ALY Allis-Chalmers Energy

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _______________

Commission file number 1-02199

ALLIS-CHALMERS ENERGY INC.

(Exact name of registrant as specified in its charter)

DELAWARE		39-0126090
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS		77056
(Address of principal executive offices)		(Zip Code)

(713) 369-0550

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At August 4, 2010 there were 72,415,682 shares of common stock, par value $0.01 per share, outstanding.

 

 

ALLIS-CHALMERS ENERGY INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2010

TABLE OF CONTENTS

		PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 30, 2010 and December 31, 2009			3
Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2010 and 2009			4
Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2010 and 2009			5
Notes to Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4. Controls and Procedures			37
PART II OTHER INFORMATION
Item 1A Risk Factors			37
Item 6. Exhibits			38
Signatures			38
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIS-CHALMERS ENERGY INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except for share and per share amounts)

		June 30,				December 31,
		2010				2009
		(unaudited)
Assets
Cash and cash equivalents		$	17,569			$	41,072
Trade receivables, net			130,904				105,059
Inventories			36,920				34,528
Deferred income tax asset			2,727				3,790
Prepaid expenses and other			7,667				13,799
Total current assets			195,787				198,248
Property and equipment, net			733,334				746,478
Goodwill			40,639				40,639
Other intangible assets, net			30,337				32,649
Debt issuance costs, net			8,628				9,545
Deferred income tax asset			33,900				22,047
Other assets			37,949				31,014
Total assets		$	1,080,574			$	1,080,620
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	18,596			$	17,027
Trade accounts payable			45,592				34,839
Accrued salaries, benefits and payroll taxes			24,799				22,854
Accrued interest			15,969				15,821
Accrued expenses			25,743				21,918
Total current liabilities			130,699				112,459
Long-term debt, net of current maturities			470,623				475,206
Deferred income tax liability			8,136				8,166
Other long-term liabilities			676				1,142
Total liabilities			610,134				596,973
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value (25,000,000 shares authorized, 36,393 shares issued and outstanding at June 30, 2010 and at December 31, 2009)			34,183				34,183
Common stock, $0.01 par value (200,000,000 shares authorized; 72,418,855 issued and outstanding at June 30, 2010 and 71,378,529 issued and outstanding at December 31, 2009)			724				714
Capital in excess of par value			425,790				422,823
Retained earnings			9,743				25,927
Total stockholders’ equity			470,440				483,647
Total liabilities and stockholders’ equity		$	1,080,574			$	1,080,620

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)
(unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues		$	158,644			$	112,505			$	299,014			$	257,608
Operating costs and expenses
Direct costs			120,723				87,239				228,438				190,373
Depreciation			20,517				19,181				40,705				38,552
Selling, general and administrative			12,114				15,525				24,177				29,165
Loss on asset disposition			—				1,916				—				1,916
Amortization			1,156				1,187				2,312				2,374
Total operating costs and expenses			154,510				125,048				295,632				262,380
Income (loss) from operations			4,134				(12,543	)			3,382				(4,772	)
Other income (expense):
Interest expense			(11,149	)			(13,221	)			(22,105	)			(26,728	)
Interest income			299				9				454				14
Gain on debt extinguishment			—				26,365				—				26,365
Other			(303	)			(485	)			(1,818	)			(268	)
Total other income (expense)			(11,153	)			12,668				(23,469	)			(617	)
Income (loss) before income taxes			(7,019	)			125				(20,087	)			(5,389	)
Provision for income taxes			1,640				(215	)			5,177				2,694
Net loss			(5,379	)			(90	)			(14,910	)			(2,695	)
Preferred stock dividend			(637	)			(35	)			(1,274	)			(35	)
Net loss attributed to common stockholders		$	(6,016	)		$	(125	)		$	(16,184	)		$	(2,730	)
Net loss per common share:
Basic		$	(0.08	)		$	0.00			$	(0.23	)		$	(0.08	)
Diluted		$	(0.08	)		$	0.00			$	(0.23	)		$	(0.08	)
Weighted average shares outstanding:
Basic			71,270				36,959				71,149				36,087
Diluted			71,270				36,959				71,149				36,087

