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		27-3321250
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10613 W Sam Houston Parkway, Suite 600, HOUSTON, TEXAS		77064
(Address of principal executive offices)		(Zip Code)

(713) 856-4222

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 þ No o

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 18, 2011, the 1,000 issued and outstanding shares of Allis-Chalmers Energy Inc. were held by Archer Limited.

     Allis-Chalmers Energy Inc. meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

 

 

ALLIS-CHALMERS ENERGY INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

TABLE OF CONTENTS

PART I
ITEM
1. Financial Statements		3
Consolidated Condensed Balance Sheets as of September 30, 2011 (Successor Company) and December 31, 2010 (Predecessor Company)		3
Consolidated Condensed Statements of Operations for the three and seven months ended September 30, 2011 (Successor Company), two months ended February 28, 2011, three and nine months ended September 30, 2010 (Predecessor Company)		4
Consolidated Condensed Statement of Stockholders’ Equity as of September 30, 2011 (Successor Company), February 28, 2011 and December 31, 2010 (Predecessor Company)		5
Consolidated Condensed Statements of Cash Flows for the seven months ended September 30, 2011 (Successor Company), two months ended February 28, 2011 and nine months ended September 30, 2010 (Predecessor Company)		6
Notes to Unaudited Consolidated Condensed Financial Statements		7
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
4. Controls and Procedures		40
PART II
1. Legal Proceedings		41
6. Exhibits		41
Signatures		41
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIS-CHALMERS ENERGY INC.

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

		Successor					Predecessor
		September 30,					December 31,
		2011					2010
		(Unaudited)
Assets
Cash and cash equivalents		$	10,191				$	20,940
Trade receivables, net			173,742					144,960
Inventories			56,357					42,140
Prepaid expenses and other			15,019					9,273
Total current assets			255,309					217,313
Property and equipment, net			670,785					723,234
Goodwill			267,428					46,333
Other intangible assets, net			91,957					33,899
Debt issuance costs, net			—					7,405
Deferred income tax asset			—					1,969
Other assets			6,188					8,116
Total assets		$	1,291,667				$	1,038,269
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	6,915				$	15,215
Trade accounts payable			53,395					46,042
Accrued salaries, benefits and payroll taxes			32,879					32,790
Accrued interest			3,525					15,524
Accrued expenses			35,476					30,676
Total current liabilities			132,190					140,247
Deferred income tax liability			17,054					8,240
Long-term debt, net of current maturities			454,693					478,225
Payable to parent			91,322					—
Other long-term liabilities			3					233
Total liabilities			695,262					626,945
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value (0 shares authorized, 0 issued and outstanding at September 30, 2011 and 25,000,000 shares authorized, 36,393 issued and outstanding at December 31, 2010)			—					34,183
Common stock, $0.01 par value (1,000 shares authorized, 1,000 issued and outstanding at September 30, 2011 and 200,000,000 authorized, 73,722,347 issued and outstanding at December 31, 2010)			—					737
Capital in excess of par value			600,885					429,924
Accumulated deficit			(4,480	)				(53,520	)
Total stockholders’ equity			596,405					411,324
Total liabilities and stockholders’ equity		$	1,291,667				$	1,038,269

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

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)

