capacity provided there is no default and compliance with the covenants under the ABL Facility is maintained. Additionally, if our availability under the ABL Facility is less than 15% of the maximum amount (or $11.25 million), we are required to maintain a minimum fixed charge coverage ratio, as defined in the ABL Facility, of at least 1.00 to 1.00, measured on a trailing 12 month basis.
The ABL Facility also contains customary restrictive covenants which, subject to certain exceptions, limit, among other things, our ability to:
declare dividends and make other distributions;
issue or sell certain equity interests;
optionally prepay, redeem or repurchase certain of our subordinated indebtedness;
make loans or investments (including acquisitions);
incur additional indebtedness or modify the terms of permitted indebtedness;
grant liens;
change our business or the business of our subsidiaries;
merge, consolidate, reorganize, recapitalize, or reclassify our equity interests;
sell our assets, and
enter into certain types of transactions with affiliates.
Our obligations under the ABL Facility are guaranteed by us and our domestic subsidiaries, subject to certain exceptions, and are secured by (i) a first-priority perfected security interest in all inventory and cash, and (ii) a second-priority perfected security in substantially all of our tangible and intangible assets, in each case, subject to certain exceptions and permitted liens.

13




Senior Notes
In 2014, we issued $300 million of unregistered senior notes at face value, with a coupon interest rate of 6.125% that are due in 2022 (the “Senior Notes”). The Senior Notes will mature on March 15, 2022 with interest due semi-annually in arrears on March 15 and September 15 of each year. We have the option to redeem the Senior Notes, in whole or in part, at any time on or after March 15, 2017 in each case at the redemption price specified in the Indenture dated March 18, 2014 (the “Indenture”) plus any accrued and unpaid interest and any additional interest (as defined in the Indenture) thereon to the date of redemption.
In accordance with a registration rights agreement with the holders of our Senior Notes, we filed an exchange offer registration statement on Form S-4 with the Securities and Exchange Commission that became effective on October 2, 2014. The exchange offer registration statement enabled the holders of our Senior Notes to exchange their senior notes for publicly registered notes with substantially identical terms. References to the “Senior Notes” herein include the senior notes issued in the exchange offer.
If we experience a change of control (as defined in the Indenture), we will be required to make an offer to each holder of the Senior Notes to repurchase all or any part of the Senior Notes at a purchase price equal to 101% of the principal amount of each Senior Note, plus accrued and unpaid interest, if any, to the date of repurchase. If we engage in certain asset sales, within 365 days of such sale we will be required to use the net cash proceeds from such sale, to the extent we do not reinvest those proceeds in our business, to make an offer to repurchase the Senior Notes at a price equal to 100% of the principal amount of each Senior Note, plus accrued and unpaid interest to the repurchase date.
The Indenture, among other things, limits us and certain of our subsidiaries, subject to certain exceptions, in our ability to:
pay dividends on stock, repurchase stock, redeem subordinated indebtedness or make other restricted payments and investments;
incur, assume or guarantee additional indebtedness or issue preferred or disqualified stock;
create liens on our or their assets;
enter into sale and leaseback transactions;
sell or transfer assets;
borrow, pay dividends, or transfer other assets from certain of our subsidiaries;
consolidate with or merge with or into, or sell all or substantially all of our properties to any other person;
enter into transactions with affiliates; and
enter into new lines of business.
The Senior Notes are not subject to any sinking fund requirements. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing domestic subsidiaries and by certain of our future domestic subsidiaries. (See Note 11, Guarantor/Non-Guarantor Condensed Consolidated Financial Statements.)
Debt Issuance Costs and Original Issue Discount
Costs incurred in connection with the issuance of our Senior Notes were capitalized and are being amortized using the effective interest method over the term of the Senior Notes which mature in March 2022. The original issue discount and costs incurred in connection with the issuance of the Term Loan were capitalized and are being amortized using the effective interest method over the expected term of the agreement. Costs incurred in connection with the ABL Facility were capitalized and are being amortized using the straight-line method over the expected term of the agreement.
6.
Fair Value of Financial Instruments
The FASB’s Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, defines fair value and provides a hierarchal framework associated with the level of subjectivity used in measuring assets and liabilities at fair value. Our financial instruments consist primarily of cash and cash equivalents, trade and other receivables, trade payables, phantom stock unit awards and long-term debt.

