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The trends in spot prices of WTI crude oil and Henry Hub natural gas, and the resulting trends in domestic land rig counts (per Baker Hughes) and domestic well servicing rig counts (per Guiberson/Association of Energy Service Companies) over the last three yearsfrom January 2019 through December 2020 are illustrated in the graphs below.
Colombian oil prices have historically trended in line with West Texas Intermediate (WTI) oil prices. Demand for drilling and production services in Colombia is largely dependent upon its national oil company’s long-term exploration and production programs, and to a lesser extent, additional activity from other producers in the region.
For additional information concerning the potential effects of volatility in oil and gas prices and other industry trends, see Item 1A – “Risk Factors” in Part I and in the section entitled “Market Conditions and Outlook” in Part II, Item 7 of this Annual Report on Form 10-K.
Market Competition
We encounter substantial competition from other drilling contractors and other oilfield service companies. Our primary market areas are highly fragmented and competitive. The fact that drilling and production services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry and may result in an oversupply of equipment in an area. Contract drilling companies and other oilfield service companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. If demand for drilling or production services improves in a region where we operate, our competitors might respond by moving in suitable rigs and production services equipment from other regions. An influx of equipment from
other regions could rapidly intensify competition, reduce profitability, and make any improvement in demand for our services short-lived.
Most drilling services contracts and production services contracts are awarded on the basis of competitive bids, which also results in price competition. In addition to pricing and equipment availability, we believe the following factors are also important to our clients in determining which drilling services or production services provider to select:
•the type, capability and condition of each of the competing drilling rigs, well servicing rigs, and wireline units and coiled tubing units;
•the mobility and efficiency of the equipment;
•the quality of service and experience of the crews;
•the reputation and safety record of the company providing the services;
•the offering of integrated and/or ancillary services; and
•the ability to provide drilling and production services equipment adaptable to, and personnel familiar with, new technologies and drilling and production techniques.
While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment, our safety record, our ability to offer ancillary services, the experience of our crews and the quality of service we provide to differentiate us from our competitors. This strategy is less effective when lower demand for drilling and production services intensifies price competition and makes it more difficult for us to compete on the basis of factors other than price. In all of the markets in which we compete, an oversupply of drilling rigs or production services equipment generally causes greater price competition and reduced profitability.
We believe that an important competitive factor in establishing and maintaining long-term client relationships is having an experienced, skilled and well-trained work force. In recent years, many of our larger clients have placed increased
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emphasis on the safety performance and quality of the crews, equipment and services provided by their contractors. We have devoted, and will continue to devote, substantial resources toward employee safety and training programs. Although price is generally the primary factor, we believe our clients consider all of these factors in determining which service provider is awarded the work, and that many clients are willing to pay a premium for the quality and safe, efficient service we provide.
The following is an overview of the market for each of our services:
•Domestic and International Drilling. Our principal domestic drilling competitors are Helmerich & Payne, Inc., Precision Drilling Corporation, Patterson-UTI Energy, Inc., and Nabors Industries Ltd. In Colombia, we primarily compete with Helmerich & Payne, Inc., Nabors Industries Ltd., Weatherford International plc, Petrex S.A., Independence Drilling S.A., Erazo Valencia S.A., Tuscany International Drilling, and Estrella International Energy Services Ltd. Our current drilling rig fleet is 100% pad-capable and offers the latest advancements in pad drilling, which we believe positions us well to compete and expand our presence in predominant shale regions.
•Well Servicing. The well servicing providers that we primarily compete with are Key Energy Services, Basic Energy Services, NexTier Oilfield Services, SuperiorKey Energy Services, Forbes Energy Services and Ranger Energy Services, Inc. As compared to the other large competitors in this industry, we believe our fleet is one of the youngest, most uniform fleets, which in addition to our safety performance and service quality, has historically allowed us to operate at utilization and hourly rates that are among the highest of our peers.
•Wireline. The wireline market in the United States is dominated by a small number of companies,fragmented with many competitors, including ourselves. These competitors includeHalliburton Company, GR Energy Services, Allied-Horizontal Wireline Services,Baker Hughes Company, Reliance Energy, Inc., Renegade Services, NexTier Oilfield Services, Mallard Completions, LLC, Nine Energy Services, and Quintana Energy Services. Additional competitors include Baker Hughes Company, Schlumberger Ltd., Halliburton CompanyPerfX Wireline, LLC and other independents. The market for wireline services is very competitive, but historically we have competed effectively with our competitors because of the diversified services we provide, our performance, and strong client service.
In addition, there are numerous smaller companies that compete in all of our services markets. Some of our competitors have greater financial, technical and other resources than we do. Their greater capabilities in these areas may enable them to:
•better withstand industry downturns;
•compete more effectively on the basis of price and technology;
•better attract and retain skilled personnel; and
•build new rigs or acquire and refurbish existing rigs and place them into service more quickly than us in periods of high drilling demand.
The need for our services fluctuates primarily in relation to the price (or anticipated price) of oil and natural gas, which in turn is driven by the supply of and demand for oil and natural gas. The level of our revenues, earnings and cash flows are substantially dependent upon, and affected by, the level of domestic and international oil and gas exploration and development activity, as well as the equipment capacity in any particular region. For a more detailed discussion, see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Clients
Seasonality
All our production services operations are impacted by seasonal factors. Our business can be negatively impacted during the winter months due to inclement weather, fewer daylight hours, holidays, and early exhaustion of our clients’ budgets. While our well servicing rigs wireline units and coiled tubingwireline units are mobile, during periods of heavy snow, ice or rain, we may not be able to move our equipment between locations.
Human Capital
We currently have approximately 2,1001,000 employees, thesubstantially all of which are full-time employees. The majority of whichour employees work in our drilling and production services operations and are primarily compensated on an hourly basis. The number of employees in operations fluctuates depending on the utilization of our drilling rigs, well servicing rigs wireline units and coiled tubingwireline units at any particular time. None of our employment arrangements are subject to collective bargaining arrangements.
Our operations require the services of employees having the technical training and experience necessary to achieve proper operational results. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. From time to time in the past, temporary shortages of qualified personnel have occurred in our industry. Additionally,Recently, we mayhave begun to experience employee attrition asthe effects of a resulttightening labor market and the resulting increased labor costs associated with the limited availability of the Chapter 11 Cases.qualified personnel. If we should suffer any material loss of personnel or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially adversely affected. While we believe our wage rates are competitive and our relationships with our employees are satisfactory, a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. The occurrence of either of these events for a significant period of time could have a material adverse effect on our financial condition and results of operations.
The materials and supplies we use in our drilling and production services operations include fuels to operate our equipment, drilling mud, drill pipe, drill collars, drill bits, cement and other job materials such as explosives and perforating guns and coiled tubing.guns. We do not rely on a single source of supply for any of these items. From time to time, there have been shortages of drilling and production services equipment and supplies during periods of high demand. Shortages could result in increased prices for equipment or supplies that we may be unable to pass on to clients and could substantially lengthen the delivery times for equipment and supplies. Any significant delays in our obtaining equipment or supplies could limit our operations and jeopardize our relations with clients and could delay and adversely affect our ability to obtain new contracts for our rigs. Any of the above could have a material adverse effect on our financial condition and results of operations.
Facilities
Our operations are headquartered in San Antonio, Texas, and we conduct our business operations through 2515 regional offices located throughout the United States in Texas, Oklahoma, Colorado, North Dakota, Pennsylvania, Wyoming, Mississippi,and Louisiana, and Kansas, and internationally in Colombia. These operating locations typically include leased real estate properties which are used for regional offices, storage and maintenance yards and employee housing sufficient to support our operations in the area. We own 108 real estate properties associated with our regional operations.
Operating Risks and Insurance
Our operations are subject to the many hazards inherent in exploration and production activity, including the risks of:
•blowouts;
•cratering;
•fires and explosions;
•loss of well control;
•collapse of the borehole;
•damaged or lost drilling equipment; and
•damage or loss from natural disasters.
Any of these hazards can result in substantial liabilities or losses to us from, among other things:
•suspension of operations;
•damage to, or destruction of, our property and equipment and that of others;
•personal injury and loss of life;
•damage to producing or potentially productive oil and gas formations through which we drill; and
•environmental damage.
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We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Those risks include, among other things, pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our clients. However, clients who provide contractual indemnification protection may not in all cases maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a client to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may be unable to maintain adequate insurance in the future at rates we consider reasonable.
Our current insurance coverage includes property insurance on our rigs, drilling equipment, production services equipment, and real property. Our insurance coverage for property damage to our rigs, drilling equipment and production services equipment is based on our estimates of the cost of comparable used equipment to replace the insured property. The policy provides for a deductible of no more than $750,000 per drilling rig and a deductible on production services equipment of $250,000 per occurrence, with an additional $350,000 annual aggregate deductible. Our third-party liability insurance coverage is $101 million per occurrence and in the aggregate, with a $500,000 self-insured retention, an additional $500,000 aggregate deductible, of $250,000 per occurrence and an additional $250,000 annual aggregate deductible.deductible of $1,000,000 on the first layer of excess coverage. We also carry insurance coverage for pollution liability up to $20 million with a deductible of $500,000. We believe that we are adequately insured for public liability and property damage to others with
respect to our operations. However, such insurance may not be sufficient to protect us against liability for all consequences of well disasters, extensive fire damage or damage to the environment.
Governmental Regulation
Many aspects of our operations are subject to various federal, state and local laws and governmental regulations, including laws and regulations governing:
•environmental quality;
•pollution control;
•remediation of contamination;
•preservation of natural resources;
•transportation; and
•worker safety.
Environment Protection. Our operations are subject to stringent federal, state and local laws, rules and regulations governing the protection of the environment and human health and safety.
Some of the laws, rules and regulations applicable to our industry relate to the disposal of hazardous substances, oilfield waste and other waste materials and restrict the types, quantities and concentrations of those substances that can be released into the environment. Several of those laws also require removal and remedial action and other cleanup under certain circumstances, commonly regardless of fault. Our operations routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous wastes and/or hazardous substances. Planning, implementation and maintenance of protective measures are required to prevent accidental discharges. Spills of oil, natural gas liquids, drilling fluids and other substances may subject us to penalties and cleanup requirements. Handling, storage and disposal of both hazardous and non-hazardous wastes are also subject to these regulatory requirements. In addition, our operations are often conducted in or near ecologically sensitive areas, such as wetlands or protected species habitats, which are subject to special protective measures and which may expose us to additional operating costs and liabilities for accidental discharges of oil, gas, drilling fluids, contaminated water or other substances, or for noncompliance with other aspects of applicable laws and regulations.
Environmental laws and regulations are complex and subject to frequent change.change, and the new Biden Administration is expected to revise existing environmental regulations and to pursue new initiatives. Failure to comply with governmental requirements or inadequate cooperation with governmental authorities could subject a responsible party to administrative, civil or criminal action. We may also be exposed to environmental or other liabilities originating from businesses and assets which we acquired from others. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination or regulatory
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noncompliance may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.
There are a variety of regulatory developments, proposals or requirements and legislative initiatives that have been introduced in the United States and international regions in which we operate that are focused on restricting the emission of carbon dioxide, methane and other greenhouse gases. Further, President Biden has announced that he intends to take aggressive action to address climate-related issues and to set the United States on a path to be carbon-neutral by 2050.
Hydraulic fracturing of wells and subsurface water disposal are also under public and governmental scrutiny due to concerns regarding potential environmental and physical impacts, including groundwater and drinking water impacts, as well as whether such activities may cause earthquakes. Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil and gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, incurred by our clients. The adoption of any federal, state or local laws or the implementation of regulations or ordinances restricting or increasing the costs of hydraulic fracturing could cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our drilling and well servicing activities, any or all of which could adversely affect our financial position, results of operations and cash flows.
Our wireline operations involve the use of radioactive isotopes along with other nuclear, electrical, acoustic, and mechanical devices. Our activities involving the use of isotopes are regulated by the U.S. Nuclear Regulatory Commission and specified agencies of certain states. Additionally, we use high explosive charges for perforating casing and formations, and we use various explosive cutters to assist in wellbore cleanout. Such operations are regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms, and Explosives and require us to obtain licenses or other approvals for the use of
densitometers as well as explosive charges. We have obtained these licenses and approvals when necessary and believe that we are in substantial compliance with these federal requirements.
In addition, our business depends on the demand for land drilling and production services from the oil and gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our clients, or otherwise directly or indirectly affect our operations. It is possible that the Biden Administration will severely restrict oil and gas development on public lands. For example, the President has already announced a hold on new drilling permits for federal lands and waters and has proposed a moratorium on hydraulic fracturing on federal lands and waters. In addition, the new administration may restrict new oil and gas leasing on public lands.
See Item 1A—“Risk Factors” in Part I of this Annual Report on Form 10-K for a detailed discussion of risks we face concerning laws and governmental regulations.
Transportation. Among the services we provide, we operate as a motor carrier for the transportation of our own equipment and therefore are subject to regulation by the U.S. Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations and regulatory safety. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.
From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.
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Worker safety. Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate our business in a manner that is consistent with applicable laws, rules and permits. An accident or other event resulting in significant environmental or property damage, or injuries or fatalities involving our employees or other persons could also trigger investigations by federal, state or local authorities. Such an accident or other event could cause us to incur substantial expenses in connection with the investigation, remediation and resolution, as well as cause lasting damage to our reputation, loss of customers and an inability to obtain insurance.
Available Information
Our website address is www.pioneeres.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission. The public may read and copy these materials at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For additional information on the operations of the Securities and Exchange Commission’s Public Reference Room, please call 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically. We have also posted on our website our: Charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board; Code of Business Conduct and Ethics; Rules of Conduct Applicable to All Employees; Corporate Governance Guidelines; and Company Contact Information. Information on our website is not incorporated into this report or otherwise made part of this report.