		Successor									Predecessor
		Three Months				Seven Months					Two Months				Three Months				Nine Months
		Ended				Ended					Ended				Ended				Ended
		September 30,				September 30,					February 28,				September 30,				September 30,
		2011				2011					2011				2010				2010
Revenues		$	222,408			$	513,272				$	126,885			$	174,288			$	473,302
Operating costs and expenses:
Direct costs			164,729				378,493					97,130				127,622				356,060
Depreciation			24,785				55,131					15,026				21,094				61,799
Selling, general and administrative			18,600				38,777					23,752				12,772				36,949
Impairment of intangible assets			—				5,100					—				—				—
Amortization			2,933				8,743					811				1,255				3,567
Total operating costs and expenses			211,047				486,244					136,719				162,743				458,375
Income (loss) from operations			11,361				27,028					(9,834	)			11,545				14,927
Other income (expense):
Interest expense			(9,327	)			(23,140	)				(7,854	)			(11,881	)			(33,986	)
Interest income			9				20					5				45				499
Other			(431	)			(452	)				122				(661	)			(2,479	)
Total other expense			(9,749	)			(23,572	)				(7,727	)			(12,497	)			(35,966	)
Income (loss) before income taxes			1,612				3,456					(17,561	)			(952	)			(21,039	)
Income tax benefit (expense)			(3,400	)			(7,936	)				(1,736	)			(1,614	)			3,563
Net loss			(1,788	)			(4,480	)				(19,297	)			(2,566	)			(17,476	)
Preferred stock dividend			—				—					(375	)			(637	)			(1,911	)
Net loss attributed to common stockholders		$	(1,788	)		$	(4,480	)			$	(19,672	)		$	(3,203	)		$	(19,387	)

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

ALLIS-CHALMERS ENERGY INC.

(In thousands, except share amounts)

(Unaudited)

																		Capital in				Retained				Total
		Preferred Stock								Common Stock								Excess of				Earnings				Stockholders’
		Shares				Amount				Shares				Amount				Par Value				(Deficit)				Equity
Predecessor
Balances, December 31, 2010			36,393			$	34,183				73,722,347			$	737			$	429,924			$	(53,520	)		$	411,324
Net loss			—				—				—				—				—				(19,297	)			(19,297	)
Preferred stock dividend			—				—				—				—				—				(375	)			(375	)
Issuance of common stock:
Issuance under stock plans, net of tax			—				—				650,727				7				(1,828	)			—				(1,821	)
Stock-based compensation			—				—				—				—				6,084				—				6,084
Balances, February 28, 2011			36,393			$	34,183				74,373,074			$	744			$	434,180			$	(73,192	)		$	395,915
Successor
Capitalization at Merger			—			$	—				1,000			$	—			$	600,885			$	—			$	600,885
Net loss			—				—				—				—				—				(4,480	)			(4,480	)
Balances, September 30, 2011			—			$	—				1,000			$	—			$	600,885			$	(4,480	)		$	596,405

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

ALLIS-CHALMERS ENERGY INC.

(In thousands)

(Unaudited)

		Successor					Predecessor
		Seven Months					Two Months				Nine Months
		Ended					Ended				Ended
		September 30,					February 28,				September 30,
		2011					2011				2010
Cash Flows from Operating Activities:
Net loss		$	(4,480	)			$	(19,297	)		$	(17,476	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			63,874					15,837				65,366
Amortization of deferred issuance costs			—					366				1,661
Debt premium amortization			(1,900	)				—				—
Stock-based compensation			—					6,084				4,374
Impairment of intangible assets			5,100					—				—
Allowance for bad debts			75					195				43
Deferred income taxes			229					140				(12,016	)
Loss on investment			—					—				1,466
Equity in loss (income) of unconsolidated affiliates			(258	)				—				409
Loss on debt extinguishment			351					—				—
Loss on sale of property and equipment			509					416				150
Changes in operating assets and liabilities, net of acquisitions:
Increase in trade receivable			(14,345	)				(15,944	)			(30,361	)
Increase in inventories			(12,407	)				(1,810	)			(2,697	)
Decrease (increase) in prepaid expenses and other assets			(6,443	)				550				8,024
Decrease (increase) in other assets			(756	)				674				1,265
(Decrease) increase in trade accounts payable			(5,601	)				12,954				8,380
Decrease in accrued interest			(8,106	)				(3,893	)			(8,904	)
(Decrease) increase in accrued expenses			(3,493	)				8,555				5,488
Decrease in other liabilities			(89	)				(141	)			(690	)
(Decrease) increase in accrued salaries, benefits and payroll taxes			1,768					(1,679	)			2,401
Net cash provided by operating activities			14,028					3,007				26,883
Cash Flows from Investing Activities:
Decrease (increase) in restricted cash			4,141					(4,141	)			—
Purchases of investment interests			—					(1,177	)			—
Business acquisition, net of cash acquired			—					—				(18,237	)
Proceeds from sale of investments			—					—				368
Purchases of property and equipment			(48,125	)				(22,758	)			(50,893	)
Deposits on asset commitments			(225	)				82				(12,967	)
Proceeds from sale of property and equipment			4,106					1,009				5,284
Net cash used in investing activities			(40,103	)				(26,985	)			(76,445	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt			64					—				4,000
Payments on long-term debt			(135,305	)				(7,819	)			(14,588	)
Net borrowings (repayments) on lines of credit			130,000					(36,500	)			36,500
Proceeds from parent			19,872					71,450
Payment of preferred stock dividend			—					(637	)			(1,911	)
Exercise of options and restricted stock awards, net of tax			—					(1,821	)			—
Debt issuance costs			—					—				(189	)
Net cash provided by financing activities			14,631					24,673				23,812
Net increase (decrease) in cash and cash equivalents			(11,444	)				695				(25,750	)
Cash and cash equivalents at beginning of period			21,635					20,940				41,072
Cash and cash equivalents at end of period		$	10,191				$	21,635			$	15,322
Supplemental information:
Interest paid (net of capitalized interest)		$	28,263				$	10,991			$	40,680
Income taxes paid (refunds)		$	10,529				$	(580	)		$	667

