UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission File Number: 000-51435

SUPERIOR WELL SERVICES, INC.

Delaware		20-2535684
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1380 Rt. 286 East, Suite #121
Indiana, Pennsylvania 15701
(Address of principal executive offices)
(Zip Code)

(724) 465-8904
(Registrant’s telephone number, including area code)

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

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

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

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

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

     As of August 5, 2010, there were outstanding 30,810,204 shares of the registrant’s common stock, par value $.01, which is the only class of common or voting stock of the registrant.

 

 

SUPERIOR WELL SERVICES, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			40
Item 4. Controls and Procedures			41
PART II — OTHER INFORMATION			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sale of Equity Securities			42
Item 6. Exhibits			42
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

		December 31,				June 30,
		2009				2010
		(in thousands, except per share data)
Current assets:
Cash and cash equivalents		$	25			$	1,659
Trade accounts receivable, net of allowance of $5,800 and $5,630, respectively			69,492				139,181
Inventories			24,991				29,177
Prepaid expenses and other current assets			2,369				2,331
Advances on materials for future delivery			3,717				3,717
Income taxes receivable			36,044				1,317
Deferred income taxes			4,203				3,621
Total current assets			140,841				181,003
Property, plant and equipment, net			409,552				380,953
Intangible assets, net of accumulated amortization of $5,244 and $6,329, respectively			7,518				6,433
Other assets			12,242				10,683
Total assets		$	570,153			$	579,072
Current liabilities:
Accounts and construction payable-trade		$	26,849			$	57,877
Current portion of long-term obligations			2,022				770
Advanced payments on servicing contracts			87				434
Accrued wages and health benefits			3,581				5,982
Accrued interest			4,356				4,179
Other accrued liabilities			5,033				7,088
Total current liabilities			41,928				76,330
Long-term debt			163,594				140,821
Deferred income taxes			37,510				36,231
Long-term capital leases			275				979
Asset retirement obligation			415				428
Stockholders’ Equity:
Preferred stock, non-voting, par $0.01 per share, 10,000,000 shares authorized Series A 4% Convertible Preferred stock, non-voting, 75,000 shares issued at December 31, 2009 (liquidation preference $75 million)			1				1
Common stock, voting, par $0.01 per share, 70,000,000 shares authorized, 30,688,137 and 30,810,591 shares issued at December 31, 2009 and June 30, 2010			305				307
Additional paid-in-capital			301,103				303,051
Retained earnings			25,022				20,924
Total stockholders’ equity			326,431				324,283
Total liabilities and stockholders’ equity		$	570,153			$	579,072

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

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
		(in thousands, except per share data)
Revenue		$	90,492			$	176,001			$	212,773			$	299,341
Cost of revenue			102,636				150,672				227,956				272,767
Gross profit (loss)			(12,144	)			25,329				(15,183	)			26,574
Selling, general and administrative expenses			13,948				12,341				30,003				23,997
Goodwill impairment			33,155				—				33,155				—
Operating income (loss)			(59,247	)			12,988				(78,341	)			2,577
Interest expense			3,150				2,848				6,326				5,750
Other income (expense), net			109				(258	)			(84	)			(122	)
Income (loss) before income taxes			(62,288	)			9,882				(84,751	)			(3,295	)
Income taxes (benefit)
Current			(5,865	)			—				(18,151	)			—
Deferred			(18,511	)			3,828				(13,977	)			(697	)
			(24,376	)			3,828				(32,128	)			(697	)
Net income (loss) before dividends on preferred stock		$	(37,912	)		$	6,054			$	(52,623	)		$	(2,598	)
Dividends on preferred stock			(750	)			(750	)			(1,500	)			(1,500	)
Net income (loss) available to common stockholders		$	(38,662	)		$	5,304			$	(54,123	)		$	(4,098	)
Earnings (loss) per common share:
Basic		$	(1.66	)		$	0.18			$	(2.33	)		$	(0.14	)
Fully diluted		$	(1.66	)		$	0.18			$	(2.33	)		$	(0.14	)
Weighted average shares outstanding — basic			23,221,080				30,205,013				23,213,064				30,195,747
Weighted average shares outstanding — diluted			26,221,080				33,259,336				26,213,064				33,345,109

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

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

		Preferred				Common				Additional				Retained
		Stock				Stock				Paid-in				Earnings				Total
		(in thousands)
BALANCE, DECEMBER 31, 2008		$	1			$	236			$	229,741			$	107,637			$	337,615
Net loss			—				—				—				(52,623	)			(52,623	)
Issuance of restricted stock awards			—				2				193				—				195
Restricted stock retired/forfeited			—				(1	)			(114	)			—				(115	)
Share-based compensation			—				—				1,471				—				1,471
Preferred Stock dividends			—				—				—				(1,500	)			(1,500	)
BALANCE, JUNE 30, 2009		$	1			$	237			$	231,291			$	53,514			$	285,043
BALANCE, DECEMBER 31, 2009		$	1			$	305			$	301,103			$	25,022			$	326,431
Net loss			—				—				—				(2,598	)			(2,598	)
Issuance of restricted stock awards			—				2				204				—				206
Restricted stock retired/forfeited			—				—				(321	)			—				(321	)
Share-based compensation			—				—				2,065				—				2,065
Preferred stock dividends			—				—				—				(1,500	)			(1,500	)
BALANCE, JUNE 30, 2010		$	1			$	307			$	303,051			$	20,924			$	324,283

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

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six months ended June 30,
		2009				2010
		(in thousands)
Cash flows from operations:
Net loss		$	(52,623	)		$	(2,598	)
Adjustments to reconcile net loss to net cash provided by operations:
Deferred income taxes			(13,977	)			(697	)
Depreciation, amortization and accretion			35,476				40,173
Provision for bad debts			1,412				2,731
Goodwill impairment			33,155				—
Loss on disposal of equipment			139				190
Stock based compensation			1,471				2,065
Changes in assets and liabilities:
Trade accounts receivable			37,218				(72,420	)
Advance on materials for future delivery			1,237				1,126
Inventory			1,356				(4,186	)
Prepaid expenses and other assets			849				38
Income tax receivable			(18,451	)			34,727
Accounts payable			(21,275	)			27,901
Advance payments on servicing contracts			(125	)			347
Accrued wages and health benefits			(1,310	)			2,401
Other accrued liabilities			52				1,878
Net cash provided by operations			4,604				33,676
Cash flows from investing:
Expenditure for property, plant and equipment, net of construction payables			(17,811	)			(10,118	)
Acquisition of businesses, net of cash acquired			(1,928	)			—
Proceeds (expenditures) for other assets			(222	)			433
Proceeds from sale of property, plant and equipment			2,427				2,579
Net cash used in investing			(17,534	)			(7,106	)
Cash flows from financing:
Principal payments on long-term debt			(101,679	)			(91,244	)
Proceeds from long-term borrowings			123,106				68,471
Issuance/retirement of restricted stock, net			80				(115	)
Payment on capital lease obligations			(555	)			(548	)
Payment of preferred dividends			(1,500	)			(1,500	)
Net cash provided by (used in) financing			19,452				(24,936	)
Net increase in cash and cash equivalents			6,522				1,634
Cash and cash equivalents, beginning of period			1,637				25
Cash and cash equivalents, end of period		$	8,159			$	1,659
Supplemental disclosure of cash flow data:
Interest paid		$	4,376			$	5,899
Income taxes paid (received)			299				(34,726	)

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

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization

     Superior Well Services, Inc. (“Superior,” “we” or “us”) was formed as a Delaware corporation on March 2, 2005 for the purpose of serving as the parent holding company for Superior GP, L.L.C. (“Superior GP”), Superior Well Services, Ltd. (“Superior Well”) and Bradford Resources, Ltd. (“Bradford”). In May 2005, Superior and the partners of Superior Well and Bradford entered into a contribution agreement that resulted in the partners of Superior Well and Bradford contributing their respective partnership interests to Superior in exchange for shares of common stock of Superior (the “Contribution Agreement”). In December 2006, Bradford was merged into Superior Well. Superior Well is a Pennsylvania limited partnership that became a wholly owned subsidiary of Superior in connection with its initial public common stock offering.

     In November 2008, Superior purchased the pressure pumping, fluid logistics and completion, production and rental tool assets of Diamondback Energy Holdings, LLC (“Diamondback”). In connection with the asset acquisition, Superior formed SWSI Fluids, LLC to acquire and operate the fluid logistics assets. SWSI Fluids, LLC is a wholly owned subsidiary of Superior.

     Superior Well provides a wide range of well services to oil and gas companies, primarily technical pumping and down-hole surveying services, in many of the major oil and natural gas producing regions of the United States.

2. Summary of Significant Accounting Policies

     Basis of Presentation

     The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial statements reflect all adjustments that, in our opinion, are necessary to fairly present our financial position and results of operations. Significant intercompany accounts and transactions have been eliminated in consolidation.

     The accompanying consolidated financial statements include the accounts of Superior and its wholly-owned subsidiaries Superior Well, Superior GP and SWSI Fluids LLC. Superior Well and Bradford (“Partnerships”), prior to the effective date of the Contribution Agreement, were entities under common control arising from common direct or indirect ownership of each. The transfer of the Partnerships assets and liabilities to Superior (see Note 1) represented a reorganization of entities under common control and was accounted for at historical cost. Prior to the reorganization, the Partnerships were not subject to federal and state corporate income taxes.

     Estimates and Assumptions

     Superior uses certain estimates and assumptions that affect reported amounts and disclosures. These estimates are based on judgments, probabilities and assumptions that are believed to be reasonable but inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Superior is subject to risks and uncertainties that may cause actual results to differ from estimated amounts.

     Cash and Cash Equivalents

     All cash and cash equivalents are stated at cost, which approximates market. Superior considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Superior maintains cash at various financial institutions that may exceed federally insured amounts.

     Trade Accounts Receivable

     Accounts receivable are carried at the amount owed by customers. Superior grants credit to all qualified customers, which are mainly independent oil and natural gas companies. Management periodically reviews accounts receivable for credit risks resulting from changes in the financial condition of its customers. Once an account is deemed not to be collectible, the remaining balance is charged to the reserve account. For the three

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

month periods ended June 30, 2009 and 2010, Superior recorded a provision for uncollectible accounts receivable of $875,000 and $1,906,000, respectively. For the six month periods ended June 30, 2009 and 2010, Superior recorded a provision for uncollectible accounts receivable of $1,412,000 and $2,731,000, respectively.