ITEM 1A. RISK FACTORS
The information set forth in this Item 1A should be read in conjunction with the rest of the information included in this report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the financial statements and related notes this report contains. While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Additional risks and uncertainties that are not presently known to us or that we currently believe are immaterial also may negatively impact our business, financial condition or operating results.
Set forth below are various risks and uncertainties that could adversely impact our business, financial condition, results of operations and cash flows.
Risks Relating to Our Chapter 11 ProceedingsEmergence from Bankruptcy
As a result of its U.S. subsidiaries filed voluntary petitions commencing the Chapter 11 Cases under the Bankruptcy Code. The Chapter 11 Casesour bankruptcy filing and the Restructuringrecent emergence:
•key suppliers, vendors or other contract counterparties may terminate their relationships with us or require additional financial assurances or enhanced performance from us;
•our ability to renew existing contracts and compete for new business may be adversely affected;
•our ability to attract, motivate and/or retain key executives and employees may be adversely affected;
•our competitors may take business away from us, and our ability to attract and retain customers may be negatively impacted;
•our employees may be distracted from performance of their duties or more easily attracted to other employment opportunities; and
•we may have a material adverse impact ondifficulty obtaining the capital we need to run and grow our business, financial condition, results of operations, and cash flows. In addition, the Chapter 11 Cases and the Restructuring may have a material adverse impact on the trading price of our common stock and ultimately are expected to result in the cancellation and discharge of our securities, including our common stock. The Plan governs distributions to and the recoveries of holders of our securities.
The Chapter 11 Casesoccurrence of one or more of these events could have a material adverse effect on our business, financial condition, results of operations, and liquidity. Bankruptcy Court protection also may make it more difficult to retain management and the key personnel necessary to the success and profitability of our business. In addition, during the period of time we are involved in a bankruptcy proceeding, our clients and suppliers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships.
As a result of the concentration of our equity ownership, the future strategy and plans of the Company may differ materially from those in the past. Upon our emergence from Chapter 11, Cases, our historical financial information may not be indicativetwelve stockholder groups were the
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beneficial owners of approximately 95% (the “Significant Stockholders”) of our future performance, which may be volatile.
•Upon our emergence from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to the Plan. We expect we will be required to adopt the fresh start accounting rules, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets and our financial results after the application of fresh start accounting may be different from historical trends.
The new to the Company. Any new directors are likely to have different backgrounds, experiences and perspectives from those individuals who previously served on the board of directorsour Board and, thus, may have different views on the issues that will determine our future. As a result, ourthe future strategy and our plans may differ materially from those of the past.
Upon our emergence from Chapter 11, we adopted fresh start accounting in accordance with ASC Topic 852 and became a new entity for financial reporting purposes. As a result, we revalued our assets and liabilities based on our estimate of our enterprise value and the fair value of each of our assets and liabilities. These estimates, projections and enterprise valuation were prepared solely for the purpose of the bankruptcy proceedings and should not be relied upon by investors for any other purpose. At the time they were prepared, the determination of these values reflected numerous estimates and assumptions, and the fair values recorded based on these estimates may not be fully realized in periods subsequent to our emergence from Chapter 11.
The consolidated financial statements after the Effective Date are not comparable with the consolidated financial statements on or before that date as indicated by the “black line” division in the financial statements and footnote tables, which emphasizes the lack of comparability between amounts presented. This will make it difficult for stockholders to assess our performance in relation to prior periods. Please see Note 2, Emergence from Voluntary Reorganization under Chapter 11 Cases or otherwise could negatively affect our businesses.
Risks Relating to the Oil and Gas Industry
•We derive all our revenues from companies in the oil and gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and gas prices.
As a provider of contract land drilling services and oil and gas production services, our business depends on the level of exploration and production activity in the geographic markets where we operate. The oil and gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities.
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Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities. Oil and gas prices have been volatile historically and, we believe, will continue to be so in the future. Worldwide political, economic, and military events as well as natural disasters have contributed to oil and gas price volatility historically and are likely to continue to do so in the future. Many factors beyond our control affect oil and gas prices, including:
•the worldwide supply and demand for oil and gas;
•domestic or global health concerns, including the outbreak of contagious or pandemic diseases, such as the recent coronavirus;
•the cost of exploring for, producing and delivering oil and gas;
•the discovery rate of new oil and gas reserves;
•the rate of decline of existing and new oil and gas reserves;
•available pipeline and other oil and gas transportation capacity;
•the levels of oil and gas storage;
•the ability of oil and gas exploration and production companies to raise capital;
•economic conditions in the United States and elsewhere;
•actions by the Organization of Petroleum Exporting Countries, which we refer to as OPEC;
•political instability in oil and gas producing regions;
•governmental regulations, both domestic and foreign;
•domestic and foreign tax policy;
•weather conditions in the United States and elsewhere;
•the pace adopted by foreign governments for the exploration, development and production of their national reserves, or their investments in oil and gas reserves located in other countries; and
•the price of foreign imports of oil and gas.
Additionally, the above factors can also be affected by technological advances affecting energy consumption and the supply and demand within the market for renewable energy resources.
•Oil and natural gas prices, and market expectations of potential changes in these prices, significantly impact the level of worldwide drilling and production services activities.
Additionally, because our business depends on the level of spending by our clients, we are also affected by our clients’ ability to access the capital markets. After several consecutive years without significant improvement in commodity prices, many exploration and production companies have limited their spending to a level which can be supported by net operating cash flows alone, as access to the capital markets through debt or equity financings has become more challenging in our industry. This challenge has increased recently due to the major stock market and bond market indices experiencing elevated levels of volatility during 2020.
If the reduction in the overall level of exploration and development activities, whether resulting from changes in oil and gas prices or otherwise, continues or worsens, it could materially and adversely affect us further by negatively impacting:
•our revenues, cash flows and profitability;
•the fair market value of our drilling and production services fleets;
•our ability to maintain or obtain additional debt financing;
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•our ability to obtain additional capital to finance our business or make acquisitions, and the cost of that capital;
•the collectability of our receivables; and
•our ability to retain skilled operations personnel.
Risks Relating to Our Business
•Reduced demand for or excess capacity of drilling services or production services could adversely affect our profitability.
Our profitability in the future will depend on many factors but largely on pricing and utilization rates for our drilling and production services. A reduction in the demand for our equipment and services or an increase in the supply of comparable equipment in our industry or any particular regional market would likely decrease the pricing and utilization rates for our affected service offerings, which would adversely affect our revenues and profitability. The continuing trend toward longer lateral wellborescommodity price environment and the enhanced efficiencyglobal oversupply of the equipmentoil during 2020 resulted in our industry, in combination with current commodity prices and more disciplined spending by exploration and production companies, has contributed to an oversupply of equipment in our industry, declining rig counts and dayrates, and substantially reduced completion activity.activity for all our service offerings.
•We operate in a highly competitive, fragmented industry in which price competition could reduce our profitability.
We encounter substantial competition from other drilling contractors and other oilfield service companies. Our primary market areas are highly fragmented and competitive. The fact that drilling and production services equipment are mobile
and can be moved from one market to another in response to market conditions heightens the competition in the industry and may result in an oversupply of equipment in an area. Contract drilling companies and other oilfield service companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. If demand for drilling or production services improves in a region where we operate, our competitors might respond by moving in suitable rigs and production services equipment from other regions. An influx of equipment from other regions could rapidly intensify competition, reduce profitability, and make any improvement in demand for our services short-lived.
Most drilling services contracts and production services contracts are awarded on the basis of competitive bids, which also results in price competition. In addition to pricing and equipment availability, we believe the following factors are also important to our clients in determining which drilling services or production services provider to select:
•the type, capability and condition of each of the competing drilling rigs, well servicing rigs, and wireline units and coiled tubing units;
•the mobility and efficiency of the equipment;
•the quality of service and experience of the crews;
•the reputation and safety record of the company providing the services;
•the offering of integrated and/or ancillary services; and
•the ability to provide drilling and production services equipment adaptable to, and personnel familiar with, new technologies and drilling and production techniques.
While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment, our safety record, our ability to offer ancillary services, the experience of our crews and the quality of service we provide to differentiate us from our competitors. This strategy is less effective when lower demand for drilling and production services intensifies price competition and makes it more difficult for us to compete on the basis of factors other than price. In all of the markets in which we compete, an oversupply of drilling rigs or production services equipment generally causes greater price competition and reduced profitability.
•We face competition from many competitors with greater resources.
Some of our competitors have greater financial, technical and other resources than we do. Their greater capabilities in these areas may enable them to:
•better withstand industry downturns;
•compete more effectively on the basis of price and technology;
•better attract and retain skilled personnel; and
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•build new rigs or acquire and refurbish existing rigs and place them into service more quickly than us in periods of high drilling demand.
•Technological advancements and trends in our industry also affect the demand for certain types of equipment, and can affect the overall demand for the services our industry provides.
•We derive a significant portion of our revenue from a limited number of major clients, and our business, financial condition and results of operations could be materially adversely affected if we are unable to maintain relationships with these clients, or if their demand for our services decreases.
Historically, we have derived a significant portion of our revenue from a limited number of major clients. ForWhile none of our clients individually accounted for more than 10% of our total revenues in either of the years ended December 31, 2020 or 2019, and 2018, our drilling and production services provided to our top three clients accounted for approximately 18%19% and 20%18%, respectively, of our revenue. The loss of one or more of our major clients, or their decrease in demand for our services, could have a material adverse effect on our business, financial condition and results of operations. For a detail of our three largest clients as a percentage of our total revenues during the last two fiscal years, see Item 1—“Business” in Part I of this Annual Report on Form 10-K.
•Certain of our contracts are subject to cancellation by our clients without penalty and/or with little or no notice.
Some of our current drilling contracts, and some drilling contracts that we may enter into in the future, may include terms allowing our clients to terminate the contracts without cause, with little or no prior notice and/or without penalty or early termination payments. The likelihood that a client may seek to terminate a contract is increased during periods of market weakness.
In periods of extended market weakness, our clients may not be able to honor the terms of existing contracts, may terminate contracts even where there may be onerous termination fees, or may seek to renegotiate contract dayrates and terms in light of depressed market conditions. During depressed market conditions, as a result of commodity prices, restricted credit markets, economic downturns, changes in priorities or strategy or other factors beyond our control, a client may no longer want or need a drilling rig that is currently under contract or may be able to obtain a comparable drilling rig at a lower dayrate. For these reasons, clients may seek to renegotiate the terms of our existing drilling contracts, terminate our contracts without justification, leverage their termination rights in an effort to renegotiate contract terms, or otherwise fail to perform their obligations under our contracts.
Our clients may also seek to terminate contracts for cause, such as the loss of or major damage to the drilling unit or other events that cause the suspension of drilling operations beyond a specified period of time. If we experience operational problems or if our equipment fails to function properly and cannot be repaired promptly, our clients will not be able to engage in drilling operations and may have the right to terminate the contracts. If equipment is not timely delivered to a client or does not pass acceptance testing, a client may in certain circumstances have the right to terminate the contract.
In the event of a cancellation, the payment of a termination fee may not fully compensate us for the loss of the contract. Additionally, the early termination of a contract may result in a drilling rig or other equipment being idle for an extended period of time. The cancellation or renegotiation of a number of our contracts could materially reduce our revenues and profitability.
•Our operations involve operating hazards, which, if not insured or indemnified against, could adversely affect our results of operations and financial condition.
Our operations are subject to the many hazards inherent in exploration and production activity, including the risks of:
•blowouts;
•cratering;
•fires and explosions;
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•loss of well control;
•collapse of the borehole;
•damaged or lost drilling equipment; and
•damage or loss from natural disasters.
Any of these hazards can result in substantial liabilities or losses to us from, among other things:
•suspension of operations;
•damage to, or destruction of, our property and equipment and that of others;
•personal injury and loss of life;
•damage to producing or potentially productive oil and gas formations through which we drill; and
•environmental damage.
We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Those risks include, among other things, pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our clients. However, clients who provide contractual indemnification protection may not in all cases maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a client to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may be unable to maintain adequate insurance in the future at rates we consider reasonable.
•We could be adversely affected if shortages of equipment, supplies or personnel occur.
Our operations require the services of employees having the technical training and experience necessary to achieve proper operational results. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. From time to time in the past, temporary shortages of qualified personnel have occurred in our industry. Additionally,Recently, we mayhave begun to experience employee attrition asthe effects of a resulttightening labor market and the resulting increased labor costs associated with the limited availability of the Chapter 11 Cases.qualified personnel. If we should suffer any material loss of personnel or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially adversely affected. A significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. The occurrence of either of these events for a significant period of time could have a material adverse effect on our financial condition and results of operations.
•Our international operations are subject to political, economic and other uncertainties not generally encountered in our domestic operations.
Our international operations are subject to political, economic and other uncertainties not generally encountered in our U.S. operations which include, among potential others:
•risks of war, terrorism, civil unrest and kidnapping of employees;
•employee strikes, work stoppages, labor disputes and other slowdowns;
•expropriation, confiscation or nationalization of our assets;
•renegotiation or nullification of contracts;
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•foreign taxation;
•the inability to repatriate earnings or capital due to laws limiting the right and ability of foreign subsidiaries to pay dividends and remit earnings to affiliated companies;
•changing political conditions and changing laws and policies affecting trade and investment;
•trade and economic sanctions or other restrictions imposed by the United States or other countries;
•concentration of clients;
•regional economic downturns;
•the overlap of different tax structures;
•the burden of complying with multiple and potentially conflicting laws;
•the risks associated with the assertion of foreign sovereignty over areas in which our operations are conducted;
•the risks associated with any lack of compliance with the Foreign Corrupt Practices Act of 1977 (“FCPA”) or other anti-corruption laws;
•the risks associated with fluctuating currency values, hard currency shortages and controls of foreign currency exchange, and higher rates of inflation as compared to our domestic operations;
•difficulty in collecting international accounts receivable; and
•potentially longer payment cycles.
