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 1-02199

ALLIS-CHALMERS ENERGY INC.

(Exact name of registrant as specified in its charter)

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

(713) 369-0550
Registrant’s telephone number, including area code

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At November 1, 2010 there were 73,426,715 shares of common stock, par value $0.01 per share, outstanding.

 

 

ALLIS-CHALMERS ENERGY INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2010

TABLE OF CONTENTS

		PAGE
PART I   FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2010 and December 31, 2009			3
Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2010 and 2009			4
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2010 and 2009			5
Notes to Unaudited Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			40
Item 4. Controls and Procedures			40
PART II OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6. Exhibits			44
Signatures			44
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIS-CHALMERS ENERGY INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except for share and per share amounts)

		September 30,				December 31,
		2010				2009
		(unaudited)
Assets
Cash and cash equivalents		$	15,322			$	41,072
Trade receivables, net			140,123				105,059
Inventories			38,993				34,528
Deferred income tax asset			2,649				3,790
Prepaid expenses and other			8,628				13,799
Total current assets			205,715				198,248
Property and equipment, net			732,857				746,478
Goodwill			46,173				40,639
Other intangible assets, net			35,138				32,649
Debt issuance costs, net			8,073				9,545
Deferred income tax asset			34,736				22,047
Other assets			40,445				31,014
Total assets		$	1,103,137			$	1,080,620
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	23,624			$	17,027
Trade accounts payable			43,361				34,839
Accrued salaries, benefits and payroll taxes			25,319				22,854
Accrued interest			6,917				15,821
Accrued expenses			27,674				21,918
Total current liabilities			126,895				112,459
Long-term debt, net of current maturities			497,100				475,206
Deferred income tax liability			8,087				8,166
Other long-term liabilities			452				1,142
Total liabilities			632,534				596,973
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value (25,000,000 shares authorized; 36,393 shares issued and outstanding at September 30, 2010 and at December 31, 2009)			34,183				34,183
Common stock, $0.01 par value (200,000,000 shares authorized;
73,430,682 shares issued and outstanding at September 30, 2010 and 71,378,529 shares issued and outstanding at December 31, 2009)			734				714
Capital in excess of par value			429,146				422,823
Retained earnings			6,540				25,927
Total stockholders’ equity			470,603				483,647
Total liabilities and stockholders’ equity		$	1,103,137			$	1,080,620

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

ALLIS-CHALMERS ENERGY INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	174,288			$	120,016			$	473,302			$	377,624
Operating costs and expenses
Direct costs			127,622				90,763				356,060				281,136
Depreciation			21,094				19,709				61,799				58,261
Selling, general and administrative			12,772				11,430				36,949				40,595
Loss on asset disposition			—				—				—				1,916
Amortization			1,255				1,184				3,567				3,558
Total operating costs and expenses			162,743				123,086				458,375				385,466
Income (loss) from operations			11,545				(3,070	)			14,927				(7,842	)
Other income (expense)
Interest expense			(11,881	)			(10,764	)			(33,986	)			(37,492	)
Interest income			45				39				499				53
Gain on debt extinguishment			—				—				—				26,365
Other			(661	)			37				(2,479	)			(231	)
Total other income (expense)			(12,497	)			(10,688	)			(35,966	)			(11,305	)
Loss before income taxes			(952	)			(13,758	)			(21,039	)			(19,147	)
Provision for income taxes			(1,614	)			4,108				3,563				6,802
Net loss			(2,566	)			(9,650	)			(17,476	)			(12,345	)
Preferred stock dividend			(637	)			(630	)			(1,911	)			(665	)
Net loss attributed to common stockholders		$	(3,203	)		$	(10,280	)		$	(19,387	)		$	(13,010	)
Net loss per common share:
Basic		$	(0.04	)		$	(0.14	)		$	(0.27	)		$	(0.27	)
Diluted		$	(0.04	)		$	(0.14	)		$	(0.27	)		$	(0.27	)
Weighted average shares outstanding:
Basic			72,207				70,945				71,506				47,834
Diluted			72,207				70,945				71,506				47,834