14




The carrying value of cash and cash equivalents, trade and other receivables, and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments. At June 30, 2018 and December 31, 2017, the aggregate estimated fair value of our phantom stock unit awards was $18.3 million and $6.1 million, respectively, for which the vested portion recognized as a liability in our condensed consolidated balance sheets was $10.1 million and $3.6 million, respectively. The phantom stock unit awards, and the measurement of fair value for these awards, are described in more detail in Note 8, Stock-Based Compensation Plans.
The fair value of our Senior Notes is estimated based on recent observable market prices for our debt instruments, which are defined by ASC Topic 820 as Level 2 inputs. The fair value of our Term Loan is based on estimated market pricing for our debt instrument, which is defined by ASC Topic 820 as using Level 3 inputs which are unobservable and therefore more likely to be affected by changes in assumptions. The following table presents supplemental fair value information and carrying value for our debt, net of discount and debt issuance costs (amounts in thousands):
 
 
 
June 30, 2018
 
December 31, 2017
 
Hierarchy Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Senior notes
2
 
$
296,578

 
$
286,875

 
$
296,181

 
$
243,948

Senior secured term loan
3
 
166,494

 
$
181,781

 
165,484

 
171,613

 
 
 
$
463,072

 
$
468,656

 
$
461,665

 
$
415,561

7.
Earnings (Loss) Per Common Share
The following table presents a reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations (amounts in thousands, except per share data):
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator (both basic and diluted):
 
 
 
 
 
 
 
Net loss
$
(18,152
)
 
$
(20,209
)
 
$
(29,291
)
 
$
(45,333
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares (denominator for basic earnings (loss) per share)
77,944

 
77,377

 
77,776

 
77,225

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

 

 

 

Denominator for diluted earnings (loss) per share
77,944

 
77,377

 
77,776

 
77,225

Loss per common share - Basic
$
(0.23
)
 
$
(0.26
)
 
$
(0.38
)
 
$
(0.59
)
Loss per common share - Diluted
$
(0.23
)
 
$
(0.26
)
 
$
(0.38
)
 
$
(0.59
)
Potentially dilutive securities excluded as anti-dilutive
4,055

 
5,185

 
5,015

 
4,750

8.
Stock-Based Compensation Plans
We grant stock option and restricted stock awards with vesting based on time of service conditions. We grant restricted stock unit awards with vesting based on time of service conditions, and in certain cases, subject to performance and market conditions. We grant phantom stock unit awards with vesting based on time of service, performance and market conditions, which are classified as liability awards under ASC Topic 718, Compensation—Stock Compensation since we expect to settle the awards in cash when they become vested.
We recognize compensation cost for our stock-based compensation awards based on the fair value estimated in accordance with ASC Topic 718, and we recognize forfeitures when they occur. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

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The following table summarizes the stock-based compensation expense recognized, by award type, and the compensation expense (benefit) recognized for phantom stock unit awards during the three and six months ended June 30, 2018 and 2017 (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Stock option awards
$
99

 
$
246

 
$
241

 
$
477

Restricted stock awards
115

 
117

 
228

 
229

Restricted stock unit awards
883

 
645

 
1,887

 
1,629

 
$
1,097

 
$
1,008

 
$
2,356

 
$
2,335

Phantom stock unit awards
$
6,099

 
$
(581
)
 