Additionally, we may be subject to foreign governmental regulations favoring or requiring the awarding of contracts to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These regulations could adversely affect our ability to compete.
We are committed to doing business in accordance with applicable anti-corruption laws and our code of conduct and ethics. We are subject, however, to the risk that our employees and agents may take action determined to be in violation of anti-corruption laws, including the FCPA or other similar laws. Any violation of the FCPA or other applicable anti-corruption laws could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and might materially adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Further, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
•Our operations are subject to various laws and governmental regulations that could restrict our future operations and increase our operating costs.
Many aspects of our operations are subject to various federal, state and local laws and governmental regulations, including laws and regulations governing:
•environmental quality;
•pollution control;
•remediation of contamination;
•preservation of natural resources;
•transportation; and
•worker safety.
Environment Protection. Our operations are subject to stringent federal, state and local laws, rules and regulations governing the protection of the environment and human health and safety.
Some of the laws, rules and regulations applicable to our industry relate to the disposal of hazardous substances, oilfield waste and other waste materials and restrict the types, quantities and concentrations of those substances that can be released into the environment. Several of those laws also require removal and remedial action and other cleanup under certain circumstances, commonly regardless of fault. Our operations routinely involve the handling of significant amounts of waste materials, some of which are classified as hazardous wastes and/or hazardous substances. Planning, implementation and maintenance of protective measures are required to prevent accidental discharges. Spills of oil, natural gas liquids, drilling fluids and other substances may subject us to penalties and cleanup requirements. Handling, storage and disposal of both hazardous and non-hazardous wastes are also subject to these regulatory requirements. In addition, our operations are often conducted in or near ecologically sensitive areas, such as wetlands or protected species habitats, which are subject to special protective measures and which
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may expose us to additional operating costs and liabilities for accidental discharges of oil, gas, drilling fluids, contaminated water or other substances, or for noncompliance with other aspects of applicable laws and regulations.
The federal Clean Water Act; the Oil Pollution Act; the federal Clean Air Act; the federal Resource Conservation and Recovery Act; the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA); the Safe Drinking Water Act (SDWA); the federal Outer Continental Shelf Lands Act; the Occupational Safety and Health Act (OSHA); regulations implementing these federal statutes (such as the “Navigable Waters Protection Rule” issued on January 23, 2020); and their state counterparts and similar statutes are the primary statutes that impose the requirements described above and provide for civil, criminal and administrative penalties and other sanctions for violation of their requirements. The OSHA hazard communication standard, the Environmental Protection Agency (EPA) “community right-to-know” regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require us to organize and report information about the hazardous materials we use
in our operations to employees, state and local government authorities and local citizens. In addition, CERCLA, also known as the “Superfund” law, and similar state statutes impose strict liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered responsible for the release or threatened release of certain hazardous substances into the environment. These persons generally include the current owner or operator of a facility where a release has occurred, the owner or operator of a facility at the time a release occurred, and companies that disposed of or arranged for the disposal of hazardous substances found at a particular site. This liability may be joint and several. Such liability, which may be imposed for the conduct of others and for conditions others have caused, includes the cost of removal and remedial action as well as damages to natural resources. Few defenses exist to the liability imposed by many environmental laws and regulations. It is also common for third parties to file claims for personal injury and property damage caused by substances released into the environment.
Environmental laws and regulations are complex and subject to frequent change.change, and the new Biden Administration is expected to revise existing environmental regulations and to pursue new initiatives. Failure to comply with governmental requirements or inadequate cooperation with governmental authorities could subject a responsible party to administrative, civil or criminal action. We may also be exposed to environmental or other liabilities originating from businesses and assets which we acquired from others. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination or regulatory noncompliance may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.
There are a variety of regulatory developments, proposals or requirements and legislative initiatives that have been introduced in the United States and international regions in which we operate that are focused on restricting the emission of carbon dioxide, methane and other greenhouse gases. Further, President Biden has announced that he intends to take aggressive action to address climate-related issues and to set the United States on a path to be carbon-neutral by 2050. Among these developments at the international level is the United Nations Framework Convention on Climate Change, which produced the “Kyoto Protocol” (an internationally applied protocol, which has been ratified in Colombia, which is a location where we provide drilling services) in 1992. More recently, in December 2015, 195 countries adopted under the Framework Convention a resolution known as the “Paris Agreement” to reduce emissions of greenhouse gases with a goal of limiting global warming to below 2°C (36°F). The Paris Agreement does not establish enforceable emissions reduction targets, but countries may establish greenhouse gas reduction measures pursuant to the agreement. The agreement went into effect in November 2016. The United States ratified the Paris Agreement in September 2016. It2016 but withdrew in November 2020. President Biden has since notifiedsigned an order to rejoin the Paris Agreement. The new President has also announced a focus on climate-related issues and a goal of setting the United Nations of its intentStates on the path to withdraw from the Paris Agreement, but under the terms of the agreement the U.S. will remain a party until November 4, 2020.net-zero carbon emissions by 2050.
In addition, the U.S. Congress has from time to time considered legislation to reduce emissions of greenhouse gases, primarily through the development of greenhouse gas cap and trade programs. Also, more than one-third of the states already have begun implementing legal measures to reduce emissions of greenhouse gases. There have been two multi-state organizations devoted to climate action. The Regional Greenhouse Gas Initiative (RGGI) is located in the Northeastern and Mid-Atlantic United States. The Western Regional Climate Action Initiative once included multiple U.S. states and much of Canada, but allowance trading is now limited to only California and Quebec, with a separate trading program administered for the province of Nova Scotia.
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In 2007, the United States Supreme Court, in Massachusetts, et al. v. EPA, held that carbon dioxide may be regulated as an “air pollutant” under the federal Clean Air Act. In December 2009, the EPA responded to this decision and issued a finding that the current and projected concentrations of greenhouse gases in the atmosphere threaten the public health and welfare of current and future generations, and that certain greenhouse gases from motor vehicles contribute to the atmospheric concentrations of greenhouse gases and hence to the threat of climate change. Subsequently, the EPA has a number of climate change regulations, including greenhouse gas control and permitting requirements for certain large stationary sources, fuel economy standards for vehicles and emissions standards for power plants.
Specific to the oil and gas industry, in April 2012, the EPA issued regulations to significantly reduce volatile organic compounds, or VOC, emissions from natural gas wells that are hydraulically fractured through the use of “green completions” to capture natural gas that would otherwise escape into the air. The EPA also issued regulations that establish standards for VOC emissions from several types of equipment at natural gas well sites, including storage tanks, compressors, dehydrators and pneumatic controllers. In May 2016, the EPA issued a rule to reduce methane (a greenhouse gas) and VOC emissions from additional oil and gas operations. Among other requirements, the rules impose standards for hydraulically fractured oil wells and equipment leaks at oil and gas production sites and extend certain existing standards to downstream oil and gas operations. In April 2017,2020, the EPA granted reconsideration of aspects of this rule. In March 2018, the EPA finalized two minor amendments toamended the rule butto relax regulatory requirements and to remove certain operations (relating to transport and storage) from rule applicability. We expect that the Biden Administration will reverse these changes. It is also announcedpossible that it is continuing to examine other rule issues.the new administration will impose more stringent requirements or promulgate additional rules concerning oil and gas emissions.
Although it is not possible at this time to predict whether proposed climate change initiatives will be adopted as initially written, if at all, or how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions. Any additional costs or operating restrictions associated with legislation or regulations regarding greenhouse gas emissions could have a material adverse effect on our operating results and cash flows. In addition, these developments could curtail the demand for fossil fuels such as oil and gas in areas of the world where our clients operate and thus adversely affect demand for our services, which may in turn adversely affect our future results of operations. Finally, we cannot predict with any certainty whether changes to temperature, storm intensity or precipitation patterns as a result of climate change will have a material impact on our operations.
In addition, our business depends on the demand for land drilling and production services from the oil and gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our clients, or otherwise directly or indirectly affect our operations. It is possible that the Biden Administration will severely restrict oil and gas development on public lands. For example, the President has already announced a hold on new drilling permits for federal lands and waters and has proposed a moratorium on hydraulic fracturing on federal lands and waters. In addition, the new administration may restrict new oil and gas leasing on public lands.
Oil and gas development restrictions are also possible due to voter initiatives. For example, in 2018, Colorado voted on Proposition 112, which would have increased drilling location setbacks from 500 feet to 2,500 feet, severely limiting access to oil and gas minerals. Although Proposition 112 was defeated, future voter initiatives are possible in certain jurisdictions. For example, at least six oil and gas ballot initiatives have already been submitted for Colorado’s November ballot with some that are similar to Proposition 112 from 2018. Further, state legislators and regulators could seek to impose similar restrictions.
Our wireline operations involve the use of radioactive isotopes along with other nuclear, electrical, acoustic, and mechanical devices. Our activities involving the use of isotopes are regulated by the U.S. Nuclear Regulatory Commission and specified agencies of certain states. Additionally, we use high explosive charges for perforating casing and formations, and we use various explosive cutters to assist in wellbore cleanout. Such operations are regulated by the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms, and Explosives and require us to obtain licenses or other approvals for the use of densitometers as well as explosive charges. We have obtained these licenses and approvals when necessary and believe that we are in substantial compliance with these federal requirements.
Transportation. Among the services we provide, we operate as a motor carrier for the transportation of our own equipment and therefore are subject to regulation by the U.S. Department of Transportation and by various state agencies. These regulatory authorities exercise broad powers, governing activities such as the authorization to engage in motor carrier operations and regulatory safety. There are additional regulations specifically relating to the
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trucking industry, including testing and specification of equipment and product handling requirements. The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. Some of these possible changes include increasingly stringent environmental regulations, changes in the hours of service regulations which govern the amount of time a driver may drive in any specific period, onboard black box recorder devices or limits on vehicle weight and size.
Interstate motor carrier operations are subject to safety requirements prescribed by the U.S. Department of Transportation. To a large degree, intrastate motor carrier operations are subject to state safety regulations that mirror federal regulations. Such matters as weight and dimension of equipment are also subject to federal and state regulations.
From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels, which may increase our costs or adversely impact the recruitment of drivers. We cannot predict whether, or in what form, any increase in such taxes applicable to us will be enacted.
Worker safety. Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate our business in a manner that is consistent with applicable laws, rules and permits. An accident or other event resulting in significant environmental or property damage, or injuries or fatalities involving our employees or other persons could also trigger investigations by federal, state or local authorities. Such an accident or other event could cause us to incur substantial expenses in connection with the investigation, remediation and resolution, as well as cause lasting damage to our reputation, loss of customers and an inability to obtain insurance.
•Federal and state legislative and regulatory initiatives related to hydraulic fracturing could result in operating restrictions or delays in the completion of oil and natural gas wells that may reduce demand for our drilling and well servicing activities and could adversely affect our financial position, results of operations and cash flows.
Hydraulic fracturing is a commonly used process that involves injection of water, sand, and a minor amount of certain chemicals to fracture the hydrocarbon-bearing rock formation to allow flow of hydrocarbons into the wellbore. Federal agencies have adopted new rules, such as the Bureau of Land Management’s (BLM) hydraulic fracturing rule finalized in March 2015, that impose additional requirements on the practice of hydraulic fracturing. The BLM has since rescinded much of the 2016 rule, but litigation challenging the replacement rule is pending. In October 2016,pending, and the BLM updated its rulesBiden Administration may take actions to restrict flaring associated with the development of oil and natural gas on public lands, including through hydraulic fracturing. The BLM has since proposed rescinding portions of the rule and portions of the rule have been suspended pending the outcome of litigation concerningre-propose the rule. Additional federal regulations may also be developed. Several states are considering legislation to regulate hydraulic fracturing practices that could impose more stringent permitting, transparency, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. Hydraulic fracturing of wells and subsurface water disposal are also under public and governmental scrutiny due to concerns regarding potential environmental and physical impacts, including groundwater and drinking water impacts, as well as whether such activities may cause earthquakes.
The federal Energy Policy Act of 2005 amended the Underground Injection Control provisions of the federal Safe Drinking Water Act (SDWA) to exclude certain hydraulic fracturing practices from the definition of “underground injection.” The EPA has asserted regulatory authority over certain hydraulic fracturing activities involving diesel fuel and has developed guidance relating to such practices. In addition, repeal of the SDWA exclusion of hydraulic fracturing has been advocated by certain advocacy organizations and others in the public. Congress has from time to time considered legislation to repeal the exemption for hydraulic fracturing from the SDWA, which would have the effect of allowing the EPA to promulgate new regulations and permitting requirements for hydraulic fracturing, and to require the disclosure of the chemical constituents of hydraulic fracturing fluids to a regulatory agency, which would make the information public via the Internet.
Scrutiny of hydraulic fracturing activities continues in other ways, with the EPA having completed a multi-year study of the potential environmental impacts of hydraulic fracturing. The Final Report issued by the EPA in December 2016 concluded that hydraulic fracturing activities can impact drinking water resources under some circumstances and identified conditions under which impacts can be more frequent or severe. In addition, in April 2012, the EPA issued the first federal air standards for natural gas wells that are hydraulically fractured, which require operators to significantly reduce VOC emissions through the use of “green completions” to capture natural gas that would otherwise escape into the air. These new rules address emissions of various pollutants frequently associated with oil and natural gas production and processing activities by, among other things, requiring new or
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reworked hydraulically-fractured gas wells to control emissions through flaring or reduced emission (or “green”) completions. The rules also establish specific new requirements, which were effective in 2012, for emissions from compressors, controllers, dehydrators, storage tanks, gas processing plants, and certain other equipment. The EPA has amended these rules several times. In May 2016, the EPA finalized a rule to reduce methane (a greenhouse gas) and VOC emissions from oil and gas operations. An amendment in 2020 relaxed some of the rule requirements and removed applicability for some sources (in the transport and storage segments of the oil and gas industry), but the Biden Administration is expected to reverse this amendment. It is also possible that the EPA will further amend its oil and gas regulations.regulations to impose more stringent requirements. These rules may require a number of modifications to our clients’ and our own operations, including the installation of new equipment to control emissions. Compliance with such rules could result in additional costs for us and our clients, including increased capital expenditures and operating costs, which may adversely impact our cash flows and results of operations.