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

ALLIS-CHALMERS ENERGY INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		For the Nine Months Ended
		September 30,
		2010				2009
Cash Flows from Operating Activities:
Net loss		$	(17,476	)		$	(12,345	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			65,366				61,819
Amortization and write-off of debt issuance costs			1,661				1,691
Stock-based compensation			4,374				3,580
Allowance for bad debts			43				4,065
Deferred income taxes			(12,016	)			(11,094	)
Loss on investment			1,466				—
Equity in loss of unconsolidated affiliates			409				—
Loss (gain) on sale of property and equipment			150				(1,180	)
Loss on asset disposition			—				1,916
Gain on debt extinguishment			—				(26,365	)
Changes in operating assets and liabilities, net of acquisition:
Decrease (increase) in trade receivable			(30,361	)			59,471
Decrease (increase) in inventories			(2,697	)			3,890
Decrease in prepaid expenses and other current assets			8,024				3,290
Decrease in other assets			1,265				1,535
Increase (decrease) in trade accounts payable			8,380				(29,035	)
(Decrease) in accrued interest			(8,904	)			(12,479	)
Increase (decrease) in accrued expenses			5,488				(11,632	)
Increase in accrued salaries, benefits and payroll taxes			2,401				1,228
(Decrease) in other long-term liabilities			(690	)			(836	)
Net Cash Provided By Operating Activities			26,883				37,519
Cash Flows from Investing Activities:
Deposits on asset commitments			(12,967	)			7,054
Business acquisition, net of cash acquired			(18,237	)			—
Purchase of investment interests			368				(1,102	)
Proceeds from sale of property and equipment			5,284				7,980
Proceeds from assets dispositions			—				3,916
Purchase of property and equipment			(50,893	)			(67,266	)
Net Cash Used In Investing Activities			(76,445	)			(49,418	)
Cash Flows from Financing Activities:
Proceeds from issuance of stock, net			—				120,337
Net proceeds from stock incentive plans			—				14
Proceeds from long-term debt			4,000				25,000
Net borrowings (repayments) under line of credit			36,500				(36,500	)
Payments on long-term debt			(14,588	)			(61,539	)
Payment of preferred stock dividend			(1,911	)			—
Debt issuance costs			(189	)			(644	)
Net Cash Provided By Financing Activities			23,812				46,668
Net change in cash and cash equivalents			(25,750	)			34,769
Cash and cash equivalents at beginning of period			41,072				6,866
Cash and cash equivalents at end of period		$	15,322			$	41,635

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

ALLIS-CHALMERS ENERGY INC.

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

Nature of Operations

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

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

Pending Merger

On August 12, 2010, we entered into a merger agreement with Seawell Limited, or Seawell, pursuant to which we will merge with and into a wholly owned subsidiary of Seawell. Completion of the merger is subject to customary closing conditions, including, but not limited to, (i) approval of the merger by our stockholders, (ii) applicable regulatory approvals, (iii) the effectiveness of a registration statement on Form F-4 relating to the Seawell common stock to be issued in the merger and, (iv) the listing of the Seawell common stock on the OSLO Stock Exchange.

Under terms of the merger, we agreed to conduct our business in the ordinary course while the merger is pending, and generally refrain, without the consent of Seawell, from entering into new lines of business, incurring new indebtedness, issuing new common stock or equity awards, or entering into new material contracts or commitments outside the normal course of business. We recorded approximately $0.6 million of costs related to the pending merger during the three months ended September 30, 2010, which are included in general and administrative expense in the General Corporate category of our segment presentation (see Note 13). If and when the merger is approved or completed, certain contractual obligations of ours will or may be triggered or accelerated under the “change of control” provisions of such contractual arrangements. Examples of such arrangements include stock-based compensation awards, severance and retention agreements applicable to executive officers, directors and certain other employees and certain debt obligations such as our senior notes.

Basis of Presentation

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

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

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

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

Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable and payable and debt. The carrying value of cash and cash equivalents and accounts receivable and payable approximate fair value due to their short-term nature. We believe the fair values and the carrying value of our debt, excluding the senior notes, would not be materially different due to the instruments’ interest rates approximating market rates for similar borrowings at September 30, 2010. Our senior notes, in the approximate aggregate amount of $430.2 million, trade “over the counter” in limited amounts and on an infrequent basis. Based on recent trades we estimate the fair value of our senior notes to be approximately $432.9 million at September 30, 2010. The price at which our senior notes trade is based on many factors such as the level of interest rates, the economic environment, the outlook for the oilfield services industry and the perceived credit risk.

Reclassification

Certain reclassifications have been made to the prior year’s consolidated condensed financial statements to conform with the current period presentation.