$
6,529

 
$
(481
)
Stock Option Awards
We grant stock option awards which generally become exercisable over a three-year period and expire ten years after the date of grant. Our stock-based compensation plans require that all stock option awards have an exercise price that is not less than the fair market value of our common stock on the date of grant. We issue shares of our common stock when vested stock option awards are exercised. We estimate the fair value of each option grant on the date of grant using a Black-Scholes option pricing model. There were no stock options granted during the six months ended June 30, 2018.
Restricted Stock and Restricted Stock Unit Awards
We grant restricted stock awards that vest over a one-year period with a fair value based on the closing price of our common stock on the date of the grant. When restricted stock awards are granted, or when restricted stock unit awards are converted to restricted stock, shares of our common stock are considered issued, but subject to certain restrictions.
We grant restricted stock unit awards with vesting based on time of service conditions only (“time-based RSUs”), and we grant restricted stock unit awards with vesting based on time of service, which are also subject to performance and market conditions (“performance-based RSUs”). Shares of our common stock are issued to recipients of restricted stock units only when they have satisfied the applicable vesting conditions.
The following table summarizes the number and weighted-average grant-date fair value of the restricted stock and restricted stock unit awards granted during the three and six months ended June 30, 2018 and 2017:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Restricted Stock:
 
 
 
 
 
 
 
Restricted stock awards granted
78,632

 
167,272

 
78,632

 
167,272

Weighted-average grant-date fair value
$
5.85

 
$
2.75

 
$
5.85

 
$
2.75

Time-based RSUs:
 
 
 
 
 
 
 
Time-based RSUs granted

 
30,000

 
788,377

 
96,728

Weighted-average grant-date fair value
$

 
$
4.00

 
$
3.85

 
$
5.61

Performance-based RSUs:
 
 
 
 
 
 
 
Performance-based RSUs granted

 

 

 
563,469

Weighted-average grant-date fair value
$

 
$

 
$

 
$
7.75

Our time-based RSUs generally vest over a three-year period, with fair values based on the closing price of our common stock on the date of grant.
Our performance-based RSUs generally cliff vest after 39 months from the date of grant and are granted at a target number of issuable shares, for which the final number of shares of common stock is adjusted based on our actual achievement levels that are measured against predetermined performance conditions. The number of shares of common stock awarded will be based upon the Company’s achievement in certain performance conditions, as compared to a predefined peer group, over the performance period, generally three years.