The EPA has also developed effluent limitations for the treatment and discharge of wastewater resulting from hydraulic fracturing activities to publicly owned treatment works (POTW). The agency’s final regulations, published on June 28, 2016, prohibited any discharge of wastewater pollutants from onshore unconventional oil and gas extraction facilities to a POTW. The EPA was also required, pursuant to a Consent Decree with environmental groups, to reevaluate whether oil and gas wastes should continue to be exempt from being considered hazardous wastes. Although the EPA concluded in April 2019 that no changes to the existing exemption are needed, similar lawsuits could be brought in the future. The U.S. Department of the Interior has also finalized regulations relating to the use of hydraulic fracturing techniques on public lands and disclosure of fracturing fluid constituents (i.e. the BLM’s hydraulic fracturing rule issued in March 2015) and has finalized, in October 2016, a rule to reduce flaring and venting associated with oil and gas operations on public lands. The BLM rules have since been rescinded, but it is possible that they will be reinstated through litigation.litigation or through rulemaking by the new Biden Administration.
In addition, some states and localities have adopted, and others are considering adopting, regulations or ordinances that could restrict hydraulic fracturing in certain circumstances, that would require, with some exceptions, disclosure of constituents of hydraulic fracturing fluids, or that would impose higher taxes, fees or royalties on natural gas production. Moreover, public debate over hydraulic fracturing and shale gas production continued to see strong public opposition, and has resulted in delays of well permits in some areas.
In June 2014, the State of New York’s Court of Appeals upheld the right of individual municipalities in the State of New York to ban hydraulic fracturing using zoning restrictions. In December 2014, New York State Governor Cuomo announced that hydraulic fracturing will be permanently banned in the state. Similarly situated municipalities in other states may seek to ban or restrict resource extraction operations within their borders using zoning and/or setback restrictions, which could adversely affect the ability of resource extraction enterprises to operate in certain parts of the country, and thus adversely affect demand for our services, which may in turn adversely affect our future results of operations. It is also possible that similar actions will be taken at the federal level, in light of a proposal by President Biden to impose a moratorium on hydraulic fracturing on federal lands and waters pending further study of the impacts of fracking and oil and gas production.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil and gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, incurred by our clients. The adoption of any federal, state or local laws or the implementation of regulations or ordinances restricting or increasing the costs of hydraulic fracturing could cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our drilling and well servicing activities, any or all of which could adversely affect our financial position, results of operations and cash flows.
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•Our operations are subject to cybersecurity risks.
Our operations are increasingly dependent on information technologies and services. Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow, and include, among other things, storms and natural disasters, terrorist attacks, utility outages, theft, viruses, malware, design defects, human error, or complications encountered as existing systems are maintained, repaired, replaced, or upgraded. Risks associated with these threats include, among other things:
•loss, corruption, or misappropriation of intellectual property, or other proprietary or confidential information (including client, supplier, or employee data);
•disruption or impairment of our and our clients’ business operations and safety procedures;
•loss or damage to our worksite data delivery systems; and
•increased costs to prevent, respond to or mitigate cybersecurity events.
Although we utilize various procedures and controls to mitigate our exposure to such risk, cybersecurity attacks and other cyber events are evolving and unpredictable. Moreover, we do not have control over the information technology systems of our clients, suppliers, and others with which our systems may connect and communicate. As a result, the occurrence of a cyber incident could go unnoticed for a period time. Any such incident could have a material adverse effect on our business, financial condition and results of operations.
•Future acquisitions or dispositions may not result in the realization of savings and efficiencies, the generation of cash flow or income, or the reduction of risk as contemplated by management, and may have a material adverse effect on our liquidity, results of operations and financial condition.
From time to time and subject to any limitations set forth in our debt financing agreements, we may seek opportunities to maximize efficiency and value through various transactions including the sale of assets or businesses, or the pursuit of acquisitions of complementary assets or businesses. These transactions are subject to inherent risks, including:
•the use of capital for acquisitions may adversely affect our cash available for other uses;
•unanticipated costs, assumption of liabilities or exposure to unforeseen liabilities of acquired businesses;
•difficulties in integrating the operations, assets and employees of the acquired business;
•difficulties in maintaining an effective internal control environment over an acquired business;
•risks of entering markets in which we have limited prior experience;
•decreased earnings, revenues or cash flow resulting from dispositions; and
•increases in our expenses and working capital requirements.
The process of integrating an acquired business may involve unforeseen costs and delays or other operational, technical and financial difficulties that may require a disproportionate amount of management attention and financial and other resources. Our failure to achieve consolidation savings, to incorporate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations.
In addition, we may not have sufficient capital resources to complete additional acquisitions. Historically, we have funded business acquisitions and the growth of our fleets through a combination of debt and equity financing. WeSubject to the limitations set forth in our debt agreements, we may incur substantial additional indebtedness to finance future acquisitions and also may issue equity securities or convertible securities in connection with such acquisitions. DebtSuch debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity or convertible securities could be dilutive to our existing shareholders.stockholders. Furthermore, we may not be able to obtain additional financing on satisfactory terms or at all. Even if we have access to the necessary capital, we may be unable to continue to identify additional suitable acquisition opportunities, negotiate acceptable terms or successfully acquire identified targets.
Our current debt agreements contain covenants that limit our ability to make acquisitions and incur, assume, or guarantee any additional indebtedness.
•The uncertainty regarding the potential phase-out of LIBOR may negatively impact our operating results.
On July 27, 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out LIBOR, the London Interbank Offer Rate, as a benchmark by the end of 2021, when private-sector banks are no
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longer required to report the information used to set the rate. LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve is considering replacing U.S. dollar LIBOR with a newly created index called the Broad Treasury Financing Rate, calculated with a broad set of short-term repurchase agreements backed by treasury securities. In the future, we may need to renegotiate our current debt arrangementsagreements or incur other indebtedness, and the phase-out of LIBOR may negatively impact the terms of such indebtedness. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market could have a material adverse effect on our financial position, results of operations, and liquidity.
Risks Relating to Our Capital Resources and Organization
•We have a significant amount of debt and despite our current level of indebtedness, we may still be able to incur more debt. Our debt levels and the restrictions imposed on us by our DIP Facilitydebt agreements may have significant consequences, including limiting our liquidity and flexibility for successfully operating our business, pursuing business opportunities, and obtaining additional financing.
Our level of indebtedness could prevent us from engaging in transactions that might otherwise be beneficial to us and could put us at a competitive disadvantage relative to other less leveraged competitors that have more cash flow to devote to their operations. Because we may have to dedicate a substantial portion of our operating cash flow to make interest and principal payments, we could be limited in our ability to:
•make investments in working capital or capital expenditures;
•obtain additional financing that may be necessary to fund or expand our operations; and
•withstand and respond to changes or events in our business, our industry or the economy in general.
The incurrence of additional indebtedness could exacerbate the above risks and make it more difficult to satisfy our existing financial obligations.
We also may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our DIP Facilitydebt agreements that, among other things, and subject to certain exceptions limit our ability to:
•transfer or merge with another company;sell assets;
•create liens;
•enter into mergers or consolidations; and
The failure to comply with any of these covenants would cause an event of default under our DIP Facilitydebt agreements which if not waived, could result in acceleration of the outstanding indebtedness under our DIP Facility,debt agreements, in which case the debt would become immediately due and payable. If this occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it.
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•We may be unable to repay or refinance our debt as it becomes due, whether at maturity or as a result of acceleration.
Our ability to meet our debt service obligations depends on our ability to generate positive cash flows from operations. We have in the past incurred, and may incur in the future, negative cash flows from our operating activities. Our ability to generate positive cash flows in the future will be influenced by:
•general industry, economic and financial conditions;
•the level of commodity prices in our industry and the level of demand for our services;
•competition in the markets where we operate; and
•other factors affecting our operations, many of which are beyond our control.
If our business does not generate sufficient cash flow from operations to service our outstanding indebtedness, we may have to undertake alternative financing plans, such as:
•refinancing or restructuring our debt;
•selling assets;
•reducing or delaying capital investments, including maintenance or refurbishment of our equipment; and/or
•seeking to raise additional capital.
We may not be able to repay our debt as it comes due, or to refinance our debt on a timely basis or on terms acceptable to us and within the limitations contained in our DIP Facility or our New Revolver when payment obligations are no longer automatically stayed under the provisions of the Bankruptcy Code.debt agreements. Failure to repay or to timely refinance any portion of our debt could result in a default under the terms of all our debt instruments and the acceleration of all indebtedness outstanding.
•Our current operations and future growth may require significant additional capital, and the amount and terms of our indebtedness could impair our ability to fund our capital requirements. The DIP Facility may be insufficient to fund our cash requirements through emergence from bankruptcy.
Our business requires substantial capital, and we may require additional capital in the event of significant departures from our current business plan, unanticipated maintenance or capital requirements, or to pursue growth opportunities. However, additional financing may not be available on a timely basis or on terms acceptable to us and within the limitations contained in our debt arrangements. agreements. To some extent, our ability to obtain additional capital is also reliant on the public perception of our industry, which may influence investors’ willingness to invest in the energy sector.
Failure to obtain additional financing, should the need for it develop, could impair our ability to fund working capital and capital expenditure requirements and meet debt service requirements, which could have a material adverse impact on our business. Further, for the duration of the Chapter 11 Cases, we will be subject to various additional risks including the inability to maintain or obtain sufficient financing sources for operations, to fund the plan of reorganization and to meet future obligations, including increased legal and other professional costs associated with the Chapter 11 Cases and our reorganization. Further, if the transactions contemplated by the Plan are not completed such that the effective date of the Plan occurs prior to the maturity of the DIP Facility, we may need to refinance the DIP Facility. We may not be able to obtain any such financing on acceptable terms, or at all.
•We expect that our ability to use our net operating losses and certain other tax attributes will be substantially limited as a result of transfers or issuances of our equity in connection with the Chapter 11 Cases.
limited.Our ability to utilize our net operating loss carryforwards and certain other tax attributes to offset future taxable income and to reduce our U.S. federal income tax liability is subject to certain governing rules and restrictions. Section 382 of the U.S. Internal Revenue Code (“Section 382”) contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating losses and certain other tax attributes existing as of the date of such ownership change. Generally, under Section 382, an “ownership change” is deemed to have occurred if one or more shareholders owning 5% or more of a company’s common stock have aggregate increases in their ownership of such stock of more than 50% over the prior three-year period. Upon experiencingour emergence from Chapter 11, we underwent an ownership change, absent any exception allowable under Section 382,as defined in the amountIRC, which will result in future annual limitations on the usage of a company’sour remaining domestic net operating losseslosses.
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Risks Relating to Our Common Stock
•We cannot assure you that an active trading market for our common stock will develop or be maintained, and certain other tax attributes thatthe market price of our common stock may be utilized to offset future taxable income will generally be subject to an annual limitation; however, the annual limitation does not limit the ability to use net operating losses in offsetting cancellation of indebtedness income pursuant to Section 108 of the U.S. Internal Revenue Code.
Our shares of common stock are not currently listed for trading on a national securitiesany stock exchange and thus the market for our common stock is limited, sporadic, and volatile which may impact the value of our shares and your ability to sell your shares.
In the event our common stock commences trading, the trading price of our common stock may fluctuate significantly. Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock. These factors include, among other things:
•our operating and financial performance and prospects;
•our ability to repay our debt;
•investor perceptions of us and the industry and markets in which we operate;
•future sales, or the availability for sale, of equity or equity-related securities;
•changes in earnings estimates or buy/sell recommendations by analysts;
•conversion of our Convertible Notes;
•limited trading volume of our common stock; and
•general financial, domestic, economic and other market conditions.
•In the event our common stock commences trading, the trading price of our common stock may not accurately reflect the value of our business.
Upon our emergence from Chapter 11, ownership of our common stock is highly concentrated, and there are a limited number of shares available for trading on any public market. As a result, any future reported trading prices for our common stock at any given time may not accurately reflect the underlying economic value of our business at that time. Any future reported trading prices could be higher or lower than the price a stockholder would be able to receive in a sale transaction, and there can be no assurance that there will be sustained.sufficient public trading in our common stock in the future to create a liquid trading market that accurately reflects the underlying economic value of our business.
•We do not intend to pay dividends on our new common stock in the foreseeable future, and therefore only appreciation of the price of our new common stock will provide a return to our shareholders.stockholders.
We do not intend to pay or declare any dividends on our new common stock and currently intend to retain any earnings to fund our working capital needs, reduce debt and fund growth opportunities. Any future dividends will be at the discretion of our board of directors after taking into account various factors it deems relevant, including our financial condition and performance, cash needs, income tax consequences and restrictions imposed by the Texas Business Organizations CodeDelaware General Corporation Law and other applicable laws and by our DIPSenior Secured Notes, ABL Credit Facility, and any otherCovertible Notes. Our debt arrangements. Our DIP Facilityagreements includes provisions that generally prohibit us from paying dividends on our capital stock, including our new common stock.
•We may issue preferred stock whose terms could adversely affect the voting power or value of our new common stock.
Our articlescertificate of incorporation authorizeauthorizes us to issue, without the approval of our shareholders,stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our new common stock respecting dividends and distributions, as our board of directors may determine; however, our issuance of preferred stock is subject to the limitations imposed on us by our debt arrangements.agreements. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our new common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions.