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

ALLIS-CHALMERS ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

Nature of Operations

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

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

Basis of Presentation

On February 23, 2011, Allis-Chalmers Energy Inc., a Delaware corporation, completed its merger (the “Merger”) with and into Wellco Sub Company (“Wellco”), a Delaware corporation and wholly owned subsidiary of Seawell Limited (“Seawell”), with Wellco continuing as the surviving entity under the name Allis-Chalmers Energy Inc. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of August 10, 2010, by and among Allis-Chalmers, Seawell and Wellco, as amended by the Amendment Agreement, dated as of October 10, 2010, by and among Allis-Chalmers, Seawell and Wellco (as so amended, the “Merger Agreement”). Following the Merger, Seawell began operating under the name Archer Limited (“Archer” or “Parent”). As of the Merger date, our assets and liabilities have been adjusted to their fair values (see Note 2) based on the purchase price resulting in changes to depreciation, amortization and interest in the successor period; therefore, the financial information for the period subsequent to the Merger is not fully comparable. The financial statements and accompanying footnotes have been separated with a black line to present pre-merger activity as the “Predecessor” company and post-merger activity as the “Successor” company. “Predecessor” refers to the operations of Allis-Chalmers prior to the consummation of the Merger and “Successor” refers to the operations of Allis-Chalmers subsequent to the Merger. The Merger date for accounting purposes has been designated as March 1, 2011.

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 statement of the interim periods. These unaudited consolidated condensed financial statements should be read in conjunction with our restated audited consolidated financial statements included in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on September 1, 2011 (the “Form 10-K/A”). The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

ALLIS-CHALMERS ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

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, 2011. Our senior notes, in the approximate aggregate amount of $318.3 million, trade “over the counter” in limited amounts and on an infrequent basis. In connection with the Merger, the recorded fair value of our senior notes was increased by $19.3 million based on the traded value at Merger date. 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.

Recent Accounting Pronouncements

We consider all newly issued but not yet adopted accounting pronouncements applicable to our operations and the preparation of our consolidated condensed financial statements. We do not believe that any issued accounting pronouncements not yet adopted by us will have a material impact on our consolidated condensed financial statements.