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Approximately half of the performance-based RSUs outstanding are subject to a market condition based on relative total shareholder return, as compared to that of our predetermined peer group, and therefore the fair value of these awards is measured using a Monte Carlo simulation model. Compensation expense for equity awards with a market condition is reduced only for actual forfeitures; no adjustment to expense is otherwise made, regardless of the number of shares issued. The remaining performance-based RSUs are subject to performance conditions, based on our EBITDA and EBITDA return on capital employed, relative to our predetermined peer group, and therefore the fair value is based on the closing price of our common stock on the date of grant, applied to the estimated number of shares that will be awarded. Compensation expense ultimately recognized for awards with performance conditions will be equal to the fair value of the restricted stock unit award based on the actual outcome of the service and performance conditions.
In April 2018, we determined that 106% of the target number of shares granted during 2015 were actually earned based on the Company’s achievement of the performance measures as described above. As of June 30, 2018, we estimate that the achievement level for our outstanding performance-based RSUs granted in 2017 will be approximately 100% of the predetermined performance conditions.
Phantom Stock Unit Awards
In 2016 and 2018, we granted 1,268,068 and 1,188,216 phantom stock unit awards with weighted-average grant-date fair values of $1.35 and $3.06 per share, respectively. These awards cliff-vest after 39 months from the date of grant, with vesting based on time of service, performance and market conditions. The number of units ultimately awarded will be based upon the Company’s achievement in certain performance conditions, as compared to a predefined peer group, over the respective three-year performance periods, and each unit awarded will entitle the employee to a cash payment equal to the stock price of our common stock on the date of vesting, subject to a maximum of $8.08 and $9.66 (which is four and three times the grant date stock price), respectively.
The fair value of these awards is measured using inputs that are defined as Level 3 inputs under ASC Topic 820, Fair Value Measurements and Disclosures. Half of the 2016 phantom stock unit awards are subject to a market condition based on relative total shareholder return, and therefore the fair values of these awards are measured using a Monte Carlo simulation model, which incorporates the estimate of our relative total shareholder return achievement level. The remaining 2016 phantom stock unit awards are subject to performance conditions, based on our relative EBITDA and EBITDA return on capital employed, and the fair values of these awards are measured using a Black-Scholes pricing model. We estimate our relative weighted average EBITDA and EBITDA return on capital achievement level for the 2016 phantom stock unit awards to be 185% at June 30, 2018. The 2018 phantom stock unit awards will vest based upon our relative total shareholder return and relative EBITDA return on capital, both of which are subject to market conditions, and therefore, the fair value of these awards is measured using a Monte Carlo simulation model which generates a fair value that incorporates the relative estimated achievement levels. We estimate our relative EBITDA return on capital achievement level for the 2018 phantom stock unit awards to be 100% at June 30, 2018.
These awards are classified as liability awards under ASC Topic 718, Compensation—Stock Compensation, because we expect to settle the awards in cash when they vest, and are remeasured at fair value at the end of each reporting period until they vest. The change in fair value is recognized as a current period compensation expense in our condensed consolidated statements of operations. Therefore, changes in the inputs used to measure fair value can result in volatility in our compensation expense. This volatility increases as the phantom stock awards approach the vesting date. We estimate that a hypothetical increase of $1 in the market price of our common stock as of June 30, 2018, if all other inputs were unchanged, would result in an increase in cumulative compensation expense of $1.1 million, which represents the hypothetical increase in fair value of the liability for all outstanding phantom stock unit awards which would be recognized as compensation expense in our condensed consolidated statement of operations.
9.
Segment Information
We have five operating segments, comprised of two drilling services business segments (domestic and international drilling) and three production services business segments (well servicing, wireline services and coiled tubing services). We revised our segments as of December 31, 2017 to reflect changes in the basis used by management in making decisions regarding our business for resource allocation and performance assessment. These changes reflect our current operating focus as is required by ASC Topic 280, Segment Reporting. The following financial information presented as of and for the three and six months ended June 30, 2017 have been restated to reflect this change.

17




Our domestic and international drilling services segments provide contract land drilling services to a diverse group of exploration and production companies through our three drilling divisions in the US and internationally in Colombia. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs.
Our well servicing, wireline services and coiled tubing services segments provide a range of production services to a diverse group of exploration and production companies, with our operations concentrated in the major domestic onshore oil and gas producing regions in the Gulf Coast, Mid-Continent and Rocky Mountain states.
The following tables set forth certain financial information for each of our segments and corporate (amounts in thousands):
 
As of and for the three months ended June 30,
 
As of and for the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Domestic drilling
$
35,634

 
$
30,473

 
$
71,560

 
$
58,818

International drilling
21,773

 
8,306

 
39,384

 
18,977

Drilling services
57,407

 
38,779

 
110,944

 
77,795

Well servicing
23,162

 
21,017

 
44,276

 
39,751

Wireline services
62,137

 
39,832

 
118,738

 
72,378

Coiled tubing services
12,076

 
7,502

 
25,302

 
12,963

Production services
97,375

 
68,351

 
188,316

 
125,092

Consolidated revenues
$
154,782

 
$
107,130

 
$
299,260

 
$
202,887

 
 
 
 
 
 
 
 
Operating costs:
 
 
 
 
 
 
 
Domestic drilling
$
21,749

 
$
20,380

 
$
42,647

 
$
39,889

International drilling
17,064

 
5,968

 
30,025

 
13,566

Drilling services
38,813

 
26,348

 
72,672

 
53,455

Well servicing
16,680

 
15,091

 
32,250

 
29,128

Wireline services
46,716

 
30,032

 
89,202

 
55,978

Coiled tubing services
11,988

 
7,588

 
22,839

 
13,226

Production services
75,384

 
52,711

 
144,291

 
98,332

Consolidated operating costs
$
114,197

 
$
79,059

 
$
216,963

 
$
151,787

 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
Domestic drilling
$
13,885

 
$
10,093

 
$
28,913

 
$
18,929

International drilling
4,709

 
2,338

 
9,359

 
5,411

Drilling services
18,594

 
12,431

 
38,272

 
24,340

Well servicing
6,482

 
5,926

 
12,026

 
10,623

Wireline services
15,421

 
9,800

 
29,536

 
16,400

Coiled tubing services
88

 
(86
)
 