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Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our new common stock.
•Provisions in our organizational documents could delay or prevent a change in control of our company even if that change would be beneficial to our shareholders.stockholders.
The existence of some provisions in our organizational documents could delay or prevent a change in control of our company even if that change would be beneficial to our shareholders.stockholders. Our articlescertificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult, including:
•provisions regulating the ability of our shareholdersstockholders to nominate candidates for election as directors or to bring matters for action at annual meetings of our shareholders;stockholders;
•limitations on the ability of our shareholdersstockholders to call a special meeting and act by written consent; and
•the authorization given to our board of directors to issue and set the terms of preferred stock.
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ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive offices are located at 1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209. For a description of our significant properties, see “Business—Company Overview” and “Business—Facilities” in Item 1 of this report. We believe that we have sufficient properties to conduct our operations and that our significant properties are suitable and adequate for their intended use.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation or subject to disputes or claims arising out of our business activities, including workers’ compensation claims and employment-related disputes. 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 flows. For information on Legal Proceedings, see Note 13, 14, Commitments and Contingencies, of the Notes to Consolidated Financial Statements, included in Part II, Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for our common stock. Our Predecessor common stock previously traded on the New York Stock Exchange (NYSE) under the symbol “PES.” As a result of our abnormally low trading price levels, the NYSE delisted our Predecessor common stock on August 14, 2019. Our Predecessor common stock subsequently traded on the OTC Markets under the symbol “PESX” until March 3, 2020, at which time, due to our voluntary filing of the Chapter 11 Cases, our common stockfiling, it commenced trading on the OTC Pink marketplace under the trading symbol “PESXQ”. Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission“PESXQ.” On May 29, 2020, upon emergence from Chapter 11, all outstanding shares of our Predecessor common stock were cancelled, and may not necessarily represent actual transactions.we issued a total of 1,049,804 shares of new common stock. As a result of the cancellation of our Predecessor common stock, the Company ceased trading on the OTC Pink marketplace.
As of February 28, 2020, 79,579,57126, 2021, 1,647,224 shares of our common stock were outstanding, held by 285 shareholders68 stockholders of record. The number of record holders does not necessarily bear any relationship to the number of beneficial owners of our common stock.
We have not paid or declared any dividends on our common stock and currently intend to retain earnings to fund our working capital needs and growth opportunities. Any future dividends will be at the discretion of our board of directors after taking into account various factors it deems relevant, including our financial condition and performance, cash needs, income tax consequences and the restrictions imposed by the Texas Business Organizations CodeDelaware General Corporation Law and other applicable laws. Additionally, our debt arrangementsagreements include provisions that generally prohibit us from paying dividends on our capital stock.
We did not make any unregistered sales of equity securities during the quarter ended December 31, 2019.2020. No shares of our common stock were purchased by or on behalf of our company or any affiliated purchaser during the quarter ended December 31, 2019.2020.
ITEM 6.SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements made in good faith that are subject to risks, uncertainties and assumptions. These forward-looking statements are based on our current beliefs, intentions, and expectations and are not guarantees or indicators of future performance. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including risks relatedand uncertainties relating to our ability to obtain the Bankruptcy Court’s approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Cases, including maintaining strategic control as debtor-in-possession, and the outcomes of Bankruptcy Court rulings and the Chapter 11 Cases in general, delays in the Chapter 11 Cases, our ability to consummate the Plan, our ability to achieve our stated goals and continue as a going concern, risks that our assumptions and analyses in the Plan are incorrect, our ability to fund our liquidity requirements during the Chapter 11 Cases, our ability to comply with the covenants under our DIP Facility, the effects of the filing of the Chapter 11 Casesour bankruptcy on our business and relationships, the interestconcentration of various constituents, our equity ownership following bankruptcy, the actions and decisionsapplication of creditors, regulators and other third parties that have an interest infresh start accounting, the Chapter 11 Cases, restrictions imposedeffect of the coronavirus (COVID-19) pandemic on us by the Bankruptcy Court,our industry, general economic and business conditions and industry trends, levels and volatility of oil and gas prices, the continued demand for drilling services or production services in the geographic areas where we operate, the highly competitive nature of our business, the supply of marketable equipment within the industry, technological advancements and trends in our industry and improvements in our competitors' equipment, the loss of one or more of our major clients or a decrease in their demand for our services, operating hazards inherent in our operations, the supply of marketable equipment within the industry, the continued availability of new components forsupplies, equipment and qualified personnel required to operate our fleets, the continued availability of qualified personnel, the political, economic, regulatory and other uncertainties encountered by our operations, and changes in, or our failure or inability to comply with, governmental regulations, including those relating to the environment, the occurrence of cybersecurity incidents, the success or failure of future acquisitions or dispositions, or acquisitions,our level of indebtedness and future compliance with covenants under our debt agreements, and the impact of not having our common stock listed on a national securities exchange or quoted on an over-the-counter market. We have discussed many of these factors in more detail elsewhere in this report, and, including under the headings “Risk Factors” in Item 1A and “Special Note Regarding Forward-Looking Statements”Statements and Risk Factor Summary” in the Introductory Note to Part I. These factors are not necessarily all the important factors that could affect us. Other unpredictable or unknown factors could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. All forward-looking statements speak only as of the date on which they are made and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We advise our shareholdersstockholders that they should (1) recognize that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.
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Recent Developments
Reorganization and Emergence from Chapter 11 Proceedings, and Going Concern
On the Effective Date, all applicable agreements governing the obligations under the Term Loan, Prepetition Senior Notes and Prepetition ABL Facility were terminated. The Term Loan and Prepetition ABL Facility were paid in full and all outstanding obligations under the Prepetition Senior Notes were canceled in exchange for 94.25% of the pro forma common equity. On the Effective Date, we entered into a $75 million senior secured asset-based revolving credit agreement which was later amended and reduced to $40 million in August 2020 (the “ABL Credit Facility”), and issued $129.8 million of aggregate principal amount of 5% convertible senior unsecured pay-in-kind notes due 2025 (the “Convertible Notes”) and $78.1 million of aggregate principal amount of floating rate senior secured notes due 2025 (the “Senior Secured Notes”), the proceeds of which were used to repay our outstanding Term Loan and certain related fees, all of which are described in more detail in the Liquidity and Capital Resources section below, under the headings entitled ABL Credit Facility and Debt Instruments and Compliance Requirements.
Also on March 1, 2020,the Effective Date, by operation of the Plan, all agreements, instruments, and other documents evidencing, relating to or connected with any equity interests of the Company, including the existing common stock, issued and outstanding immediately prior to the Effective Date, and any rights of any holder in respect thereof, were deemed canceled, discharged and of no force or effect. Pursuant to the Plan, we are operating asissued a debtor-in-possessiontotal of 1,049,804 shares of our new common stock, with approximately 94.25% of such new common stock being issued to holders of the Prepetition Senior Notes outstanding immediately prior to the Effective Date. Holders of the existing common stock received an aggregate of 5.75% of the proforma common equity (subject to the dilution from the Convertible Notes and new management incentive plan), at a conversion rate of 0.0006849838 new shares for each existing share.
As part of the transactions undertaken pursuant to the authority granted under Chapter 11Plan, we converted from a Texas corporation to a Delaware corporation, filed the Certificate of Incorporation of the Bankruptcy Code. Pursuant toCompany with the Chapter 11 Cases, we intend to significantly de-leverage our balance sheetoffice of the Secretary of State of the State of Delaware, and reduce overall indebtedness upon completionadopted Amended and Restated Bylaws of that process. Additionally, as a debtor-in-possession, certainthe Company.
Shares of our activitiesPredecessor common stock were delisted from the OTC Pink Marketplace, and shares of our new common stock are subjectnot currently listed on any stock exchange or quoted on any over-the-counter market. We anticipate the trading of our new common stock on the OTC market to review and approval by the Bankruptcy Court, including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully orcommence again in the time frame contemplated by the RSA. In connection with the Bankruptcy Petitions, we entered into the RSA with the Consenting Creditors. Pursuant to the RSA, the Consenting Creditors and the Pioneer RSA Parties made certain customary commitments to each other, including the Consenting Noteholders committing to vote for, and the Consenting Creditors committing to support, the Restructuring to be effectuated through the Plan to be proposed by the Pioneer RSA Parties.near future.
For additional information concerning our bankruptcy proceedings under Chapter 11, see Note 2, Going Concern and Subsequent EventsEmergence from Voluntary Reorganization under Chapter 11,of the Notes to Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data.
Fresh Start Accounting — The financial statements included herein have been prepared as if we are a going concern and Item 1A – “Risk Factors”in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 852, Reorganizations (ASC Topic 852). In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.
We evaluated the events between May 29, 2020 and May 31, 2020 and concluded that the use of an accounting convenience date of May 31, 2020 (the “Fresh Start Reporting Date”) would not have a material impact on our consolidated financial statements. As such, the application of fresh start accounting was reflected in our consolidated balance sheet as of May 31, 2020 and related fresh start accounting adjustments were included in our consolidated statement of operations for the five months ended May 31, 2020.
In accordance with ASC Topic 852, with the application of fresh start accounting, we allocated the reorganization value to our individual assets and liabilities (except for deferred income taxes) based on their estimated fair values in
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conformity with ASC Topic 805, Business Combinations. The amount of deferred taxes was determined in accordance with ASC Topic 740, Income Taxes. The Effective Date fair values of our assets and liabilities differed materially from their recorded values as reflected on the historical balance sheets. For additional information about the application of fresh start accounting, see Note 3, Fresh Start Accounting,of the Notes to Consolidated Financial Statements included in Part III, Item 8 Financial Statements and Supplementary Data.
As a result of this Annual Reportthe application of fresh start accounting and the effects of the implementation of the Plan, our consolidated financial statements after the Effective Date are not comparable with the consolidated financial statements on Form 10-K.or before that date as indicated by the “black line” division in the financial statements and footnote tables, which emphasizes the lack of comparability between amounts presented. References to “Successor” relate to our financial position and results of operations after the Effective Date. References to “Predecessor” refer to our financial position and results of operations on or before the Effective Date.
Measures taken by federal, state and local governments, both globally and domestically, to reduce the rate of spread of COVID-19 resulted in a decrease in general economic activity and a corresponding decrease in global and domestic energy demand in 2020, which negatively impacted oil and gas prices, and which in turn reduced demand for, and the pricing of, products and services provided to the oil and gas industry, including the products and services which we provide. In addition, actions by OPEC and a group of other oil-producing nations led by Russia further disrupted the supply and demand economics and negatively impacted crude oil prices. These events pushed crude oil storage near capacity and drove prices down significantly, as described further in the below section entitled “Market Conditions and Outlook”. Although the recovery of supply chain disruptions and the approval of COVID-19 vaccinations in late 2020 have led to signs of stabilization and improvements in commodity pricing, to the extent that the previously described conditions continue to exist or worsen in future periods, our clients’ willingness and ability to explore for, develop and produce hydrocarbons will be adversely affected, which will impact the demand for our products and services and adversely affect our results of operations and liquidity. We have worked to respond to the recent and current market conditions in a number of ways, including:
•Safety Measures. We have taken proactive steps in our field operations and corporate offices to protect the health and safety of our employees and contractors, including temperature screenings at field job sites, remote working for our office employees, and we implemented procedures for hygiene and distancing at all our locations.
•Reduced Capital Spending. We significantly reduced our initial 2020 capital expenditure budget to a total spend of $15.6 million on capital expenditures, while our original budget contemplated capital expenditures of approximately $40 million.
•Closure of Under-performing Operations. In April 2020, we closed our coiled tubing operations and idled all our coiled tubing equipment, which were subsequently placed as held for sale. We have also closed or consolidated 9 operating locations within our wireline and well servicing operations and exited 13 long-term leases during 2020 as well as various other short-term leases that support our business, and renegotiated or otherwise downsized other leased locations in order to reduce overhead and improve profitability.
•Cost-Cutting Measures. Throughout 2020, we implemented various cost-cutting measures including, among other things, (i) a 50% reduction in our total headcount, (ii) the suspension of our Employee Incentive Plan and determining that no bonuses would be payable thereunder, (iii) a reduction in the base salaries of each of our executive officers (with the exception of our Interim Chief Executive Officer) by 24% to 35%, (iv) certain hourly, salary and incentive compensation reductions for administrative and operations personnel throughout the company, (v) a20% reduction in the cash compensation of each of our non-employee directors effective until June 30, 2021 (or such other date as determined by the Board) and (vi) the suspension of certain employee benefits, including matching 401(k) contributions.
•Liquidating Non-strategic Assets. During 2020, we completed the sales of various assets for cash proceeds of $12.6 million and have an additional $3.6 million designated as held for sale at December 31, 2020.
Company Overview and Business Segments
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. Drilling services and
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production services are fundamental to establishing and maintaining the flow of oil and natural gas throughout the productive life of a well.
Our current business is comprised of two business lines — Drilling Services and Production Services. We report our Drilling Services business as two reportable segments: (i)(consisting of Domestic Drilling and (ii) International Drilling. We report ourDrilling reportable segments) and Production Services business as three reportable segments: (i)(consisting of Well Servicing (ii)and Wireline Services reportable segments). In April 2020, we closed our coiled tubing operations and (iii) Coiled Tubing Services.idled all our coiled tubing equipment, which were subsequently placed as held for sale as of June 30, 2020. Financial information about our operating segments is included in Note 12, 13, Segment Information, of the Notes to Consolidated Financial Statements, included in Part II, Item 8,, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.10-K.