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

		For the Six Months Ended
		June 30,
		2010				2009
Cash Flows from Operating Activities:
Net loss		$	(14,910	)		$	(2,695	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			43,017				40,926
Amortization and write-off of debt issuance costs			1,106				1,151
Stock-based compensation			3,001				2,345
Allowance for bad debts			—				3,565
Deferred taxes			(10,821	)			(6,088	)
Loss (gain) on sale of property and equipment			807				(602	)
Loss on investment			1,466				—
Equity in loss of unconsolidated affiliates			260				—
Loss on asset disposition			—				1,916
Gain on debt extinguishment			—				(26,365	)
Changes in operating assets and liabilities:
Decrease (increase) in trade receivable			(25,845	)			55,279
Decrease (increase) in inventories			(2,392	)			2,526
Decrease in prepaid expenses and other current assets			8,838				7,411
Decrease in other assets			799				1,120
Increase (decrease) in trade accounts payable			10,753				(27,170	)
Increase (decrease) in accrued interest			148				(2,954	)
Increase (decrease) in accrued expenses			3,801				(5,760	)
Increase (decrease) in accrued salaries, benefits and payroll taxes			1,945				(1,036	)
(Decrease) in other long-term liabilities			(466	)			(605	)
Net Cash Provided By Operating Activities			21,507				42,964
Cash Flows from Investing Activities:
Deposits on asset commitments			(10,096	)			10,032
Proceeds from sale of investments			368				—
Proceeds from sale of property and equipment			2,616				6,693
Purchase of property and equipment			(30,989	)			(57,993	)
Net Cash Used In Investing Activities			(38,101	)			(41,268	)
Cash Flows from Financing Activities:
Proceeds from issuance of stock, net			—				120,337
Proceeds from long-term debt			4,000				25,000
Net repayments of line of credit			—				(36,500	)
Payments on long-term debt			(9,446	)			(57,396	)
Payment of preferred stock dividend			(1,274	)			—
Debt issuance costs			(189	)			(644	)
Net Cash (Used In) Provided By Financing Activities			(6,909	)			50,797
Net change in cash and cash equivalents			(23,503	)			52,493
Cash and cash equivalents at beginning of period			41,072				6,866
Cash and cash equivalents at end of period		$	17,569			$	59,359

The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.

ALLIS-CHALMERS ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Allis-Chalmers Energy Inc. and subsidiaries (“Allis-Chalmers”, “we”, “our” or “us”) is a multi-faceted oilfield service company that provides services and equipment to oil and natural gas exploration and production companies, throughout the United States including Texas, Louisiana, Arkansas, Pennsylvania, Oklahoma, New Mexico, offshore in the Gulf of Mexico, and internationally, primarily in Argentina, Brazil, Bolivia and Mexico. We operate in three sectors of the oil and natural gas service industry: Oilfield Services; Drilling and Completion and Rental Services.

We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service and rates per day for equipment and tools that we rent to our customers. The price we charge for our services depends upon several factors, including the level of oil and natural gas drilling activity and the competitive environment in the particular geographic regions in which we operate. Contracts are awarded based on price, quality of service and equipment and general reputation and experience of our personnel. The principal operating costs are direct and indirect labor and benefits, repairs and maintenance of our equipment, insurance, equipment rentals, fuel, depreciation and general and administrative expenses.

Basis of Presentation

Our unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. These unaudited consolidated condensed financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be perceived with certainty. Accordingly, our accounting estimates require the exercise of judgment. While management believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, stock-based compensation, income taxes and valuation allowances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained or as our operating environment changes.

Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable and payable, and debt. The carrying value of cash and cash equivalents and accounts receivable and payable approximate fair value due to their short-term nature. We believe the fair values and the carrying value of our debt, excluding the senior notes, would not be materially different due to the instruments’ interest rates approximating market rates for similar borrowings at June 30, 2010. Our senior notes, in the approximate aggregate amount of $430.2 million, trade “over the counter” in limited amounts and on an infrequent basis. Based on recent trades we estimate the fair value of our senior notes to be approximately $385.4 million at June 30, 2010. The price at which our senior notes trade is based on many factors such as the level of interest rates, the economic environment, the outlook for the oilfield services industry and the perceived credit risk.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance that eliminates the qualifying special purpose entity concept, changes the requirements for derecognizing financial assets and requires enhanced disclosures about transfers of financial assets. The guidance also revises earlier guidance for determining whether an entity is a variable interest entity, requires a new approach for determining who should consolidate a variable interest entity, changes when it is necessary to reassess who should consolidate a variable interest entity, and requires enhanced disclosures related to an enterprise’s involvement in variable interest entities. We adopted the guidance effective January 1, 2010, which did not have a material effect on our financial statements.

In October 2009, the FASB issued authoritative guidance that amends earlier guidance addressing the accounting for contractual arrangements in which an entity provides multiple products or services (deliverables) to a customer. The amendments address the unit of accounting for arrangements involving multiple deliverables and how arrangement consideration should be allocated to the separate units of accounting, when applicable, by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. The amendments also require that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The guidance is effective for fiscal years beginning on or after June 15, 2010, with earlier application permitted. We are currently evaluating the effects that the guidance may have on our financial statements.

In January 2010, the FASB issued authoritative guidance that changes the disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. The changes also clarify existing disclosure requirements related to how assets and liabilities should be grouped by class and valuation techniques used for recurring and nonrecurring fair value measurements. We adopted the guidance in the first quarter 2010, which did not have an impact on our financial position, results of operations or cash flows.

In February 2010, the FASB amended guidance on subsequent events to alleviate potential conflicts between FASB guidance and SEC requirements. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements in the first quarter 2010. The adoption of this guidance did not have an impact on our financial statements.

NOTE 2 — STOCK-BASED COMPENSATION

We recognize all share-based payments to employees and directors in the financial statements based on their grant-date fair values. We utilize the Black-Scholes model to determine fair value, which incorporates assumptions to value stock-based awards. The dividend yield on our common stock is assumed to be zero as we have historically not paid dividends on our common stock and have no current plans to do so in the future. The expected volatility is based on historical volatility of our common stock. The risk-free interest rate is the related United States Treasury yield curve for periods within the expected term of the option at the time of grant. We estimate forfeiture rates based on our historical experience.

The following summarizes the Black-Scholes model assumptions used for the options granted in the three months ended June 30, 2010 and six months ended June 30, 2010 and 2009 (no options were granted in the three months ended June 30, 2009):

		For the Three Months				For the Six Months
		Ended				Ended
		June 30,				June 30,
		2010				2010				2009
Expected dividend yield			—				—				—
Expected price volatility			88.54	%			89.81	%			77.32	%
Risk free interest rate			1.51	%			1.41	%			1.37	%
Expected life of options		5 years				5 years				5 years
Weighted average fair value of options granted at market value		$	2.70			$	2.63			$	0.77

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 2 — STOCK-BASED COMPENSATION (Continued)

Our net loss for the three months ended June 30, 2010 and 2009 includes approximately $1.6 million and $1.3 million, respectively, of compensation costs related to share-based payments. Our net loss for the six months ended June 30, 2010 and 2009 includes approximately $3.0 million and $2.3 million, respectively, of compensation costs related to share-based payments. As of June 30, 2010 there was $2.5 million of unrecognized compensation expense related to non-vested stock option grants. We expect approximately $340,000 to be recognized over the remainder of 2010 and approximately $535,000, $511,000, $506,000, $506,000 and $129,000 to be recognized during the years ended 2011 through 2015, respectively.

A summary of our stock option activity during the six months ended June 30, 2010 and related information is as follows:

						Weighted				Weighted
		Shares				Average				Average				Aggregate
		Under				Exercise				Contractual				Intrinsic Value
		Option				Price				Life (Years)				(millions)
Balance at December 31, 2009			701,732			$	6.31
Granted			1,072,253				3.78
Canceled			(21,967	)			8.30
Exercised			—
Outstanding at June 30, 2010			1,752,018			$	4.74				8.11			$	0.10
Exercisable at June 30, 2010			586,432			$	7.08				5.15			$	0.02

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of our common stock on the last trading day of the second quarter of 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2010.