2,463

 
(263
)
Production services
21,991

 
15,640

 
44,025

 
26,760

Consolidated gross margin
$
40,585

 
$
28,071

 
$
82,297

 
$
51,100


18




 
As of and for the three months ended June 30,
 
As of and for the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Identifiable Assets:
 
 
 
 
 
 
 
Domestic drilling (1)
$
380,355

 
$
412,319

 
$
380,355

 
$
412,319

International drilling (1) (2)
42,457

 
33,469

 
42,457

 
33,469

Drilling services
422,812

 
445,788

 
422,812

 
445,788

Well servicing
124,458

 
135,041

 
124,458

 
135,041

Wireline services
99,243

 
88,629

 
99,243

 
88,629

Coiled tubing services
31,889

 
26,121

 
31,889

 
26,121

Production services
255,590

 
249,791

 
255,590

 
249,791

Corporate
78,642

 
12,962

 
78,642

 
12,962

Consolidated identifiable assets
$
757,044

 
$
708,541

 
$
757,044

 
$
708,541

 
 
 
 
 
 
 
 
Depreciation and Amortization:
 
 
 
 
 
 
 
Domestic drilling
$
10,139

 
$
11,534

 
$
20,588

 
$
23,013

International drilling
1,301

 
1,357

 
2,748

 
2,979

Drilling services
11,440

 
12,891

 
23,336

 
25,992

Well servicing
4,865

 
5,000

 
9,785

 
10,012

Wireline services
4,601

 
4,452

 
9,209

 
8,905

Coiled tubing services
2,114

 
2,089

 
4,146

 
4,215

Production services
11,580

 
11,541

 
23,140

 
23,132

Corporate
267

 
308

 
558

 
608

Consolidated depreciation and amortization
$
23,287

 
$
24,740

 
$
47,034

 
$
49,732

 
 
 
 
 
 
 
 
Capital Expenditures:
 
 
 
 
 
 
 
Domestic drilling
$
4,736

 
$
6,314

 
$
7,494

 
$
15,780

International drilling
1,213

 
1,342

 
3,913

 
1,714

Drilling services
5,949

 
7,656

 
11,407

 
17,494

Well servicing
3,403

 
2,007

 
5,452

 
14,347

Wireline services
4,917

 
3,501

 
8,590

 
7,509

Coiled tubing services
4,817

 
982

 
7,981

 
2,262

Production services
13,137

 
6,490

 
22,023

 
24,118

Corporate
251

 
231

 
495

 
372

Consolidated capital expenditures
$
19,337

 
$
14,377

 
$
33,925

 
$
41,984

(1)
Identifiable assets for our drilling segments include the impact of a $35.1 million and $20.6 million intercompany balance, as of June 30, 2018 and 2017, respectively, between our domestic drilling segment (intercompany receivable) and our international drilling segment (intercompany payable).
(2)
Identifiable assets for our international drilling segment include five drilling rigs that are owned by our Colombia subsidiary and three drilling rigs that are owned by one of our domestic subsidiaries and leased to our Colombia subsidiary.
The following table reconciles the consolidated gross margin of our segments reported above to loss from operations as reported on the condensed consolidated statements of operations (amounts in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Consolidated gross margin
$
40,585

 
$
28,071

 
$
82,297

 
$
51,100

Depreciation and amortization
(23,287
)
 
(24,740
)
 
(47,034
)
 
(49,732
)
General and administrative
(24,829
)
 
(16,112
)
 
(44,023
)
 
(33,856
)
Bad debt recovery, net of expense
370

 
226

 
422

 
589

Impairment
(2,368
)
 
(795
)
 
(2,368
)
 