     Assets Held For Sale

     Superior classifies certain assets as held for sale based on management having the authority and intent of entering into commitments for sale transactions expected to close in the next twelve months. When management identifies an asset held for sale, Superior estimates the net selling price of such an asset. If the net selling price is less than the carrying amount of the asset, a reserve for loss is established. Fair value is determined at prevailing market conditions, appraisals or current estimated net sales proceeds from pending offers.

     Advances on Material for Future Delivery

     In January 2010, Superior amended its take-or-pay contract with Preferred Rocks USS, Inc. to purchase fracturing sand through December 2015. In connection with the take-or-pay contract Superior advanced $15 million for materials that will be delivered in the future. Under the amended terms of the take-or-pay contract, Superior earns a 6% interest rate on the unused portion of the advance on materials. The advance on materials for future delivery will be used to offset future purchase commitments under the take-or-pay contract. At June 30, 2010, the portion of the advance expected to offset future purchases within the next twelve months amounted to $3.7 million and is reflected in current assets. Other assets include $8.8 million for advances expected to offset future purchases after one year.

     Property, Plant and Equipment

     Superior’s property, plant and equipment are stated at cost less accumulated depreciation. The costs are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives range from 15 to 30 years for building and improvements, range from 5 to 15 years for disposal wells and related equipment and range from 5 to 10 years for equipment and vehicles. Depreciation expense, excluding intangible amortization, amounted to $17.4 million and $19.8 million for the three months ended June 30, 2009 and 2010, respectively. Depreciation expense, excluding intangible amortization, amounted to $34.3 million and $39.1 million for the six months ended June 30, 2009 and 2010, respectively.

     Repairs and maintenance costs that do not extend the useful lives of the asset are expensed in the period incurred. Gain or loss resulting from the retirement or other disposition of assets is included in income.

     Superior reviews long-lived assets for impairment whenever there is evidence that the carrying value of such assets may not be recoverable. The review consists of comparing the carrying value of the assets with the assets’ expected future undiscounted cash flows. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the assets and their eventual dispositions are less than the assets’ carrying value. Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions.

     Revenue Recognition

     Superior’s revenue is comprised principally of service revenue. Product sales represent approximately 1% of total revenues. Services and products are generally sold based on fixed or determinable pricing agreements with the customer and generally do not include rights of return. Service revenue is recognized, net of discount, when the services are provided and collectability is reasonably assured. Substantially all of Superior’s services performed for customers are completed at the customer’s site within one day. Superior recognizes revenue from product sales when the products are delivered to the customer and collectability is reasonably assured. Products are delivered and used by our customers in connection with the performance of our cementing services. Product sale prices are determined by published price lists provided to our customers.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     Inventories

     Inventories are stated at the lower of cost or market. Cost primarily represents invoiced costs. We regularly review inventory quantities on hand and record provisions for excess or obsolete inventory based primarily on historical usage, estimated product demand and technological developments.

     Insurance Expense

     Superior partially self-insures employee health insurance plan costs. The estimated costs of claims under this self-insurance program are accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. The self-insurance accrual is estimated based upon our historical experience, as well as any known unpaid claims activity. Judgment is required to determine the appropriate accrual levels for claims incurred but not yet received and paid. The accrual estimates are based primarily upon recent historical experience adjusted for employee headcount changes. Historically, the lag time between the occurrence of an insurance claim and the related payment has been approximately one to two months and the differences between estimates and actuals have not been material. The estimates could be affected by actual claims being significantly different. Presently, Superior maintains an insurance policy that covers claims in excess of $150,000 per employee.

     Income Taxes

     Superior recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in Superior’s financial statements or tax returns. Using this method, deferred tax liabilities and assets were determined based on the difference between the financial carrying amounts and tax bases of assets and liabilities using estimated effective tax rates. Prior to becoming wholly-owned subsidiaries of Superior, Superior Well and Bradford were not taxable entities for federal or state income tax purposes and, accordingly, were not subject to federal or state corporate income taxes. Superior’s accounting policies require that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We evaluate the realizability of our deferred tax assets on quarterly basis and valuation allowances are provided as necessary. We have not recorded any valuation allowances as of June 30, 2010. Superior’s balance sheets at December 31, 2009 and June 30, 2010 do not include any liabilities associated with uncertain tax positions; further Superior has no unrecognized tax benefits that if recognized would change the effective tax rate.

     We file U.S. federal income tax returns and various state and local income tax returns. We are not subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2005. Superior classifies interest related to income tax expense in interest expense and penalties in general and administrative expense. Interest and penalties for the three and six months ended June 30, 2009 and 2010 were insignificant in each period. We are subject to U.S. federal income tax examinations for years after 2005 and we are subject to various state and local tax examinations for years after 2005.

     Asset Retirement Obligations

     Superior records the fair value of an asset retirement obligation as a liability in the period in which it incurs legal obligation associated with the retirement of the assets and capitalizes an equal amount as a cost of the assets, depreciating it over the life of the assets. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted to reflect the passage of time, changes in the estimated future cash flows underlying the obligation, acquisition or construction of assets and settlements of obligations. In November 2008, Superior assumed asset retirement obligations, through the Diamondback asset acquisition, to plug and abandon its disposal wells at the end of their operations. Accretion expense for the three and six months ended June 30, 2009 and 2010 was insignificant.

     Fair Value of Financial Instruments

     In September 2006, the FASB issued accounting Topic 820, “Fair Value Measurements,” which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. This statement applies to other accounting pronouncements that require or permit fair value measurements and is effective for financial statements

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On January 1, 2008, we adopted, without material impact on our consolidated financial statements, the provisions of Topic 820 related to financial assets and liabilities.

     Topic 820 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

			Level 1 quoted prices in active markets for identical assets or liabilities;
			Level 2 quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
			Level 3 unobservable inputs for the asset or liability, such as discounted cash flow models or valuations.

     The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

     Superior’s financial instruments are not held for trading purposes.

     Acquisitions

     Assets acquired in business combinations were recorded on Superior’s consolidated balance sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by Superior have been included in Superior’s consolidated statements of income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying net assets acquired, including other intangible assets was allocated to goodwill. In certain circumstances, the allocations are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when we receive final information.

     Goodwill and Intangible Assets

     We perform our goodwill impairment test annually, or more frequently, if an event or circumstances would give rise to an impairment indicator. These circumstances include, but are not limited to, significant adverse changes in the business climate. Our goodwill impairment test is performed at the business segment levels, technical services and fluid logistics, as they represent our reporting units. The impairment test is a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill, and uses a future cash flow analysis based on the estimates and assumptions for our long-term business forecast. If the fair value of a reporting unit exceeds its carrying amount, the reporting unit’s goodwill is deemed to be not impaired. If the fair value of a reporting unit is less than its carrying amount, the second step of the goodwill impairment test is performed to determine the impairment loss, if any. This second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill, and if the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of that goodwill, an impairment loss is recorded for the difference. Any impairment charge would reduce earnings.

     Superior performed an assessment of goodwill at December 31, 2008 and the tests resulted in no indications of impairment. However, Superior determined a “triggering event” requiring an interim assessment had occurred at June 30, 2009 because the oil and gas services industry continued to decline and its net book value had been substantially in excess of its market capitalization during the second quarter of 2009.

     To estimate the fair value of the business segments, Superior used a weighted-average approach of two commonly used valuation techniques; a discounted cash flow method and a similar transaction method. Superior’s management assigned a weight to the results of each of these methods based on the facts and circumstances that are in existence for that testing period. During the second quarter of 2009, because of overall economic downturn, management assigned more weighting to the discounted cash flow method than the similar transaction method. Given the continued deterioration of the general economic and oil service industry conditions during 2009, management believed that similar transactions may not be as useful because the valuations may reflect distressed

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

sales conditions. Accordingly, the similar transaction weighting was reduced to 10% during the second quarter of 2009.

     In addition to the estimates made by management regarding the weighting of the various valuation techniques, the creation of the techniques themselves requires significant estimates and assumptions to be made by management. The discounted cash flow method, which is assigned the highest weight by management, requires assumptions about future cash flows, future growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our forecasts and strategic plans, as well as the beliefs of management about future activity levels. In applying the discounted cash flow approach, the cash flow available for distribution is projected for a finite period of years. Cash flow available for distribution is defined as the amount of cash that could be distributed as a dividend without impairing our future profitability or operations. The cash flow available for distribution and the terminal value (our value at the end of the estimation period) are discounted to present value to derive an indication of value of the business enterprise.

     Superior’s intangible assets consist of $6.4 million of customer relationships and non-compete agreements that are amortized over their estimated useful lives which range from three to five years. For the three months ended June 30, 2009 and 2010, Superior recorded amortization expense of $583,000 and $543,000, respectively. For the six months ended June 30, 2009 and 2010, Superior recorded amortization expense of $1,165,000 and $1,085,000, respectively.

     Valuation of Finite-Lived Intangible and Tangible Assets

     Superior performs impairment tests when a possible impairment may exist. Unlike goodwill and indefinite-lived intangible assets, fixed assets and finite-lived intangibles are not tested for impairment on a recurring basis, but only when circumstances or events indicate a possible impairment may exist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, but are not limited to, an adverse change in business conditions, a significant decrease in benefits being derived from an acquired business, or a significant disposal of a particular asset or asset class. If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis.

     We determined a “triggering event” requiring an assessment had occurred because the oil and gas services industry continued to decline and our net book value had been substantially in excess of our market capitalization during the second and third quarters of 2009. No impairment was indicated by this test.

     Concentration of Credit Risk

     Substantially all of Superior’s customers are engaged in the oil and gas industry. This concentration of customers may impact Superior’s overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. One customer accounted for 28% and 21% of our revenue for the three months ended June 30, 2009 and 2010, respectively. Two customers accounted for 24% and 11% of our revenue for the six months ended June 30, 2009. One customer accounted for 16% of our revenue for the six months ended June 30, 2010. At December 31, 2009, two customers accounted for 23% and 12% of Superior’s accounts receivable while eight customers collectively accounted for 62%of Superior’s accounts receivable. At June 30, 2010, one customer accounted for 26% and eight customers collectively accounted for 67% of Superior’s accounts receivable, respectively.

     Stock Based Compensation

     We account for equity-based awards using an approach in which the fair value of an award is estimated at the date of grant and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied. The three months ended June 30, 2009 and 2010 include $734,000 and $1,200,000 of additional compensation expense, respectively, as a result of stock based compensation. The six months ended June 30, 2009 and 2010 include $1,471,000 and $2,065,000 of additional compensation expense, respectively, as a result of stock based compensation.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     Weighted Average Shares Outstanding

     The consolidated financial statements include “basic” and “diluted” per share information. Basic per share information is calculated by dividing net income available to common stockholders by the weighted average number of shares outstanding. For the both the three months ended June 30, 2009 and 2010, net income (loss) was reduced by $750,000 of preferred dividend payments to arrive at net income (loss) available to common stockholders. For both the six months ended June 30, 2009 and 2010, net income (loss) was reduced by $1,500,000 of preferred dividend payments to arrive at net income (loss) available to common stockholders. Diluted per share information is calculated by also considering the impact of restricted common stock on the weighted average number of shares outstanding.