Restricted stock awards, or RSAs, activity during the six months ended June 30, 2010 were as follows:

						Weighted Average
						Grant-Date Fair
		Number of				Value
		Shares				Per Share
Nonvested at December 31, 2009			837,626			$	15.63
Granted			2,061,750				3.78
Vested			(294,253	)			17.30
Forfeited			(3,333	)			3.77
Nonvested at June 30, 2010			2,601,790			$	6.06

We determine the fair value of RSAs based on the market price of our common stock on the date of grant. Compensation cost for RSAs is primarily recognized on a straight-line basis over the vesting or service period and is net of forfeitures. During the six months ended June 30, 2010, we granted 1,237,750 performance based RSAs to executive officers and key employees that vest upon meeting certain financial performance conditions over the next five years. In connection with performance-based RSAs, compensation cost is based on estimated number of shares expected to be issued. As of June 30, 2010, there was $8.3 million of total unrecognized compensation cost related to nonvested RSAs. We expect approximately $2.3 million to be recognized over the remainder of 2010 and approximately $2.3 million, $1.3 million, $1.2 million, $1.1 million and $88,000 to be recognized during the years ended 2011 through 2105, respectively.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 3 — INVENTORIES

Inventories consisted of the following (in thousands):

		June 30,				December 31,
		2010				2009
Manufactured
Finished goods		$	3,401			$	2,983
Work in process			1,360				2,299
Raw materials			1,255				884
Total manufactured			6,016				6,166
Rig parts and related inventory			12,208				10,654
Shop supplies and related inventory			8,864				7,762
Chemicals and drilling fluids			4,599				4,381
Rental supplies			2,026				2,134
Hammers			2,191				2,257
Coiled tubing and related inventory			784				939
Drive pipe			232				235
Total inventories		$	36,920			$	34,528

NOTE 4— GOODWILL AND INTANGIBLE ASSETS

Goodwill and other intangible assets with infinite lives are not amortized, but tested for impairment annually or more frequently if circumstances indicate that impairment may exist. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized. Goodwill and indefinite-lived intangible assets listed on the balance sheet totaled $40.6 million at June 30, 2010 and December 31, 2009.

Definite-lived intangible assets that continue to be amortized relate to our purchase of customer-related and marketing-related intangibles, patents and non-compete agreements. These intangibles have useful lives ranging from three to twenty years. Amortization of intangible assets for the three and six months ended June 30, 2010 were $1.1 million and $2.3 million, respectively, compared to $1.2 million and $2.4 million for the same periods in the prior year. At June 30, 2010, intangible assets totaled $30.3 million, net of $15.1 million of accumulated amortization.

NOTE 5- DEBT

Our long-term debt consisted of the following (in thousands):

		June 30,				December 31,
		2010				2009
Senior notes		$	430,238			$	430,238
Revolving line of credit			—				—
Term loans			56,892				60,744
Insurance premium financing			1,998				997
Capital lease obligations			91				254
Total debt			489,219				492,233
Less: current maturities			18,596				17,027
Long-term debt, net of current maturities		$	470,623			$	475,206

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 5 — DEBT (Continued)

Senior notes, line of credit agreements and term loans

On January 18, 2006 and August 14, 2006, we closed on private offerings, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $160.0 and $95.0 million aggregate principal amount of our senior notes, respectively. The senior notes are due January 15, 2014 and bear interest at 9.0%. The proceeds were used to fund the acquisitions of Specialty Rental Tools, Inc. and DLS Drilling, Logistics & Services Company, or DLS, to repay existing debt and for general corporate purposes. On June 29, 2009, we closed on a tender offer in which we purchased $30.6 million aggregate principal of our 9.0% senior notes for a total consideration of $650 per $1,000 principal amount.