New Accounting Pronouncements

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

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

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

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

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

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

NOTE 2– ACQUISITION

On July 12, 2010, we acquired American Well Control, Inc., or AWC, for a total consideration of approximately $21.5 million, which included approximately $19.5 million in cash and 1.0 million shares of our common stock. AWC is a leading manufacturer of premium high-pressure valves used in hydraulic fracturing in the unconventional gas shale plays. The following table summarizes the preliminary allocation of the purchase price and related acquisition costs to the estimated fair value of the assets acquired at the date of acquisition (in thousands):

Current assets		$	7,745
Property and equipment			2,756
Intangible assets, including goodwill			11,589
Other long-term assets			2
Total assets acquired			22,092
Current liabilities			444
Long-term liabilities			181
Net assets acquired		$	21,467

AWC’s historical property and equipment values were increased by approximately $27,000 based on third-party valuations. Goodwill of $5.5 million was recognized for this acquisition and was calculated as the excess of the consideration transferred over the fair value of the net assets acquired. It includes the expected synergies and other benefits that we believe will result from the combined operations and intangible assets that do not qualify for separate recognition such as assembled workforce. Other intangible assets included approximately $5.6 million assigned to customer lists, $400,000 to trade name and $55,000 to non-competes. None of the intangibles are tax deductible. The amortizable intangibles have a weighted-average useful life of 9.9 years. We do not expect any material differences from the preliminary allocation of the purchase price. AWC’s financial results since the acquisition are included in our Rental Services segment.

NOTE 3 — STOCK-BASED COMPENSATION

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

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

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

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

NOTE 3 — STOCK-BASED COMPENSATION (Continued)

Our net loss for the three months ended September 30, 2010 and 2009 includes approximately $1.4 million and $1.2 million, respectively, of compensation costs related to share-based payments. Our net loss for the nine months ended September 30, 2010 and 2009 includes approximately $4.4 million and $3.6 million, respectively, of compensation costs related to share-based payments. As of September 30, 2010, there was $2.3 million of unrecognized compensation expense related to non-vested stock option grants. We expect approximately $134,000 to be recognized over the remainder of 2010 and approximately $535,000, $511,000, $506,000, $506,000 and $129,000 to be recognized during the years ended 2011 through 2015, respectively.

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

						Weighted				Weighted-
		Shares				Average				Average				Aggregate
		Under				Exercise				Contractual				Intrinsic Value
		Option				Price				Life (Years)				(millions)
Balance at December 31, 2009			701,732			$	6.31
Granted			1,072,253				3.78
Canceled			(21,967	)			8.30
Exercised			—
Outstanding at September 30, 2010			1,752,018			$	4.74				7.86			$	0.85
Exercisable at September 30, 2010			586,432			$	7.08				4.90			$	0.14

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

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

						Weighted-Average
						Grant-Date Fair
		Number of Shares				Value Per Share
Nonvested at December 31, 2009			837,626			$	15.63
Granted			2,061,750				3.78
Vested			(335,787	)			17.48
Forfeited			(3,333	)			3.77
Nonvested at September 30, 2010			2,560,256			$	5.86

We determine the fair value of RSAs based on the market price of our common stock on the date of grant. Compensation cost for RSAs is primarily recognized on a straight-line basis over the vesting or service period and is net of forfeitures. During the nine months ended September 30, 2010, we granted 1,237,750 performance-based RSAs to executive officers and key employees that vest upon meeting certain financial performance conditions over the next five years. In connection with performance-based RSAs, compensation cost is based on the estimated number of shares expected to be issued. As of September 30, 2010, there was $7.1 million of total unrecognized compensation cost related to nonvested RSAs. We expect approximately $1.1 million to be recognized over the remainder of 2010 and approximately $2.3 million, $1.3 million, $1.2 million, $1.1 million and $88,000 to be recognized during the years ended 2011 through 2015, respectively.

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

NOTE 4 — INVENTORIES

Inventories consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Manufactured
Finished goods		$	3,814			$	2,983
Work in process			2,099				2,299
Raw materials			2,355				884
Total manufactured			8,268				6,166
Rig parts and related inventory			11,991				10,654
Shop supplies and related inventory			8,621				7,762
Chemicals and drilling fluids			4,919				4,381
Rental supplies			1,908				2,134
Hammers			2,269				2,257
Coiled tubing and related inventory			847				939
Drive pipe			170				235
Total inventories		$	38,993			$	34,528

NOTE 5— GOODWILL AND INTANGIBLE ASSETS

Goodwill and other intangible assets with infinite lives are not amortized, but tested for impairment annually or more frequently if circumstances indicate that impairment may exist. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized. Goodwill and indefinite-lived intangible assets listed on the balance sheet totaled $46.2 million and $40.6 million at September 30, 2010 and December 31, 2009, respectively.