     Although the restricted shares are considered legally issued and outstanding under the terms of the restricted stock agreement, they are still excluded from the computation of basic earnings per share. Once vested, the shares are included in basic earnings per share as of the vesting date. Superior includes unvested restricted stock with service conditions in the calculation of diluted earnings per share using the treasury stock method. Assumed proceeds under the treasury stock method would include unamortized compensation cost and potential windfall tax benefits. If dilutive, the stock is considered outstanding as of the grant date for diluted earnings per share computation purposes. If anti-dilutive, it would be excluded from the diluted earnings per share computation. The restricted shares were anti-dilutive for the three and six months ended June 30, 2009. 54,323 and 149,362 restricted shares were considered to be dilutive for the three and six months ended June 30, 2010, respectively.

     Additionally, we account for the effect of our Series A Preferred Stock (as defined in Note 3) in the diluted earnings per share calculation using the “if converted” method. Under this method, the $75 million of Series A Preferred Stock is assumed to be converted to common shares at the conversion price of $25.00, which equals three million “if converted” shares. The number of “if-converted” shares is weighted for the number of days outstanding in the period. If dilutive, these shares would be considered outstanding for the first half of 2010 for diluted earnings per share computation purposes. If anti-dilutive, these shares would be excluded from the diluted earnings per share computation. These “if converted” shares were anti-dilutive for both the three and six months ended June 30, 2009 and 2010, respectively.

     Reclassification

     Certain prior amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on operating income (loss) for any of the periods presented.

3. Business Combinations

     Assets acquired in business combinations were recorded on Superior’s consolidated balance sheets as of the date of the respective acquisition based upon their estimated fair values at such dates. The results of operations of businesses acquired by Superior have been included in Superior’s consolidated statements of income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying net assets acquired, including identifiable intangible assets was allocated to goodwill. When appropriate, we engage third-party appraisal firms to assist in fair value determination of equipment, identifiable intangible assets and any other significant assets or liabilities and the determination of the fair-value of non-cash consideration that may be issued to seller.

     In July 2008, Superior purchased substantially all the operating assets of Nuex Wireline, Inc. (“Nuex”) for approximately $6.0 million in cash and potential payments of up to $1.5 million over a three-year period pursuant to an earnout arrangement. Nuex provides cased hole completion services. The operating assets included five cased hole trucks and various tools and logging systems that are compatible with Superior’s existing systems. Superior retained all of Nuex’s 16 employees. The acquired operations were integrated into Superior’s Rocky Mountain operations, which expanded our presence in Brighton, Colorado. Nuex’s purchase cost was allocated as follows: $1.5 million, $3.6 million and $0.9 million to property, plant and equipment, goodwill and intangible assets, respectively.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     In November 2008, Superior purchased the pressure pumping, fluid logistics and completion, production and rental tools business lines from Diamondback for approximately $202.0 million. The acquisition consideration consisted of $71.5 million in cash, $42.9 million of Series A 4% Convertible Preferred Stock ($75 million liquidation preference) (the “Series A Preferred Stock”) with a perpetual term and $80 million in Second Lien Notes (as defined in Note 5) aggregating $194.4 million plus $7.6 million of transaction costs for a total purchase price of $202.0 million. The fair value of the Series A Preferred Stock was estimated using quotes obtained from an investment bank that used a convertible valuation tool used by investment banks, convertible investors and other market participants to value equity-linked securities. The Diamondback assets included 128,000 horsepower of technical pumping equipment operating in the Anadarko, Arkoma, and Permian Basins, as well as the Barnett Shale, Woodford Shale, West Texas, Southern Louisiana and Texas Gulf Coast. Additionally, the Diamondback assets included water transport equipment, frac tanks and six water disposal wells. Diamondback’s purchase cost was allocated as follows: $165.2 million, $12.4 million, $7.0 million and $22.3 million to property, plant and equipment, inventory, intangible assets and goodwill, respectively. Additionally, Superior assumed liabilities in connection with the Diamondback purchase of accrued paid time off, capital lease obligations, and asset retirement obligations of $1.0 million, $3.4 million and $0.4 million, respectively.

4. Property, Plant and Equipment

     Property, plant and equipment at December 31, 2009 and June 30, 2010 consisted of the following:

		December 31,				June 30,
		2009				2010
		(in thousands)
Property, Plant and Equipment:
Land		$	453			$	453
Building and improvements			19,647				19,891
Equipment and vehicles			540,050				549,556
Disposal wells and equipment			8,705				8,705
Construction in progress			9,305				8,450
			578,160				587,055
Accumulated depreciation			(168,608	)			(206,102	)
Total property, plant and equipment, net		$	409,552			$	380,953

5. Short and Long-term Obligations

          Debt

     On September 30, 2008, we entered into a credit agreement (as amended, the “Credit Agreement”) with a syndicate of financial institutions that provided for a secured revolving credit facility (our “Credit Facility”) which matures on March 31, 2013. As a result of several amendments to the Credit Agreement during 2009, amounts outstanding under our Credit Facility cannot exceed the lesser of the total capacity and the “borrowing base” (as defined in the Credit Agreement) that currently consists of (i) 80% of eligible accounts receivable and (ii) 20% of the net book value of property, plant and equipment. At June 30, 2010, the total capacity under our Credit Facility was $75 million. As described in Note 14, Superior amended the Credit Facility to temporarily increase it by $15.0 million to $90.0 million. On December 31, 2010, the temporary increase in the Credit Facility capacity will expire. Under the terms of the Credit Agreement, the total capacity will be reduced to $25.0 million upon the sale of our fluid logistics business. Once the total capacity under our Credit Facility is reduced to $50.0 million, the “borrowing base” will consist solely of 80% of eligible accounts receivable.

     Borrowings under our Credit Facility are secured by substantially all of our business assets. The interest rate on borrowings under our Credit Facility is set, at our option, at either LIBOR plus a spread of 4.0% or the prime lending rate plus a spread of 2.0%. At December 31, 2009, we had $82.7 million outstanding, $7.3 million in letters of credit outstanding and $10.0 million of available capacity under our Credit Facility. The weighted average interest rate for our Credit Facility was 3.6% during 2009. At June 30, 2010, we had $60.0 million outstanding, $6.3 million in letters of credit outstanding and $8.7 million of available capacity under our Credit Facility. The weighted average interest rate for our Credit Facility for the three and six months ended June 30, 2010 was 4.3%.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     In connection with the Diamondback asset acquisition (Note 3), Superior issued an aggregate principal amount of $80 million second lien notes due November 2013 (the “Second Lien Notes”). The Second Lien Notes are secured by a second priority lien on the assets secured by our Credit Facility. In connection with the issuance of the Second Lien Notes, we entered into an indenture (the “Indenture”), among us, our subsidiaries and the Wilmington Trust FSB, as trustee. Interest on the Second Lien Notes accrues at an initial rate of 7% per annum and the rate increases by 1% per annum on each anniversary date of the Indenture. Interest is payable quarterly in arrears on January 1, April 1, July 1 and October 1, commencing on January 1, 2009.

     Under the Credit Agreement and the Indenture, we are subject to certain limitations, including limitations on our ability to: make capital expenditures in excess of $10.0 million per quarter through March 2011; incur additional debt or sell assets; make certain investments, loans and acquisitions; guarantee debt; grant liens; enter into transactions with affiliates and engage in other lines of business. We are also subject to financial covenants, which include minimum quarterly EBITDA amounts, senior and total debt to EBITDA ratios and an interest coverage ratio. These covenants are subject to a number of exceptions and qualifications set forth in the Credit Agreement. At December 31, 2009 and June 30, 2010, we were in compliance with the financial covenants required under the Credit Agreement and the Indenture. Long-term debt at December 31, 2009 and June 30, 2010 consisted of the following (amounts in thousands):

		December 31,				June 30,
		2009				2010
Credit Facility with interest rates at either LIBOR plus a spread of 4.0% or the prime lending rate plus a spread of 2.0% due March 2013, collateralized by cash, investment property, accounts receivable, inventory, intangibles and equipment		$	82,689			$	60,000
Second Lien Notes due November 2013 with an initial interest rate of 7.0% per annum which increases 1% per annum on the anniversary date of the indenture, collateralized by a second priority lien on Superior’s assets secured by the Credit Facility			80,000				80,000
Mortgage notes payable to a bank with interest at the bank’s prime lending rate minus 1%, payable in monthly installments of $8,622 plus interest through January 2021, collateralized by real property			995				938
Notes payable to sellers with nominal interest rates due through December 2010, collateralized by specific buildings and equipment			36				9
			163,720				140,947
Less — Payments due within one year			126				126
Total		$	163,594			$	140,821

     Principal payments required under our long-term debt obligations during the next five years and thereafter are as follows: 2010-$126,000, 2011-$103,000, 2012-$103,000, 2013-$140,103,000, 2014-$103,000 and thereafter $409,000.

     Capital Lease Obligations

     In connection with the Diamondback asset acquisition (Note 3), Superior recorded capital leases on equipment that extend through 2011. Assets held under capital leases totaling $1.4 million net book value are included in property, plant and equipment within the equipment and vehicles asset class. Amortization of assets recorded under capital leases is reported in depreciation, amortization and accretion expense.

     Future minimum lease payments under capital leases as of June 30, 2010 are (amounts in thousands):

Due in 1 year		$	819
Due in 2 years			1,056
Total minimum payments			1,875
Less amounts representing interest			252
Total obligation under capital leases			1,623
Less current portion			644
Long-term portion		$	979

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Stockholders’ equity

     Common Stock

     We are authorized to issue 70,000,000 shares of common stock, $0.01 par value per share, of which 30,688,137 and 30,810,591 shares of common stock were outstanding as of December 31, 2009 and June 30, 2010, respectively. All of our currently outstanding shares of common stock are listed on the NASDAQ Global Select Market under the symbol “SWSI”.

     Subject to the rights of the holders of any outstanding shares of preferred stock, each share of common stock is entitled to: (i) one vote on all matters presented to the stockholders, with no cumulative voting rights; (ii) receive such dividends as may be declared by our Board of Directors (the “Board”) out of funds legally available therefore; and (iii) in the event of our liquidation or dissolution, share ratably in any distribution of our assets.