NOTE 2 — BUSINESS COMBINATIONS

Merger with Archer

Pursuant to the Merger, each outstanding share of common stock of Allis-Chalmers was converted into the right to receive either $4.25 cash or 1.15 fully paid and nonassessable Archer common shares. The fair value of total consideration was approximately $600.9 million with approximately 95% of Allis-Chalmers stockholders electing to receive 97.1 million Archer common shares in the Merger and the remainder receiving an aggregate of approximately $18 million in cash. The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the assets at Merger (in thousands):

Current assets		$	237,873
Property and equipment			682,406
Intangible assets, including goodwill			373,227
Other long-term assets			4,949
Total assets acquired			1,298,455
Current liabilities			148,360
Long-term liabilities			549,210
Merger net assets		$	600,885

Our historical property and equipment values were decreased by $47.1 million, our senior notes were increased by $19.3 million, other assets were decreased by $13.8 million and other long-term liabilities were increased by $8.6 million. The fair value assigned to the debt was based on actively traded prices and changes in other assets and liabilities were based on third-party valuations or other market based approaches. Goodwill of $267.4 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 $91.2 million assigned to customer lists, $6.7 million to trade name, $5.6 million to patents and $2.3 million to backlogs (see note 4). Goodwill is not tax deductible. The amortizable intangibles have a weighted-average useful life of 8.9 years. The allocation of the purchase price has been based upon preliminary fair values. Estimates and assumptions are subject to change upon management’s review of the final valuation.

ALLIS-CHALMERS ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 2 — BUSINESS COMBINATIONS (Continued)

Acquisition of AWC

On July 12, 2010, we acquired AWC Frac Valves Inc. (formerly known as American Well Control, Inc.), which we refer to herein as AWC, for a total consideration of approximately $19.2 million, which included approximately $17.2 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 allocation of the purchase price to the estimated fair value of the assets acquired at the date of acquisition (in thousands):

Current assets		$	7,585
Property and equipment			2,756
Intangible assets, including goodwill			11,749
Other long-term assets			2
Total assets acquired			22,092
Current liabilities			1,527
Long-term liabilities			1,401
Net assets acquired		$	19,164

AWC’s historical property and equipment values were increased by approximately $27,000 based on third-party valuations. Goodwill of $5.7 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. Goodwill is not tax deductible. The amortizable intangibles have a weighted-average useful life of 9.9 years.

NOTE 3 — STOCK-BASED COMPENSATION

Under the Merger Agreement, holders of our outstanding stock options, whether or not then exercisable or vested, had the option to elect to receive, at the effective time of the Merger, either cash or fully exercisable and vested stock options to purchase Archer common shares. In addition, all restrictions on time-lapse and performance-based restricted stock awards were deemed to have lapsed and each restricted share was deemed to be an unrestricted share of our common stock. Our Incentive Stock Plans were terminated in connection with the Merger. Our net loss for the two months ended February 28, 2011 includes approximately $6.1 million of compensation costs related to share-based payments with approximately $5.4 million of this amount relating to the acceleration of stock based compensation expense associated with the Merger.

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 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 (no options were granted during the three and nine months ended September 30, 2011 and the three months ended September 30, 2010):

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

ALLIS-CHALMERS ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 3 — STOCK-BASED COMPENSATION (Continued)

A summary of our stock option activity and related information is as follows:

						Weighted
		Shares				Average
		Under				Exercise
		Option				Price
Balance at December 31, 2010			1,751,018			$	4.74
Granted			—				—
Converted at Merger			(1,750,018	)			4.74
Exercised			(1,000	)			1.23
Outstanding at September 30, 2011			—				—

Restricted stock awards, or RSAs, activity during the nine months ended September 30, 2011 is as follows:

						Weighted
						Average Grant-
						Date Fair Value
		Number of Shares				Per Share
Nonvested at December 31, 2010			1,702,067			$	6.09
Granted			—				—
Vested			(1,702,067	)			6.09
Forfeited			—				—
Nonvested at September 30, 2011			—			$	—

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

Goodwill and other intangible assets with infinite lives are not amortized, but tested for impairment annually or more frequently if circumstances indicate that impairment may exist. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized. Goodwill was $267.4 million and $46.3 million at September 30, 2011 and December 31, 2010, respectively.