Definite-lived intangible assets that continue to be amortized relate to our purchase of customer-related and marketing-related intangibles, patents and non-compete agreements. These intangibles have useful lives ranging from three to 20 years. Amortization of intangible assets for the three and nine months ended September 30, 2010 were $1.3 million and $3.6 million, respectively, compared to $1.2 million and $3.6 million for the same periods in the prior year. At September 30, 2010, intangible assets totaled $35.1 million, net of $16.4 million of accumulated amortization.

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

NOTE 6 — DEBT

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

		September 30,				December 31,
		2010				2009
Senior notes		$	430,238			$	430,238
Revolving line of credit			36,500				—
Term loans			52,484				60,744
Insurance premium financing			1,486				997
Capital lease obligations			16				254
Total debt			520,724				492,233
Less: current maturities			23,624				17,027
Long-term debt, net of current maturities		$	497,100			$	475,206

Senior notes, line of credit agreements and term loans

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

In January 2007, we closed on a private offering, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, of $250.0 million principal amount of 8.5% senior notes due 2017. The proceeds of the senior notes offering, together with a portion of the proceeds of our concurrent common stock offering, were used to repay the debt outstanding under our $300.0 million bridge loan facility which we incurred to finance our acquisition of substantially all the assets of Oil & Gas Rental Services, Inc. On June 29, 2009, we closed on a tender offer in which we purchased $44.2 million aggregate principal amount of our 8.5% senior notes for a total consideration of $600 per $1,000 principal amount.

We have a $90.0 million revolving line of credit with a final maturity date of April 26, 2012 pursuant to a revolving credit agreement that contains customary events of default and financial covenants and limits our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. On April 9, 2009, we amended our revolving credit agreement to modify the leverage and interest coverage ratio covenants. Effective December 31, 2009, we again amended the leverage and interest coverage ratio covenants of the revolving credit agreement. This amendment relaxed the required financial ratios for the quarter ended December 31, 2009 and for each of the quarters in 2010. Our obligations under the amended and restated credit agreement are secured by substantially all of our assets located in the U.S. We were in compliance with all debt covenants as of September 30, 2010 and December 31, 2009. As of September 30, 2010, we had $36.5 million of borrowings outstanding and $4.0 million in outstanding letters of credit under our revolving credit facility. As of December 31, 2009, the only usage of our revolving credit facility consisted of $4.2 million in outstanding letters of credit. The interest rate under our revolving credit facility is based on prime or LIBOR plus a margin. The weighted-average interest rate was 7.9% at September 30, 2010.

As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from two to five years. The weighted-average interest rate on these loans was 2.0% and 2.1% as of September 30, 2010 and December 31, 2009, respectively. The outstanding amount due under these bank loans as of September 30, 2010 and December 31, 2009 was $350,000 and $1.1 million, respectively.

On February 15, 2008, through our DLS subsidiary, we entered into a $25.0 million import finance facility with a bank. Borrowings under this facility were used to fund a portion of the purchase price of the new drilling and service rigs ordered for our Drilling and Completion segment. The loan is repayable over four years in equal semi-annual installments beginning one year after each disbursement with the final principal payment due not later than March 15, 2013. The import finance facility is unsecured and contains customary events of default and financial covenants and limits DLS’ ability to incur additional indebtedness, make capital expenditures, create liens and sell assets. We were in compliance with all debt covenants as of September 30, 2010 and December 31, 2009. The bank loan rates are based on LIBOR plus a margin. The weighted-average interest rate was 4.3% and 4.4% at September 30, 2010 and December 31, 2009, respectively. The outstanding amount under the import finance facility as of September 30, 2010 and December 31, 2009 was $15.5 million and $20.1 million, respectively.