     In October 2009, Superior completed a follow-on offering of 6,900,000 shares of its common stock, which included 900,000 shares sold by Superior to cover the exercise by the underwriters of an option to purchase additional shares to cover over-allotments. Proceeds to Superior, net of the underwriting discount and offering expenses, were approximately $68.5 million.

     Preferred Stock

     We are authorized to issue 10,000,000 shares of preferred stock, $0.01 par value per share, of which 75,000 shares of preferred stock were outstanding both at December 31, 2009 and June 30, 2010. The preferred stock is issuable in series with such voting rights, if any, designations, powers, preferences and other rights and such qualifications, limitations and restrictions as may be determined by the Board. The Board may fix the number of shares constituting each series and increase or decrease the number of shares of any series.

     In November 2008, we issued 75,000 shares of Series A Preferred Stock in connection with the Diamondback asset acquisition. The Series A Preferred Stock is perpetual and ranks senior to our common stock with respect to payment of dividends, and amounts upon liquidation, dissolution or winding up. As of December 31, 2009 and June 30, 2010, 75,000 shares of a Series A Preferred Stock were outstanding.

     Dividends

     Holders of Series A Preferred Stock are entitled to receive, when, as and if declared by the Board out of our assets legally available therefore, cumulative cash dividends at the rate per annum of $40.00 per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock are payable quarterly in arrears on December 1, March 1, June 1 and September 1 of each year (and, in the case of any undeclared and unpaid dividends, at such additional times and for such interim periods, if any, as determined by the Board), at such annual rate. Dividends are cumulative from the date of the original issuance of the Series A Preferred Stock, whether or not in any dividend period or periods we have assets legally available for the payment of such dividends.

     As of June 30, 2010, dividends on outstanding shares of Series A Preferred Stock have been declared and paid in full with respect to each quarter since initial issuance.

     Liquidation Preference

     Holders of Series A Preferred Stock are entitled to receive, in the event that we are liquidated, dissolved or wound up, whether voluntary or involuntary, $1,000 per share (the “Liquidation Value”) plus an amount per share equal to all dividends undeclared and unpaid thereon to the date of final distribution to such holders (the “Liquidation Preference”), and no more. Until the holders of Series A Preferred Stock have been paid the Liquidation Preference in full, no payment will be made to any holder of Junior Stock upon our liquidation, dissolution or winding up. The term “Junior Stock” means our common stock and any other class of our capital stock issued and outstanding that ranks junior as to the payment of dividends or amounts payable upon liquidation, dissolution and winding up to the Series A Preferred Stock. As of December 31, 2009 and June 30, 2010, the Series A Preferred Stock had a total Liquidation Preference of $75.0 million.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     Redemption

     The Series A Preferred Stock is redeemable at any time on or after November 18, 2013 and Superior, at its option, may redeem any or all at 101% of the Liquidation Value, plus, all accrued dividends with respect thereto to the redemption. The redemption price is payable in cash.

     Voting Rights

     Except as otherwise from time to time required by applicable law or upon certain events of preferred default, the holders of Series A Preferred Stock have no voting rights and their consent is not required for taking any corporate action. When and if the holders of the Series A Preferred Stock are entitled to vote, each holder will be entitled to one vote per share.

     Conversion

     Each share of Series A Preferred Stock is convertible, in whole or in part at the option of the holders thereof, into shares of common stock at a conversion price of $25.00 per share of common stock (equivalent to a conversion rate of 40 shares of common stock for each share of Series A Preferred Stock), representing 3,000,000 common shares at December 31, 2009 and June 30, 2010. The right to convert shares of Series A Preferred Stock called for redemption will terminate at the close of business on the day preceding a redemption date.

     Stock Incentive Plan

     In July 2005, Superior adopted a stock incentive plan for its employees, directors and consultants. The 2005 Stock Incentive Plan (the “2005 Stock Incentive Plan”) permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, phantom stock awards, performance awards, bonus stock awards or any combination of the foregoing to employees, directors and consultants. A maximum of 2,700,000 shares of common stock may be issued pursuant to awards under the 2005 Stock Incentive Plan. The Compensation Committee of the Board, which is composed entirely of independent directors, determines all awards made pursuant to the 2005 Stock Incentive Plan. In March 2010, the 2005 Stock Incentive Plan was amended and restated (the “Amended and Restated Incentive Compensation Plan”) and subsequently approved by the stockholders at the Annual Meeting of Stockholders in May 2010.

     Superior accounts for equity awards using an approach in which the fair value of an award is estimated at the date of grant and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied.

     During 2007, Superior granted restricted common stock awards that totaled 135,200 shares. Superior’s non-employee directors, officers and key employees received restricted common stock awards during 2007 of 22,000, 26,000 and 87,200, respectively. During 2008, Superior granted restricted common stock awards that totaled 176,400 shares. Superior’s non-employee directors, officers and key employees received restricted common stock awards during 2008 of 12,000, 32,500 and 131,900, respectively. During 2009, Superior granted restricted common stock awards that totaled 195,750 shares. Superior’s non-employee directors, officers and key employees received restricted common stock awards during 2009 of 18,000, 33,500 and 144,250, respectively. During 2010, Superior granted restricted common stock awards that totaled 205,900 shares. Superior’s non-employee directors, officers and key employees received restricted common stock awards during 2010 of 18,000, 45,250 and 142,650, respectively. Each award is subject to a service requirement that requires the director, officer or key employee to continuously serve as a member of the Board or as an employee of Superior from the date of grant through the number of years following the date of grant as set forth in the following schedule. Under the terms of the Stock Incentive Plan, vested shares may be issued net of a number of shares necessary to satisfy the participant’s income tax obligation. Such amounts are recorded as shares retired. The forfeiture restrictions lapse with respect to a percentage of the aggregate number of restricted shares in accordance with the following schedule:

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

		Percentage of Total Number of Restricted Shares
Number of Full Years		as to Which Forfeiture Restrictions Lapse
Less than 1 year			0	%
1 year			15	%
2 years			30	%
3 years			45	%
4 years			60	%
5 years or more			100	%

     Under the 2005 Stock Incentive Plan, the fair value of the restricted stock awards is based on the closing market price of Superior’s common stock on the date of grant. A summary of the activity of Superior’s restricted stock awards are as follows:

						Weighted Average
						Grant Date Fair
		Number of shares				Value Per Share
Nonvested at December 31, 2008			463,086			$	22.97
Granted			195,750				8.94
Vested			(73,570	)			24.88
Forfeited			(67,995	)			17.69
Retired			(9,216	)			25.51
Nonvested at December 31, 2009			508,055				17.95
Granted			205,900				17.74
Vested			(77,081	)			17.62
Forfeited			(40,118	)			14.44
Retired			(15,888	)			17.62
Nonvested at June 30, 2010			580,868			$	18.17

     The aggregate market value of cumulative awards was approximately $17.9 million, before the impact of income taxes. At June 30, 2010, Superior’s unrecognized compensation costs related to non-vested awards amounted to $7.0 million. Superior is recognizing the expense in connection with the restricted share awards ratably over the five year vesting period. Compensation expense related to the 2005 Stock Incentive Plan for the three months ended June 30, 2009 and 2010 was $734,000 and $1,200,000, respectively. Compensation expense related to the 2005 Stock Incentive Plan for the six months ended June 30, 2009 and 2010 was $1,471,000 and $2,065,000, respectively.

7. Income Taxes

     Superior accounts for income taxes and the related accounts under the liability method. Deferred taxes and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to be in effect during the year in which the basis differences reverse.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The provision (benefit) for income taxes is comprised of:

		Period Ended June 30, 2009								Period Ended June 30, 2010
		Three Months				Six Months				Three Months				Six Months
		Ended				Ended				Ended				Ended
Current:
State and local		$	(718	)		$	(1,518	)		$	—			$	—
U.S. federal			(5,147	)			(16,633	)			—				—
Total current			(5,865	)			(18,151	)			—
Deferred:
State and local			(2,302	)			(2,187	)			481				—
U.S. federal			(16,209	)			(11,790	)			3,347				(697	)
Total deferred			(18,511	)			(13,977	)			3,828				(697	)
Provision (benefit) for income tax expense		$	(24,376	)		$	(32,128	)		$	3,828			$	(697	)

     Significant components of Superior’s deferred tax assets and liabilities are as follows:

		December 31,				June 30,
		2009				2010
		(in thousands)
Deferred tax assets:
Restricted stock		$	1,464			$	1,108
Accrued expenses and other			1,330				1,478
Net operating loss carry forward			22,360				24,803
Allowance for doubtful accounts receivable			2,227				2,055
Total deferred tax assets			27,381				29,444
Deferred tax liabilities:
Depreciation differences on property, plant and equipment			(60,688	)			(62,054	)
Total deferred tax liabilities			(60,688	)			(62,054	)
Net deferred taxes		$	(33,307	)		$	(32,610	)

     A reconciliation of income tax expense using the statutory U.S. income tax rate compared with actual income tax expense is as follows:

		Period Ended June 30, 2009								Period Ended June 30, 2010
		Three Months				Six Months				Three Months				Six Months
		Ended				Ended				Ended				Ended
Federal statutory tax rate			(35	)%			(35	)%			35	%			(35	)%
Impact of vesting of restricted stock			1				1				—				17
State income taxes			(3	)			(3	)			3				—
Other			(2	)			(1	)			1				(3	)
Effective income tax rate			(39	)%			(38	)%			39	%			(21	)%

     We file U.S. federal tax returns and separate income tax returns in many state and local jurisdictions. We are subject to U.S. federal income tax examinations for years after 2005 and we are subject to various state and local tax examinations for years after 2005. Our continuing policy is to recognize interest related to income tax expense in interest expense and penalties in general and administrative expense. We do not have any accrued interest or penalties related to tax amounts as of June 30, 2009 and 2010. Throughout 2009, our unrecognized tax benefits were insignificant. We had available at June 30, 2010, a U.S. federal income tax net operating loss (“NOL”) carryforward of approximately $17.9 million which will expire between 2029 and 2030. Additionally, we have $6.9

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

million of state income tax NOL carryforward and $1.0 million of U.S. federal alternative minimum tax NOL carryforward available at June 30, 2010. The state NOL and U.S. federal alternative minimum tax carryforward periods range from 5 to 20 years.

8. 401(k) Plan

     Superior Well has a defined contribution profit sharing/401(k) retirement plan (the “Plan”) covering substantially all employees. Employees are eligible to participate after six months of service. Under terms of the Plan, employees are entitled to contribute up to 100% of their compensation, within limitations prescribed by the Internal Revenue Code. Superior Well may elect to make discretionary contributions to the Plan, all subject to vesting ratably over a three-year period.