Definite-lived intangible assets that continue to be amortized relate to our purchase of customer-related and marketing-related intangibles patents and backlogs. These intangibles have useful lives ranging from four months to twenty years. Amortization of intangible assets for the three and seven months ended September 30, 2011 and two months ended February 28, 2011 was $2.9 million, $8.7 million and $811,000, respectively, compared to $1.3 million and $3.6 million for the three and nine months ended September 30, 2010, respectively. In connection with the Merger, a $5.1 million value was assigned to the Allis-Chalmers tradename. Following the Merger, Seawell and its subsidiaries, including us, have begun operating under the name Archer. As a result, it was determined that there was no material remaining value associated with the Allis-Chalmers tradename and the results for the seven months ended September 30, 2011 includes an intangible asset impairment charge of $5.1 million. At September 30, 2011, intangible assets totaled $92.0 million, net of $8.7 million of accumulated amortization. Future amortization of intangible assets at September 30, 2011 is approximately $2.9 million for the remainder of 2011 and an average of approximately $11.6 million during the years ended 2012 through 2015.

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

NOTE 5 — INVENTORIES

Inventories consisted of the following (in thousands):

		Successor					Predecessor
		September 30,					December 31,
		2011					2010
Manufactured
Finished goods		$	5,086				$	4,238
Work in process			4,358					2,990
Raw materials			5,667					3,600
Total manufactured			15,111					10,828
Rig parts and related inventory			16,391					11,565
Shop supplies and related inventory			12,030					9,620
Chemicals and drilling fluids			6,267					4,814
Rental supplies			1,427					1,761
Hammers			3,101					2,380
Coiled tubing and related inventory			1,921					1,046
Drive pipe			109					126
Total inventories		$	56,357				$	42,140

NOTE 6 — INCOME TAXES

In accordance with generally accepted accounting principles, we estimate the full-year effective tax rate from continuing operations and apply this rate to our year-to-date income from continuing operations. In addition, we separately calculate the tax impact of unusual items, if any. The consolidated effective tax rate for the two months ended February 28, 2011, three and seven months ended September 30, 2011 was (9.9)%, 210.9% and 229.6%, respectively, compared to (169.5)% and 16.9% for the three and nine months ended September 30, 2010. The fluctuations in the tax rates are principally the result of valuation allowances on losses generated in the United States and variances in withholding taxes from foreign operations as a percentage of pretax income (loss).

Income (loss) before income taxes which was subject to United States and non-United States income taxes was as follow (in thousands):

		Successor									Predecessor
		Three Months Ended				Seven Months Ended					Two Months Ended				Three Months Ended				Nine Months Ended
		September 30,				September 30,					February 28,				September 30,				September 30,
		2011				2011					2011				2010				2010
United States		$	(732	)		$	386				$	(17,544	)		$	(4,666	)		$	(36,059	)
Outside United States			2,344				3,070					(17	)			3,714				15,020
		$	1,612			$	3,456				$	(17,561	)		$	( 952	)		$	(21,039	)

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

NOTE 6 — INCOME TAXES (Continued)

The income tax provision consists of the following (in thousands):

		Successor									Predecessor
		Three Months Ended				Seven Months Ended					Two Months Ended				Three Months Ended				Nine Months Ended
		September 30,				September 30,					February 28,				September 30,				September 30,
		2011				2011					2011				2010				2010
Income tax expense (benefit):
United States		$	184			$	424				$	233			$	(810	)		$	(11,323	)
Outside United States			3,216				7,512					1,503				2,424				7,760
		$	3,400			$	7,936				$	1,736			$	1,614			$	(3,563	)
The following table reconciles the statutory tax rates to our actual tax rate:
		Successor									Predecessor
		Three Months Ended				Seven Months Ended					Two Months Ended				Three Months Ended				Nine Months Ended
		September 30,				September 30,					February 28,				September 30,				September 30,
		2011				2011					2011				2010				2010
United States statutory federal income tax rate			35.0	%			35.0	%				35.0	%			35.0	%			35.0	%
United States State income taxes, net of federal benefit			1.2				1.2					0.7				2.2				2.2
Non-United States income taxed at different rates			19.2				31.8					0.3				64.5				10.4
Valuation allowance, permanent differences and other			155.5				161.6					(45.9	)			(271.2	)			(30.7	)
Effective tax rate			210.9	%			229.6	%				(9.9	)%			(169.5	)%			16.9	%