(795
)
Gain on dispositions of property and equipment, net
726

 
621

 
1,061

 
1,092

Loss from operations
$
(8,803
)
 
$
(12,729
)
 
$
(9,645
)
 
$
(31,602
)

19




10.
Commitments and Contingencies
In connection with our operations in Colombia, our foreign subsidiaries have obtained bonds for bidding on drilling contracts, performing under drilling contracts, and remitting customs and importation duties. We have guaranteed payments of $73.4 million relating to our performance under these bonds as of June 30, 2018.
We are currently undergoing sales and use tax audits for multi-year periods. As of June 30, 2018 and December 31, 2017, our accrued liability was $1.4 million and $1.2 million, respectively, based on our estimate of the sales and use tax obligations that are expected to result from these audits. Due to the inherent uncertainty of the audit process, we believe that it is reasonably possible that we may incur additional tax assessments with respect to one or more of the audits in excess of the amount accrued. We believe that such an outcome would not have a material adverse effect on our results of operations or financial position. Because certain of these audits are in a preliminary stage, an estimate of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot reasonably be made.
Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment-related disputes. Legal costs relating to these matters are expensed as incurred. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition, results of operations or cash flow from operations.
11.
Guarantor/Non-Guarantor Condensed Consolidating Financial Statements
Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all existing 100% owned domestic subsidiaries, except for Pioneer Services Holdings, LLC. The subsidiaries that generally operate our non-U.S. business concentrated in Colombia do not guarantee our Senior Notes. The non-guarantor subsidiaries do not have any payment obligations under the Senior Notes, the guarantees or the Indenture.
In the event of a bankruptcy, liquidation or reorganization of any non-guarantor subsidiary, such non-guarantor subsidiary will pay the holders of its debt and other liabilities, including its trade creditors, before it will be able to distribute any of its assets to us. In the future, any non-U.S. subsidiaries, immaterial subsidiaries and subsidiaries that we designate as unrestricted subsidiaries under the Indenture will not guarantee the Senior Notes. As of June 30, 2018, there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
As a result of the guarantee arrangements, we are presenting the following condensed consolidating balance sheets, statements of operations and statements of cash flows of the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries.

20




CONDENSED CONSOLIDATING BALANCE SHEETS
(unaudited, in thousands)
 
June 30, 2018
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
57,351

 
$
(1,688
)
 
$
5,854

 
$

 
$
61,517

Restricted cash
2,000

 

 

 

 
2,000

Receivables, net of allowance
4

 
100,739

 
25,342

 
741

 
126,826

Intercompany receivable (payable)
(24,836
)
 
59,677

 
(34,841
)
 

 

Inventory

 
8,895

 
8,824

 

 
17,719

Assets held for sale

 
6,433

 

 

 
6,433

Prepaid expenses and other current assets
2,062

 
3,137

 
1,511

 

 
6,710

Total current assets
36,581

 
177,193

 
6,690

 
741

 
221,205

Net property and equipment
1,949

 
502,384

 
28,944

 

 
533,277

Investment in subsidiaries
589,844

 
22,780

 

 
(612,624
)
 

Deferred income taxes
40,272

 

 

 
(40,272
)
 

Other noncurrent assets
641

 
582

 
1,339

 

 
2,562

Total assets
$
669,287

 
$
702,939

 
$
36,973

 
$
(652,155
)
 
$
757,044

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
1,245

 
$
29,882

 
$
6,887

 
$

 
$
38,014

Deferred revenues

 
45

 
1,876

 

 
1,921

Accrued expenses
20,980

 
38,193

 
4,434

 
741

 
64,348

Total current liabilities
22,225

 
68,120

 
13,197

 
741

 
104,283

Long-term debt, less unamortized discount and debt issuance costs
463,072

 

 

 

 
463,072

Deferred income taxes

 
43,701

 

 
(40,272
)
 
3,429

Other noncurrent liabilities
1,299

 
1,274

 
996

 

 
3,569

Total liabilities
486,596

 
113,095

 
14,193

 
(39,531
)
 