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

NOTE 6 — DEBT (Continued)

As part of our acquisition of BCH Ltd, or BCH, we assumed a $23.6 million term loan credit facility with a bank. The BCH credit agreement is dated June 2007 and contains customary events of default and financial covenants which are based on BCH’s stand-alone financial statements. Obligations under the facility are secured by substantially all of the BCH assets. BCH was in compliance with all debt covenants as of December 31, 2009. The bank has waived certain financial ratio covenants for the September 30, 2010 and December 31, 2010 measurement periods. As we cannot be certain that BCH would attain compliance with the covenants within one year, we have classified the entire outstanding balance of the loan in the current portion of long-term debt. The facility is repayable in quarterly principal installments plus interest with the final payment due not later than August 2012. The interest rates under the credit facility are based on LIBOR plus a margin. At September 30, 2010 and December 31, 2009, the outstanding amount of the loan under the credit facility was $11.8 million and $16.2 million, respectively, and the interest rate was 3.5% at both dates.

On May 22, 2009, we drew down $25.0 million on a term loan credit facility with a lending institution. The facility was utilized to fund a portion of the purchase price of two new drilling rigs. The loan is secured by the equipment. The facility is repayable in quarterly installments of approximately $1.4 million of principal and interest and matures in May 2015. The loan bears interest at a fixed rate of 9.0%. At September 30, 2010 and December 31, 2009, the outstanding amount of the loan was $20.8 million and $23.4 million, respectively.

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

Notes payable

In 2010, we obtained insurance premium financings in the aggregate amount of $2.6 million with a fixed weighted-average interest rate of 4.8%. Under terms of the agreements, amounts outstanding are paid over eight and 11 month repayment schedules. The outstanding balance of these notes was approximately $1.5 million at September 30, 2010. In 2009, we obtained insurance premium financings in the aggregate amount of $3.2 million with a fixed weighted-average interest rate of 4.8%. Under terms of these agreements, amounts outstanding are paid over 10 and 11 month repayment schedules. The outstanding balance of these notes was approximately $0 and $997,000 at September 30, 2010 and December 31, 2009, respectively.

Other debt

As part of our acquisition of BCH, we assumed various capital leases with terms of two to three years. The outstanding balance under these capital leases was $16,000 and $254,000 at September 30, 2010 and December 31, 2009, respectively.

NOTE 7 — STOCKHOLDERS’ EQUITY

We issued 1.0 million shares of our common stock in connection with the acquisition of AWC in July of 2010 (see Note 2).

During the nine months ended September 30, 2010, we had restricted stock award grants and vested performance-based restricted stock which resulted in the issuance of approximately 1.1 million shares of our common stock. We recognized approximately $4.4 million of compensation expense related to share-based payments in the first nine months of 2010 that was recorded as capital in excess of par value (see Note 3). During the nine months ended September 30, 2010, we declared approximately $1.9 million in dividends on our preferred stock. Accrued dividends of approximately $637,000 were included in our accrued expenses of $27.7 million as of September 30, 2010 and our accrued expenses of $21.9 million as of December 31, 2009. The accrued dividends were paid in October 2010 and February 2010, respectively.

NOTE 8 — LOSS ON ASSET DISPOSITION

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

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

NOTE 9 — GAIN ON DEBT EXTINGUISHMENT

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

NOTE 10 — INCOME (LOSS) PER COMMON SHARE

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

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Numerator:
Net loss		$	(2,566	)		$	(9,650	)		$	(17,476	)		$	(12,345	)
Preferred stock dividend			(637	)			(630	)			(1,911	)			(665	)
Net loss attributed to common stockholders		$	(3,203	)		$	(10,280	)		$	(19,387	)		$	(13,010	)
Denominator:
Weighted-average common shares outstanding excluding nonvested restricted stock			72,207				70,945				71,506				47,834
Effect of potentially dilutive common shares:
Convertible preferred stock and stock-based compensation			—				—				—				—
Weighted-average common shares outstanding and assumed conversions			72,207				70,945				71,506				47,834
Net loss per common share
Basic		$	(0.04	)		$	(0.14	)		$	(0.27	)		$	(0.27	)
Diluted		$	(0.04	)		$	(0.14	)		$	(0.27	)		$	(0.27	)
Potentially dilutive securities excluded as anti-dilutive			17,126				15,016				15,946				15,557

Convertible preferred stock and share-based compensation shares of approximately 14.7 million and 14.5 million were excluded in the computation of diluted earnings per share for the three months ended September 30, 2010 and 2009, respectively as the effect would have been anti-dilutive (e.g., those that increase income per share) due to the net loss for the period. Convertible preferred stock and share-based compensation shares of approximately 15.0 million and 5.1 million were excluded in the computation of diluted earnings per share for the nine months ended September 30, 2010 and 2009, respectively, as the effect would have been anti-dilutive.