NOTE 7 — DEBT

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

		Successor					Predecessor
		September 30,					December 31,
		2011					2010
Senior notes		$	318,331				$	430,238
Revolving line of credit			130,000					36,500
Bank term loans			13,216					25,723
Other debt			61					979
Total debt			461,608					493,440
Less: current maturities of long-term debt			6,915					15,215
Long-term debt		$	454,693				$	478,225

Senior notes, bank loans and line of credit agreements

In January 2006 and August 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, to repay existing debt and for general corporate purposes. In June 2009, we closed on a tender offer in which we purchased $30.6 million aggregate principal of our 9.0% senior notes for a total consideration of $650 per $1,000 principal amount. In connection with the Merger and based on actively traded prices of our senior notes, we increased the fair value of the 9.0% senior notes to $1,022 per $1,000 principal amount. In May 2011, pursuant to the terms of change of

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

NOTE 7 — DEBT (Continued)

control provisions in the indentures governing the senior notes and as a result of the Merger, holders had the right to require us to purchase, all or a portion of such holders’ Notes. Accordingly we purchased $1.8 million aggregate principal of our 9.0% senior notes for a total consideration of $1,010 per $1,000 principal amount. In July 2011, pursuant to the terms of the senior notes indenture, we redeemed $125.0 million aggregate principal of our 9.0% senior notes for a total consideration of $1,023 per $1,000 principal amount. In connection with this redemption we have drawn $130.0 million on our Parent’s $1.2 billion Multicurrency Term and Revolving Facility. The $1.2 billion facility is divided into tranches with $350.0 million having a final maturity date of December 31, 2011 and the remainder having a final maturity date of November 11, 2015. The interest rate is based on LIBOR plus a margin.

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 of our 8.5% senior notes for a total consideration of $600 per $1,000 principal amount. In connection with the Merger and based on actively traded prices of our senior notes, we increased the fair value of the 8.5% senior notes to $1,070 per $1,000 principal amount. In May 2011, pursuant to the terms of change of control provisions in the indentures governing the senior notes and as a result of the Merger, we purchased $92,000 aggregate principal of our 8.5% senior notes for a total consideration of $1,010 per $1,000 principal amount.

We had a $90.0 million revolving line of credit with a final maturity date of April 26, 2012 pursuant to a revolving credit agreement that contained customary events of default and financial covenants and limited our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens and sell assets. Effective December 31, 2009, we 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 United States. We were in compliance with all debt covenants as of December 31, 2010. As of December 31, 2010, we had $36.5 million of borrowings outstanding and $4.1 million in outstanding letters of credit under our revolving credit facility. The weighted-average interest rate was 7.8% at December 31, 2010. The revolving line of credit was repaid and terminated in connection with the Merger.

As part of our acquisition of DLS, we assumed various bank loans with floating interest rates based on LIBOR plus a margin and terms ranging from 2 to 5 years. The weighted average interest rate on these loans was 2.0% as of December 31, 2010. The outstanding amount due under these bank loans as of September 30, 2011 and December 31, 2010 was $0 and $350,000, respectively.

On February 15, 2008, through our DLS subsidiary in Argentina, 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 Services 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, 2011 and December 31, 2010. The bank loan rates are based on LIBOR plus a margin. The weighted average interest rate was 5.2% at September 30, 2011 and 4.2% at December 31, 2010. The outstanding amount under the import finance facility as of September 30, 2011 and December 31, 2010 was $9.8 million and $14.4 million, respectively.