In January 2007, we closed on a private offering, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, of $250.0 million principal amount of 8.5% senior notes due 2017. The proceeds of the senior notes offering, together with a portion of the proceeds of our concurrent common stock offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility which we incurred to finance our acquisition of substantially all the assets of Oil & Gas Rental Services, Inc. On June 29, 2009, we closed on a tender offer in which we purchased $44.2 million aggregate principal of our 8.5% senior notes for a total consideration of $600 per $1,000 principal amount.

We have a $90.0 million revolving line of credit with a final maturity date of April 26, 2012 which contains customary events of default and financial covenants and limits our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. On April 9, 2009, we amended our revolving credit agreement to modify the leverage and interest coverage ratio covenants. Effective December 31, 2009, we again amended the leverage and interest coverage ratio covenants of the revolving credit agreement. This amendment relaxed the required financial ratios for the quarter ended December 31, 2009 and for each of the quarters in 2010. Our obligations under the amended and restated credit agreement are secured by substantially all of our assets located in the U.S. We were in compliance with all debt covenants as of June 30, 2010 and December 31, 2009. As of June 30, 2010 and December 31, 2009, the only usage of our revolving facility consisted of $4.2 million in outstanding letters of credit. The credit agreement loan rates are based on prime or LIBOR plus a margin.

As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from 2 to 5 years. The weighted average interest rates on these loans was 1.9% and 2.1% as of June 30, 2010 and December 31, 2009, respectively. The outstanding amount due as of June 30, 2010 and December 31, 2009 was $0.7 million and $1.1 million, respectively.

On February 15, 2008, through our DLS subsidiary, we entered into a $25.0 million import finance facility with a bank. Borrowings under this facility were used to fund a portion of the purchase price of the new drilling and service rigs ordered for our Drilling and Completion segment. The loan is repayable over four years in equal semi-annual installments beginning one year after each disbursement with the final principal payment due not later than March 15, 2013. The import finance facility is unsecured and contains customary events of default and financial covenants and limits DLS’ ability to incur additional indebtedness, make capital expenditures, create liens and sell assets. We were in compliance with all debt covenants as of June 30, 2010 and December 31, 2009. The bank loan rates are based on LIBOR plus a margin. The weighted average interest rate was 4.2% and 4.4% at June 30, 2010 and December 31, 2009, respectively. The outstanding amount as of June 30, 2010 and December 31, 2009 was $17.3 million and $20.1 million, respectively.

As part of our acquisition of BCH Ltd, or BCH, we assumed a $23.6 million term loan credit facility with a bank. The credit agreement is dated June 2007 and contains customary events of default and financial covenants. Obligations under the facility are secured by substantially all of the BCH assets. The facility is repayable in quarterly principal installments plus interest with the final payment due not later than August 2012. We were in compliance with all debt covenants as of June 30, 2010 and December 31, 2009. The credit facility loan interest rates are based on LIBOR plus a margin. At June 30, 2010 and December 31, 2009, the outstanding amount of the loan was $13.2 million and $16.2 million, respectively and the interest rate was 3.8% and 3.5%, respectively.

On May 22, 2009, we drew down $25.0 million on a new term loan credit facility with a lending institution. The facility was utilized to fund a portion of the purchase price of two new drilling rigs. The loan is secured by the equipment. The facility is repayable in quarterly installments of approximately $1.4 million of principal and interest and matures in May 2015. The loan bears interest at a fixed rate of 9.0%. At June 30, 2010 and December 31, 2009, the outstanding amount of the loan was $21.7 million and $23.4 million, respectively.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 5 — DEBT (Continued)

On February 9, 2010, through our DLS subsidiary, we entered into a $4.0 million term loan facility. The loan is repayable in semi-annual installments beginning April 14, 2011 with interest at 8.5% per annum. The final maturity date is April 14, 2014 and the loan is unsecured.