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

NOTE 11 — SUPPLEMENTAL CASH FLOW INFORMATION (in thousands)

		For the Nine Months Ended
		September 30,
		2010				2009
Cash paid for interest and income taxes:
Interest		$	41,507			$	48,631
Income taxes			667				3,963
Non-cash investing and financing transactions in connection with an acquisition:
Goodwill		$	(2,000	)		$	—
Value of common stock, issued			2,000				—
Other non-cash investing and financing activities:
Insurance premium financed		$	2,579			$	3,204
Receivable from sale of investment			274				—
Assets transferred to joint venture investment			—				1,639
Preferred stock dividend			1,911				665

NOTE 12 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

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

NOTE 12 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2010 (unaudited)

		Allis-
		Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Assets
Cash and cash equivalents		$	—			$	7,780			$	7,542			$	—			$	15,322
Trade receivables, net			—				77,263				73,454				(10,594	)			140,123
Inventories			—				18,906				20,087				—				38,993
Intercompany receivables			—				106,193				—				(106,193	)			—
Note receivable from affiliate			23,551				—				—				(23,551	)			—
Prepaid expenses and other			22				5,832				5,423				—				11,277
Total current assets			23,573				215,974				106,506				(140,338	)			205,715
Property and equipment, net			—				469,640				263,217				—				732,857
Goodwill			—				28,784				17,389				—				46,173
Other intangible assets, net			425				28,320				6,393				—				35,138
Debt issuance costs, net			7,954				119				—				—				8,073
Note receivable from affiliates			2,100				—				—				(2,100	)			—
Investments in affiliates			981,488				—				—				(981,488	)			—
Other assets			32,767				39,099				3,315				—				75,181
Total assets		$	1,048,307			$	781,936			$	396,820			$	(1,123,926	)		$	1,103,137
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	—			$	5,172			$	18,452			$	—			$	23,624
Trade accounts payable			—				17,033				36,922				(10,594	)			43,361
Accrued salaries, benefits and payroll taxes			—				1,976				23,343				—				25,319
Accrued interest			6,356				203				358				—				6,917
Accrued expenses			1,041				15,275				11,358				—				27,674
Intercompany payables			103,569				—				2,624				(106,193	)			—
Note payable to affiliate			—				—				23,551				(23,551	)			—
Total current liabilities			110,966				39,659				116,608				(140,338	)			126,895
Long-term debt, net of current maturities			466,738				17,146				13,216				—				497,100
Note payable to affiliate			—				—				2,100				(2,100	)			—
Other long-term liabilities			—				—				8,539				—				8,539
Total liabilities			577,704				56,805				140,463				(142,438	)			632,534
Commitments and contingencies
Stockholders’ Equity
Preferred Stock			34,183				—				—				—				34,183
Common stock			734				3,527				42,963				(46,490	)			734
Capital in excess of par value			429,146				591,978				137,439				(729,417	)			429,146
Retained earnings			6,540				129,626				75,955				(205,581	)			6,540
Total stockholders’ equity			470,603				725,131				256,357				(981,488	)			470,603
Total liabilities and stockholders’ equity		$	1,048,307			$	781,936			$	396,820			$	(1,123,926	)		$	1,103,137

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

NOTE 12 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2010 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Revenues		$	—			$	78,034			$	96,325			$	(71	)		$	174,288
Operating costs and expenses
Direct costs			—				47,152				80,541				(71	)			127,622
Selling, general and administrative			1,176				7,677				3,919				—				12,772
Depreciation and amortization			12				15,547				6,790				—				22,349
Total operating costs and expenses			1,188				70,376				91,250				(71	)			162,743
Income (loss) from operations			(1,188	)			7,658				5,075				—				11,545
Other income (expense):
Equity earnings in affiliates, net of tax			9,376				—				—				(9,376	)			—
Interest, net			(10,769	)			(505	)			(562	)			—				(11,836	)
Other			15				(166	)			(510	)			—				(661	)
Total other expense			(1,378	)			(671	)			(1,072	)			(9,376	)			(12,497	)
Net income (loss) before income taxes			(2,566	)			6,987				4,003				(9,376	)			(952	)
Provision for income taxes			—				811				(2,425	)			—				(1,614	)
Net income (loss)			(2,566	)			7,798				1,578				(9,376	)			(2,566	)
Preferred stock dividend			(637	)			—				—				—				(637	)
Net income (loss) attributed to common stockholders		$	(3,203	)		$	7,798			$	1,578			$	(9,376	)		$	(3,203	)