As part of our acquisition of BCH, we assumed a $23.6 million term loan credit facility with a bank. The credit agreement was dated June 2007 and contained customary events of default and financial covenants which were based on BCH’s stand-alone financial statements. The facility was repayable in quarterly principal installments plus interest and was to mature in August 2012. Obligations under the facility were secured by substantially all of the BCH assets. The bank waived certain financial ratio covenants for the December 31, 2010 measurement period and we classified the entire outstanding balance of the loan in the current portion of long-term debt. The interest rates were based on LIBOR plus a margin and the interest rate was 3.5% at December 31, 2010. The outstanding amount of the loan as of December 31, 2010 was $7.0 million. The term loan credit facility was paid in full in connection with the Merger.

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

NOTE 7 — DEBT (Continued)

On February 9, 2010, through our DLS subsidiary, we entered into a $4.0 million term loan facility. The loan is repayable in semi-annual installments beginning April 14, 2011 and bears interest at 8.5% per annum. The final maturity date is April 14, 2014 and the loan is unsecured. The outstanding amount under the term loan facility as of September 30, 2011 and December 31, 2010 was $3.4 million and $4.0 million, respectively.

Other Debt

In 2010, we obtained insurance premium financings in the aggregate amount of $2.9 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 $0 and $1.0 million at September 30, 2011 and December 31, 2010, respectively. We also have amounts outstanding under a capital lease that will expire in 2013. As of September 30, 2011, the amount outstanding under the capital lease was $61,000.

NOTE 8 — STOCKHOLDERS’ EQUITY

During the two months ended February 28, 2011, we had option exercises and certain vesting in restricted stock grants which resulted in the issuance of 933,083 shares of our common stock. We retained 282,356 shares from employees in connection with the settlement of tax obligations arising from the vesting of restricted stock grants. We recognized approximately $6.1 million of compensation expense related to share-based payments during the two months ended February 28, 2011 that was recorded as capital in excess of par value (see Note 3).

Pursuant to the Merger, each share of our convertible preferred stock was converted to common stock and each outstanding share of common stock of Allis-Chalmers was converted into the right to receive either $4.25 cash or 1.15 fully paid and nonassessable Archer common shares. Holders of our outstanding stock options, whether or not then exercisable or vested, elected to receive, at the effective time of the Merger, either cash or fully exercisable and vested stock options to purchase Archer common shares. In addition, all restrictions on time-lapse and performance-based restricted stock awards were deemed to have lapsed and each restricted share was deemed to be an unrestricted share of our common stock. Subsequent to the Merger, we have 1,000 shares authorized all of which have been issued to Archer Limited at a par value of $0.01 per share.

NOTE 9 — 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 (iii) the subsidiaries that are not guarantors of the senior notes (in thousands):

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

NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2011 (Successor)
(Unaudited)

		Allis-Chalmers				Subsidiary				Subsidiary				Consolidating				Consolidated
		(Guarantor)				Guarantors				Non-Guarantors				Adjustments				Total
Assets
Cash and cash equivalents		$	—			$	6,810			$	3,381			$	—			$	10,191
Trade receivables, net			—				105,720				100,358				(32,336	)			173,742
Inventories			—				29,662				26,695				—				56,357
Intercompany receivables			—				105,122				—				(105,122	)			—
Note receivable from affiliate			18,862				—				—				(18,862	)			—
Prepaid expenses and other			12				5,306				9,701				—				15,019
Total current assets			18,874				252,620				140,135				(156,320	)			255,309
Property and equipment, net			—				396,804				273,981				—				670,785
Goodwill			—				179,697				87,731				—				267,428
Other intangible assets, net			—				55,948				36,009				—				91,957
Note receivable from affiliates			1,500				—				—				(1,500	)			—
Investments in affiliates			1,177,161				—				—				(1,177,161	)			—
Other assets			—				5,328				860				—				6,188
Total assets		$	1,197,535			$	890,397			$	538,716			$	(1,334,981	)		$	1,291,667
Liabilities and Stockholders’ Equity
Current maturities of long-term debt		$	—			$	—			$	6,915			$	—			$	6,915
Trade accounts payable			—				20,991				64,740				(32,336	)			53,395
Accrued salaries, benefits and payroll taxes			—				5,548				27,331				—				32,879
Accrued interest			3,296				—				229				—				3,525
Accrued expenses			265				15,720				19,491				—				35,476
Intercompany payables			57,916				—				47,206				(105,122	)			—
Note payable to affiliate			—				—				18,862				(18,862	)			—
Total current liabilities			61,477				42,259				184,774				(156,320	)			132,190
Long-term debt, net of current maturities			448,331				—				6,362				—				454,693
Note payable to affiliate			—				—				1,500				(1,500	)			—
Payable to parent			91,322				—				—				—				91,322
Other long-term liabilities			—				—				17,057				—				17,057
Total liabilities			601,130				42,259				209,693				(157,820	)			695,262
Commitments and Contingencies
Stockholders’ Equity
Common stock			—				3,527				42,963				(46,490	)			—
Capital in excess of par value			600,885				823,395				290,090				(1,113,485	)			600,885
Retained earnings (deficit)			(4,480	)			21,216				(4,030	)			(17,186	)			(4,480	)
Total stockholders’ equity			596,405				848,138				329,023				(1,177,161	)			596,405
Total liabilities and stockholders’ equity		$	1,197,535			$	890,397			$	538,716			$	(1,334,981	)		$	1,291,667