574,353

Total shareholders’ equity
182,691

 
589,844

 
22,780

 
(612,624
)
 
182,691

Total liabilities and shareholders’ equity
$
669,287

 
$
702,939

 
$
36,973

 
$
(652,155
)
 
$
757,044

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
72,258

 
$
(1,881
)
 
$
3,263

 
$

 
$
73,640

Restricted cash
2,008

 

 

 

 
2,008

Receivables, net of allowance
7

 
93,866

 
19,174

 
(42
)
 
113,005

Intercompany receivable (payable)
(24,836
)
 
51,532

 
(26,696
)
 

 

Inventory

 
7,741

 
6,316

 

 
14,057

Assets held for sale

 
6,620

 

 

 
6,620

Prepaid expenses and other current assets
1,238

 
3,193

 
1,798

 

 
6,229

Total current assets
50,675

 
161,071

 
3,855

 
(42
)
 
215,559

Net property and equipment
2,011

 
521,080

 
26,532

 

 
549,623

Investment in subsidiaries
596,927

 
20,095

 

 
(617,022
)
 

Deferred income taxes
38,028

 

 

 
(38,028
)
 

Other noncurrent assets
496

 
788

 
403

 

 
1,687

Total assets
$
688,137

 
$
703,034

 
$
30,790

 
$
(655,092
)
 
$
766,869

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
286

 
$
24,174

 
$
5,078

 
$

 
$
29,538

Deferred revenues

 
97

 
808

 

 
905

Accrued expenses
12,504

 
37,814

 
4,195

 
(42
)
 
54,471

Total current liabilities
12,790

 
62,085

 
10,081

 
(42
)
 
84,914

Long-term debt, less unamortized discount and debt issuance costs
461,665

 

 

 

 
461,665

Deferred income taxes

 
41,179

 

 
(38,028
)
 
3,151

Other noncurrent liabilities
3,586

 
2,843

 
614

 

 
7,043

Total liabilities
478,041

 
106,107

 
10,695

 
(38,070
)
 
556,773

Total shareholders’ equity
210,096

 
596,927

 
20,095

 
(617,022
)
 
210,096

Total liabilities and shareholders’ equity
$
688,137

 
$
703,034

 
$
30,790

 
$
(655,092
)
 
$
766,869


21




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands)

 
Three months ended June 30, 2018
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
133,008

 
$
21,774

 
$

 
$
154,782

Costs and expenses:
 
 
 
 
 
 
 
 
 
Operating costs

 
97,134

 
17,063

 

 
114,197

Depreciation and amortization
266

 
21,720

 
1,301

 

 
23,287

General and administrative
10,130

 
14,090

 
714

 
(105
)
 
24,829

Intercompany leasing

 
(1,215
)
 
1,215

 

 

Bad debt recovery, net of expense

 
(370
)
 

 

 
(370
)
Impairment

 
2,368

 

 

 
2,368

Gain on dispositions of property and equipment, net

 
(713
)
 
(13
)
 

 
(726
)
Total costs and expenses
10,396

 
133,014

 
20,280

 
(105
)
 
163,585

Income (loss) from operations
(10,396
)
 
(6
)
 
1,494

 
105

 
(8,803
)
Other income (expense):

 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
521

 
1,034

 

 
(1,555
)
 

Interest expense
(9,645
)
 
(2
)
 
5

 

 
(9,642
)
Other income (expense)
159

 
223

 
(233
)
 
(105
)
 
44

Total other income (expense), net
(8,965
)
 
1,255

 
(228
)
 
(1,660
)
 
(9,598
)
Income (loss) before income taxes
(19,361
)
 
1,249

 
1,266

 
(1,555
)
 
(18,401
)
Income tax (expense) benefit 1
1,209

 
(728
)
 
(232
)
 

 
249

Net income (loss)
$
(18,152
)
 
$
521

 
$
1,034

 
$
(1,555
)
 
$
(18,152
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
98,824

 
$
8,306

 
$

 
$