9. Related-Party Transactions

     Superior Well provides technical pumping services and down-hole surveying services to a customer owned by certain stockholders and directors of Superior. The total amounts of services provided to these affiliated parties for the three months ended June 30, 2009 and 2010 were approximately $1,242,000 and $2,207,000, respectively. The total amounts of services provided to these affiliated parties for the six months ended June 30, 2009 and 2010 were approximately $1,992,000 and $3,063,000, respectively. The accounts receivable outstanding from the affiliated party were $846,000 and $851,000 at December 31, 2009 and June 30, 2010, respectively.

     Superior Well also regularly purchases, in the ordinary course of business, materials from vendors owned by certain stockholders and directors of Superior. The total amounts paid to these affiliated parties were approximately $445,000 and $905,000 for the three months ended June 30, 2009 and 2010, respectively. The total amounts paid to these affiliated parties were approximately $1,178,000 and $1,356,000 for the six months ended June 30, 2009 and 2010, respectively. Superior Well had accounts payable to these affiliates of $331,000 and $739,000 at December 31, 2009 and June 30, 2010, respectively.

     At December 31, 2009 and June 30, 2010, a commercial bank in which certain stockholders and directors of Superior hold ownership interests held $995,000 and $938,000 of Superior Well’s mortgage notes (Note 5) and a $1.2 million participation in the Credit Facility (Note 5).

     In connection with the Diamondback asset acquisition (Note 3), Superior Well entered into a transition services agreement to provide temporary services to Diamondback, which terminated on June 30, 2009. These services included assistance in payroll, information technologies and certain other corporate support service matters. The total amount of services provided to Diamondback for the three and six months ended June 30, 2009 was approximately $82,000 and $150,000, respectively. The accounts receivable outstanding from Diamondback at June 30, 2009 was $150,000. There were no services provided or accounts receivable outstanding for the three and six months ending June 30, 2010.

     In connection with the Diamondback asset acquisition (Note 3), Superior Well entered into facility leases with an affiliate of Diamondback. The lease terms range from nine months to five years and the monthly lease payments are approximately $39,000. Rent expense for these leased facilities for the three month period ended June 30, 2009 and 2010 was $365,000 and $118,000, respectively. Rent expense for these leased facilities for the six month period ended June 30, 2009 and 2010 was $731,000 and $236,000, respectively. There was no unpaid balance at December 31, 2009 and June 30, 2010.

10. Business Segment Information

     Superior’s method of determining what information to report is based on the way our management organizes the operating segments for making operational decisions and assessing financial performance. We operate out of two subsidiaries that form the basis for the segments that we report. These segments have been selected based on resource allocation by management and performance. Following is a discussion of our reporting segments.

     Technical Services— These operating segments provide completion services, down-hole surveying services and technical pumping services (consisting of fracturing, cementing, acidizing, nitrogen, down-hole surveying and completion services). These operating segments have been aggregated into one reportable segment because they

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

offer the same type of services, have similar economic characteristics, have similar production processes and use the same methods to provide services.

     Fluid Logistics— This operating segment provides a variety of services to assist our customers to obtain, transport, store and dispose of fluids that are involved in the drilling, development and production of hydrocarbons.

     We evaluate performance and allocate resources based on operating income (loss). Information regarding our two reportable operating segments, technical services and fluid logistics, is set forth below:

Three Months Ended June 30, 2010
		Technical				Fluid
		Services				Logistics				Corporate				Total
		(in thousands)
Net revenue		$	170,414			$	5,587			$	—			$	176,001
Depreciation, amortization and accretion		$	18,789			$	1,395			$	203			$	20,387
Operating income (loss)		$	18,764			$	(977	)		$	(4,799	)		$	12,988
Capital expenditures		$	4,642			$	—			$	46			$	4,688
Segment assets as of June 30, 2010		$	532,879			$	38,907			$	7,286			$	579,072

Three Months Ended June 30, 2009
		Technical				Fluid
		Services				Logistics				Corporate				Total
		(in thousands)
Net revenue		$	85,901			$	4,591			$	—			$	90,492
Depreciation, amortization and accretion		$	16,420			$	1,434			$	137			$	17,991
Operating loss		$	(46,007	)		$	(9,389	)		$	(3,851	)		$	(59,247	)
Capital expenditures		$	8,344			$	—			$	111			$	8,455
As of June 30, 2009 segment assets		$	560,354			$	43,231			$	5,879			$	609,464

Six Months Ended June 30, 2010
		Technical				Fluid
		Services				Logistics				Corporate				Total
		(in thousands)
Net revenue		$	288,761			$	10,580			$	—			$	299,341
Depreciation, amortization and accretion		$	37,050			$	2,792			$	331			$	40,173
Operating income (loss).		$	13,552			$	(2,184	)		$	(8,791	)		$	2,577
Capital expenditures		$	10,061			$	—			$	57			$	10,118
As of June 30, 2010 segment assets		$	532,879			$	38,907			$	7,286			$	579,072

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Six Months Ended June 30, 2009
		Technical				Fluid
		Services				Logistics				Corporate				Total
						(in thousands)
Net revenue		$	199,175			$	13,598			$	—			$	212,773
Depreciation, amortization and accretion		$	32,339			$	2,867			$	270			$	35,476
Operating loss		$	(59,040	)		$	(11,600	)		$	(7,701	)		$	(78,341	)
Capital expenditures		$	17,563			$	10			$	238			$	17,811
As of June 30, 2009 segment assets		$	560,354			$	43,231			$	5,879			$	609,464

     We do not allocate interest expense, other expense or tax expense to the operating segments. The following table reconciles operating income (loss) as reported above to net income (loss) for the three and six months ended June 30, 2009 and 2010.

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2010				2009				2010
						(in thousands)
Segment operating income (loss)		$	(59,247	)		$	12,988			$	(78,341	)		$	2,577
Interest expense			3,150				2,848				6,326				5,750
Other income (expense), net			109				(258	)			(84	)			(122	)
Income taxes			(24,376	)			3,828				(32,128	)			(697	)
Net income (loss)		$	(37,912	)		$	6,054			$	(52,623	)		$	(2,598	)

11. Commitments and Contingencies

     Minimum annual rental payments, principally for non-cancelable real estate and vehicle leases with terms in excess of one year, in effect at December 31, 2009, were as follows: 2010-$9,311,000; 2011-$7,098,000; 2012-$5,144,000; 2013-$3,211,000, and 2014-$1,148,000.

     Total rental expense charged to operations was approximately $2,124,000 and $2,117,000 for the three months ended June 30, 2009 and 2010, respectively. Total rental expense charged to operations was approximately $4,593,000 and $4,227,000 for the six months ended June 30, 2009 and 2010, respectively.

     In January 2010, we amended a take-or-pay contract with Preferred Rocks USS, Inc. to purchase fracturing sand through December 2015. In connection with the take-or-pay contract, Superior advanced $15 million for materials that will be delivered in the future. Under the amended terms of the take-or-pay contract, Superior earns a 6% interest rate on the unused portion of the advance on materials. The advance on materials for future delivery will be used to offset future purchase commitments under the take-or-pay contract. Effective January 1, 2010, the minimum purchases under the take-or-pay contract are estimated at $14.2 million annually.

     Superior had commitments of approximately $1.7 million and $3.3 million for capital expenditures as of December 31, 2009 and June 30, 2010, respectively.

     Superior is involved in various legal actions and claims arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will not have a material adverse effect on the financial position, results of the operations or cash flow of Superior.

12. Fair Value of Financial Instruments

     The fair values are classified according to a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs consist of quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability. Level 3 inputs have the lowest priority. Superior uses appropriate valuation techniques based on the available inputs to measure the fair values of its assets and liabilities. When available, Superior measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

     Superior’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, notes payable and long term debt. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The carrying value of our Credit Facility and mortgage notes payable approximates fair value at December 31, 2009 and June 30, 2010, since the interest rates are market-based and are generally adjusted periodically, representing Level 1 measurements.

     The Second Lien Notes are not actively traded in an established market. The fair values of this debt is estimated by using Standard & Poor’s leveraged loan composite indices with similar terms and maturity, that is, a Level 2 fair value measurement. The fair value of the Second Lien Notes was $76.0 million compared to a carrying value of $80.0 million at June 30, 2010.

13. Guarantees of Securities Registered

     Superior filed a registration statement on Form S-3 that included $80 million of outstanding debt securities that were issued on November 18, 2008 and that are guaranteed by all of Superior’s subsidiaries. Superior, as the parent company, has no independent operating assets or operations. The subsidiaries’ guarantees of the debt securities are full and unconditional as well as joint and several. In addition, there are no restrictions on the ability of Superior to obtain funds from its subsidiaries by dividend or loan, and there are no restricted assets in any subsidiaries although all business assets secure debt.

14. Subsequent Events

     On July 16, 2010, Superior entered into an amendment (the “Third Amendment”) to the Credit Agreement evidencing its Credit Facility. The following changes were made to the Credit Agreement as a result of the Third Amendment:

	•		the total capacity under the Credit Facility was temporarily increased by $15.0 million to $90.0 million. On December 31, 2010, the temporary increase in the Credit Facility capacity will expire; and
	•		the financial covenants in the Credit Agreement were revised such that Superior’s required maximum capital expenditures was increased from $6.0 million per quarter to $10 million per quarter commencing in the quarter ending as of June 30, 2010; and
	•		the letter of credit sublimit was reduced from $25.0 million to $12.5 million; and
	•		the financial covenants were revised such that Superior’s required minimum quarterly EBITDA must not be less than: $6.0 million, $7.5 million and $10.0 million for the second, third and fourth quarters of 2010, respectively.
			All other material terms remain the same.

     On August 6, 2010, we and Nabors Industries Ltd. (“Nabors”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Nabors will cause a wholly-owned subsidiary (the “Purchaser”) to commence a cash tender offer (the “Offer”) to acquire all of our outstanding shares (“Shares”) of common stock for $22.12 per Share in cash (the “Offer Price”). The Offer will commence within ten business days of August 6th and will remain open for at least 20 business days. The Offer is subject to the satisfaction or waiver of a number of customary conditions, including the valid tender prior to the expiration of the Offer, when added to the number of Shares owned by Nabors or the Purchaser, of a majority of the Shares then outstanding and the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

     After consummation of the Offer, and subject to certain conditions in the Merger Agreement, the Purchaser will merge with and into us (the “Merger”), and we will survive as a subsidiary of Nabors. At the effective time of the Merger, each issued and outstanding Share (other than Shares owned by Nabors, the Purchaser, us, any of our wholly-owned subsidiaries or stockholders that have perfected their appraisal rights under the Delaware General Corporation Law (“DGCL”)) shall be cancelled and converted into the right to receive the Offer Price. If the Purchaser holds 90% or more of our outstanding Shares immediately prior to the Merger, it may effect the Merger without a meeting of our stockholders in accordance with DGCL. Pursuant to the Merger Agreement, we granted the Purchaser an irrevocable option (the “Top-Up Option”), to purchase at the Offer Price the aggregate number of newly-issued Shares that, when added to the number of Shares owned by Nabors and the Purchaser at the time of such exercise, constitutes one Share more than ninety percent (90%) of the Shares outstanding immediately after the exercise.