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

NOTE 12 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2010 (unaudited)

		Allis-Chalmers								Subsidiary
		(Parent/				Subsidiary				Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors				Adjustments				Total
Revenues		$	—			$	192,676			$	282,025			$	(1,399	)		$	473,302
Operating costs and expenses
Direct costs			—				124,528				232,931				(1,399	)			356,060
Selling, general and administrative			3,708				22,033				11,208				—				36,949
Depreciation and amortization			35				45,779				19,552				—				65,366
Total operating costs and expenses			3,743				192,340				263,691				(1,399	)			458,375
Income (loss) from operations			(3,743	)			336				18,334				—				14,927
Other income (expense):
Equity earnings in affiliates, net of tax			17,643				—				—				(17,643	)			—
Interest, net			(31,421	)			(291	)			(1,775	)			—				(33,487	)
Other			45				(1,944	)			(580	)			—				(2,479	)
Total other expense			(13,733	)			(2,235	)			(2,355	)			(17,643	)			(35,966	)
Net income (loss) before income taxes			(17,476	)			(1,899	)			15,979				(17,643	)			(21,039	)
Provision for income taxes			—				11,323				(7,760	)			—				3,563
Net income (loss)			(17,476	)			9,424				8,219				(17,643	)			(17,476	)
Preferred stock dividend			(1,911	)			—				—				—				(1,911	)
Net income (loss) attributed to common stockholders		$	(19,387	)		$	9,424			$	8,219			$	(17,643	)		$	(19,387	)

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

NOTE 12 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

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

		Allis-								Other
		Chalmers								Subsidiaries
		(Parent/				Subsidiary				(Non-				Consolidating				Consolidated
		Guarantor)				Guarantors				Guarantors)				Adjustments				Total
Cash Flows from Operating Activities:
Net income (loss)		$	(17,476	)		$	9,424			$	8,219			$	(17,643	)		$	(17,476	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			35				45,779				19,552				—				65,366
Amortization and write-off of debt issuance costs			1,643				18				—				—				1,661
Stock-based compensation			4,374				—				—				—				4,374
Allowance for bad debts			—				43				—				—				43
Equity earnings in affiliates			(17,643	)			—				—				17,643				—
Deferred taxes			(11,847	)			(332	)			163				—				(12,016	)
Loss on sale of equipment			—				74				76				—				150
Loss on investment			—				1,466				—				—				1,466
Equity in losses of unconsolidated affiliates			—				409				—				—				409
Changes in operating assets and liabilities, net of acquisitions:
(Increase) in trade receivables			—				(15,869	)			(14,492	)			—				(30,361	)
(Increase) in inventories			—				(867	)			(1,830	)			—				(2,697	)
Decrease in prepaid expenses and other current assets			129				3,791				4,104				—				8,024
Decrease in other assets			—				549				716				—				1,265
(Decrease) increase in trade accounts payable			—				(4,637	)			13,017				—				8,380
(Decrease) increase in accrued interest			(9,016	)			(25	)			137				—				(8,904	)
Increase in accrued expenses			258				3,430				1,800				—				5,488
(Decrease) increase in accrued salaries, benefits and payroll taxes			—				(850	)			3,251				—				2,401
(Decrease) in other long-term liabilities			—				—				(690	)			—				(690	)
Net Cash Provided By (Used In) Operating Activities			(49,543	)			42,403				34,023				—				26,883
Cash Flows from Investing Activities:
Investment in affiliates			(19,467	)			—				—				19,467				—
Notes receivable from affiliates			8,328				—				—				(8,328	)			—
Deposits on asset commitments			—				(12,694	)			(273	)			—				(12,967	)
Proceeds from sale of investments			—				368				—				—				368
Proceeds from sale of property and equipment			—				4,911				373				—				5,284
Business acquisitions			—				(18,237	)			—				—				(18,237	)
Purchase of property and equipment			—				(30,158	)			(20,735	)			—				(50,893	)
Net Cash Used in Investing Activities			(11,139	)			(55,810	)			(20,635	)			11,139				(76,445	)