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

NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2011 (Successor)
(Unaudited)

		Allis-Chalmers				Subsidiary				Subsidiary				Consolidating				Consolidated
		(Guarantor)				Guarantors				Non-Guarantors				Adjustments				Total
Revenues		$	—			$	95,677			$	126,794			$	(63	)		$	222,408
Operating costs and expenses:
Direct costs			—				58,215				106,577				(63	)			164,729
Depreciation `			—				17,370				7,415				—				24,785
Selling, general and administrative			67				10,861				7,672				—				18,600
Amortization			—				1,591				1,342				—				2,933
Total operating costs and expenses			67				88,037				123,006				(63	)			211,047
Income (loss) from operations			(67	)			7,640				3,788				—				11,361
Other income (expense):
Equity earnings in affiliates, net of tax			6,995				—				—				(6,995	)			—
Interest, net			(8,379	)			(1	)			(938	)			—				(9,318	)
Other			(337	)			237				(331	)			—				(431	)
Total other income (expense)			(1,721	)			236				(1,269	)			(6,995	)			(9,749	)
Net income (loss) before income taxes			(1,788	)			7,876				2,519				(6,995	)			1,612
Provision for income taxes			—				(184	)			(3,216	)			—				(3,400	)
Net income (loss)		$	(1,788	)		$	7,692			$	(697	)		$	(6,995	)		$	(1,788	)

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

NOTE 9 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Seven Months Ended September 30, 2011 (Successor)
(Unaudited)

		Allis-Chalmers				Subsidiary				Subsidiary				Consolidating				Consolidated
		(Guarantor)				Guarantors				Non-Guarantors				Adjustments				Total
Revenues		$	—			$	226,559			$	287,065			$	(352	)		$	513,272
Operating costs and expenses:
Direct costs			—				137,094				241,751				(352	)			378,493
Depreciation `			—				38,167				16,964				—				55,131
Selling, general and administrative			167				21,858				16,752				—				38,777
Impairment of intangible assets			—				4,400				700				—				5,100
Amortization			—				3,714				5,029				—				8,743
Total operating costs and expenses			167				205,233				281,196				(352	)			486,244
Income (loss) from operations			(167	)			21,326				5,869				—				27,028
Other income (expense):
Equity earnings in affiliates, net of tax			17,186				—				—				(17,186	)			—
Interest, net			(21,180	)			(3	)			(1,937	)			—				(23,120	)
Other			(319	)			317				(450	)			—				(452	)
Total other income (expense)			(4,313	)			314				(2,387	)			(17,186	)			(23,572	)
Net income (loss) before income taxes			(4,480	)			21,640				3,482				(17,186	)			3,456
Provision for income taxes			—				(424	)			(7,512	)			—				(7,936	)
Net income (loss)		$	(4,480	)		$	21,216			$	(4,030	)		$	(17,186	)		$	(4,480	)