Notes payable

In April 2010, we obtained an insurance premium financing in the aggregate amount of $2.4 million with a fixed interest rate of 4.7%. Under terms of the agreement, amounts outstanding are paid over an 11 month repayment schedule. The outstanding balance of this note was approximately $2.0 million at June 30, 2010. In 2009, we obtained insurance premium financings in the aggregate amount of $3.2 million with a fixed average weighted interest rate of 4.8%. Under terms of the agreements, amounts outstanding are paid over 10 and 11 month repayment schedules. The outstanding balance of these notes was approximately $0 and $997,000 at June 30, 2010 and December 31, 2009, respectively.

Other debt

As part of our acquisition of BCH, we assumed various capital leases with terms of two to three years. The outstanding balance under these capital leases was $91,000 and $254,000 at June 30, 2010 and December 31, 2009, respectively.

NOTE 6 — STOCKHOLDERS’ EQUITY

During the six months ended June 30, 2010, we had restricted stock award grants and vested performance based restricted stock which resulted in the issuance of approximately 1 million shares of our common stock. We recognized approximately $3.0 million of compensation expense related to share-based payments in the first six months of 2010 that was recorded as capital in excess of par value (see Note 2). During the six months ended June 30, 2010, we declared approximately $1.3 million in dividends on our preferred stock. Accrued dividends of approximately $637,000 were included in our accrued expenses of $25.7 million as of June 30, 2010 and our accrued expenses of $21.9 million as of December 31, 2009. The accrued dividends were paid in July 2010 and February 2010, respectively.

NOTE 7 — LOSS ON ASSET DISPOSITION

During the three and six months ended June 30, 2009, we recorded a $1.9 million loss on asset disposition in our Drilling and Completion segment. The insurance proceeds related to damages incurred on a blow-out which destroyed one of our drilling rigs were not sufficient to cover the book value of the rig and related assets.

NOTE 8 — GAIN ON DEBT EXTINGUISHMENT

During the three and six months ended June 30, 2009, we recorded a gain of $26.4 million as a result of a tender offer that we completed on June 29, 2009. We purchased $30.6 million aggregate principal of our 9.0% senior notes and $44.2 million aggregate principal of 8.5% senior notes for approximately $46.4 million. The gain is net of a $1.5 million write-off of debt issuance costs related to the retired notes and we incurred approximately $466,000 in expenses related to the transactions.

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 9 — LOSS PER COMMON SHARE

Basic earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible preferred stock, stock options, etc.) as if they had been converted. The components of basic and diluted earnings per share are as follows (in thousands, except per share amounts):

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Numerator:
Net loss		$	(5,379	)		$	(90	)		$	(14,910	)		$	(2,695	)
Preferred stock dividend			(637	)			(35	)			(1,274	)			(35	)
Net loss attributed to common stockholders		$	(6,016	)		$	(125	)		$	(16,184	)		$	(2,730	)
Denominator:
Weighted average common shares outstanding excluding nonvested restricted stock			71,270				36,959				71,149				36,087
Effect of potentially dilutive common shares:
Convertible preferred stock and stock-based compensation			—				—				—				—
Weighted average common shares outstanding and assumed conversions			71,270				36,959				71,149				36,087
Net loss per common share
Basic		$	(0.08	)		$	0.00			$	(0.23	)		$	(0.08	)
Diluted		$	(0.08	)		$	0.00			$	(0.23	)		$	(0.08	)
Potentially dilutive securities excluded as anti-dilutive			17,710				15,698				16,126				15,698

Convertible preferred stock and stock-based compensation shares of approximately 14.6 million and 14.9 million were excluded in the computation of diluted earnings per share for the three and six months ended June 30, 2010, respectively as the effect would have been anti-dilutive (e.g., those that increase income per share) due to the net loss for the period.

NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION (in thousands)

		For the Six Months Ended
		June 30,
		2010				2009
Cash paid for interest and income taxes:
Interest		$	21,294			$	28,329
Income taxes			57				1,354
Non-cash activities:
Insurance premiums financed			2,432				2,381
Receivable from sale of investments			274				—
Assets transferred to joint venture investment			—				1,330
Preferred stock dividend			1,274				35

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Set forth on the following pages are the condensed consolidating financial statements of (i) Allis-Chalmers Energy Inc., (ii) its subsidiaries that are guarantors of the senior notes and revolving credit facility and (iii) the subsidiaries that are not guarantors of the senior notes and revolving credit facility (in thousands).