•Drilling Services — Our current drilling rig fleet is 100% pad-capable and offers the latest advancements in pad drilling, with 17 AC rigs in the US and 8 SCR rigs in Colombia. We provide a comprehensive service offering which includes the drilling rig, crews, supplies, and most of the ancillary equipment needed to operate our drilling rigs, which are deployed through our division offices in the following regions:
| Rig Count | ||||||||
| Domestic drilling: | ||||||||
| Marcellus/Utica | 5 | |||||||
| Permian Basin and Eagle Ford | 10 | |||||||
| Bakken | 2 | |||||||
| International drilling | 8 | |||||||
| 25 | ||||||||
•Production Services — Ourproduction services business segments provide well, wireline and coiled tubinga range of services to producers primarily in Texas, andNorth Dakota, the Mid-Continent and Rocky Mountain regions, as well as in North Dakota, Louisianaregion, and Mississippi.Louisiana. As of December 31, 2019,2020, the fleet counts for each of our production services business segments arewere as follows:
| 550 HP | 600 HP | Total | |||||||||||||||
| Well servicing rigs, by horsepower (HP) rating | 111 | 12 | 123 | ||||||||||||||
| Wireline services units | 76 | ||||||||||||||||
| 550 HP | 600 HP | Total | |||
| Well servicing rigs, by horsepower (HP) rating | 112 | 12 | 124 | ||
| Total | |||||
| Wireline services units | 93 | ||||
| Coiled tubing services units | 9 | ||||
Market Conditions and Outlook
Industry Overview — Demand for oilfield services offered by our industry is a function of our clients’ willingness and ability to make operating expenditures and capital expenditures to explore for, develop and produce hydrocarbons, which is primarily driven by current and expected oil and natural gas prices.
Our business is influenced substantially by exploration and production companies’ spending that is generally categorized as either a capital expenditure or an operating expenditure. Capital expenditures for the drilling and completion of exploratory and development wells in proven areas are more directly influenced by current and expected oil and natural gas prices and generally reflect the volatility of commodity prices. In contrast, operating expenditures for the maintenance of existing wells, for which a range of production services are required in order to maintain production, are relatively more stable and predictable.
However, in a severe downturn that is prolonged, both operating and capital expenditures are significantly reduced, and the demand for all our service offerings is significantly impacted. After a prolonged downturn among the production services, the demand for completion-orientedworkover services generally improves first, followed by the demand for completion-oriented services as exploration and production companies begin to complete wells that were previously drilled but not completed during the downturn, and to complete newly drilled wells as the demand for drilling services improves during recovery.
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For additional information concerning the potential effects of explorationvolatility in oil and production activity withingas prices and other industry trends, see Item 1A – “Risk Factors” in Part I of this Annual Report on Form 10-K.
Market Conditions and Outlook — Since January 2020, the COVID-19 pandemic and oil and natural gas market volatility have resulted in a region can fluctuatesignificant decrease in oil prices and significant disruption and uncertainty in the oil and natural gas market. Beginning in March 2020, the decline in demand due to a varietythe COVID-19 pandemic coincided with the announcement of factors which may directly or indirectly impactprice reductions and possible production increases by members of OPEC and other oil exporting nations, including Russia. Although OPEC and other oil exporting nations ultimately agreed to cut production, these extreme supply and demand dynamics caused significant crude oil price declines, negatively impacting our operationsindustry’s oil producers who responded with significant cuts in the region. From time to time, temporary regional slowdowns or constraints occur in our industry due to a variety of factors, including, among others, infrastructure or takeaway capacity limitations, labor shortages, increased regulatory or environmental pressures, or an influx of competitors in a particular region. Any of these
Additionally, because our business depends on the level of spending by our clients, we are also affected by our clients’ ability to access the capital markets. After several consecutive years without significant improvement in commodity prices, many exploration and production companies have limited their spending to a level which can be supported by net operating cash flows alone, as access to the capital markets through debt or equity financings has become more challenging in our industry. This challenge has increased recently due to the major stock market and bond market indices experiencing elevated levels of volatility during 2020.
The trends in spot prices of WTI crude oil and Henry Hub natural gas, and the resulting trends in domestic land rig counts (per Baker Hughes) and domestic well servicing rig counts (per Guiberson/Association of Energy Service Companies) over the last three yearsfrom January 2019 through December 2020 are illustrated in the graphs below.
The trendscommodity price environment and global oversupply of oil during 2020 resulted in commodity pricing and domestic rig counts over the last 12 months are illustrated below:
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As our clients continue to adjust their capital budgets and operations in response to the end of their terms, will expire as follows:
| Spot Market Contracts | Term Contract Expiration by Period | |||||||||||||||||||
| Total Term Contracts | Within 6 Months | 6 Months to 1 Year | 1 Year to 18 Months | 18 Months to 2 Years | 2 to 4 Years | |||||||||||||||
| Domestic rigs | 3 | 12 | 5 | 6 | — | — | 1 | |||||||||||||
| International rigs: | ||||||||||||||||||||
| Earning under contract | — | 3 | — | 3 | — | — | — | |||||||||||||
| On standby (not earning) | — | 2 | 2 | — | — | — | — | |||||||||||||
| 3 | 17 | 7 | 9 | — | — | 1 | ||||||||||||||
Liquidity and Capital Resources
Our completion of the Chapter 11 Cases on March 1,has allowed us to significantly reduce our level of indebtedness and our future cash interest obligations. We currently expect that cash and cash equivalents, cash generated from operations, and available funds under the ABL Credit Facility are adequate to cover our liquidity requirements for at least the next 12 months. However, our ability to maintain sufficient liquidity and compliance with our debt instruments over the next 12 months, grow, make capital expenditures, and service our debt depends primarily upon (i) the level of demand for, and pricing of, our products and services; (ii) the level of spending by our clients; (iii) our ability to collect our receivables and access borrowings under the ABL Credit Facility; (iv) the supply and demand for oil and gas; (v) oil and gas prices; (vi) general economic and market conditions; and (vii) and other factors that are beyond our control.
The market competition between OPEC and non-OPEC countries coupled with the impact of the COVID-19 pandemic caused significant crude oil price declines, negatively impacting our industry’s oil producers who responded with significant cuts in their recent and projected spending which has affected, and to the extent it continues or worsens could continue to negatively affect, the amount of cash we generate and have available for working capital requirements, capital expenditures, and debt service.
Our availability under the ABL Credit Facility at December 31, 2020 we are operatingwas $15.9 million, which our access to would be subject to (i) our requirement to maintain 15% of the maximum revolver amount available or comply with a fixed charge coverage ratio and (ii) the requirement to maintain availability of at least $4 million, which may include up to $2 million of pledged cash. In addition, as a debtor-in-possession pursuant to the authority granted under Chapter 11result of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to significantly de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession,current market conditions, certain of our activitiesclients are subject to reviewfacing financial pressures and approval by the Bankruptcy Court, including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business.liquidity issues. There can be no guaranteeassurance that the Chapter 11 Casesone or more of our clients will not delay or default on payments owed to us or file for bankruptcy protection, in which case we may be completed successfullyunable to collect all, or in the time frame contemplated by the RSA.
Sources of CapitalCapital Resources
Our principal sources of liquidity currently consist of:
•total cash and cash equivalents;equivalents, including restricted cash ($32.3 million as of December 31, 2020);
•cash generated from operations; and
•the availability under the ABL Credit Facility ($15.9 million as of December 31, 2020, as discussed below).
In the future, we may also consider equity and/or debt offerings, as appropriate, to meet our DIP Facility.liquidity needs. However, our ability to access the capital markets by issuing debt or equity securities will be dependent on market conditions, our financial condition, and other factors beyond our control. Additionally, the ABL Credit Facility and the indentures for our Convertible Notes and Senior Secured Notes contain covenants that limit our ability to incur additional indebtedness, the incurrence of which would also first require the approval of two of our principal stockholders, and our bylaws limit our ability to issue equity securities without the prior written consent of one of our principal stockholders.
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The maturity date of credit thereunderloans made under the ABL Credit Facility is the earliest of 90 days prior to refinancematurity of the Senior Secured Notes or the Convertible Notes (both of which are described below in the section entitled Debt Instruments and Compliance Requirements) and May 29, 2025. Borrowings under the ABL Credit Facility will bear interest at a rate of (i) the LIBOR rate (subject to a floor of 0%) plus an applicable margin of 375 basis points per annum or (ii) the base rate plus an applicable margin of 275 basis points per annum.
The ABL Credit Facility is guaranteed by the Borrowers and is secured by a first lien on the Borrowers’ accounts receivable and inventory, and the cash proceeds thereof, and a second lien on substantially all of the other assets and properties of the Borrowers. The ABL Credit Facility limits our annual capital expenditures to 125% of the budget set forth in the projections for any fiscal year and provides that if our availability plus pledged cash of up to $3 million falls below $6 million (15% of the maximum revolver amount), we will be required to comply with a fixed charge coverage ratio of 1.0 to 1.0, all of which is defined in the ABL Credit Facility.
As of December 31, 2020, we had no borrowings and approximately $7.3 million in outstanding letters of credit under the Prepetition ABL Facility in connection with the termination of the Prepetition ABLCredit Facility and to pay fees and expenses in connection with the Chapter 11 Cases and transactional and professional fees related thereto.
Uses of Capital Resources
Our principal liquidity requirements are currently for:
•working capital needs;
•capital expenditures; and
•debt service.
Our operations have historically generated cash flows sufficientworking capital needs typically fluctuate in relation to meetactivity and pricing. Following a sustained period of low activity, our requirementsworking capital needs generally increase as we invest in reactivating previously idle equipment and in purchases of inventory and supplies for debt service and normal capital expenditures. However, ourexpected increasing activity. Our capital requirements generallyto maintain our equipment also fluctuate in relation to activity, and increase during periods when rig construction projectsfollowing a period of sustained low activity. Our capital requirements are in progress oralso increased during periods of expansion, in our production services business, at which times we have been more likely to access capital through equity or debt financing. Additionally, our working capital needs may increase in periods of increasing
Working Capital — Our working capital and current ratio, which we calculate by dividing current assets by current liabilities, were as follows as of December 31, 2020 and December 31, 2019 (amounts in thousands, except current ratio):
| Successor | Predecessor | |||||||||||||||||||
| December 31, 2020 | December 31, 2019 | Change | ||||||||||||||||||
| Current assets | $ | 113,133 | $ | 182,912 | $ | (69,779) | ||||||||||||||
| Current liabilities | 59,018 | 91,581 | (32,563) | |||||||||||||||||
| Working capital | $ | 54,115 | $ | 91,331 | $ | (37,216) | ||||||||||||||
| Current ratio | 1.9 | 2.0 | (0.1) | |||||||||||||||||
The decrease in our working capital during 2020 is primarily due to a decrease of $57.2 million, or 62%, in our total trade and unbilled receivables, despite a decrease of $15.0 million, or 46%, in our accounts payable and a $6.5 million decrease in accrued employee costs, all of which are primarily a result of the significant decline in demand for our service offerings which resulted in decreased revenue and related costs.
Total cash, including cash equivalents and restricted cash, increased by $6.7 million, primarily due to $9.9 million of cash provided by the refinancing of our debt obligations upon emergence from Chapter 11, net of subsequent debt repayments, all of which was partially offset by a net investment of $2.9 million in capital expenditures and $0.3 million of net cash used in operating activities.
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Other decreases in our current assets during 2020 included: (i) a $9.8 million decrease in inventory primarily due to the revaluation of assets upon our adoption of fresh start accounting as well as the classification of our coiled tubing inventory as held-for-sale after closing those operations in April 2020, (ii) a $6.2 million decrease in other receivables primarily due to an income tax refund in 2020 related to our international operations, and (iii) a $2.7 million decrease in prepaid and other current assets partially due to the usage of professional fee retainers associated with our bankruptcy proceedings as well as the amortization of deferred mobilization costs for our domestic drilling rigs.
Other decreases in our current liabilities during 2020 included: (i) a $4.7 million decrease in other accrued expenses primarily related to reduced sales tax accruals which was a result of reduced activity levels in our international drilling operations and the payment of sales tax obligations associated with several sales tax audits which were finalized in 2020, a $1.3 million decrease in current lease liabilities primarily associated with leases that were exited during 2020, and an approximate $1 million decrease in legal and other professional fee accruals primarily associated with preparations for our bankruptcy proceedings, (ii) a $3.4 million decrease in accrued interest resulting from the refinancing of our debt obligations upon emergence from Chapter 11, and (iii) a $2.0 million decrease in accrued insurance premiums and deductibles primarily resulting from a decrease in our estimated liability for the deductibles under our workers compensation and health insurance policies, partially as a result of fewer employees and reduced activity.
Capital Expenditures — For the year ended December 31,During 2020 and 2019, and 2018, our primary uses of capital resources were for propertyexpenditures totaled $15.6 million and equipment additions, for which we paid $50.0 million, and $67.1 million, respectively. In recent years, we have limited our capital spending torespectively, primarily routine expenditures and select asset acquisitions to optimize our fleets. In 2019, two-thirds of our total spending related to routine expenditures that are necessary to maintain our fleets, including fleet upgrades, refurbishments and purchases of replacement supporting equipment. We reduced ourwhile capital expenditures inadditions during 2019 by 25% from the prior year, primarily in our production services businesses, as our fleet expansion and other discretionary spending in these businesses decreased by a total of $15.4 million. Capital expenditures for fleet additions of approximately $7.5 million and $18.5 million in 2019 and 2018, respectively,also included the completion of construction ofon our 17th17th AC domestic drilling rig which we began in 2018 and deployed in early 2019, the purchase of a coiled tubing unit in 2018, and the remaining installments on certain fleet additions which were ordered in 2017 but delivered in 2018, including one coiled tubing unit and three wireline units. Other discretionary spending duringMarch 2019 and 2018 primarily related to select domestic drilling rig upgradesvarious vehicle and the purchase of new support equipment.ancillary equipment purchases and upgrades.