SUPERIOR WELL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The Merger Agreement contains representations, warranties and covenants of the parties customary for transactions of this type. The Merger Agreement also contains customary termination provisions and provides that, in connection with the termination of the Merger Agreement under specified circumstances, we may be required to pay Nabors a termination fee equal to $22.5 million and to reimburse Nabors for transaction expenses up to $5.0 million. The Merger Agreement also provides for acceleration of vesting for outstanding restricted stock awards.

     In connection with the Offer and the Merger, David E. Wallace, Rhys R. Reese, Jacob B. Linaberger, David E. Snyder, Mark E. Snyder and certain affiliates of David E. Snyder and Mark E. Snyder (together, the “Supporting Stockholders”) have entered into a Tender and Voting Agreement with Nabors and the Purchaser (the “Voting Agreement”). Pursuant to the Voting Agreement, the Supporting Stockholders agreed, among other things, (i) to tender in the Offer (and not withdraw) all Shares beneficially owned or subsequently acquired by them, (ii) not to transfer any such Shares other than in accordance with the terms and conditions set forth in the Tender and Voting Agreement, (iii) not to take any action in violation of the Merger Agreement provisions against soliciting or initiating discussions with third parties regarding other proposals to acquire us, (iv) to appoint Nabors as their proxy to vote such Shares in connection with the Merger Agreement and (v) to vote such Shares in support of the Merger in the event stockholder approval is required to consummate the Merger. The Supporting Stockholders currently hold approximately 33.9% of the outstanding Shares and approximately 30.0% of the Shares on a fully diluted basis.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. This discussion contains forward-looking statements that reflect management’s current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements or as a result of certain factors such as those set forth below under “Cautionary Statement Regarding Forward-Looking Statements.”

Cautionary Statement Regarding Forward-Looking Statements

     This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements included in this report that are not historical facts, that address activities, events or developments that we expect or anticipate will or may occur in the future, including things such as plans for growth of the business, future capital expenditures, competitive strengths, goals, references to future goals or intentions or other such references are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including “may,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or similar words. These statements are made by us based on our past experience and our perception of historical trends, current conditions and expected future developments as well as other considerations we believe are appropriate under the circumstances. Whether actual results and developments in the future will conform to our expectations is subject to numerous risks and uncertainties, many of which are beyond our control. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors, including, but not limited to:

	•		A sustained decrease in domestic spending by the oil and natural gas exploration and production industry;
	•		a decline in or substantial volatility of crude oil and natural gas commodity prices;
	•		a weakening in the credit and capital markets and lack of credit availability or other access to capital;
	•		our inability to comply with the financial and other covenants in our debt agreements as a result of reduced revenues and financial performance or our inability to raise sufficient funds through assets sales or equity issuances;
	•		overcapacity and competition in our industry;
	•		unanticipated costs, delays and other difficulties in executing our long-term growth strategy;
	•		the loss of one or more significant customers;
	•		the loss of or interruption in operations of one or more key suppliers;
	•		the incurrence of significant costs and liabilities in the future resulting from our failure to comply with new or existing environmental regulations or an accidental release of hazardous substances into the environment; and
	•		other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission (“SEC”) filings.

     When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, as well as other written and oral statements made or incorporated by reference from time to time by us in other reports and filings with the SEC. All forward-looking statements included in this report and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made, other than as required by law, 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.

Overview

     We are a Delaware corporation formed in 2005 to serve as the parent holding company for an oilfield services business operating under the Superior Well Services name since 1997. We service our customers in key markets in many of the active domestic oil and natural gas producing regions in the Appalachian, Mid-Continent, Rocky Mountain, Southwest and Southeast regions of the United States. In August 2005, we completed our initial public offering of 6,460,000 shares of common stock at a price of $13.00 per share and follow-on offerings of common stock in December 2006 for 3,690,000 shares at a price of $25.50 per share and in October 2009 for 6,900,000 shares at a price of $10.50 per share. We provide a wide range of wellsite solutions to oil and natural gas companies, primarily technical pumping services and down-hole surveying services. We focus on offering technologically advanced equipment and services at competitive prices, which we believe allows us to successfully compete against both major oilfield services companies and smaller, independent service providers.

     In November 2008, we purchased the pressure pumping, fluid logistics and completion, production and rental tools business lines from Diamondback Energy Holdings, LLC, or Diamondback, for approximately $202.0 million. The acquisition consideration consisted of $71.5 million in cash, $42.9 million of our Series A 4% Convertible Preferred Stock ($75 million liquidation preference), or the Series A Preferred Stock, and $80 million in second lien notes aggregating $194.4 million plus $7.6 million of transaction costs for a total purchase price of $202.0 million. See Note 3 to our consolidated financial statements for more information. As part of the acquisition, we acquired 128,000 horsepower, 105 transports and trucks, 400 frac tanks, six water disposal wells and completion and rental tool businesses in Louisiana, Texas and Oklahoma. The assets that we purchased from Diamondback are operating in the Anadarko, Arkoma, and Permian Basins, as well as the Barnett Shale, Woodford Shale, West Texas, southern Louisiana and the Texas Gulf Coast.

Recent Developments

     On August 6, 2010, we and Nabors Industries Ltd. (“Nabors”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Nabors will cause a wholly-owned subsidiary (the “Purchaser”) to commence a cash tender offer (the “Offer”) to acquire all of our outstanding shares (“Shares”) of common stock for $22.12 per Share in cash (the “Offer Price”). The Offer will commence within ten business days of August 6th and will remain open for at least 20 business days. The Offer is subject to the satisfaction or waiver of a number of customary conditions, including the valid tender prior to the expiration of the Offer, when added to the number of Shares owned by Nabors or the Purchaser, of a majority of the Shares then outstanding and the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

     After consummation of the Offer, and subject to certain conditions in the Merger Agreement, the Purchaser will merge with and into us (the “Merger”), and we will survive as a subsidiary of Nabors. At the effective time of the Merger, each issued and outstanding Share (other than Shares owned by Nabors, the Purchaser, us, any of our wholly-owned subsidiaries or stockholders that have perfected their appraisal rights under the Delaware General Corporation Law (“DGCL”)) shall be cancelled and converted into the right to receive the Offer Price. If the Purchaser holds 90% or more of our outstanding Shares immediately prior to the Merger, it may effect the Merger without a meeting of our stockholders in accordance with DGCL. Pursuant to the Merger Agreement, we granted the Purchaser an irrevocable option (the “Top-Up Option”), to purchase at the Offer Price the aggregate number of newly-issued Shares that, when added to the number of Shares owned by Nabors and the Purchaser at the time of such exercise, constitutes one Share more than ninety percent (90%) of the Shares outstanding immediately after the exercise.

     The Merger Agreement contains representations, warranties and covenants of the parties customary for transactions of this type. The Merger Agreement also contains customary termination provisions and provides that, in connection with the termination of the Merger Agreement under specified circumstances, we may be required to pay Nabors a termination fee equal to $22.5 million and to reimburse Nabors for transaction expenses up to $5.0 million. The Merger Agreement also provides for acceleration of vesting for outstanding restricted stock awards.

     In connection with the Offer and the Merger, David E. Wallace, Rhys R. Reese, Jacob B. Linaberger, David E. Snyder, Mark E. Snyder and certain affiliates of David E. Snyder and Mark E. Snyder (together, the “Supporting Stockholders”) have entered into a Tender and Voting Agreement with Nabors and the Purchaser (the “Voting Agreement”). Pursuant to the Voting Agreement, the Supporting Stockholders agreed, among other things, (i) to tender in the Offer (and not withdraw) all Shares beneficially owned or subsequently acquired by them, (ii) not to transfer any such Shares other than in accordance with the terms and conditions set forth in the Tender and Voting Agreement, (iii) not to take any action in violation of the Merger Agreement provisions against soliciting or initiating discussions with third parties regarding other proposals to acquire us, (iv) to appoint Nabors as their proxy to vote such Shares in connection with the Merger Agreement and (v) to vote such Shares in support of the Merger in the event stockholder approval is required to consummate the Merger. The Supporting Stockholders currently hold approximately 33.9% of the outstanding Shares and approximately 30.0% of the Shares on a fully diluted basis.

Services Offered

     Our services are conducted through two principal business segments, which are technical services and fluid logistics services. Each business segment includes service lines that contain similarities among customers, financial performance and management, as well as the economic and business conditions impacting their activity levels. Technical services include technical pumping services, completion, production and rental tool services and down-hole surveying services. Fluid logistics services include those services related to the transportation, storage and disposal of fluids that are used in the drilling, development and production of hydrocarbons. Substantially all of our customers are domestic oil and natural gas exploration and production companies that typically require all types of services in their operations. Our operating revenue from these operations, and their relative percentages of our total revenue, consisted of the following (dollars in thousands):

		Period Ended June 30, 2009								Period Ended June 30, 2010
		Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
Revenue:
Technical services		$	85,901			$	199,175			$	170,414			$	288,761
Fluid Logistic services			4,591				13,598				5,587				10,580
Total revenue		$	90,492			$	212,773			$	176,001			$	299,341

     The following is a brief description of our services:

     Technical Services

     Technical Pumping Services

     We offer three types of technical pumping services — stimulation, nitrogen and cementing — which accounted for 74.7%, 5.9% and 11.3% of our revenue for the three months ended June 30, 2010 and 67.2%, 6.0% and 12.0% of our revenue for the three months ended June 30, 2009, and 74.9%, 5.0% and 10.8% of our revenue for the six months ended June 30, 2010 and 66.0%, 5.8% and 12.9% of our revenue for the six months ended June 30, 2009, respectively. Our fluid-based stimulation services include fracturing and acidizing, which are designed to improve the ?ow of oil and natural gas from producing zones. In addition to our fluid-based stimulation services, we also use

nitrogen to stimulate wellbores. Our foam-based nitrogen stimulation services accounted for substantially all of our total nitrogen services revenue for the three and six months ended June 30, 2009 and 2010. Our cementing services consist of blending high-grade cement and water with various additives to create a cement slurry that is pumped through the well casing into the void between the casing and the bore hole. Once the slurry hardens, the cement isolates fluids and gases, which protects the casing from corrosion, holds the well casing in place and controls the well.