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2010 (unaudited)

		Allis-Chalmers
		(Parent/				Subsidiary				Subsidiary				Consolidating
		Guarantor)				Guarantors				Non-Guarantors				Adjustments				Consolidated Total
Assets
Cash and cash equivalents		$	—			$	13,324			$	4,245			$	—			$	17,569
Trade receivables, net			—				56,010				81,845				(6,951	)			130,904
Inventories			—				17,015				19,905				—				36,920
Intercompany receivables			—				104,356				1,096				(105,452	)			—
Note receivable from affiliate			28,286				—				—				(28,286	)			—
Prepaid expenses and other			93				6,754				3,547				—				10,394
Total current assets			28,379				197,459				110,638				(140,689	)			195,787
Property and equipment, net			—				474,477				258,857				—				733,334
Goodwill			—				23,250				17,389				—				40,639
Other intangible assets, net			437				23,320				6,580				—				30,337
Debt issuance costs, net			8,503				125				—				—				8,628
Note receivable from affiliates			2,400				—				—				(2,400	)			—
Investments in affiliates			950,645				—				—				(950,645	)			—
Other assets			31,932				36,736				3,181				—				71,849
Total assets		$	1,022,296			$	755,367			$	396,645			$	(1,093,734	)		$	1,080,574
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	—			$	5,602			$	12,994			$	—			$	18,596
Trade accounts payable			—				19,170				33,373				(6,951	)			45,592
Accrued salaries, benefits and payroll taxes			—				2,567				22,232				—				24,799
Accrued interest			15,448				212				309				—				15,969
Accrued expenses			718				13,851				11,174				—				25,743
Intercompany payables			105,452				—				—				(105,452	)			—
Note payable to affiliate			—				—				28,286				(28,286	)			—
Total current liabilities			121,618				41,402				108,368				(140,689	)			130,699
Long-term debt, net of current maturities			430,238				18,099				22,286				—				470,623
Note payable to affiliate			—				—				2,400				(2,400	)			—
Other long-term liabilities			—				—				8,812				—				8,812
Total liabilities			551,856				59,501				141,866				(143,089	)			610,134
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock			34,183				—				—				—				34,183
Common stock			724				3,526				42,963				(46,489	)			724
Capital in excess of par value			425,790				570,512				137,439				(707,951	)			425,790
Retained earnings			9,743				121,828				74,377				(196,205	)			9,743
Total stockholders’ equity			470,440				695,866				254,779				(950,645	)			470,440
Total liabilities and stockholders equity		$	1,022,296			$	755,367			$	396,645			$	(1,093,734	)		$	1,080,574

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2010 (unaudited)

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

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2010 (unaudited)

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

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 2010 (unaudited)

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

ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 11 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 2010 (unaudited)

		Allis-Chalmers
		(Parent/				Subsidiary				Other Subsidiaries				Consolidating
		Guarantor)				Guarantors				(Non-Guarantors)				Adjustments				Consolidated Total
Cash Flows from Financing Activities:
Accounts receivable from affiliates			—				(27,210	)			(955	)			28,165				—
Accounts payable to affiliates			28,165				—				—				(28,165	)			—
Note payable to affiliate			—				—				(3,293	)			3,293				—
Proceeds from long-term debt			—				—				4,000				—				4,000
Payments on long-term debt			—				(3,116	)			(6,330	)			—				(9,446	)
Payment of preferred stock dividend			(1,274	)			—				—				—				(1,274	)
Debt issuance costs			(189	)			—				—				—				(189	)
Net Cash Provided By (Used In) Financing Activities			26,702				(30,326	)			(6,578	)			3,293				(6,909	)
Net change in cash and cash equivalents			—				(18,534	)			(4,969	)			—				(23,503	)
Cash and cash equivalents at beginning of period			—				31,858				9,214				—				41,072
Cash and cash equivalents at end of period		$	—			$	13,324			$	4,245			$	—			$	17,569