Currently, we expect to spend approximately $40$20 million to $22 million on capital expenditures during 2020 primarily2021, which is limited to routine expenditures necessary to maintain our existing fleets and also re-activate idle equipment as the industry improves.fleets. Actual capital expenditures may vary depending on the climate of our industry and any resulting increase or decrease in activity levels, the timing of commitments and payments, availability of capital resources, and the level of investment opportunities that meet our strategic and return on capital employed criteria. We expect to fund the capital expenditures in 20202021 from cash and operating cash flow in excess of our working capital requirements, although available borrowings under our DIPABL Credit Facility are also available, if necessary.
| December 31, 2019 | December 31, 2018 | Change | |||||||||
| Current assets | $ | 182,912 | $ | 215,034 | $ | (32,122 | ) | ||||
| Current liabilities | 91,581 | 104,768 | (13,187 | ) | |||||||
| Working capital | $ | 91,331 | $ | 110,266 | $ | (18,935 | ) | ||||
| Current ratio | 2.0 | 2.1 | (0.1 | ) | |||||||
The following is a summary of our debt instruments and $1.5 millioncompliance requirements including covenants, restrictions and guarantees, as it relates to our Convertible Notes and Senior Secured Notes, and a summary of proceeds from insurance recoveries.
| Payments Due by Period | |||||||||||||||||||
| Contractual Obligations | Total | Within 1 Year | 2 to 3 Years | 4 to 5 Years | Beyond 5 Years | ||||||||||||||
| Debt | $ | 475,000 | $ | — | $ | 475,000 | $ | — | $ | — | |||||||||
| Interest on debt | 79,188 | 35,000 | 44,188 | — | — | ||||||||||||||
| Purchase commitments | 3,612 | 3,612 | — | — | — | ||||||||||||||
| Operating leases | 8,716 | 2,496 | 3,380 | 2,029 | 811 | ||||||||||||||
| Incentive compensation | 4,612 | 4,065 | 547 | — | — | ||||||||||||||
| $ | 571,128 | $ | 45,173 | $ | 523,115 | $ | 2,029 | $ | 811 | ||||||||||
Convertible Notes Indenture and Convertible Notes due 2025. We entered into an indenture, dated as of the Effective Date, among the Company and Wilmington Trust, N.A., as trustee (the “Convertible Notes Indenture”), and issued $129.8 million aggregate principal amount of convertible senior unsecured pay-in-kind notes due 2025 thereunder.
The Convertible Notes are general unsecured obligations which will mature on November 15, 2025, unless earlier accelerated, redeemed, converted or repurchased, and bear interest at a fixed rate of 5% per annum, which will be payable semi-annually in-kind in the form of an increase to the principal amount.
The Convertible Notes are convertible at the option of the holders at any time into shares of our Term Loan, Prepetition ABL Facility,common stock and Seniorwill convert mandatorily into our common stock at maturity; provided, however, that if the value of our common stock otherwise deliverable in connection with a mandatory conversion of a Convertible Note on the maturity date would be less than the principal amount of such Convertible Note plus accrued and unpaid interest, then the Convertible Note will
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instead convert into an amount of cash equal to the principal amount thereof plus accrued and unpaid interest. The initial conversion rate is 75 shares of common stock per $1,000 principal amount of the Convertible Notes, obligations. Additionally,which in aggregate represents 9,732,825 shares of common stock and an initial conversion price of $13.33 per share. The conversion rate is subject to customary anti-dilution adjustments.
If we undergo a “fundamental change” as defined in the Convertible Notes Indenture, subject to certain conditions, holders may require us to repurchase all or any portion of their Convertible Notes for cash at an amount equal to 100% of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid interest. In the case of certain fundamental change events that constitute merger events (as defined in the Convertible Notes Indenture), we have a superseding right to cause the mandatory conversion of default underall or part of the credit agreements governingConvertible Notes into a number of shares of common stock, per $1,000 principal amount of Convertible Notes, equal to the then-current conversion rate or the cash value of such number of shares of common stock (but not less than the principal amount).
Holders of Convertible Notes are entitled to vote on all matters on which holders of our Term Loan and Prepetition ABL Facility andcommon stock generally are entitled to vote (or, if any, to take action by written consent of the indenture governingholders of our Senior notes have occurred and are continuing, includingcommon stock), voting together as a resultsingle class together with the shares of cross-our common stock and not as a separate class, on an as-converted basis, at any annual or special meeting of holders of our common stock and each holder is entitled to such number of votes as such holder would receive on an as-converted basis on the record date for such vote.
The Convertible Notes Indenture contains customary events of default. In the case of an event of default arising from certain transactionsevents of bankruptcy, insolvency or other similar law, with respect to us or any of our significant subsidiaries, all outstanding Convertible Notes will become due and payable immediately without further action or notice. If any other event of default occurs and is continuing, then the trustee or the holders of at least 25% in aggregate principal amount of the Convertible Notes then outstanding may declare the Convertible Notes due and payable immediately.
The Convertible Notes Indenture provides, subject to certain exceptions, that for so long as our debt obligations are, in general, guaranteed by our domestic subsidiaries. Our obligationscommon stock is registered under the Term LoanSecurities Exchange Act of 1934 (the “Exchange Act”), a beneficial owner of the Convertible Notes is not entitled to receive shares of our common stock upon an optional conversion of any Convertible Notes during any period of time in which the aggregate number of shares of our common stock that may be acquired by such beneficial owner upon conversion of Convertible Notes shall, when added to the aggregate number of shares of our common stock deemed beneficially owned, directly or indirectly, by such beneficial owner and each person subject to aggregation of our common stock with such beneficial owner under Section 13 or Section 16 of the Exchange Act at such time, exceed 9.99% of the total issued and outstanding shares of our common stock. Certain of the holders of Convertible Notes opted out of this provision at the Effective Date.
Senior Secured Notes Indenture and Senior Secured Notes due 2025. We entered into an indenture, dated as of the Effective Date, among the Company, the subsidiary guarantors party thereto and Wilmington Trust, N.A., as trustee (the “Senior Secured Notes Indenture”), and issued $78.1 million aggregate principal amount of floating rate senior secured notes due 2025 thereunder. The Senior Secured Notes are guaranteed by our wholly-owned domestic subsidiaries, and areon a senior secured basis by substantially all of our existing domestic assets, in each case, subject to certain exceptions and permitted liens. Oursubsidiaries, which also guarantee our obligations under the Prepetition ABL Credit Facility, are guaranteed by us(the “Guarantors”) on a full and our domestic subsidiaries, subject to certain exceptions,unconditional basis and are secured by a second lien on the accounts receivable and inventory and a first lien on substantially all of the other assets and properties (including the cash proceeds thereof) of the Company and the Guarantors.
The Senior Secured Notes will mature on May 15, 2025 and interest will accrue at the rate of LIBOR plus 9.5% per annum, with a LIBOR rate floor of 1.5%, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing on August 15, 2020. With respect to any interest payment due on or prior to May 29, 2021, 50% of the interest will be payable in cash and 50% of the interest will be paid in-kind in the form of an increase to the principal amount; however, a majority in interest of the holders of the Senior Secured Notes may elect to have 100% of the interest due on or prior to May 29, 2021 payable in-kind. For all interest periods commencing on or after May 15, 2024, the interest rate for the Senior Secured Notes will be a rate equal to LIBOR plus 10.5%, with a LIBOR rate floor of 1.5%.
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We may redeem all or part of the Senior Secured Notes on or after June 1, 2021 at redemption prices (expressed as percentages of the principal amount) equal to (i) 104% for the twelve-month period beginning on June 1, 2021; (ii) 102% for the twelve-month period beginning on June 1, 2022; (iii) 101% for the twelve-month period beginning on June 1, 2023 and (iv) 100% for the twelve-month period beginning June 1, 2024 and at any time thereafter, plus accrued and unpaid interest at the redemption date. Notwithstanding the foregoing, if a first-priority perfectedchange of control (as defined in the Senior Secured Notes Indenture) occurs prior to June 1, 2022, we may elect to purchase all remaining outstanding Senior Secured Notes not tendered to us as described below at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the applicable redemption date. If a change of control (as defined in the Senior Secured Notes Indenture) occurs, holders of the Senior Secured Notes will have the right to require us to repurchase all or any part of their Senior Secured Notes at a purchase price equal to 101% of the aggregate principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest, if any, to the repurchase date.
The Senior Secured Notes Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries, to incur, assume or guarantee additional indebtedness; pay dividends or distributions on capital stock or redeem or repurchase capital stock; make investments; repay junior debt; sell stock of our subsidiaries; transfer or sell assets; enter into sale and lease back transactions; create liens; enter into transactions with affiliates; and enter into mergers or consolidations. The Senior Secured Notes Indenture contains a minimum asset coverage ratio of 1.5 to 1.0 as of any June 30 or December 31, beginning December 31, 2020. As of December 31, 2020, the asset coverage ratio, as calculated under the Senior Secured Notes Indenture, was 3.2 to 1.0.
The Senior Secured Notes Indenture also provides for certain customary events of default, including, among others, nonpayment of principal or interest, breach of covenants, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, failure of a security document to create an effective security interest in collateral, bankruptcy and insolvency events, and cross acceleration, which would permit the principal, premium, if any, interest and other monetary obligations on all inventorythe then outstanding Senior Secured Notes to be declared due and cash,payable immediately.
Pursuant to the Senior Secured Notes Indenture, we commenced offers to purchase $2.6 million in aggregate principal amount of the Senior Secured Notes in October and (ii)December 2020 at a second-priority perfected security in substantially allpurchase price equal to 100% of our tangiblethe principal amount of the Senior Secured Notes purchased, plus accrued and intangible assets, in each case, subject to certain exceptions and permitted liens. unpaid interest through, but not including, the respective purchase dates. As of December 31, 2020, the aggregate principal amount of Senior Secured Notes outstanding is $77.4 million.
Supplemental Guarantor Information
Our Prepetition Senior Notes arewere fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of ourall existing 100% owned domestic subsidiaries, generally excluding thoseexcept for Pioneer Services Holdings, LLC. The Prepetition Senior Notes, the guarantees, and the Prepetition Senior Notes Indenture were terminated on the Effective Date pursuant to the Plan. See Note 2, Emergence from Voluntary Reorganization under Chapter 11, for more information.
Our Senior Secured Notes are issued by Pioneer Energy Services Corp. (the “Parent Issuer”) and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all existing 100%-owned domestic subsidiaries which(the “Guarantors”), except for Pioneer Services Holdings, LLC. The subsidiaries that generally operate our international drilling business.
non-U.S. business concentrated in Colombia do not guarantee our Senior Secured Notes (and did not guarantee our Prepetition Senior Notes). 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 lendersnon-guarantor subsidiaries do not have any payment obligations under the Term Loan maintainSenior Secured Notes, the guarantees, or the Senior Secured Notes Indenture. In the event of 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 asbankruptcy, liquidation or reorganization of any June 30 or December 31non-guarantor subsidiary, such non-guarantor subsidiary would be obligated to pay the holders of its debt and other liabilities, including its trade creditors, before it would be able to distribute any calendar year through maturity.of its assets to us. As of December 31, 2019,2020, the asset coverage ratio,aggregate principal amount of Senior Secured Notes outstanding is $77.4 million, and there were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.
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The following tables present summarized financial information for the Parent Issuer and Guarantors, on a combined basis after the elimination of intercompany balances and transactions between the Parent Issuer and Guarantors and investments in any subsidiary that is a non-guarantor (amounts in thousands):
| Successor | |||||
| December 31, 2020 | |||||
| Current assets, excluding those due from non-guarantor subsidiaries | $ | 88,544 | |||
| Current assets due from non-guarantor subsidiaries | 28,176 | ||||
| Property and equipment, net | 143,277 | ||||
| Noncurrent assets, excluding property and equipment | 15,596 | ||||
| Current liabilities | $ | 55,362 | |||
| Long-term debt | 147,167 | ||||
| Noncurrent liabilities, excluding long-term debt | 6,348 | ||||
| Successor | Predecessor | |||||||||||||
| Seven Months Ended December 31, 2020 | Five Months Ended May 31, 2020 | |||||||||||||
| Revenues | $ | 91,654 | $ | 126,442 | ||||||||||
| Operating costs | 68,668 | 100,372 | ||||||||||||
Loss from operations(1) | (17,636) | (61,657) | ||||||||||||
Net loss(1) | (36,299) | (95,631) | ||||||||||||
(1) Includes intercompany lease income from non-guarantor subsidiary totaling $2.8 million and $2.0 million during the Successor and Predecessor periods, respectively.
Results of Operations
As a result of our emergence from Chapter 11 on May 29, 2020, our financial results for the periods prior to the Fresh Start Reporting date of May 31, 2020 are referred to as calculated under the Term Loan, was 1.94 to 1.00. Additionally, if our availability under the Prepetition ABL Facility is less than 15%those of the maximum amount (or $11.25 million),“Predecessor,” and our financial results for the periods subsequent to May 31, 2020 are referred to as those of the “Successor.”
Although the Successor period(s) and the Predecessor period(s) are distinct reporting periods, we are requiredhave combined the Successor and Predecessor period results during the year ended December 31, 2020 in order to maintain a minimum fixed charge coverage ratio, as definedprovide some comparability of such information to the corresponding Predecessor period ended December 31, 2019. While this combined presentation is not presented according to generally accepted accounting principles in the Prepetition ABL Facility,United States of at least 1.00America (GAAP) and no comparable GAAP measures are presented, management believes that providing this financial information is the most relevant and useful method for making comparisons to 1.00, measured on a trailing 12-month basis.
identifying trends in or reaching conclusions regarding our overall operating performance.