     Completion, Production and Rental Tool Services

     Completion and production services were added in connection with the Diamondback asset acquisition and accounted for 1.3% and 3.7% of our revenues for the three months ended June 30, 2010 and 2009, and 1.7% and 3.4% of our revenue for the six months ended June 30, 2010 and 2009, respectively. Our completion and production services and other production related activities include specialty services, many of which are performed after drilling has been completed. Consequently, these services occur later in the lifecycle while a well is being completed or during the production stage. These specialty services include plugging and abandonment, gravel pack, storm valves, roustabout services, as well as the sale and rental of equipment. As newly drilled oil and natural gas wells are prepared for production, our completion services include selectively testing producing zones of the wells before and after stimulation.

     Down-Hole Surveying Services

     We offer two types of down-hole surveying services — logging and perforating — which collectively accounted for approximately 3.6% and 6.0% of our revenue for the three months ended June 30, 2010 and 2009, and 4.1% and 5.5% of our revenue for the six months ended June 30, 2010 and 2009, respectively. Our logging services involve the gathering of down-hole information through the use of specialized tools that are lowered into a wellbore from a truck. An armored electro-mechanical cable, or wireline, is used to transmit data to our surface computer that records various characteristics about the formation or zone to be produced. We provide perforating services as the initial step of stimulation by lowering specialized tools and perforating guns into a wellbore by wireline. The specialized tools transmit data to our surface computer to verify the integrity of the cement and position the perforating gun, which fires shaped explosive charges to penetrate the producing zone to create a short path between the oil or natural gas reservoir and the production tubing to enable the production of hydrocarbons. We also perform workover services aimed at improving the production rate of existing oil and natural gas wells, including perforating new hydrocarbon bearing zones in a well once a deeper zone or formation has been depleted.

     Fluid Logistics Services

     Oil and natural gas operations use and produce significant quantities of fluids. We provide a variety of services to assist our customers to obtain, transport, store and dispose of fluids that are involved in the drilling, development and production of hydrocarbons. We own or lease over 100 fluid hauling transports and trucks, which are used to transport various fluids in the lifecycle of an oil or natural gas well. As of June 30, 2010, we also owned approximately 400 frac tanks that we rent to producers for use in fracturing and stimulation operations plus other fluid storage needs. We use our fleet of fluid hauling trucks to fill and empty the frac tanks and we deliver and remove these tanks from the well sites. As of June 30, 2010, we owned and operated six water disposal wells in North Texas and southern Oklahoma. The disposal wells are an important component of our fluid logistics operations as they provide an efficient solution for the disposal of waste waters. Our fluid logistics services accounted for approximately 3.2% and 5.1% of our revenues for the three months ended June 30, 2010 and 2009, and 3.5% and 6.4% of our revenues for the six months ended June 30, 2010 and 2009, respectively.

How We Generate Our Revenue

     The majority of our customers are regional, independent oil and natural gas companies. The primary factor influencing demand for our services by those customers is their level of drilling activity, which, in turn, depends primarily on current and anticipated future crude oil and natural gas commodity prices and production depletion rates.

     We generate revenue from our technical pumping services, completion, production and rental tool services and down-hole surveying services by charging our customers a set-up charge plus an hourly rate based on the type of

equipment used. The set-up charges and hourly rates are determined by a competitive bid process and depend upon the type of service to be performed, the equipment and personnel required for the particular job and the market conditions in the region in which the service is performed. Each job is given a base time allotment of six hours. We generally charge an increased hourly rate for each hour worked beyond the initial four hour base time allotment. We also charge customers for the materials, such as stimulation fluids, cement and nitrogen, that we use in each job. Material charges include the cost of the materials plus a markup and are based on the actual quantity of materials used.

     We generate revenue from our fluid logistics services by charging our customers based on volumes of fluids transported and disposed of and rental charges for use of our frac tanks. The rates for the transportation of fluids are generally determined by a competitive bid process and depend upon the type of service to be performed, the equipment and personnel and the cost of goods required for the particular job and the market conditions in the region in which the service is performed. The rates for our fluid disposal services vary depending on the type of fluid being disposed of, and the rates charged are generally driven by market conditions in the region the disposal well is located. Frac tanks are rented on a daily basis and the rates are generally driven by market conditions in the region the disposal well is located.

How We Evaluate Our Operations

     Our management uses a variety of financial and operational measurements to analyze the performance of our services. These measurements include the following: (1) operating income per operating region; (2) material and labor expenses as a percentage of revenue; (3) selling, general and administrative expenses as a percentage of revenue; and (4) Adjusted EBITDA, which is a non-GAAP financial measure and is discussed in more detail below.

     Operating Income per Operating Region

     We currently service customers in five operating regions through our 27 service centers. In April 2009, we ceased operations at our service centers in Wooster, Ohio and Cleveland, Oklahoma due to significant activity declines in those areas. In October 2009, we ceased operations at our service centers in Coalgate, Oklahoma; Trinidad, Colorado; Alvarado, Texas and Artesia, New Mexico and ceased stimulation operations in Clinton, Oklahoma due to significant activity declines in those areas. In January 2010 we ceased operations at our service center in Farmington, New Mexico due to significant activity declines in that area. In June 2010 we sold the assets of our Homity, Oklahoma wireline operations. Our Appalachian region service centers are located in Bradford, Black Lick and Mercer, Pennsylvania; Kimball, Buckhannon and Jane Lew, West Virginia; Norton, Virginia; and Gaylord, Michigan. Our Southeast region service centers are located in Cottondale, Alabama; Columbia, Mississippi; and Bossier City and Broussard, Louisiana. Our Mid-Continent region service centers are located in Clinton, Marlow, Countyline, Sweetwater, and Elk City, Oklahoma; Hays, Kansas; and Van Buren, Arkansas. Our Rocky Mountain region service centers are located in Vernal, Utah; Rock Springs, Wyoming; Williston, North Dakota; and Brighton, Colorado. Our Southwest region service centers are located in Cresson, Tolar, Midland and Victoria, Texas.

     The operating income (loss) generated in each of our operating regions is an important part of our operational analysis. We monitor operating income (loss) separately for each of our operating regions and analyze trends to determine our relative performance in each region. Our analysis enables us to more efficiently allocate our equipment and field personnel among our various operating regions and determine if we need to increase our marketing efforts in a particular region. By comparing our operating income (loss) on an operating region basis, we can quickly identify market increases or decreases in the diverse geographic areas in which we operate. It has been our experience that when we establish a new service center in a particular operating region, it may take from 12 to 24 months before that service center has a positive impact on the operating income (loss) that we generate in the relevant region.

     Material and Labor Expenses as a Percentage of Revenue

     A significant portion of the cost of revenues is comprised of the cost of materials, maintenance, fuel and the wages of our field personnel. Although, the cost of these expenses as a percentage of revenue has historically remained relatively stable for our established service centers, the industry experienced an unprecedented decline in drilling activity during 2009 compared to 2008. This rapid and deep reduction in drilling activity resulted in heavy

pricing pressure and severe margin contraction in all our service offerings. Beginning in the fourth quarter of 2009 and continuing through the second quarter of 2010, rig count and drilling activity started increasing in many regions in the United States. The activity increases have been strongest in the more service-intensive shale plays, as well as the more oil-focused producing regions. Starting in the first quarter of 2010, we began to see modest pricing improvements from our customers on most of our services, which continued through the second quarter of 2010 and favorably impacted our operating margins during the first half of 2010. Recently, however, higher natural gas storage levels have weakened natural gas prices, which could negatively impact drilling activity for the remainder of 2010.

     Our material costs primarily include the cost of inventory consumed while performing our stimulation, nitrogen and cementing services. We try to pass on to our customers the increases in our material and fuel costs. However, due to the timing of our marketing and bidding cycles, there is generally a delay of several weeks or months from the time that we incur an actual price increase until the time that we can pass on that increase to our customers. During 2009, the economic conditions and the decline in the overall demand for certain types of our services made it difficult to pass these price increases on to our customers. The improvement in overall demand for our services during 2010 has improved our ability to pass on cost increases to our customers.

     Our labor costs consist primarily of wages for our field personnel. If we experience a shortage of qualified supervision personnel and equipment operators in certain areas in which we operate, it is possible that we will have to raise wage rates to attract and train workers from other fields in order to maintain or expand our current work force. We try to pass on higher wage expenses through an increase in our service rates. During 2009, the economic conditions and the decline in the overall demand for certain types of our services made it difficult to pass these price increases on to our customers. The improvement in overall demand for our services during 2010 has improved our ability to pass on cost increases to our customers.

     Selling, General and Administrative Expenses as a Percentage of Revenue

     Our selling, general and administrative expenses, or SG&A expenses, include administrative expenses, employee compensation and related benefits, office and lease expenses, insurance costs and professional fees, as well as other costs and expenses not directly related to field operations. Our management continually evaluates the level of our SG&A expenses in relation to our revenue because these expenses have a direct impact on our profitability.

     Adjusted EBITDA

     We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense, non-cash stock compensation expense, non-cash goodwill and intangible impairment and depreciation, amortization and accretion expense. We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because:

	•		it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which the assets were acquired; and
	•		it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results.

Our management uses Adjusted EBITDA:

	•		as a measure of operating performance because it assists us in comparing our performance on a consistent basis, since it removes the impact of our capital structure and asset base from our operating results;
	•		as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations;
	•		to assess compliance with financial ratios and covenants included in our credit facility;

	•		in communications with lenders concerning our financial performance; and
	•		to evaluate the viability of potential acquisitions and overall rates of return.

     Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to net income (loss) as indicators of operating performance or any other measures of performance derived in accordance with GAAP. Other companies in our industry may calculate Adjusted EBITDA differently than we do and Adjusted EBITDA may not be comparable with similarly titled measures reported by other companies. See “—Non-GAAP Accounting Measures” for a reconciliation of Adjusted EBITDA to net income (loss).

How We Manage Our Operations

     Our management team uses a variety of tools to manage our operations. These tools include monitoring: (1) service crew utilization and performance; (2) equipment maintenance performance; (3) customer satisfaction; and (4) safety performance.

     Service Crew Performance

     We monitor our revenue on a per service crew basis to determine the relative performance of each of our crews. We also measure our activity levels by the total number of jobs completed by each of our crews as well as by each of the trucks in our fleet. We evaluate our crew and fleet utilization levels on a monthly basis. By monitoring the relative performance of each of our service crews, we can more efficiently allocate our personnel and equipment to maximize our overall crew utilization.

     Equipment Maintenance Performance

     Preventative maintenance on our equipment is an important factor in our profitability. If our equipment is not maintained properly, our repair costs may increase and, during levels of high activity, our ability to operate efficiently could be significantly diminished due to having trucks and other equipment out of service. Our maintenance crews perform monthly inspections and preventative maintenance on each of our trucks and other mechanical equipment. Our management monitors the performance of our maintenance crews at each of our service centers by monitoring the level of maintenance expenses as a percentage of revenue. A rising level of maintenance expenses as a percentage of revenue at a particular service center can be an early indication that our preventative maintenance schedule is not being followed. In this situation, management can take corrective measures, such as adding additional maintenance personnel to a particular service center to help reduce maintenance expenses as well as ensure that maintenance issues do not interfere with operations.

     Customer Satisfaction

     Upon completion of each job, we encourage our customers to complete a “pride in performance survey” that gauges their satisfaction level. The customer evaluates the performance of our service crew under various criteria and comments on their overall satisfaction level. Survey results give our management valuable information from which to identify performance issues and trends. Our management also uses the results of these surveys to evaluate our position relative to our competitors in the various markets in which we operate.

     Safety Performance

     Maintaining a strong safety record is a critical component of our operational success. Many of our larger customers have safety history standards we must satisfy before we can perform services for them. We maintain an online safety database that our customers can access to review our historical safety record. Our management also uses this safety database to identify negative trends in operational incidents so that appropriate measures can be taken to maintain a positive safety history.

Our Industry and Business Outlook

     We provide products and services primarily to domestic onshore oil and natural gas exploration and production companies for use in the drilling and production of oil and natural gas. The main factor influencing demand for well services in our industry is the level of drilling activity by oil and natural gas companies, which, in turn, depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Our customers’ cash flows, in many instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. The opposite is true for higher oil and natural gas prices.

     Since the last half of 2008, the weakened credit markets and recessionary environment has reduced the demand for crude oil and natural gas. As a result, crude oil and natural gas prices fell sharply during the first half of 2009, which caused a decline in the demand for our services as customers reduced their exploration and production expenditures. The price of crude oil and natural gas has improved from pricing levels experienced during the first half of 2009, and this improvement began to be reflected in increased drilling activity. Beginning in the fourth quarter of 2009 and continuing through the first half of 2010, rig count and drilling activity started increasing in many regions of the United States. The activity increases have been strongest in the more service-intensive shale plays, as well as the more oil-focused producing regions. Due to improving equipment utilization, we began to see modest pricing improvements on most of our services during the first quarter of 2010 and continuing through the second quarter of 2010. We believe our ability to service more technically complex plays, our participation in many of the most active drilling plays in the United States, as well as our strength in the Appalachian region will generally help us to maintain a strong competitive position.

     As of July 26, 2010 the 12-month strip for crude oil (West Texas Intermediate) and natural gas (Henry Hub) were $81.29 and $4.96, respectively. A sustained drop in the commodity prices for natural gas, coupled with tighter credit markets, may cause many exploration and production companies to reduce their capital spending. This would result in reduced demand for our services that could intensify the pricing pressures for our services. We continue to believe in the long term fundamentals of our business and the industry. However, the weakened economic and credit markets and the current high storage levels of natural gas have caused the short and mid-term outlook for our business and the industry to remain uncertain. Long-term forecast for energy demand suggests an increasing demand for oil and natural gas which, when coupled with flat or declining production curves, we believe should result over the long-term in the continuation of historically high crude oil and natural gas commodity prices.

     Some of the more significant indicators of current and future spending levels of oil and natural gas companies are crude oil and natural gas prices and the availability of credit, which together drive drilling activity. Our financial performance is significantly affected by crude oil and natural gas prices and domestic land rig activity, which are summarized in the following tables.

		Three Months Ended June 30,												Six Months Ended June 30,
		2009				2010				%Change				2009				2010				%Change
Average rig count (1)
Crude Oil			196				536				173.5	%			237				495				108.9	%
Natural gas			729				957				31.3				891				921				3.4
Total U.S. land rigs			925				1,493				61.4	%			1,128				1,416				25.5	%
Commodity prices (avg.):
Crude Oil (West Texas Intermediate)		$	59.62			$	78.03				30.9	%		$	51.35			$	78.37				52.6	%
Natural gas (Henry Hub)			3.36				3.88				15.5	%			3.96				4.53				14.4	%

Our Long-term Growth Strategy

     Given the current market conditions it is unlikely that we will make significant growth investments in the near term. However, our long-term growth strategy contemplates engaging in organic expansion opportunities and, to a

lesser extent, complementary acquisitions of other oilfield services businesses. Our organic expansion activities generally consist of establishing service centers in new locations, including purchasing related equipment and hiring experienced local personnel. Historically, many of our customers have asked us to expand our operations into new regions that they enter. Once we establish a new service center, we seek to expand our operations by attracting new customers and hiring additional local personnel.

     Our revenues from each operating region, and their relative percentage of our total revenue, consisted of the following (dollars in thousands):

		Three Months Ended June 30,																Six Months Ended June 30,
Region		2009								2010								2009								2010
Appalachian		$	28,037				31.0	%		$	50,928				29.0	%		$	58,611				27.6	%		$	80,915				27.0	%
Southeast			12,077				13.4				26,966				15.3				33,480				15.7				49,353				16.5
Southwest			27,085				29.9				37,150				21.1				63,397				29.8				67,609				22.6
Rocky Mountain			2,277				2.5				25,380				14.4				10,296				4.8				42,114				14.1
Mid-Continent			21,016				23.2				35,577				20.2				46,989				22.1				59,350				19.8
Total		$	90,492				100.0	%		$	176,001				100.0	%		$	212,773				100.0	%		$	299,341				100.0	%

     We also pursue selected acquisitions of complementary businesses, such as our acquisition of the Diamondback assets, both in existing operating regions and in new geographic areas in which we do not currently operate. In analyzing a particular acquisition, we consider the operational, financial and strategic benefits of the transaction. Our analysis includes the location of the business, strategic fit of the business in relation to our business strategy, expertise required to manage the business, capital required to integrate and maintain the business, the strength of the customer relationships associated with the business and the competitive environment of the area where the business is located. From a financial perspective, we analyze the rate of return the business will generate under various scenarios, the comparative market parameters applicable to the business and the cash flow capabilities of the business.

     To successfully execute our long-term growth strategy, we will require access to capital on competitive terms to the extent that we do not generate sufficient cash from operations. We intend to finance future acquisitions primarily by using capacity available under our credit facility and equity or debt offerings or a combination of both. For a more detailed discussion of our capital resources, please read “ – Liquidity and Capital Resources.”

Our Results of Operations

     Our results of operations are derived primarily by three interrelated variables: (1) market price for the services we provide; (2) drilling activities of our customers; and (3) cost of materials and labor. To a large extent, the pricing environment for our services will dictate our level of profitability. Our pricing is also dependent upon the prices and market demand for crude oil and natural gas, which affect the level of demand for, and the pricing of, our services and fluctuates with changes in market and economic condition and other factors. During 2009, increased capacity in each of our operating regions resulted in significant downward pricing pressure and increased discounts in our service prices. Beginning in the first quarter of 2010 and continuing into the second quarter of 2010, we started to see decling discounts in our service prices that were more prevalent in higher activity markets. To a lesser extent, seasonality can affect our operations in the Appalachian region and certain parts of the Mid-Continent and Rocky Mountain regions, which may be subject to a brief period of diminished activity during spring thaw due to road restrictions. As our operations have expanded in recent years into new operating regions in warmer climates, this brief period of diminished activity has a lesser impact on our overall results of operations.

     Results for the three and six months ended June 30, 2009 and 2010

     Our results of operations from our primary categories of services consisted of the following for the three and six month periods ended June 30, 2009 and 2010:

		Three Months Ended June 30,																Six Months Ended June 30,
		2009								2010								2009								2010
Revenues:
Technical pumping services		$	77,113				85.2	%			161,632				91.9	%		$	180,188				84.7	%			271,607				90.7	%
Down-hole surveying services			5,403				6.0				6,414				3.6				11,805				5.5				12,212				4.1
Completion services			3,385				3.7				2,368				1.3				7,182				3.4				4,942				1.7
Total Technical Services			85,901				94.9				170,414				96.8				199,175				93.6				288,761				96.5
Fluid Logistics			4,591				5.1				5,587				3.2				13,598				6.4				10,580				3.5
Total revenue			90,492				100.0				176,001				100.0				212,773				100.0				299,341				100.0
Expenses:
Cost of revenue			102,636				113.4				150,672				85.6				227,956				107.1				272,767				91.1
Selling general and administrative expenses			13,948				15.4				12,341				7.0				30,003				14.1				23,997				8.0
Goodwill impairment			33,155				36.6				—				0.0				33,155				15.6				—				0.0
Total expense			149,739				165.5				163,013				92.6				291,114				136.8				296,764				99.1
Operating income (loss)		$	(59,247	)			(65.5	)%			12,988				7.4	%		$	(78,341	)			(36.8	)%			2,577				0.9	%

     Revenue

     The following table summarizes the dollar and percentage changes for the types of service revenues for the three and six month periods ended June 30, 2009 when compared to the same periods in 2010 (dollars in thousands):

		Three Months Ended June 30,																Six Months Ended June 30,
										$				%												$				%
		2009				2010				change				change				2009				2010				change				change
Revenues by service type
Stimulation		$	60,852			$	131,427			$	70,575				116.0	%		$	140,357			$	224,220			$	83,863				59.7	%
Cementing			10,858				19,823				8,965				82.6				27,453				32,566				5,113				18.6
Nitrogen			5,403				10,382				4,979				92.2				12,378				14,821				2,443				19.7
Technical pumping services			77,113				161,632				84,519				109.6				180,188				271,607				91,419				50.7
Down-hole surveying services			5,403				6,414				1,011				18.7				11,805				12,212				407				3.4
Completion services			3,385				2,368				(1,017	)			(30.0	)			7,182				4,942				(2,240	)			(31.2	)
Total Technical Services			85,901				170,414				84,513				98.4				199,175				288,761				89,586				45.0
Fluid logistics			4,591				5,587				996				21.7				13,598				10,580				(3,018	)			(22.2	)
Total revenue		$	90,492			$	176,001			$	85,509				94.5	%		$	212,773			$	299,341			$	86,568				40.7	%