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The following table provides certain information about our operations, including details of each of our business segments’ revenues, operating costs and gross margin and the percentage of the consolidated amount of each which is attributable to each business segment, for the years ended December 31, 2019 and 2018periods indicated (amounts in thousands, except percentages):thousands).
| Successor | Predecessor | Combined (Non-GAAP) | Predecessor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Seven Months Ended December 31, 2020 | Five Months Ended May 31, 2020 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic drilling | $ | 44,205 | $ | 53,341 | $ | 97,546 | $ | 151,769 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| International drilling | 12,220 | 15,928 | 28,148 | 88,932 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Drilling services | 56,425 | 69,269 | 125,694 | 240,701 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Well servicing | 30,739 | 31,947 | 62,686 | 115,715 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wireline services | 16,710 | 35,543 | 52,253 | 172,931 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Coiled tubing services | — | 5,611 | 5,611 | 46,445 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Production services | 47,449 | 73,101 | 120,550 | 335,091 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated revenues | $ | 103,874 | $ | 142,370 | $ | 246,244 | $ | 575,792 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating costs: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic drilling | $ | 26,846 | $ | 33,101 | $ | 59,947 | $ | 92,183 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| International drilling | 9,529 | 13,676 | 23,205 | 65,007 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Drilling services | 36,375 | 46,777 | 83,152 | 157,190 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Well servicing | 24,325 | 26,877 | 51,202 | 83,461 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wireline services | 17,090 | 31,836 | 48,926 | 151,145 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Coiled tubing services | 408 | 8,557 | 8,965 | 39,557 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Production services | 41,823 | 67,270 | 109,093 | 274,163 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated operating costs | $ | 78,198 | $ | 114,047 | $ | 192,245 | $ | 431,353 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic drilling | $ | 17,359 | $ | 20,240 | $ | 37,599 | $ | 59,586 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| International drilling | 2,691 | 2,252 | 4,943 | 23,925 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Drilling services | 20,050 | 22,492 | 42,542 | 83,511 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Well servicing | 6,414 | 5,070 | 11,484 | 32,254 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wireline services | (380) | 3,707 | 3,327 | 21,786 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Coiled tubing services | (408) | (2,946) | (3,354) | 6,888 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Production services | 5,626 | 5,831 | 11,457 | 60,928 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated gross margin | $ | 25,676 | $ | 28,323 | $ | 53,999 | $ | 144,439 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (40,224) | $ | (104,225) | $ | (144,449) | $ | (63,904) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA (1) | $ | 10,597 | $ | 2,723 | $ | 13,320 | $ | 60,153 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | |||||||||||||
| 2019 | 2018 | ||||||||||||
| Revenues: | |||||||||||||
| Domestic drilling | $ | 151,769 | 26 | % | $ | 145,676 | 25 | % | |||||
| International drilling | 88,932 | 15 | % | 84,161 | 14 | % | |||||||
| Drilling services | 240,701 | 41 | % | 229,837 | 39 | % | |||||||
| Well servicing | 115,715 | 20 | % | 93,800 | 16 | % | |||||||
| Wireline services | 172,931 | 31 | % | 215,858 | 36 | % | |||||||
| Coiled tubing services | 46,445 | 8 | % | 50,602 | 9 | % | |||||||
| Production services | 335,091 | 59 | % | 360,260 | 61 | % | |||||||
| Consolidated revenues | $ | 575,792 | 100 | % | $ | 590,097 | 100 | % | |||||
| Operating costs: | |||||||||||||
| Domestic drilling | $ | 92,183 | 21 | % | $ | 86,910 | 20 | % | |||||
| International drilling | 65,007 | 15 | % | 64,074 | 15 | % | |||||||
| Drilling services | 157,190 | 36 | % | 150,984 | 35 | % | |||||||
| Well servicing | 83,461 | 19 | % | 67,554 | 16 | % | |||||||
| Wireline services | 151,145 | 36 | % | 167,337 | 39 | % | |||||||
| Coiled tubing services | 39,557 | 9 | % | 44,038 | 10 | % | |||||||
| Production services | 274,163 | 64 | % | 278,929 | 65 | % | |||||||
| Consolidated operating costs | $ | 431,353 | 100 | % | $ | 429,913 | 100 | % | |||||
| Gross margin: | |||||||||||||
| Domestic drilling | $ | 59,586 | 41 | % | $ | 58,766 | 37 | % | |||||
| International drilling | 23,925 | 17 | % | 20,087 | 13 | % | |||||||
| Drilling services | 83,511 | 58 | % | 78,853 | 50 | % | |||||||
| Well servicing | 32,254 | 22 | % | 26,246 | 16 | % | |||||||
| Wireline services | 21,786 | 15 | % | 48,521 | 30 | % | |||||||
| Coiled tubing services | 6,888 | 5 | % | 6,564 | 4 | % | |||||||
| Production services | 60,928 | 42 | % | 81,331 | 50 | % | |||||||
| Consolidated gross margin | $ | 144,439 | 100 | % | $ | 160,184 | 100 | % | |||||
| Consolidated: | |||||||||||||
| Net loss | $ | (63,904 | ) | $ | (49,011 | ) | |||||||
Adjusted EBITDA (1) | $ | 60,153 | $ | 89,655 | |||||||||
(1) Adjusted EBITDA represents income (loss) before interest expense, income tax (expense) benefit, depreciation and amortization, prepetition restructuring charges, impairment, reorganization items, and any loss on extinguishment of debt. Adjusted EBITDA is a non-GAAP measure that our management uses to facilitate period-to-period comparisons of our core operating performance and to evaluate our long-term financial performance against that of our peers. We believe that this measure is useful to investors and analysts in allowing for greater transparency of our core operating performance and makes it easier to compare our results with those of other companies within our industry. Adjusted EBITDA should not be considered (a) in isolation of, or as a substitute for, net income (loss), (b) as an indication of cash flows from operating activities or (c) as a measure of liquidity. In addition, Adjusted EBITDA does not represent funds available for discretionary use. Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.
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A reconciliation of net loss, as reported, to Adjusted EBITDA, and to consolidated gross margin, are set forth in the following table:table (amounts in thousands):
| Successor | Predecessor | Combined (Non-GAAP) | Predecessor | ||||||||||||||||||||||||||||||||||||||
| Seven Months Ended December 31, 2020 | Five Months Ended May 31, 2020 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (40,224) | $ | (104,225) | $ | (144,449) | $ | (63,904) | |||||||||||||||||||||||||||||||||
| Depreciation and amortization | 33,613 | 35,647 | 69,260 | 90,884 | |||||||||||||||||||||||||||||||||||||
| Prepetition restructuring charges | — | 16,822 | 16,822 | — | |||||||||||||||||||||||||||||||||||||
| Impairment | 742 | 17,853 | 18,595 | 2,667 | |||||||||||||||||||||||||||||||||||||
| Reorganization items, net | 4,263 | 21,903 | 26,166 | — | |||||||||||||||||||||||||||||||||||||
| Interest expense | 14,831 | 12,294 | 27,125 | 39,835 | |||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | 188 | 4,215 | 4,403 | — | |||||||||||||||||||||||||||||||||||||
| Income tax benefit | (2,816) | (1,786) | (4,602) | (9,329) | |||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | 10,597 | 2,723 | 13,320 | 60,153 | |||||||||||||||||||||||||||||||||||||
| General and administrative | 24,055 | 22,047 | 46,102 | 91,185 | |||||||||||||||||||||||||||||||||||||
| Bad debt expense (recovery), net | (227) | 1,209 | 982 | (79) | |||||||||||||||||||||||||||||||||||||
| Gain on dispositions of property and equipment, net | (6,132) | (989) | (7,121) | (4,513) | |||||||||||||||||||||||||||||||||||||
| Other expense (income) | (2,617) | 3,333 | 716 | (2,307) | |||||||||||||||||||||||||||||||||||||
| Consolidated gross margin | $ | 25,676 | $ | 28,323 | $ | 53,999 | $ | 144,439 | |||||||||||||||||||||||||||||||||
| Year ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (amounts in thousands) | |||||||
| Net loss | $ | (63,904 | ) | $ | (49,011 | ) | |
| Depreciation | 90,884 | 93,554 | |||||
| Impairment | 2,667 | 4,422 | |||||
| Interest expense | 39,835 | 38,782 | |||||
| Income tax expense (benefit) | (9,329 | ) | 1,908 | ||||
| Adjusted EBITDA | 60,153 | 89,655 | |||||
| General and administrative | 91,185 | 74,117 | |||||
| Bad debt expense (recovery), net | (79 | ) | 271 | ||||
| Gain on dispositions of property and equipment, net | (4,513 | ) | (3,121 | ) | |||
| Other income | (2,307 | ) | (738 | ) | |||
| Consolidated gross margin | $ | 144,439 | $ | 160,184 | |||
Consolidated gross margin— We experienced a significant decline in demand for all our service offerings during 2020 as a result of the economic downturn caused by the COVID-19 pandemic and adverse global oil production and pricing decisions made by OPEC and non-OPEC countries, as described in more detail in the earlier section entitled, “Market Conditions and Outlook.” Our consolidated gross margin decreased by $15.7$90.4 million, or 10%63%, during 20192020, as compared to 2018, due to a2019. Our production services offerings, which are heavily completion-oriented businesses, were most significantly impacted by the decline in demand, for our wireline services, despite an increase inwith a combined gross margin for alldecrease of 81% during 2020 as compared to 2019. While our otherdrilling services business segments in 2019. The $15.7 million overall decrease in consolidatedwere also significantly impacted, and experienced a combined 49% gross margin decrease during this same period, the impact was netsomewhat mitigated by the longer-term nature of a $11.0 million increase in gross margin for our other business segments.the operations, which are typically supported by term contracts.
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•DrillingServices— OurOn a percentage basis, our drilling services revenues and operating costs increased by $10.9 million, or 5%, and $6.2 million, or 4%, respective,decreased in tandem during 20192020 as compared to 2018. The resulting increase in margin during 2019, is primarily due to the deployment of our newest AC drilling rig in March 2019, increased revenues associated with the demobilization of rigs in Colombia,declining by 48% and the benefit of early termination revenues during 2019 on three domestic drilling contracts.47%, respectively. The following table provides operating statistics for each of our drilling services segments:
| Successor | Predecessor | Combined (Non-GAAP) | Predecessor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Seven Months Ended December 31, 2020 | Five Months Ended May 31, 2020 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Domestic drilling: | Domestic drilling: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average number of drilling rigs | 17 | 16 | Average number of drilling rigs | 17 | 17 | 17 | 17 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Utilization rate | 92 | % | 99 | % | Utilization rate | 57 | % | 81 | % | 67 | % | 92 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Revenue days | 5,660 | 5,808 | Revenue days | 2,083 | 2,100 | 4,183 | 5,660 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average revenues per day | $ | 26,814 | $ | 25,082 | Average revenues per day | $ | 21,222 | $ | 25,400 | $ | 23,320 | $ | 26,814 | ||||||||||||||||||||||||||||||||||||||||||||
| Average operating costs per day | 16,287 | 14,964 | Average operating costs per day | 12,888 | 15,762 | 14,331 | 16,287 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average margin per day | $ | 10,527 | $ | 10,118 | Average margin per day | $ | 8,334 | $ | 9,638 | $ | 8,989 | $ | 10,527 | ||||||||||||||||||||||||||||||||||||||||||||
| International drilling: | International drilling: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average number of drilling rigs | 8 | 8 | Average number of drilling rigs | 8 | 8 | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Utilization rate | 75 | % | 77 | % | Utilization rate | 28 | % | 28 | % | 28 | % | 75 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Revenue days | 2,195 | 2,258 | Revenue days | 480 | 335 | 815 | 2,195 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average revenues per day | $ | 40,516 | $ | 37,272 | Average revenues per day | $ | 25,458 | $ | 47,546 | $ | 34,537 | $ | 40,516 | ||||||||||||||||||||||||||||||||||||||||||||
| Average operating costs per day | 29,616 | 28,376 | Average operating costs per day | 19,852 | 40,824 | 28,472 | 29,616 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average margin per day | $ | 10,900 | $ | 8,896 | Average margin per day | $ | 5,606 | $ | 6,722 | $ | 6,065 | $ | 10,900 | ||||||||||||||||||||||||||||||||||||||||||||
Our domestic drilling average margin per day decreased by 15% during 2020 as compared to 2019, as revenue days decreased by 26%. Average revenues per day declined during 2020 as dayrates for contracts that were renewed and renegotiated in late 2019 and during 2020 were reduced. Additionally, average revenues and margin per day increased during 2019 as compared to 2018, primarily due to the deployment of our newest AC drilling rig in March 2019 and $3.1benefited from $1.5 million of revenues foradditional revenue associated with the early termination of two of our domestic drilling contracts in 2019, which is net of $1.6 million of early termination revenue recognized in May 2020. These decreases were offset in part by the benefit of rigs placed on standby in 2020. Beginning in late March 2020, rather than terminating their contracts with us, certain of our clients elected to temporarily stack three of our rigs, placing them on an extended standby for a reduced revenue rate and the option to reactivate the rigs through the remainder of the contract term. Although these drilling contracts,rigs earn lower standby rates as well ascompared to daywork rates, operating costs incurred are minimal, which reduces operating costs per day and benefits overall margin per day. Two of these rigs recommenced operations in the impactfourth quarter of higher2020 while the third rig remained stacked through the end of the year.
Our international drilling average dayrates during 2019. Average dayrates during 2019 were higher than in 2018 primarily due to contract dayrate increases that occurred in late 2018 and early 2019, despite the downward re-pricing of contracts that were either renewed or renegotiated in late 2019. The overall increases in average revenues and margin per day were also partially offsetdecreased by the impact of reduced utilization in 2019,44% during 2020, as compared to 2018.
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•Production Services— Our revenues and operating costs from production services decreased by $25.2 million, or 7%, and $4.8 million, or 2%,64% during 20192020 as compared to 2018. The decrease in revenue is a result of the2019, while operating costs decreased demand for wireline completion services, partially offset by increased demand for our well servicing business which experienced increases of 23% in both revenue and gross margin during 2019.60%. The following table provides operating statistics for each of our production services segments: