Seventy Seven Energy Inc. - FORM 10-Q

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EX-10.2 - EXHIBIT 10.2 - Seventy Seven Energy Inc.	ex_10220160331.htm
EX-32.2 - EXHIBIT 32.2 - Seventy Seven Energy Inc.	ex32220160331.htm
EX-12.1 - EXHIBIT 12.1 - Seventy Seven Energy Inc.	ex12120160331.htm
EX-32.1 - EXHIBIT 32.1 - Seventy Seven Energy Inc.	ex32120160331.htm
EX-10.4 - EXHIBIT 10.4 - Seventy Seven Energy Inc.	ex10420160331.htm
EX-31.2 - EXHIBIT 31.2 - Seventy Seven Energy Inc.	ex31220160331.htm
EX-10.1 - EXHIBIT 10.1 - Seventy Seven Energy Inc.	ex10120160331.htm
EX-31.1 - EXHIBIT 31.1 - Seventy Seven Energy Inc.	ex31120160331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016



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

FOR THE TRANSITION PERIOD FROM TO

Commission File No. 001-36354

Seventy Seven Energy Inc.

(Exact name of registrant as specified in its charter)



Oklahoma		45-3338422
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

777 N.W. 63rd Street Oklahoma City, Oklahoma		73116
(Address of principal executive offices)		(Zip Code)

(405) 608-7777

(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 ý No ¨

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

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

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

As of April 21, 2016, there were 58,928,042 shares of our $0.01 par value common stock outstanding.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION		1
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Changes in Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION		48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 5.	Other Information	51
Item 6.	Exhibits	53

SIGNATURES		54

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements

SEVENTY SEVEN ENERGY INC.

Condensed Consolidated Balance Sheets

(Unaudited)



	March 31, 2016			December 31, 2015
	(In thousands, except share amounts)
Assets:
Current Assets:
Cash and cash equivalents	$	74,671		$	130,648
Short-term investments	6,242			—
Accounts receivable, net of allowance of $4,160 and $3,680 at March 31, 2016 and December 31, 2015, respectively	127,714			164,721
Inventory	18,903			18,553
Deferred income tax asset	1,444			1,499
Prepaid expenses and other	14,224			17,141
Total Current Assets	243,198			332,562
Property and Equipment:
Property and equipment, at cost	2,691,060			2,646,446
Less: accumulated depreciation	(1,180,554		)	(1,116,026		)
Total Property and Equipment, Net	1,510,506			1,530,420
Other Assets:
Deferred financing costs	1,150			1,238
Other long-term assets	39,014			38,398
Total Other Assets	40,164			39,636
Total Assets	$	1,793,868		$	1,902,618
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	$	28,440		$	53,767
Current portion of long-term debt	5,000			5,000
Other current liabilities	76,831			98,318
Total Current Liabilities	110,271			157,085
Long-Term Liabilities:
Deferred income tax liabilities	52,502			60,623
Long-term debt, excluding current maturities	1,564,494			1,564,592
Other long-term liabilities	1,920			1,478
Total Long-Term Liabilities	1,618,916			1,626,693
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Common stock, $0.01 par value: authorized 250,000,000 shares; issued and outstanding 59,041,492 and 59,397,831 shares at March 31, 2016 and December 31, 2015, respectively	590			594
Paid-in capital	356,178			350,770
Accumulated deficit	(292,087		)	(232,524		)
Total Stockholders’ Equity	64,681			118,840
Total Liabilities and Stockholders’ Equity	$	1,793,868		$	1,902,618

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

SEVENTY SEVEN ENERGY INC.

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended March 31,
	2016			2015
	(In thousands, except per share data)
Revenues:
Revenues	$	155,361		$	429,787
Operating Expenses:
Operating costs	106,960			331,611
Depreciation and amortization	69,645			84,975
General and administrative	22,262			33,912
(Gains) losses on sales of property and equipment, net	(450		)	4,210
Impairments and other	305			6,272
Total Operating Expenses	198,722			460,980
Operating Loss	(43,361		)	(31,193		)
Other (Expense) Income:
Interest expense	(25,279		)	(23,516		)
Income from equity investee	—			972
Other income (expense)	1,003			(96		)
Total Other Expense	(24,276		)	(22,640		)
Loss Before Income Taxes	(67,637		)	(53,833		)
Income Tax Benefit	(8,074		)	(16,232		)
Net Loss	$	(59,563	)	$	(37,601	)

Loss Per Common Share (Note 3)
Basic	$	(1.09	)	$	(0.78	)
Diluted	$	(1.09	)	$	(0.78	)

Weighted Average Common Shares Outstanding (Note 3)
Basic	54,492			48,275
Diluted	54,492			48,275

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

SEVENTY SEVEN ENERGY INC.

Condensed Consolidated Statement of Changes in Equity

(Unaudited)



	Common Stock					Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount			Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
	(In thousands)
Balance at December 31, 2015	59,398		$	594		$	350,770	$	(232,524	)	$	118,840
Net loss	—		—			—		(59,563		)	(59,563		)
Share-based compensation	(357	)	(4		)	5,408		—			5,404
Balance at March 31, 2016	59,041		$	590		$	356,178	$	(292,087	)	$	64,681

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

SEVENTY SEVEN ENERGY INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended March 31,
	2016			2015
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS	$	(59,563	)	$	(37,601	)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization	69,645			84,975
Amortization of deferred financing costs	1,241			1,028
(Gains) losses on sales of property and equipment, net	(450		)	4,210
Impairments and other	305			6,272
Income from equity investee	—			(972		)
Provision for doubtful accounts	842			2,580
Non-cash compensation	6,112			18,355
Deferred income tax benefit	(8,066		)	(16,232		)
Other	(17		)	—
Changes in operating assets and liabilities	(6,174		)	(35,102		)
Net cash provided by operating activities	3,875			27,513
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment	(54,207		)	(40,607		)
Purchases of short-term investments	(6,242		)	—
Proceeds from sales of assets	2,158			1,988
Additions to investments	—			(88		)
Other	21			14
Net cash used in investing activities	(58,270		)	(38,693		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from revolving credit facility	—			109,300
Payments on revolving credit facility	—			(94,500		)
Payments on term loan	(1,250		)	—
Other	(332		)	(537		)
Net cash (used in) provided by financing activities	(1,582		)	14,263
Net (decrease) increase in cash	(55,977		)	3,083
Cash and cash equivalents, beginning of period	130,648			891
Cash and cash equivalents, end of period	$	74,671		$	3,974



SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
Decrease in other current liabilities related to purchases of property and equipment	$	(2,458	)	$	(8,405	)
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS:
Interest paid, net of amount capitalized	$	20,816		$	21,744

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

SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Risks and Uncertainties

Basis of Presentation

The accompanying condensed consolidated financial statements and related notes present the financial position of Seventy Seven Energy Inc. (“SSE,” “we,” “us,” “our” or “ours”) as of March 31, 2016 and December 31, 2015, results of operations for the three months ended March 31, 2016 and 2015, changes in equity for the three months ended March 31, 2016 and cash flows for the three months ended March 31, 2016 and 2015. These notes relate to the three months ended March 31, 2016 (the “Current Quarter”) and the three months ended March 31, 2015 (the “Prior Quarter”). All significant intercompany accounts and transactions within SSE have been eliminated.

Seventy Seven Finance Inc. (“SSF”) is a 100% owned finance subsidiary of SSE that was incorporated for the purpose of facilitating the offering of SSE’s 2019 Notes (see Note 5). SSF does not have any operations or revenues.

The accompanying condensed consolidated financial statements were prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. Certain footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been appropriately condensed or omitted. Therefore, these interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2015 contained in our Annual Report on Form 10-K (Commission File No. 001-36354) filed with the U.S. Securities and Exchange Commission (“SEC”) on February 17, 2016.

Risks and Uncertainties

We operate in a highly cyclical industry. The main factor influencing demand for oilfield services is the level of drilling and completions activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Demand for oil and natural gas is cyclical and is subject to large and rapid fluctuations. When oil and natural gas price increases occur, producers increase their capital expenditures, which generally results in greater revenues and profits for oilfield service companies. The increased capital expenditures also ultimately result in greater production, which historically has resulted in increased supplies and reduced prices that, in turn, tend to reduce demand for oilfield services. For these reasons, our results of operations may fluctuate from quarter-to-quarter and from year-to-year.

The sustained decline in commodity prices since mid-2014 has dramatically reduced the level of onshore United States drilling and completions activity and, consequently, the demand for our services. During the first quarter of 2016, NYMEX WTI oil spot prices had declined to their lowest levels since 2003 and NYMEX natural gas spot prices had fallen from multi-year highs reached in early-2014. The extent and length of the current down cycle continues to be uncertain and is dependent on a number of economic, geopolitical and monetary policy factors that are outside our control. Until there is a sustained recovery in commodity prices, we expect that reduced equipment utilization levels and pricing pressure across each of our operating segments will persist. If drilling and completions activity remains at depressed levels or worsens, it would likely have a material adverse impact on our business, financial condition, cash flows and results of operations.

Historically, we have provided a significant percentage of our oilfield services to Chesapeake Energy Corporation (“CHK”). For the Current Quarter and Prior Quarter, CHK accounted for approximately 64% and 74%, respectively, of our total revenues. As of March 31, 2016 and December 31, 2015, CHK accounted for approximately 59% and 65%, respectively, of our total accounts receivable. If CHK ceases to engage us on terms that are attractive to us during any future period, our business, financial condition, cash flows and results of operations would be materially adversely affected during such period.

On April 15, 2016, SSE and all of our wholly owned subsidiaries entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with (i) certain lenders (the “Consenting Incremental Term Loan Lenders”) representing approximately 92.0% of the outstanding principal amount under our Incremental Term Supplement (Tranche A) loan (the “Incremental Term Loan”), and (ii) certain noteholders (the “Consenting 2019 Noteholders”) collectively owning or controlling approximately 57.7% of the aggregate outstanding principal amount of the 6.625% senior unsecured notes due 2019 of Seventy Seven Operating LLC (“SSO”) and SSF, our wholly owned subsidiaries (the “2019 Notes”). The Consenting 2019 Noteholders and the Consenting Incremental Term Loan Lenders are referred to herein as the “Restructuring Support Parties.”

The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment to and obligations of us

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and the Restructuring Support Parties (and any successors or permitted assigns that become party thereto) in connection with a

restructuring of the 2019 Notes, our 6.50% senior unsecured notes due 2022 (the “2022 Notes”) and our common stock, par value $0.01 per share (the “Restructuring Transactions”), pursuant to a pre-packaged or pre-negotiated plan of reorganization (the “Plan”) to be filed under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). In addition, on April 22, 2016, the Company and all of its wholly owned subsidiaries entered into an amendment to the Restructuring Support Agreement with the Restructuring Support Parties to extend certain dates set forth in the original agreement, including extending the deadline to commence solicitation of votes for the Plan until April 29, 2016. We intend to commence the Chapter 11 cases upon concluding solicitation of votes on the Plan.

The Plan will be based on the restructuring term sheet attached to the Restructuring Support Agreement (the “Term Sheet”). The Term Sheet contemplates that we will continue our day-to-day operations substantially as currently conducted and that all of our commercial and operational contracts will remain in effect in accordance with their terms preserving the rights of all parties. The significant elements of the Plan include:

•payment in full in the ordinary course of all trade creditors and other general unsecured creditors;

•the exchange of the full $650.0 million of the 2019 Notes into either 96.75%, if the holders of the 2022 Notes

vote as a class to accept the Plan, or 98.67%, if the holders of the 2022 Notes vote as a class to not accept the

Plan, of our new common stock to be issued in the reorganization (“New Common Stock”);

•the exchange of the full $450.0 million of the 2022 Notes for either (i) 3.25% of the New Common Stock as well as

warrants exercisable for 15% of the New Common Stock at predetermined equity values (the “2022 Warrants”), if the holders of the 2022 Notes vote as a class to accept the Plan, or (ii) 1.33% of the New Common Stock, if the holders of the 2022 Notes vote as a class to not accept the Plan;

•the issuance, if all classes of claims entitled to vote accept the Plan, to our existing common stockholders of

two series of warrants exercisable for an aggregate of 20% of the New Common Stock at predetermined

equity values;

•the reinstatement of our $400 million existing secured term loan on identical terms; and

•the payment of a consent fee equal to 2% of the Incremental Term Loan plus $15 million of the outstanding

Incremental Term Loan balance, together with the reinstatement of the remaining $84 million balance of the Incremental Term Loan on identical terms other than the suspension of any prepayment premium for a period of 18 months.

The Plan is expected to effectuate, among other things, a substantial reduction in our bond obligations (including $1.1 billion in the aggregate of the face amount of the 2019 Notes and 2022 Notes).

The warrants that may be provided in exchange for the 2022 Notes and to the existing common stockholders will be exercisable at any time until their expiration date. The 2022 warrants will be exercisable for a per share price based upon a total equity value of $524 million and will expire 5 years from the effective date of the reorganization, subject to the earlier expiration upon the occurrence of certain extraordinary events. The two series of warrants that may be provided to existing common stockholders will be exercisable at share prices based on total equity values of $1.788 billion and $2.5 billion and will expire 5 years and 7 years, respectively, from the effective date, subject to earlier expiration upon the occurrence of certain extraordinary events.

Upon the consummation of the Plan, all unvested existing management equity-based compensation plans will be cancelled. The reorganized SSE expects to implement a management incentive plan pursuant to which certain officers and employees of the reorganized SSE will be eligible to receive, in the aggregate, cash and/or shares and/or options to acquire shares of New Common Stock up to 10% of our total outstanding New Common Stock at the discretion of our reorganized Board of Directors.

In accordance with the Restructuring Support Agreement, each of the Restructuring Support Parties agrees, among other things: (i) to support and use commercially reasonable efforts to complete the Restructuring Transactions and all transactions contemplated by the Restructuring Support Agreement in accordance with certain deadlines specified in the Restructuring Support Agreement; (ii) to vote all of its claims to accept the Plan and to not withdraw, amend or revoke (or cause to be withdrawn, amended or revoked) its tender, consent or vote with respect to the Plan; (iii) to not directly or indirectly object to, delay, impede or take any other action to interfere with the Restructuring Transactions, or propose, file, support or vote for any

restructuring, workout or Chapter 11 plan for us other than the Restructuring Transactions and the Plan; (iv) to not take certain

actions in furtherance of the declaration of a default or event of default with respect to its debt holdings; and (v) to not take any

other action that is materially inconsistent with its obligations under the Restructuring Support Agreement.

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In accordance with the Restructuring Support Agreement, we agree, subject to our officers’ managers’ and directors’ fiduciary duties, among other things: (i) to support, negotiate in good faith, and take all necessary and appropriate actions to complete the Restructuring Transactions set forth in the Plan; (ii) to take all commercially reasonable actions necessary to complete the Restructuring Transactions set forth in the Plan in accordance with certain milestones defined in the Restructuring Support Agreement; (iii) to make commercially reasonable efforts to obtain any and all required regulatory and/or third-party approvals necessary to consummate the Plan; and (iv) to not undertake any action materially inconsistent with the adoption and implementation of the Plan and the speedy confirmation thereof.

2. Change in Accounting Estimate

We review the estimated useful lives of our property and equipment on an ongoing basis. Based on this review in the first quarter of 2015, we concluded that the estimated useful lives of certain drilling rig components and certain drilling rigs were shorter than the estimated useful lives used for depreciation in our consolidated financial statements. We reflected this useful life change as a change in estimate, effective January 1, 2015, which increased depreciation expense by $12.0 million, increased net loss by $8.4 million and increased basic and diluted loss per share by $0.17 during the Prior Quarter.

3. Earnings Per Share

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide nonforfeitable dividend rights and are required to be included in the computation of our basic earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Diluted earnings per share is computed using the weighted average shares outstanding for basic earnings per share, plus the dilutive effect of stock options. The dilutive effect of unvested restricted stock and stock options is determined using the treasury stock method, which assumes the amount of unrecognized compensation expense related to unvested share-based compensation awards is used to repurchase shares at the average market price for the period.



	Three Months Ended March 31,
	2016			2015
	(In thousands, except per share data)
Basic loss per share:
Allocation of earnings:
Net loss	$	(59,563	)	$	(37,601	)

Weighted average common shares outstanding^(a)	54,492			48,275
Basic loss per share	$	(1.09	)	$	(0.78	)

Diluted loss per share:
Allocation of earnings:
Net loss	$	(59,563	)	$	(37,601	)

Weighted average common shares, including dilutive effect^(a)(b)	54,492			48,275
Diluted loss per share	$	(1.09	)	$	(0.78	)


(a)	No incremental shares of potentially dilutive restricted stock awards or units were included for periods presented as their effect was antidilutive under the treasury stock method.


(b)	The exercise price of stock options exceeded the average market price of our common stock during the Current Quarter and Prior Quarter. Therefore, the stock options were not dilutive.

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. Asset Sales and Impairments and Other

Asset Sales

During the Current Quarter and Prior Quarter, we sold ancillary equipment for $2.2 million and $3.4 million, respectively. We recorded net (gains) losses on sales of property and equipment of approximately ($0.5) million and $4.2 million related to these asset sales during the Current Quarter and Prior Quarter, respectively.

Impairments and Other

A summary of our impairments and other is as follows:



	Three Months Ended March 31,
	2016		2015
	(In thousands)
Drilling rigs held for use	$	305	$	3,290
Trucking and water disposal equipment	—		2,543
Other	—		439
Total impairments and other	$	305	$	6,272

We recognized $0.3 million and $3.3 million of impairment charges during the Current Quarter and Prior Quarter, respectively, for certain drilling rigs that we deemed to be impaired based on our assessment of future demand and the suitability of the identified rigs in light of this demand. Estimated fair value for these drilling rigs was determined using significant unobservable inputs (Level 3) based on an income approach.

We recognized $2.5 million of impairment charges during the Prior Quarter for certain trucking and water disposal equipment that we deemed to be impaired based on expected future cash flows of this equipment. Estimated fair value for the trucking and fluid disposal equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

We identified certain other property and equipment during the Prior Quarter that we deemed to be impaired based on our assessment of the market value and expected future cash flows of the long-lived asset. We recorded impairment charges of $0.4 million during the Prior Quarter related to these assets. Estimated fair value for this property and equipment was determined using significant unobservable inputs (Level 3) based on an income approach.

The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management’s judgment. A continued period of low oil and natural gas prices or continued reductions in capital expenditures by CHK or our other customers would likely have an adverse impact on our utilization and the prices that we receive for our services. This could result in the recognition of future material impairment charges on the same, or additional, property and equipment if future cash flow estimates, based upon information then available to management, indicate that their carrying values are not recoverable.

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Debt

As of March 31, 2016 and December 31, 2015, our long-term debt consisted of the following:



	March 31, 2016		December 31, 2015
	(In thousands)
6.625% Senior Notes due 2019	$	650,000	$	650,000
6.50% Senior Notes due 2022	450,000		450,000
Term Loans	492,000		493,250
Total principal amount of debt	1,592,000		1,593,250
Less: Current portion of long-term debt	5,000		5,000
Less: Unamortized deferred financing costs	22,506		23,658
Total long-term debt	$	1,564,494	$	1,564,592

2019 Senior Notes

In October 2011, we and SSF co-issued $650.0 million in aggregate principal amount of 6.625% Senior Notes due 2019. The 2019 Notes will mature on November 15, 2019 and interest is payable semi-annually in arrears on May 15 and November 15 of each year. The 2019 Notes are guaranteed by all of our existing subsidiaries, other than certain immaterial subsidiaries and SSF, which is a co-issuer of the 2019 Notes.

We may redeem all or part of the 2019 Senior Notes at the following prices (as a percentage of principal), plus accrued and unpaid interest, if redeemed during the 12-month period beginning on November 15 of the years indicated below:



Year	Redemption Price
2016	101.656	%
2017 and thereafter	100.000	%

The 2019 Notes are subject to covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to: (1) sell assets; (2) declare dividends or make distributions on our equity interests or purchase or redeem our equity interests; (3) make investments or other specified restricted payments; (4) incur or guarantee additional indebtedness and issue disqualified or preferred equity; (5) create or incur certain liens; (6) enter into agreements that restrict the ability of our restricted subsidiaries to pay dividends and make intercompany loans or transfer assets to us; (7) effect a merger, consolidation or sale of all or substantially all of our assets; (8) enter into transactions with affiliates; and (9) designate subsidiaries as unrestricted subsidiaries. The 2019 Senior Notes also have cross default provisions that apply to other indebtedness of SSE and any of its guarantor subsidiaries. If the 2019 Senior Notes achieve an investment grade rating from either Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Rating Services (“S&P”), our obligation to comply with certain of these covenants will be suspended, and if the 2019 Senior Notes achieve an investment grade rating from both Moody’s and S&P, then all such covenants will terminate. We were in compliance with the covenants of the 2019 Notes at March 31, 2016.

2022 Senior Notes

In June 2014, we issued $500.0 million in aggregate principal amount of 6.50% Senior Notes due 2022. The 2022 Notes will mature on July 15, 2022 and interest is payable semi-annually in arrears on July 15 and January 15 of each year. Prior to the full repayment or refinancing of the 2019 Notes, the 2022 Notes will become fully and unconditionally guaranteed on a senior unsecured basis by each of our domestic subsidiaries, if any, that has outstanding indebtedness or guarantees in an aggregate principal amount greater than $15.0 million, other than (i) guarantors of the 2019 Notes, (ii) SSO or (iii) subsidiaries of SSO. We do not have any such subsidiaries currently; therefore, the 2022 Notes are not guaranteed. Upon the full repayment of the 2019 Notes, the 2022 Notes will be fully and unconditionally guaranteed on a senior unsecured basis by each of our domestic subsidiaries that has outstanding indebtedness or guarantees in an aggregate principal amount greater than $15.0 million.

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We may redeem up to 35% of the 2022 Notes with proceeds of certain equity offerings at a redemption price of 106.5% of the principal amount plus accrued and unpaid interest prior to July 15, 2017, subject to certain conditions. Prior to July 15, 2017, we may redeem some or all of the 2022 Notes at a price equal to 100% of the principal amount plus a make-whole premium determined pursuant to a formula set forth in the indenture governing the 2022 Notes, plus accrued and unpaid interest. On or after July 15, 2017, we may redeem all or part of the 2022 Notes at the following prices (as a percentage of principal), plus accrued and unpaid interest, if redeemed during the 12-month period beginning on July 15 of the years indicated below:



Year	Redemption Price
2017	104.875	%
2018	103.250	%
2019	101.625	%
2020 and thereafter	100.000	%

The 2022 Notes are subject to covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to: (1) sell assets; (2) declare dividends or make distributions on our equity interests or purchase or redeem our equity interests; (3) make investments or other specified restricted payments; (4) incur or guarantee additional indebtedness and issue disqualified or preferred equity; (5) create or incur certain liens; (6) enter into agreements that restrict the ability of our restricted subsidiaries to pay dividends and make intercompany loans or transfer assets to us; (7) effect a merger, consolidation or sale of all or substantially all of our assets; (8) enter into transactions with affiliates; and (9) designate subsidiaries as unrestricted subsidiaries. The 2022 Notes also have cross default provisions that apply to other indebtedness of SSE and certain of our subsidiaries. If the 2022 Notes achieve an investment grade rating from either Moody’s or S&P, our obligation to comply with certain of these covenants will be suspended, and if the 2022 Notes achieve an investment grade rating from both Moody’s and S&P, then all such covenants will terminate. We were in compliance with the covenants of the 2022 Notes at March 31, 2016.

Term Loans

In June 2014, we entered into a $400.0 million seven-year term loan credit agreement (the “Term Loan”). Borrowings under the Term Loan bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month London Interbank Offered Rate (“LIBOR”) rate adjusted daily plus 1.00% or (ii) LIBOR, with a floor of 0.75%, plus, in each case, an applicable margin. The applicable margin for borrowings is 2.00% for Base Rate loans and 3.00% for LIBOR loans, depending on whether the Base Rate or LIBOR is used, provided that if and for so long as the leverage ratio is less than a certain level and the term loans have certain ratings from each of S&P and Moody’s, such margins will be reduced by 0.25%. As of March 31, 2016, the applicable rate for borrowings under the Term Loan was 3.75%. The Term Loan is repayable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Term Loan and will mature in full on June 25, 2021.

Obligations under the Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Term Loan at any time. Borrowings under our Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates.

In May 2015, we entered into an incremental term supplement to the Term Loan and borrowed $100.0 million in aggregate principal amount and received net proceeds of $94.5 million. Borrowings under the Incremental Term Loan bear interest at our option at either (i) LIBOR, with a floor of 1.00% or (ii) the Base Rate, calculated as the greatest of (1) the Bank of America, N.A. prime rate, (2) the federal funds rate plus 0.50% and (3) a one-month LIBOR rate adjusted daily plus 1.00%, plus, in each case, an applicable margin. The applicable margin for borrowings is 9.00% for LIBOR loans and 8.00% for Base

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Rate loans, depending on whether the Base Rate or LIBOR is used. As of March 31, 2016, the applicable rate for borrowings under the Incremental Term Loan was 10.0%. The Incremental Term Loan is payable in equal consecutive quarterly installments equal to 0.25% (1.00% per annum) of the original principal amount of the Incremental Term Loan and will mature in full on June 25, 2021.

Obligations under the Incremental Term Loan are guaranteed jointly and severally by all of our present and future direct and indirect wholly-owned material domestic subsidiaries, other than certain excluded subsidiaries. Amounts borrowed under the Incremental Term Loan are secured by liens on all of our equity interests in our current and future subsidiaries, and all of our subsidiaries’ present and future real property, equipment (including drilling rigs and frac spread equipment), fixtures and other fixed assets.

We may prepay all or a portion of our Incremental Term Loan at any time. Borrowings under our Incremental Term Loan may be subject to mandatory prepayments with the net cash proceeds of certain issuances of debt, certain asset sales and other dispositions and certain condemnation events, and with excess cash flow in any calendar year in which our leverage ratio exceeds 3.25 to 1.00. The Incremental Term Loan contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. All prepayments of the Incremental Term Loan, except for mandatory prepayments described above, if made on or prior to the 42-month anniversary of the Incremental Term Loan, are subject to a prepayment premium equal to (i) a make-whole premium determined pursuant to a formula set forth in the Incremental Term Loan if made on or prior to the 18-month anniversary of the Incremental Term Loan, (ii) 5.00% of such principal amount if made after the 18-month anniversary and on or prior to the 30-month anniversary of the Incremental Term Loan, or (iii) 3.00% of such principal amount if made after the 30-month anniversary and on or prior to the 42-month anniversary of the Incremental Term Loan. We were in compliance with the covenants of the Term Loan and Incremental Term Loan at March 31, 2016.

Credit Facility

In June 2014, we, through SSO, entered into a five-year senior secured revolving bank credit facility (the “Credit Facility”) with total commitments of $275.0 million. The maximum amount that we may borrow under the Credit Facility is subject to the borrowing base, which is based on a percentage of eligible accounts receivable, subject to reserves and other adjustments. All obligations under the Credit Facility are fully and unconditionally guaranteed jointly and severally by SSE, and all of our present and future direct and indirect material domestic subsidiaries. Borrowings under the Credit Facility are secured by liens on cash and accounts receivable of the borrowers and the guarantors, and bear interest at our option at either (i) the Base Rate, calculated as the greatest of (1) the rate of interest publicly announced by Wells Fargo Bank, National Association, as its “prime rate,” subject to each increase or decrease in such prime rate effective as of the date such change occurs, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR Rate plus 1.00%, each of which is subject to an applicable margin, or (ii) LIBOR, plus, in each case, an applicable margin. The applicable margin ranges from 0.50% to 1.00% per annum for Base Rate loans and 1.50% to 2.00% per annum for LIBOR loans. The unused portion of the Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to average unused amounts. Interest on LIBOR loans is payable at the end of the selected interest period, but no less frequently than quarterly. Interest on Base Rate loans is payable monthly in arrears.

The Credit Facility contains various covenants and restrictive provisions which limit our ability to (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments or loans and create liens; (4) pay certain dividends or make other distributions and (5) engage in transactions with affiliates. The Credit Facility requires maintenance of a fixed charge coverage ratio based on the ratio of consolidated EBITDA (minus unfinanced capital expenditures) to fixed charges, in each case as defined in the Credit Facility agreement, at any time availability is below a certain threshold and for a certain period of time thereafter. If we fail to perform our obligations under the agreement, the Credit Facility could be terminated and any outstanding borrowings under the Credit Facility may be declared immediately due and payable. The Credit Facility also contains cross default provisions that apply to our other indebtedness. As of March 31, 2016, there were no borrowings on the Credit Facility and we were in compliance with the covenants.

6. Other Current Liabilities

Other current liabilities as of March 31, 2016 and December 31, 2015 are detailed below:



	March 31, 2016		December 31, 2015
	(In thousands)
Other Current Liabilities:
Accrued expenses	$	18,477	$	29,760
Payroll related	15,807		21,561
Insurance reserves	9,488		9,718
Interest	26,171		22,950
Income, property, sales, use and other taxes	3,353		8,336
Property and equipment	3,535		5,993
Total Other Current Liabilities	$	76,831	$	98,318

7. Commitments and Contingencies

Operating Leases

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stated in the respective agreement. As of March 31, 2016, we were also party to various lease agreements for other property and equipment with varying terms.

Aggregate undiscounted minimum future lease payments under our operating leases at March 31, 2016 are presented below:



	Rail Cars		Other		Total
	(In thousands)
Remainder of 2016	$	3,974	$	1,033	$	5,007
2017	3,360		745		4,105
2018	1,430		374		1,804
2019	715		209		924
Total	$	9,479	$	2,361	$	11,840

Rent expense for real property, rail cars and other property and equipment for both the Current Quarter and Prior Quarter was $1.8 million, and was included in operating costs and general and administrative expenses in our condensed consolidated statements of operations.

Other Commitments

Much of the equipment we purchase requires long production lead times. As a result, we usually have outstanding orders and commitments for such equipment. As of March 31, 2016, we had $31.1 million of purchase commitments related to future capital expenditures that we expect to incur in 2016. These commitments relate primarily to the construction of the remaining contracted PeakeRigs™.

Litigation

We expect to commence Chapter 11 cases to implement our restructuring pursuant to the Restructuring Support Agreement. While the filing of a bankruptcy petition automatically stays certain actions against us, including actions to collect pre-petition indebtedness or to exercise control over the property of our bankruptcy estates, we intend to seek authority to pay all general claims in the ordinary course of business notwithstanding the commencement of the Chapter 11 cases in a manner consistent with the Restructuring Support Agreement. The Plan in the Chapter 11 cases, if confirmed, will provide for the treatment of claims against our bankruptcy estates, including pre-petition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 cases (see Note 1).

We are involved in various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, property damage claims and contract actions. We record an associated liability when a loss is probable and the amount can be reasonably estimated. Although the outcome of litigation cannot be predicted with certainty, management is of the opinion that no pending or threatened lawsuit or dispute incidental to our business operations is likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued and actual results could differ materially from management’s estimates.

Self-Insured Reserves

We are self-insured up to certain retention limits with respect to workers’ compensation and general liability matters. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history. Included in operating costs is workers’ compensation expense of $1.1 million and $2.5 million, during the Current Quarter and Prior Quarter, respectively.

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8. Stock-Based Compensation

Our stock-based compensation program consists of restricted stock available to employees and stock options. The restricted stock awards and stock options are equity-classified awards. We also recognize compensation expense (benefit) related to performance share units granted by CHK to our chief executive officer. Included in operating costs and general and administrative expenses is stock-based compensation expense of $5.7 million and $12.5 million, for the Current Quarter and Prior Quarter, respectively.

Equity-Classified Awards

Restricted Stock. The fair value of restricted stock awards is determined based on the fair market value of SSE common shares on the date of the grant. This value is amortized over the vesting period.

A summary of the status and changes of unvested shares of restricted stock is presented below.



	Number of Unvested Restricted Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Unvested shares as of January 1, 2016	5,896		$	11.93
Granted	—		$	—
Vested	(1,618	)	$	4.47
Forfeited	(66	)	$	15.72
Unvested shares as of March 31, 2016	4,212		$	14.74

As of March 31, 2016, there was $32.4 million of total unrecognized compensation cost related to the unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately twenty-two months.

Stock Options. CHK granted stock options to our chief executive officer under CHK’s Long-Term Incentive Plan for incentive and retention purposes. The incentive-based stock options vest ratably over a three-year period and our retention-based stock options will vest one-third on each of the third, fourth and fifth anniversaries of the grant date of the original CHK award, in the case of a replacement award. Outstanding options expire ten years from the date of grant of the original CHK award, in the case of a replacement award. We have not issued any new stock options, other than the replacement awards, since the spin-off.

The following table provides information related to stock option activity for the Current Quarter:



	Number of Shares Underlying Options	Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years	Aggregate Intrinsic Value^(a)
	(in thousands)				(in thousands)
Outstanding at January 1, 2016	348	$	16.19	7.23	$	—
Granted	—	$	—	—	$	—
Exercised	—	$	—	—	$	—
Outstanding at March 31, 2016	348	$	16.19	6.99	$	—
Exercisable at March 31, 2016	205	$	16.30	7.01	$	—


(a)	The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of March 31, 2016, there was $0.2 million of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of approximately eight months.

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Other

Performance Share Units. CHK granted performance share units (“PSUs”) to our chief executive officer under CHK’s Long-Term Incentive Plan that includes both an internal performance measure and external market condition as it relates to CHK. Following the spin-off, compensation expense is recognized through the changes in fair value of the PSUs over the vesting period with a corresponding adjustment to equity and any related cash obligations are the responsibility of CHK. We recognized (credits) of ($0.9) million for the Prior Quarter.

9. Income Taxes

Our effective tax rate was 12% and 30% for the Current Quarter and Prior Quarter, respectively. The decrease in the effective income tax rate from the Prior Quarter to the Current Quarter is primarily due to the tax benefit at expected rates being offset by an increase in the valuation allowance. Further, our effective tax rate can fluctuate as a result of state income taxes, permanent differences and changes in pre-tax income.

Based on our anticipated operating results in subsequent quarters, we project being in a net deferred tax asset position at December 31, 2016. We believe it is more likely than not that these deferred tax assets will not be realized, and accordingly are recording sufficient valuation allowance through the effective tax rate to have a full valuation allowance at December 31, 2016. As of March 31, 2016, we have recorded a valuation allowance of $11.6 million, which reduced our income tax benefit in the Current Quarter.

A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry.

The benefit of an uncertain tax position taken or expected to be taken on an income tax return is recognized in the consolidated financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority. Interest and penalties, if any, related to uncertain tax positions would be recorded in interest expense and other expense, respectively. There were no uncertain tax positions at March 31, 2016 and December 31, 2015.

As described in Note 1, elements of the Plan include that our 2019 Notes and 2022 Notes will be exchanged for New Common Stock. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. Upon emergence from Chapter 11 bankruptcy proceedings, the CODI may reduce some or all of the amount of prior tax attributes, which can include net operating losses, capital losses, alternative minimum tax credits and tax basis in assets. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year ending subsequent to the date of emergence.

The IRC provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future taxable income in the event of a change in ownership. Emergence from Chapter 11 bankruptcy proceedings may result in a change in ownership for purposes of the IRC. However, the IRC provides alternatives for taxpayers in Chapter 11 bankruptcy proceedings that may or may not result in an annual limitation. We are in the process of determining which alternatives are most beneficial to us under the Restructuring Support Agreement.

10. Equity Method Investment

We own 49% of the membership interest in Maalt Specialized Bulk, L.L.C. (“Maalt”). We recorded equity method adjustments to our investment of $1.0 million, for our share of Maalt’s income for the Prior Quarter. We also made additional investments of $0.1 million in the Prior Quarter.

We review our equity method investment for impairment whenever certain impairment indicators exist, including the absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. A loss in value of an investment which is other than a temporary decline should be recognized. We estimated that the fair value of our investment in Maalt was zero as of December 31, 2015, resulting in a non-cash impairment charge of $8.8 million for the year ended December 31, 2015. Estimated fair value for our investment in Maalt was determined using significant unobservable inputs (Level 3) based on an income approach.

11. Fair Value Measurements

The fair value measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Authoritative guidance on fair value measurements and disclosures clarifies that a fair value measurement for a liability should reflect the entity’s non-performance risk. In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active

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markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2- Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3- Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources.

Fair Value on Recurring Basis

The carrying values of cash, short-term investments, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments.

Fair Value on Non-Recurring Basis

Fair value measurements were applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which consist primarily of long-lived asset impairments based on Level 3 inputs. See Note 4 for additional discussion.

Fair Value of Other Financial Instruments

The fair values of the note receivable and our debt are the estimated amounts a market participant would have to pay to purchase the note receivable or our debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on quoted market prices or average valuations of similar debt instruments at the balance sheet date for those debt instruments for which quoted market prices are not available. Estimated fair values are determined by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.



	March 31, 2016				December 31, 2015
	Carrying Amount		Fair Value (Level 2)		Carrying Amount		Fair Value (Level 2)
	(In thousands)
Financial assets:
Note Receivable	$	27,000	$	21,160	$	27,000	$	17,842

Financial liabilities:
6.625% Senior Notes due 2019	$	643,183	$	200,285	$	642,713	$	221,975
6.5% Senior Notes due 2022	$	444,880	$	27,000	$	444,701	$	71,865
Term Loans	$	481,431	$	349,508	$	482,178	$	371,080
Less: Current portion of long-term debt	$	5,000			$	5,000
Total long-term debt	$	1,564,494			$	1,564,592

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12. Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and trade receivables. Accounts receivable from CHK and its affiliates were $77.9 million and $109.6 million as of March 31, 2016 and December 31, 2015, or 59% and 65%, respectively, of our total accounts receivable. Revenues from CHK and its affiliates were $98.7 million and $317.3 million, for the Current Quarter and Prior Quarter, or 64% and 74%, respectively, of our total revenues. We believe that the loss of this customer would have a material adverse effect on our operating results as there can be no assurance that replacement customers would be identified and accessed in a timely fashion. See Note 13 for further discussion of agreements entered into as part of the spin-off, including a services agreement and rig-specific daywork drilling contracts.

13. Transactions with CHK

Prior to the completion of our spin-off on June 30, 2014, we were a wholly owned subsidiary of CHK, and transactions between us and CHK (including its subsidiaries) were considered to be transactions with affiliates. Subsequent to June 30, 2014, CHK and its subsidiaries are not considered affiliates of us or any of our subsidiaries. We have disclosed below agreements entered into between us and CHK prior to the completion of our spin-off.

On June 25, 2014, we entered into a master separation agreement and several other agreements with CHK as part of the spin-off. The master separation agreement entered into between CHK and us governs the separation of our businesses from CHK, the distribution of our shares to CHK shareholders and other matters related to CHK’s relationship with us, including cross-indemnities between us and CHK. In general, CHK agreed to indemnify us for any liabilities relating to CHK’s business and we agreed to indemnify CHK for any liabilities relating to our business.

On June 25, 2014, we entered into a tax sharing agreement with CHK, which governs the respective rights, responsibilities and obligations of CHK and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and certain other matters regarding taxes.

On June 25, 2014, we entered into an employee matters agreement with CHK providing that each company has responsibility for our own employees and compensation plans. The agreement also contains provisions concerning benefit protection for both SSE and CHK employees, treatment of holders of CHK stock options, restricted stock, restricted stock units and performance share units, and cooperation between us and CHK in the sharing of employee information and maintenance of confidentiality.

On June 25, 2014, we entered into a transition services agreement with CHK under which CHK provides or makes available to us various administrative services and assets for specified periods beginning on the distribution date. In consideration for such services, we pay CHK fees, a portion of which is a flat fee, generally in amounts intended to allow CHK to recover all of its direct and indirect costs incurred in providing those services. These charges from CHK were $5.6 million for the Prior Quarter. This agreement was terminated during the second quarter of 2015.

We are party to a master services agreement with CHK pursuant to which we provide drilling and other services and supply materials and equipment to CHK. Drilling services are typically provided pursuant to rig-specific daywork drilling contracts similar to those we use for other customers. The specific terms of each request for other services are typically set forth in a field ticket, purchase order or work order. The master services agreement contains general terms and provisions, including minimum insurance coverage amounts that we are required to maintain and confidentiality obligations with respect to CHK’s business, and allocates certain operational risks between CHK and us through indemnity provisions. The master services agreement will remain in effect until we or CHK provides 30 days written notice of termination, although such agreement may not be terminated during the term of the services agreement described below.

Prior to the spin-off, we were party to a services agreement with CHK under which CHK guaranteed the utilization of a portion of our drilling rig and hydraulic fracturing fleets during the term of the agreement. In connection with the spin-off, we entered into new services agreements with CHK which supplements the master services agreement. Under the new services agreement, CHK is required to utilize the lesser of (i) seven, five and three of our pressure pumping crews in years one, two and three of the agreement, respectively, or (ii) 50% of the total number of all pressure pumping crews working for CHK in all its operating regions during the respective year. CHK is required to utilize our pressure pumping services for a minimum number of stages as set forth in the agreement. CHK is entitled to terminate the agreement in certain situations, including in the event we fail to materially comply with the overall quality of service provided by similar service providers. Additionally, CHK’s

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requirement to utilize our services may be suspended under certain circumstances, such as if we are unable to timely accept and supply services ordered by CHK or as a result of a force majeure event.

In connection with the spin-off, we entered into rig-specific daywork drilling contracts with CHK for the provision of drilling services. The drilling contracts had a commencement date of July 1, 2014 and terms ranging from three months to three years. CHK has the right to terminate the drilling contracts under certain circumstances.

14. Segment Information

As of March 31, 2016, our revenues, loss before income taxes and identifiable assets are primarily attributable to three reportable segments. During the second quarter of 2015, we sold the remaining business and assets included in the oilfield trucking segment. Our former oilfield trucking segment’s historical results for periods prior to the sales continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Each of these segments represents a distinct type of business. These segments have separate management teams which report to our chief operating decision maker. The results of operations in these segments are regularly reviewed by the chief operating decision maker for purposes of determining resource allocation and assessing performance. Management evaluates the performance of our segments based upon earnings before interest, taxes and depreciation and amortization.

Prior to the Current Quarter, the information that was regularly reviewed by our chief operating decision maker included general and administrative expenses that were allocated to each of our reportable segments for corporate overhead functions provided by the Other Operations segment on behalf of our reportable segments. Effective in the Current Quarter, we no longer allocate general and administrative expenses to our reportable segments from the Other Operations segment in the information that is reviewed by our chief operating decision maker. Accordingly, this change has been reflected through retroactive revision of the Prior Quarter segment information.

The following is a description of our segments and other operations:

Drilling. Our drilling segment provides land drilling for oil and natural gas E&P activities. As of March 31, 2016, we owned a fleet of 92 land drilling rigs.

Hydraulic Fracturing. Our hydraulic fracturing segment provides hydraulic fracturing and other well stimulation services. As of March 31, 2016, we owned 13 hydraulic fracturing fleets with an aggregate of 500,000 horsepower.

Oilfield Rentals. Our oilfield rentals segment provides premium rental tools for land-based oil and natural gas drilling, completion and workover activities.

Former Oilfield Trucking. Our oilfield trucking segment provided drilling rig relocation and logistics services as well as fluid handling services. During the second quarter of 2015, we sold Hodges and our water hauling assets. As part of the spin-off, we sold our crude hauling assets to a third party. As of June 30, 2015, there were no remaining assets or operations in the oilfield trucking segment. Our former oilfield trucking segment's historical results for periods prior to the sale continue to be included in our historical financial results as a component of continuing operations as reflected in the tables below.

Other Operations. Our other operations consists primarily of our corporate functions, including our 2019 Notes, 2022 Notes, Term Loans and Credit Facility.

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	Drilling			Hydraulic Fracturing			Oilfield Rentals			Former Oilfield Trucking			Other Operations			Intercompany Eliminations			Consolidated Total
	(In thousands)
For The Three Months Ended March 31, 2016:
Revenues	$	71,919		$	76,308		$	7,239		$	—		$	2,077		$	(2,182	)	$	155,361
Intersegment revenues	(11		)	—			(94		)	—			(2,077		)	2,182			—
Total revenues	$	71,908		$	76,308		$	7,145		$	—		$	—		$	—		$	155,361
Depreciation and amortization	38,304			19,741			8,501			—			3,099			—			69,645
Losses (gains) on sales of property and equipment, net	240			45			(717		)	—			(18		)	—			(450		)
Impairments and other	305			—			—			—			—			—			305
Interest expense	—			—			—			—			(25,279		)	—			(25,279		)
Other income	291			203			1			—			508			—			1,003
Income (Loss) Before Income Taxes	$	5,887		$	(13,789	)	$	(9,793	)	$	—		$	(49,942	)	$	—		$	(67,637	)

For The Three Months Ended March 31, 2015:
Revenues	$	166,054		$	202,017		$	32,565		$	31,184		$	2,067		$	(4,100	)	$	429,787
Intersegment revenues	—			—			(77		)	(1,956		)	(2,067		)	4,100			—
Total revenues	$	166,054		$	202,017		$	32,488		$	29,228		$	—		$	—		$	429,787
Depreciation and amortization	49,539			16,277			12,172			5,054			1,933			—			84,975
Losses (gains) on sales of property and equipment, net	4,386			(5		)	(171		)	(10		)	10			—			4,210
Impairments and other	3,729			—			—			2,543			—			—			6,272
Interest expense	—			—			—			—			(23,516		)	—			(23,516		)
Income from equity investee	—			972			—			—			—			—			972
Other (expense) income	(42		)	73			(24		)	9			(112		)	—			(96		)
Income (Loss) Before Income Taxes (As Previously Reported)	$	686		$	8,667		$	(5,024	)	$	(18,377	)	$	(39,785	)	$	—		$	(53,833	)
Corporate Overhead Allocation	$	9,183		$	6,654		$	1,899		$	2,676		$	(20,412	)	$	—		$	—
Income (Loss) Before Income Taxes (As Revised)	$	9,869		$	15,321		$	(3,125	)	$	(15,701	)	$	(60,197	)	$	—		$	(53,833	)

As of March 31, 2016:
Total Assets	$	1,127,501		$	269,392		$	76,990		$	—		$	319,985		$	—		$	1,793,868
As of December 31, 2015
Total Assets	$	1,144,144		$	291,584		$	92,588		$	—		$	374,302		$	—		$	1,902,618

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

15. Condensed Consolidating Financial Information

In October 2011, we issued and sold the 2019 Notes with an aggregate principal amount of $650.0 million (see Note 5). Pursuant to the Indenture governing the 2019 Notes, such notes are fully and unconditionally and jointly and severally guaranteed by SSO’s parent, SSE, and all of SSO’s subsidiaries, other than SSF, which is a co-issuer of the 2019 Notes, and certain immaterial subsidiaries. Each of the subsidiary guarantors is 100% owned by SSO and there are no material subsidiaries of SSO other than the subsidiary guarantors. SSF and Western Wisconsin Sand Company, LLC are minor non-guarantor subsidiaries whose condensed consolidating financial information is included with the subsidiary guarantors. SSE and SSO have independent assets and operations. There are no significant restrictions on the ability of SSO or any subsidiary guarantor to obtain funds from its subsidiaries by dividend or loan.

Set forth below are condensed consolidating financial statements for SSE (“Parent”) and SSO (“Subsidiary Issuer”) on a stand-alone, unconsolidated basis, and their combined guarantor subsidiaries as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Condensed Consolidating Balance Sheet
	March 31, 2016
	Parent		Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Assets:
Current Assets:
Cash	$	66	$	74,605		$	—		$	—		$	74,671
Short-term investments	—		6,242			—			—			6,242
Accounts receivable, net	—		134			127,580			—			127,714
Inventory	—		—			18,903			—			18,903
Deferred income tax asset	—		1,124			320			—			1,444
Prepaid expenses and other	—		8,633			7,330			(1,739		)	14,224
Total Current Assets	66		90,738			154,133			(1,739		)	243,198
Property and Equipment:
Property and equipment, at cost	—		31,163			2,659,897			—			2,691,060
Less: accumulated depreciation	—		(6,120		)	(1,174,434		)	—			(1,180,554		)
Total Property and Equipment, Net	—		25,043			1,485,463			—			1,510,506
Other Assets:
Deferred financing costs, net	—		1,150			—			—			1,150
Other long-term assets	4,024		118,261			11,169			(94,440		)	39,014
Investments in subsidiaries and intercompany advances	511,557		1,434,157			—			(1,945,714		)	—
Total Other Assets	515,581		1,553,568			11,169			(2,040,154		)	40,164
Total Assets	$	515,647	$	1,669,349		$	1,650,765		$	(2,041,893	)	$	1,793,868
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	—	$	108		$	28,332		$	—		$	28,440
Current portion of long-term debt	—		5,000			—			—			5,000
Other current liabilities	6,086		32,223			40,261			(1,739		)	76,831
Total Current Liabilities	6,086		37,331			68,593			(1,739		)	110,271
Long-Term Liabilities:
Deferred income tax liabilities	—		—			146,942			(94,440		)	52,502
Long-term debt, excluding current maturities	444,880		1,119,614			—			—			1,564,494
Other long-term liabilities	—		847			1,073			—			1,920
Total Long-Term Liabilities	444,880		1,120,461			148,015			(94,440		)	1,618,916
Total Stockholders’ Equity	64,681		511,557			1,434,157			(1,945,714		)	64,681
Total Liabilities and Stockholders’ Equity	$	515,647	$	1,669,349		$	1,650,765		$	(2,041,893	)	$	1,793,868

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Condensed Consolidating Balance Sheet
	December 31, 2015
	Parent		Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Assets:
Current Assets:
Cash	$	46	$	130,602		$	—		$	—		$	130,648
Accounts receivable, net	—		138			164,583			—			164,721
Inventory	—		—			18,553			—			18,553
Deferred income tax asset	—		376			1,123			—			1,499
Prepaid expenses and other	20		37,523			9,324			(29,726		)	17,141
Total Current Assets	66		168,639			193,583			(29,726		)	332,562
Property and Equipment:
Property and equipment, at cost	—		31,265			2,615,181			—			2,646,446
Less: accumulated depreciation	—		(4,958		)	(1,111,068		)	—			(1,116,026		)
Total Property and Equipment, Net	—		26,307			1,504,113			—			1,530,420
Other Assets:
Deferred financing costs, net	—		1,238			—			—			1,238
Other long-term assets	2,575		114,087			10,901			(89,165		)	38,398
Investments in subsidiaries and intercompany advances	575,089		1,415,997			—			(1,991,086		)	—
Total Other Assets	577,664		1,531,322			10,901			(2,080,251		)	39,636
Total Assets	$	577,730	$	1,726,268		$	1,708,597		$	(2,109,977	)	$	1,902,618
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable	58		517			53,192			—			$	53,767
Current portion of long-term debt	—		5,000			—			—			5,000
Other current liabilities	14,131		25,276			88,637			(29,726		)	98,318
Total Current Liabilities	14,189		30,793			141,829			(29,726		)	157,085
Long-Term Liabilities:
Deferred income tax liabilities	—		—			149,788			(89,165		)	60,623
Long-term debt, excluding current maturities	444,701		1,119,891			—			—			1,564,592
Other long-term liabilities	—		495			983			—			1,478
Total Long-Term Liabilities	444,701		1,120,386			150,771			(89,165		)	1,626,693
Total Stockholders’ Equity	118,840		575,089			1,415,997			(1,991,086		)	118,840
Total Liabilities and Stockholders’ Equity	$	577,730	$	1,726,268		$	1,708,597		$	(2,109,977	)	$	1,902,618

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Condensed Consolidating Statement of Operations
	Three Months Ended March 31, 2016
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenues:
Revenues	$	—		$	—		$	156,532		$	(1,171	)	$	155,361
Operating Expenses:
Operating costs	—			—			106,960			—			106,960
Depreciation and amortization	—			1,256			68,389			—			69,645
General and administrative	—			22,972			461			(1,171		)	22,262
Losses on sales of property and equipment, net	—			(18		)	(432		)	—			(450		)
Impairments and other	—			—			305			—			305
Total Operating Expenses	—			24,210			175,683			(1,171		)	198,722
Operating Loss	—			(24,210		)	(19,151		)	—			(43,361		)
Other (Expense) Income:
Interest expense	(7,492		)	(17,787		)	—			—			(25,279		)
Other income	—			474			529			—			1,003
Equity in net loss of subsidiary	(53,528		)	(16,579		)	—			70,107			—
Total Other (Expense) Income	(61,020		)	(33,892		)	529			70,107			(24,276		)
Loss Before Income Taxes	(61,020		)	(58,102		)	(18,622		)	70,107			(67,637		)
Income Tax Benefit	(1,457		)	(4,574		)	(2,043		)	—			(8,074		)
Net Loss	$	(59,563	)	$	(53,528	)	$	(16,579	)	$	70,107		$	(59,563	)

Table of Contents

SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Condensed Consolidating Statement of Operations
	Three Months Ended March 31, 2015
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Revenues:
Revenues	$	—		$	—		$	430,536		$	(749	)	$	429,787
Operating Expenses:
Operating costs	—			—			331,611			—			331,611
Depreciation and amortization	—			67			84,908			—			84,975
General and administrative	68			11,916			22,677			(749		)	33,912
Losses on sales of property and equipment, net	—			—			4,210			—			4,210
Impairments and other	—			—			6,272			—			6,272
Total Operating Expenses	68			11,983			449,678			(749		)	460,980
Operating Loss	(68		)	(11,983		)	(19,142		)	—			(31,193		)
Other (Expense) Income:
Interest expense	(8,259		)	(15,257		)	—			—			(23,516		)
Income from equity investee	—			—			972			—			972
Other (expense) income	—			(133		)	37			—			(96		)
Equity in net loss of subsidiary	(31,784		)	(12,665		)	—			44,449			—
Total Other (Expense) Income	(40,043		)	(28,055		)	1,009			44,449			(22,640		)
Loss Before Income Taxes	(40,111		)	(40,038		)	(18,133		)	44,449			(53,833		)
Income Tax Benefit	(2,510		)	(8,254		)	(5,468		)	—			(16,232		)
Net Loss	$	(37,601	)	$	(31,784	)	$	(12,665	)	$	44,449		$	(37,601	)

Table of Contents

SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Condensed Consolidating Statements of Cash Flows
	Three Months Ended March 31, 2016
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Cash Flows From Operating Activities:	$	(15,329	)	$	(1,476	)	$	20,680		$	—		$	3,875
Cash Flows From Investing Activities:
Additions to property and equipment	—			(340		)	(53,867		)	—			(54,207		)
Purchases of short-term investments	—			(6,242		)	—			—			(6,242		)
Proceeds from sales of assets	—			30			2,128			—			2,158
Distributions from (to) affiliates	15,349			(31,038		)	—			15,689			—
Other	—			—			21			—			21
Net cash provided by (used in) investing activities	15,349			(37,590		)	(51,718		)	15,689			(58,270		)
Cash Flows From Financing Activities:
Payments on term loan	—			(1,250		)	—			—			(1,250		)
Distributions (to) from affiliates	—			(15,349		)	31,038			(15,689		)	—
Other	—			(332		)	—			—			(332		)
Net cash (used in) provided by financing activities	—			(16,931		)	31,038			(15,689		)	(1,582		)
Net increase (decrease) in cash	20			(55,997		)	—			—			(55,977		)
Cash, beginning of period	46			130,602			—			—			130,648
Cash, end of period	$	66		$	74,605		$	—		$	—		$	74,671

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Condensed Consolidating Statements of Cash Flows
	Three Months Ended March 31, 2015
	Parent			Subsidiary Issuer			Guarantor Subsidiaries			Eliminations			Consolidated
	(In thousands)
Cash Flows From Operating Activities:	$	(17,975	)	$	13,463		$	82,508		$	(50,483	)	$	27,513
Cash Flows From Investing Activities:
Additions to property and equipment	—			(7,073		)	(33,534		)	—			(40,607		)
Proceeds from sale of assets	—			—			1,988			—			1,988
Additions to investment	—			—			(88		)	—			(88		)
Contributions from affiliates	21,251			—			—			(21,251		)	—
Other	—			—			14			—			14
Net cash used in investing activities	21,251			(7,073		)	(31,620		)	(21,251		)	(38,693		)
Cash Flows From Financing Activities:
Borrowings from revolving credit facility	—			109,300			—			—			109,300
Payments on revolving credit facility	—			(94,500		)	—			—			(94,500		)
Distributions to affiliates	—			(21,251		)	(50,483		)	71,734			—
Other	—			(117		)	(420		)	—			(537		)
Net cash provided by financing activities	—			(6,568		)	(50,903		)	71,734			14,263
Net increase (decrease) in cash	3,276			(178		)	(15		)	—			3,083
Cash, beginning of period	77			733			81			—			891
Cash, end of period	$	3,353		$	555		$	66		$	—		$	3,974

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SEVENTY SEVEN ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

16. Recently Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation - Stock Compensation,” which modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall,” which requires separate presentation of financial assets and liabilities on the balance sheet and requires evaluation of the need for valuation allowance of deferred tax assets related to available-for-sale securities. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017 with early adoption not permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes," which simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets be classified as noncurrent in the balance sheet. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern," which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early application permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; the FASB also provided for early adoption for annual reporting periods beginning after December 15, 2016. We are currently evaluating what impact this standard will have on our consolidated financial statements.

17. Subsequent Events

On April 15, 2016, we entered into a Restructuring Support Agreement with the Restructuring Support Parties. See Note 1 for additional discussion.



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

The following discussion and analysis of our financial condition and results of operations relates to the three months ended March 31, 2016 (the “Current Quarter”), the three months ended March 31, 2015 (the “Prior Quarter”), and the three months ended December 31, 2015 (the “Previous Quarter”) and should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this quarterly report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2015.

Overview

We are a diversified oilfield services company providing a wide range of wellsite services to U.S. land-based E&P customers. We offer services and equipment that are strategic to our customers’ oil and natural gas operations. We conduct our business through three operating segments: Drilling, Hydraulic Fracturing and Oilfield Rentals. Our operations are geographically diversified across many of the most active oil and natural gas plays in the onshore United States, including the Anadarko and Permian Basins and the Eagle Ford, Haynesville, Marcellus, Niobrara and Utica Shales.

Since we commenced operations in 2001, we have actively grown and modernized our asset base. As of March 31, 2016, our marketed rig fleet of 92 all-electric rigs consisted of 35 Tier 1 rigs (including 24 proprietary PeakeRigs™) and 57 Tier 2 rigs. Additionally, we had two additional contracted PeakeRigs™ under construction, one of which has been delivered and one of which is scheduled to be delivered during the remainder of 2016. As of March 31, 2016, we also owned 13 hydraulic fracturing fleets with an aggregate of 500,000 horsepower and a diversified oilfield rentals business. For additional information regarding our business and strategies, please read “Business” in Item 1 of our Annual Report on Form 10-K.

Cyclical Nature of Industry

The sustained decline in commodity prices since mid-2014 has dramatically reduced the level of onshore United States drilling and completions activity and, consequently, the demand for our services. During the three months ended March 31, 2016, NYMEX WTI maintained oil spot pricing at their lowest levels since 2003 and NYMEX natural gas spot prices had fallen from multi-year highs reached in early-2014. The extent and length of the current down cycle continues to be uncertain and is dependent on a number of economic, geopolitical and monetary policy factors that are outside our control. Until there is a sustained recovery in commodity prices, we expect that reduced equipment utilization levels and pricing pressure across each of our operating segments will persist. If drilling and completions activity remains at depressed levels or worsens, it will likely have a material adverse impact on our business, financial condition, cash flows and results of operations.

Restructuring Support Agreement

On April 15, 2016, SSE and all of our wholly owned subsidiaries entered into a Restructuring Support Agreement with certain lenders representing approximately 92.0% of the outstanding principal amount under our Incremental Term Loan and certain noteholders collectively owning or controlling approximately 57.7% of the aggregate outstanding principal amount of the 2019 Notes (collectively, the “Restructuring Support Parties”).

The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment to and obligations of us

and the Restructuring Support Parties (and any successors or permitted assigns that become party thereto) in connection with a

restructuring of our 2019 Notes, our 2022 Notes and our common stock, par value $0.01 per share, pursuant to a pre-packaged or pre-negotiated plan of reorganization to be filed under Chapter 11 of the United States Bankruptcy Code. In addition, on April 22, 2016, the Company and all of its wholly owned subsidiaries entered into an amendment to the Restructuring Support

Agreement with the Restructuring Support Parties to extend certain dates set forth in the original agreement, including extending the deadline to commence solicitation of votes for the Plan until April 29, 2016. We intend to commence the Chapter 11 cases upon concluding solicitation of votes on the Plan.

The Plan will be based on the restructuring term sheet attached to the Restructuring Support Agreement. The Term Sheet contemplates that we will continue our day-to-day operations substantially as currently conducted and that all of our commercial and operational contracts will remain in effect in accordance with their terms preserving the rights of all parties. The significant elements of the Plan include:

•payment in full in the ordinary course of all trade creditors and other general unsecured creditors;

•the exchange of the full $650.0 million of the 2019 Notes into either 96.75% of the New Common Stock, if the holders

of the 2022 Notes vote as a class to accept the Plan, or 98.67% of the New Common Stock, if the holders of the 2022

Notes vote as a class to not accept the Plan;

•the exchange of the full $450.0 million of the 2022 Notes for either (i) 3.25% of our New Common Stock as well as

warrants exercisable for 15% of the New Common Stock at predetermined equity values, if the holders of the 2022 Notes vote as a class to accept the Plan, or (ii) 1.33% of the New Common Stock, if the holders of the 2022 Notes vote as a class to not accept the Plan;

•the issuance, if all classes of claims entitled to vote accept the Plan, to our existing common stockholders of

two series of warrants exercisable for an aggregate of 20% of the New Common Stock at predetermined

equity values;

•the reinstatement of our existing $400 million secured term loan on identical terms; and

•the payment of a consent fee equal to 2% of the Incremental Term Loan plus $15 million of the outstanding

The Plan is expected to effectuate, among other things, a substantial reduction in our bond obligations (including $1.1 billion in the aggregate of the face amount of the 2019 Notes and 2022 Notes).

restructuring, workout or Chapter 11 plan for us other than the Restructuring Transactions and the Plan; (iv) to not take certain

actions in furtherance of the declaration of a default or event of default with respect to its debt holdings; and (v) to not take any

other action that is materially inconsistent with its obligations under the Restructuring Support Agreement.

approvals necessary to consummate the Plan; and (iv) to not undertake any action materially inconsistent with the adoption and implementation of the Plan and the speedy confirmation thereof.

The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to filing, confirmation and consummation of the Plan, among other requirements, and in the event of certain breaches by the parties under the Restructuring Support Agreement. There can be no assurance that the Restructuring Transactions will be consummated. We continue to believe that we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements. If the Restructuring Transactions are not consummated, we would continue to evaluate various strategic alternatives to reduce the level of our long-term debt and lower our future cash interest obligations, including debt repurchases, exchanges of existing debt securities for new debt securities and exchanges or conversions of existing debt securities for new equity securities, among other options.

Backlog

We maintain a backlog of contract revenues under our contracts for the provision of drilling and hydraulic fracturing services. Our drilling and hydraulic fracturing backlogs as of March 31, 2016 were approximately $255.2 million and $164.2 million, respectively, with average durations of 13 months and 10 months, respectively. We calculate our drilling backlog by multiplying the day rate under our contracts by the number of days remaining under the contract. We calculate our hydraulic fracturing backlog by multiplying (i) the rate per stage, which varies by operating region and is, therefore, estimated based on current customer activity levels by region and current contract pricing, by (ii) the number of stages remaining under the contract, which we estimate based on current and anticipated utilization of our crews. With respect to our hydraulic fracturing backlog, our contracts provide for periodic adjustments of the rates we may charge for our services, which will be negotiated based on then-prevailing market pricing and in the future may be higher or lower than the current rates we charge and utilize in calculating our backlog. Our drilling backlog calculation does not include any reduction in revenues related to mobilization or demobilization, nor does it include potential reductions in rates for unscheduled standby or during periods in which the rig is moving, on standby or incurring maintenance and repair time in excess of what is permitted under the drilling contract. In addition, many of our drilling contracts are subject to termination by the customer on short notice and provide for an early termination payment to us in the event that the contract is terminated by the customer. We calculate our contract drilling early termination value assuming each rig remains stacked for the remainder of the term of the terminated contract. As a result of the foregoing, revenues could differ materially from the backlog and early termination amounts presented.

As of March 31, 2016, we expect to recognize revenues from backlog as follows (in millions):



	2016		2017		Thereafter
Backlog	$	233.5	$	167.9	$	18.0

As of March 31, 2016, our total contract early termination value related to our drilling backlog was as follows (in millions):



	2016		2017		Thereafter
Drilling contract early termination value	$	111.2	$	81.4	$	10.1

How We Evaluate Our Operations

Our management team uses a variety of tools to monitor and manage our operations in the following eight areas: (a) segment gross margin, (b) equipment maintenance performance, (c) customer satisfaction, (d) asset utilization, (e) safety performance, (f) Adjusted EBITDA, (g) Adjusted Revenues and (h) Adjusted Operating Costs.

Segment Gross Margin. We define segment gross margin as segment revenues less segment operating costs. We view segment gross margin as one of our key management tools for managing costs at the segment level and evaluating segment performance. Our management tracks segment gross margin both as an absolute amount and as a percentage of revenues compared to prior periods.

Equipment Maintenance Performance. Equipment reliability (“uptime”) is an important factor to the success of our business. Uptime is beneficially impacted through preventive maintenance on our equipment. We have formal preventive maintenance procedures which are regularly monitored for compliance. Further, management monitors maintenance expenses

as a percentage of revenue. This metric provides a leading indicator with respect to the execution of preventive maintenance and ensures that equipment reliability issues do not negatively impact operational uptime.

Customer Satisfaction. Upon completion of many of our services, we encourage our customers to provide feedback on the services provided. The evaluation of our performance is based on various criteria and our customer comments are indicative of their overall satisfaction level. This feedback provides us with the necessary information to reinforce positive performance and remedy negative issues and trends.

Asset Utilization. By consistently monitoring our operations’ activity levels, pricing and relative performance of each of our rigs and fleets, we can more efficiently allocate our personnel and equipment to maximize revenue generation. We measure our activity levels by the total number of jobs completed by each of our drilling rigs and hydraulic fracturing fleets on a periodic basis. We also monitor the utilization rates of our drilling rigs. We define utilization of our drilling rigs as the number of rigs that have operated in the past 30 days divided by the number of rigs that have operated in the last 90 days.

Safety Performance. Maintaining a safe and incident free workplace is a critical component of our operational success. Our management team uses both lagging and leading indicators to measure and manage safety performance. Total Recordable Incident Rate (“TRIR”), Lost Time Incident Rate (“LTIR”) and Motor Vehicle Crash Rate (“MVCR”) are key lagging indicators reviewed by management. We also review leading indicators such as safety observations, training completion, and action item completion to enhance our view of safety performance. Safety performance data is reported, tracked and trended in a centralized database, which allows us to efficiently focus our incident prevention efforts.

Adjusted EBITDA. The primary financial and operating measurement that our management uses to analyze and monitor the operating performance of our business is Adjusted EBITDA, which we define as net income before interest expense, income tax expense, depreciation and amortization, as further adjusted to add back gain or loss on sale of a business and exit costs, gain or loss on sale of property and equipment, impairment of goodwill, impairments and other, impairment of equity method investment, non-cash stock compensation, severance-related costs, restructuring charges, interest income, and certain non-recurring items, such as the sale of our drilling rig relocation and logistics business and the sale of our water hauling assets. The table below shows our Adjusted EBITDA for the three months ended March 31, 2016 and 2015 and the three months ended December 31, 2015.



	Three Months Ended
	March 31,					December 31,
	2016			2015		2015
	(In thousands)
Adjusted EBITDA:
Consolidated	$	37,874		$	93,344	$	56,296
Drilling ^(a)	$	46,028		$	73,193	$	55,907
Hydraulic Fracturing ^(b)	$	6,501		$	32,912	$	14,155
Oilfield Rentals ^(c)	$	(1,747	)	$	9,691	$	938

(a)

During the Previous Quarter and Prior Quarter, general and administrative expenses were allocated to the Drilling segment in the amount of $7.6 million and $9.2 million, respectively, for corporate functions provided by the Other Operations segment on behalf of the Drilling segment. No allocations were made in the Current Quarter and the allocations for the Previous and Prior Quarters have been retroactively revised in the table above. See Note 14 to our condensed consolidated financial statements included in Item 1 of this report for further detail.

(b)

During the Previous Quarter and Prior Quarter, general and administrative expenses were allocated to the Hydraulic Fracturing segment in the amount of $6.1 million and $6.7 million, respectively, for corporate functions provided by the Other Operations segment on behalf of the Hydraulic Fracturing segment. No allocations were made in the Current Quarter and the allocations for the Previous and Prior Quarters have been retroactively revised in the table above. See Note 14 to our condensed consolidated financial statements included in Item 1 of this report for further detail.

(c)

During the Previous Quarter and Prior Quarter, general and administrative expenses were allocated to the Oilfield Rentals segment in the amount of $2.6 million and $1.9 million, respectively, for corporate functions provided by the Other Operations segment on behalf of the Oilfield Rentals segment. No allocations were made in the Current Quarter and the allocations for the Previous and Prior Quarters have been retroactively revised in the table above. See Note 14 to our condensed consolidated financial statements included in Item 1 of this report for further detail.

Adjusted Revenues and Adjusted Operating Costs. Key financial and operating measurements that our management uses to analyze and monitor our period-over-period operating performance are “Adjusted Revenues” and “Adjusted Operating Costs”, which we define as revenues and operating costs before revenues and operating costs associated with our rig relocation and logistics business and water hauling assets that were sold in the second quarter of 2015.

Non-GAAP Financial Measures

“Adjusted EBITDA”, “Adjusted Revenues” and “Adjusted Operating Costs” are non-GAAP financial measures. Adjusted EBITDA, Adjusted Revenues and Adjusted Operating Costs, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and are not measures of performance calculated in accordance with generally accepted accounting principles (“GAAP”).

Adjusted Revenues and Adjusted Operating Costs should not be considered in isolation or as a substitute for revenues and operating costs, respectively, prepared in accordance with GAAP. However, our management uses Adjusted Revenues and Adjusted Operating Costs to evaluate our period-over-period operating performance because our management believes these measures improve the comparability of our continuing business and they may be useful to an investor in evaluating our operating performance. A reconciliation of Adjusted Revenues and Adjusted Operating Costs to the GAAP measures of revenues and operating costs, respectively, is provided below in “—Results of Operations” for each period discussed.

Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. However, our management uses Adjusted EBITDA to evaluate our performance and liquidity and believes Adjusted EBITDA may be useful to an investor in evaluating our operating performance and liquidity because this measure:


•	is widely used by investors in the oilfield services industry to measure a company’s operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon accounting methods, book value of assets, capital structure and the method by which assets were acquired, among other factors;


•	is a financial measurement that is used by rating agencies, lenders and other parties to evaluate our creditworthiness; and


•	is used by our management for various purposes, including as a measure of performance of our operating entities and as a basis for strategic planning and forecasting.

There are significant limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss. Additionally, because Adjusted EBITDA excludes some, but not all, items that affect net income and is defined differently by other companies in our industry, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

On a consolidated basis, the following tables present a reconciliation of Adjusted EBITDA to the GAAP financial measures of net loss and cash provided by operating activities. The following tables also provide a reconciliation of Adjusted EBITDA to the GAAP financial measure of net income or loss for each of our operating segments.

Consolidated



	Three Months Ended
	March 31,						December 31,
	2016			2015			2015
	(In thousands)
Net loss	$	(59,563	)	$	(37,601	)	$	(60,590	)
Add:
Interest expense	25,279			23,516			25,303
Income tax benefit	(8,074		)	(16,232		)	(18,173		)
Depreciation and amortization	69,645			84,975			68,642
Loss (gain) on sale of a business and exit costs	148			—			(1,326		)
(Gains) losses on sales of property and equipment, net	(450		)	4,210			(368		)
Impairment of goodwill	—			—			27,434
Impairments and other	305			6,272			1,912
Impairment of equity method investment	—			—			8,806
Non-cash compensation	6,112			18,355			4,864
Severance-related costs	339			1,404			409
Restructuring charges	4,747			—			—
Interest income	(614		)	—			(617		)
Less:
Drilling rig relocation and logistics Adjusted EBITDA	—			(3,859		)	—
Water hauling Adjusted EBITDA	—			(4,586		)	—
Adjusted EBITDA	$	37,874		$	93,344		$	56,296



	Three Months Ended
	March 31,						December 31,
	2016			2015			2015
	(In thousands)
Cash provided by operating activities	$	3,875		$	27,513		$	20,444
Add:
Changes in operating assets and liabilities	6,174			35,102			12,841
Interest expense	25,279			23,516			25,303
Amortization of deferred financing costs	(1,241		)	(1,028		)	(1,242		)
Income from equity investees	—			972			—
Provision for doubtful accounts	(842		)	(2,580		)	555
Current tax expense	(8		)	—			58
Exit costs of Former Oilfield Trucking	148			—			(1,364		)
Severance-related costs	339			1,404			409
Restructuring charges	4,747			—			—
Interest income	(614		)	—			(617		)
Other	17			—			(91		)
Less:
Drilling rig relocation and logistics Adjusted EBITDA	—			(3,859		)	—
Water hauling Adjusted EBITDA	—			(4,586		)	—
Adjusted EBITDA	$	37,874		$	93,344		$	56,296

Drilling



	Three Months Ended
	March 31,				December 31,
	2016		2015		2015
	(In thousands)
Net income (loss)	$	5,184	$	479	$	(15,547	)
Add:
Income tax expense (benefit)	703		207		(4,663		)
Depreciation and amortization	38,304		49,539		37,442
Losses on sales of property and equipment, net	240		4,386		664
Impairment of goodwill	—		—		27,434
Impairments and other	305		3,729		1,912
Non-cash compensation	985		5,326		802
Severance-related costs	189		344		215
Corporate overhead allocation ^(a)	—		9,183		7,648
Restructuring charges	118		—		—
Adjusted EBITDA	$	46,028	$	73,193	$	55,907

(a)

Prior to the Current Quarter, the information that was regularly reviewed by our chief operating decision maker included general and administrative expenses that were allocated to each of our reportable segments for corporate overhead functions provided by the Other Operations segment, on behalf of our reportable segments. Effective in the Current Quarter, we no longer allocate general and administrative expenses to our reportable segments from the Other Operations segment in the information that is reviewed by our chief operating decision maker. Accordingly, this change has been reflected through retroactive revision of the prior period segment information.

Hydraulic Fracturing



	Three Months Ended
	March 31,						December 31,
	2016			2015			2015
	(In thousands)
Net (loss) income	$	(12,143	)	$	6,054		$	(15,222	)
Add:
Income tax (benefit) expense	(1,646		)	2,613			(4,565		)
Depreciation and amortization	19,741			16,277			18,691
Losses (gains) on sales of property and equipment, net	45			(5		)	59
Impairment of equity method investment	—			—			8,806
Non-cash compensation	429			1,238			207
Severance-related costs	—			81			83
Corporate overhead allocation ^(a)	—			6,654			6,096
Restructuring charges	75			—			—
Adjusted EBITDA	$	6,501		$	32,912		$	14,155

(a)

Prior to the Current Quarter, the information that was regularly reviewed by our chief operating decision maker included general and administrative expenses that were allocated to each of our reportable segments for corporate overhead functions provided by the Other Operations segment, on behalf of our reportable segments. Effective in the Current Quarter, we no longer allocate general and administrative expenses to our reportable segments from the Other Operations segment in the information that is reviewed by our chief operating decision maker. Accordingly, this change has been reflected through retroactive revision of the prior period segment information.

Oilfield Rentals



	Three Months Ended
	March 31,						December 31,
	2016			2015			2015
	(In thousands)
Net loss	$	(8,624	)	$	(3,509	)	$	(7,852	)
Add:
Income tax benefit	(1,169		)	(1,515		)	(2,355		)
Depreciation and amortization	8,501			12,172			9,390
Gains on sales of property and equipment, net	(717		)	(171		)	(1,003		)
Non-cash compensation	184			861			50
Severance-related costs	38			(46		)	82
Corporate overhead allocation ^(a)	—			1,899			2,626
Restructuring charges	40			—			—
Adjusted EBITDA	$	(1,747	)	$	9,691		$	938

(a)

Prior to the Current Quarter, the information that was regularly reviewed by our chief operating decision maker included general and administrative expenses that were allocated to each of our reportable segments for corporate overhead functions provided by the Other Operations segment, on behalf of our reportable segments. Effective in the Current Quarter, we no longer allocate general and administrative expenses to our reportable segments from the Other Operations segment in the information that is reviewed by our chief operating decision maker. Accordingly, this change has been reflected through retroactive revision of the prior period segment information.

Liquidity and Capital Resources

We require capital to fund ongoing operations, including operating expenses, organic growth initiatives, investments, acquisitions and debt service.

As of March 31, 2016, we had cash of $74.7 million and working capital of $132.9 million. As of April 21, 2016, SSE had cash and short-term investments of $80.5 million and our revolving credit facility remained undrawn. As of March 31, 2016, we had $31.1 million of purchase commitments related to future capital expenditures that we expect to incur in 2016.

We expect that our primary sources of liquidity will be from cash on hand, cash from operations and, until commencing a pre-packaged Chapter 11 proceeding, availability under our revolving credit facility. In addition, we intend to enter into a $100.0 million senior secured asset-based debtor-in-possession revolving credit facility (the “DIP Facility”) upon commencing a pre-packaged Chapter 11 proceeding after concluding solicitation of votes on the Plan pursuant to the Restructuring Support Agreement and we expect that the DIP Facility will convert to a $100.0 million senior secured asset-based revolving credit facility upon emerging from the Chapter 11 bankruptcy proceeding. For additional information about the planned restructuring, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Restructuring Support Agreement”.

Long-Term Debt

The following table presents our long-term debt as of March 31, 2016 and December 31, 2015:



	March 31, 2016		December 31, 2015
	(in thousands)
6.625% Senior Notes due 2019	$	650,000	$	650,000
6.50% Senior Notes due 2022	450,000		450,000
Term Loans	492,000		493,250
Total principal amount of debt	1,592,000		1,593,250
Less: Current portion of long-term debt	5,000		5,000
Total principal amount of long-term debt	1,587,000		1,588,250
Less: Unamortized deferred financing costs	22,506		23,658
Total long-term debt	$	1,564,494	$	1,564,592

For further information on our long-term debt, please read Note 5 to our condensed consolidated financial statements included in Item 1 of this report.

Capital Expenditures

Our business is capital-intensive, requiring significant investment to maintain, upgrade and purchase equipment to meet our customers’ needs and industry demand. Our capital requirements consist primarily of:


•	growth capital expenditures, which are defined as capital expenditures made to acquire additional equipment and other assets, increase our service lines, expand geographically or advance other strategic initiatives for the purpose of growing our business; and


•	maintenance capital expenditures, which are defined as capital expenditures that are necessary to maintain the service capability of our existing assets and include the replacement of components and equipment which are worn or obsolete.

Total capital expenditures were $54.2 million and $40.6 million for the Current Quarter and Prior Quarter, respectively. As of March 31, 2016, we had $31.1 million of purchase commitments related to future capital expenditures that we expect to incur in 2016 and we currently expect that our total capital expenditures will be under $100.0 million for 2016. We may increase, decrease or reallocate our anticipated capital expenditures during any period based on industry conditions, the availability of capital or other factors, and a significant component of our anticipated capital spending is discretionary. In addition, from time to time we may use cash on hand in excess of our budgeted capital expenditures to repurchase and cancel our outstanding long-term debt or our common stock, subject to approval by our Board of Directors.

Cash Flow

Our cash flow depends in large part on the level of spending by our customers on exploration, development and production activities. Sustained increases or decreases in the price of oil or natural gas could have a material impact on these activities, thus materially affecting our cash flows. The following is a discussion of our cash flow for the Current Quarter and Prior Quarter.



	Three Months Ended March 31,
	2016			2015
	(Unaudited) (In thousands)
Cash Flow Statement Data:
Net cash provided by operating activities	$	3,875		$	27,513
Net cash used in investing activities	$	(58,270	)	$	(38,693	)
Net cash (used in) provided by financing activities	$	(1,582	)	$	14,263
Cash, beginning of period	$	130,648		$	891
Cash, end of period	$	74,671		$	3,974

Operating Activities. Cash provided by operating activities was $3.9 million and $27.5 million for the Current Quarter and Prior Quarter, respectively. Changes in working capital items decreased cash provided by operating activities by $6.2 million and $35.1 million for the Current Quarter and Prior Quarter, respectively. Factors affecting changes in operating cash flows are largely the same as those that affect net income, with the exception of non-cash expenses such as depreciation and amortization, amortization of deferred financing costs, gains or losses on sales of property and equipment, impairments, non-cash compensation, income or losses from equity investees and deferred income taxes.

Investing Activities. Cash used in investing activities was $58.3 million and $38.7 million for the Current Quarter and Prior Quarter, respectively. Capital expenditures are the main component of our investing activities. The main component of our capital expenditures for both the Current Quarter and Prior Quarter was our investment in new PeakeRigs™. Additionally, we purchased hydraulic fracturing equipment with an aggregate of 60,000 horsepower, at auction, for $10.6 million during the Current Quarter. Cash used in investing activities was partially offset by proceeds from asset sales in the amounts of $2.2 million and $2.0 million for the Current Quarter and Prior Quarter, respectively. We also purchased $6.2 million of short-term investments during the Current Quarter.

Financing Activities. Net cash (used in) provided by financing activities was ($1.6) million and $14.3 million for the Current Quarter and Prior Quarter, respectively. We had borrowings and repayments under our credit facility of $109.3 million and $94.5 million, respectively, during the Prior Quarter. We made term loan repayments of $1.3 million during the Current Quarter.

Results of Operations

Results of Operations—Three Months Ended March 31, 2016 vs. December 31, 2015

The following table sets forth our condensed consolidated statements of operations for the Current Quarter and Previous Quarter.



	Three Months Ended
	March 31, 2016			December 31, 2015
	(In thousands)
Revenues:
Revenues	$	155,361		$	192,788
Operating Expenses:
Operating costs	106,960			124,243
Depreciation and amortization	69,645			68,642
General and administrative	22,262			16,705
Loss on sale of a business	—			38
Gains on sales of property and equipment, net	(450		)	(368		)
Impairment of goodwill	—			27,434
Impairments and other	305			1,912
Total Operating Expenses	198,722			238,606
Operating Loss	(43,361		)	(45,818		)
Other (Expense) Income:
Interest expense	(25,279		)	(25,303		)
Loss and impairment from equity investee	—			(8,806		)
Other income	1,003			1,164
Total Other Expense	(24,276		)	(32,945		)
Loss Before Income Taxes	(67,637		)	(78,763		)
Income Tax Benefit	(8,074		)	(18,173		)
Net Loss	$	(59,563	)	$	(60,590	)

Revenues. Revenues for the Current Quarter decreased $37.4 million from the Previous Quarter due to decreased utilization and increased pricing pressure during the Current Quarter. The majority of our revenues have historically been derived from CHK and its working interest partners. The percentage of our revenues derived from CHK was 64% and 69% for the Current Quarter and the Previous Quarter, respectively.



	Three Months Ended
	March 31, 2016		December 31, 2015
Revenue:	(In thousands)
Drilling	$	71,908	$	89,558
Hydraulic fracturing	76,308		91,930
Oilfield rentals	7,145		11,290
Other operations	—		10
Total	$	155,361	$	192,788

Operating Costs. Operating costs for the Current Quarter decreased $17.3 million from the Previous Quarter primarily due to a decrease in labor-related costs and a decrease in product costs in our hydraulic fracturing segment. As a percentage of revenues, operating costs were 69% and 64% for the Current Quarter and Previous Quarter, respectively. The increase was due to increased pricing pressure.



	Three Months Ended
	March 31, 2016		December 31, 2015
Operating Costs:	(In thousands)
Drilling	$	27,156	$	34,869
Hydraulic fracturing	70,439		78,083
Oilfield rentals	9,078		10,437
Other operations	287		854
Total	$	106,960	$	124,243

Drilling



	Three Months Ended
	March 31, 2016		December 31, 2015
	(In thousands)
Revenues	$	71,908	$	89,558
Operating costs	27,156		34,869
Gross margin	$	44,752	$	54,689

Drilling revenues for the Current Quarter decreased $17.7 million, or 20%, from the Previous Quarter. This decrease was primarily due to a 30% decline in revenue days. Average revenue per revenue day decreased 4% due to pricing pressure. Revenues from non-CHK customers were 39% of total segment revenues in both the Current Quarter and Previous Quarter.

Drilling operating costs for the Current Quarter decreased $7.7 million, or 22%, from the Previous Quarter, primarily due to decreases in labor-related costs. Average operating costs per revenue day in the Current Quarter increased 13% from the Previous Quarter, primarily due to fewer revenue days. As a percentage of drilling revenues, drilling operating costs were 38% and 39% for the Current Quarter and the Previous Quarter, respectively. Drilling restructuring charges were $0.1 million in the Current Quarter.

Hydraulic Fracturing



	Three Months Ended
	March 31, 2016		December 31, 2015
	(In thousands)
Revenues	$	76,308	$	91,930
Operating costs	70,439		78,083
Gross margin	$	5,869	$	13,847

Hydraulic fracturing revenues for the Current Quarter decreased $15.6 million, or 17%, from the Previous Quarter. This decrease was due to a 7% decline in revenues per stage and a 22% decline in stages completed during the Current Quarter. Revenues from non-CHK customers increased to 30% of total segment revenues in the Current Quarter, compared to 19% for the Previous Quarter.

Hydraulic fracturing operating costs for the Current Quarter decreased $7.6 million, or 10% from the Previous Quarter, primarily due to a 13% decrease in product costs. As a percentage of hydraulic fracturing revenues, hydraulic fracturing operating costs were 92% and 85% for Current Quarter and Previous Quarter, respectively. The increase was due to increased pricing pressure. Hydraulic fracturing restructuring charges were $0.1 million in the Current Quarter.

Oilfield Rentals



	Three Months Ended
	March 31, 2016			December 31, 2015
	(In thousands)
Revenues	$	7,145		$	11,290
Operating costs	9,078			10,437
Gross margin	$	(1,933	)	$	853

Oilfield rental revenues for the Current Quarter decreased $4.1 million, or 37%, from the Previous Quarter. The decrease was primarily due to a decline in utilization attributable to reductions in drilling and completions activity by our customers. As a percentage of total segment revenues, revenues from non-CHK customers increased to 76% of total segment revenues in the Current Quarter, compared to 71% for the Previous Quarter.

Oilfield rental operating costs for the Current Quarter decreased $1.4 million, or 13%, from the Previous Quarter. The decrease was primarily due to a decline in labor-related costs and subcontracting services. As a percentage of oilfield rental revenues, oilfield rental operating costs were 127% and 92% for the Current Quarter and Previous Quarter, respectively. The increase was due to significant declines in fleet utilization and increased pricing pressure.

Other Financial Statement Items

Depreciation and Amortization. Depreciation and amortization for the Current Quarter and Previous Quarter were $69.6 million and $68.6 million, respectively. As a percentage of revenues, depreciation and amortization expense was 45% and 36% for the Current Quarter and Previous Quarter, respectively.

General and Administrative Expenses. General and administrative expenses for the Current Quarter and Previous Quarter were $22.3 million and $16.7 million, respectively. During the Current Quarter, we recognized restructuring charges of $4.7 million related to the restructuring agreement we entered into in April 2016. See Note 1 to the Unaudited Condensed Consolidated Financial Statements included in Part 1 of this report for additional discussion. We also incurred non-cash compensation expenses of $4.5 million and $3.8 million and severance-related costs of $0.3 million and $0.4 million during the Current Quarter and Previous Quarter, respectively. As a percentage of revenues, general and administrative expenses were 14% and 9% for the Current Quarter and Previous Quarter, respectively.

Gains on Sales of Property and Equipment, Net. We recorded gains on sales of property and equipment of $0.5 million and $0.4 million during the Current Quarter and Previous Quarter, respectively.

Impairments and Other. During the Current Quarter and Prior Quarter, we recognized impairment charges of $0.3 million and $1.9 million for certain drilling rigs that we impaired based on expected future cash flows of these rigs.

Impairment of Goodwill. During the Previous Quarter, we recognized an impairment loss of $27.4 million on the goodwill associated with our 2011 Bronco acquisition.

Interest Expense. Interest expense for both the Current Quarter and Previous Quarter was $25.3 million related to borrowings under our senior notes, term loans and credit facility.

Loss and Impairment from Equity Investee. Loss and impairment from equity investee was $8.8 million for the Previous Quarter, respectively, which was a result of our 49% membership interest in Maalt. We recorded non-cash impairment charges of $8.8 million in the Previous Quarter which resulted from an excess of carrying value over the estimated fair value for this investment.

Other Income. Other income was $1.0 million and $1.2 million for the Current Quarter and Previous Quarter, respectively.

Income Tax Benefit. We recorded income tax benefit of $8.1 million and $18.2 million for the Current Quarter and Previous Quarter, respectively. The $10.1 million decrease in income tax benefit is primarily the result of a valuation allowance of $11.6 million being recorded in the Current Quarter which caused our effective tax rate to decrease from 23% in the Previous Quarter to 12% in the Current Quarter.

Three Months Ended March 31, 2016 vs. March 31, 2015

The following table sets forth our condensed consolidated statements of operations for the Current Quarter and Prior Quarter.



	Three Months Ended March 31,
	2016			2015
	(In thousands)
Revenues:
Revenues	$	155,361		$	429,787
Operating Expenses:
Operating costs	106,960			331,611
Depreciation and amortization	69,645			84,975
General and administrative	22,262			33,912
(Gains) losses on sales of property and equipment, net	(450		)	4,210
Impairments and other	305			6,272
Total Operating Expenses	198,722			460,980
Operating Loss	(43,361		)	(31,193		)
Other (Expense) Income:
Interest expense	(25,279		)	(23,516		)
Income from equity investee	—			972
Other income (expense)	1,003			(96		)
Total Other Expense	(24,276		)	(22,640		)
Loss Before Income Taxes	(67,637		)	(53,833		)
Income Tax Benefit	(8,074		)	(16,232		)
Net Loss	$	(59,563	)	$	(37,601	)

Revenues. Revenues and Adjusted Revenues for the Current Quarter decreased $274.4 million and $245.2 million, respectively, from the Prior Quarter. The decrease was primarily due to decreased utilization and increased pricing pressure. The percentage of our revenues derived from CHK was 64% and 74% for the Current Quarter and Prior Quarter, respectively.



	Three Months Ended March 31,
	2016		2015
Revenue:	(In thousands)
Drilling	$	71,908	$	166,054
Hydraulic fracturing	76,308		202,017
Oilfield rentals	7,145		32,488
Former oilfield trucking	—		29,228
Total	$	155,361	$	429,787

Adjusted Revenue^(a):
Revenue	$	155,361	$	429,787
Less:
Drilling rig relocation and logistics revenues	—		23,830
Water hauling revenues	—		5,398
Adjusted Revenue	$	155,361	$	400,559


(a)	“Adjusted Revenue” is a non-GAAP financial measure of revenues that excludes revenues associated with our rig relocation and logistics business and water hauling assets that were sold in the second quarter of 2015. For a

description of our calculation of adjusted revenues and the reasons why our management uses this measure to evaluate our business, please read “— How We Evaluate Our Operations” and “— Non-GAAP Financial Measures.”

Operating Costs. Operating costs and Adjusted Operating Costs for the Current Quarter decreased $224.7 million and $188.4 million, respectively, from the Prior Quarter. The decrease was due to declines in labor-related costs, a decline in utilization in each of our segments and a decrease in product costs in our hydraulic fracturing segment. As a percentage of adjusted revenues, adjusted operating costs were 69% and 74% for the Current Quarter and Prior Quarter, respectively. The decrease was due primarily to declines in labor-related costs.



	Three Months Ended March 31,
	2016		2015
Operating Costs:	(In thousands)
Drilling	$	27,156	$	98,140
Hydraulic fracturing	70,439		171,305
Oilfield rentals	9,078		23,619
Former oilfield trucking	—		36,291
Other operations	287		2,256
Total	$	106,960	$	331,611

Adjusted Operating Costs^(a):
Operating Costs	$	106,960	$	331,611
Less:
Drilling rig relocation and logistics operating costs	—		26,980
Water hauling operating costs	—		9,311
Adjusted Operating Costs	$	106,960	$	295,320

(a)

“Adjusted Operating Costs” is a non-GAAP financial measure of operating costs that excludes operating costs associated with our drilling rig relocation and logistics business and water hauling assets, which were sold in the second quarter of 2015. For a description of our calculation of adjusted operating costs and the reasons why our management uses this measure to evaluate our business, see “— How We Evaluate Our Operations” and “— Non-GAAP Financial Measures.”

Drilling



	Three Months Ended March 31,
	2016		2015
	(In thousands)
Revenues	$	71,908	$	166,054
Operating costs	27,156		98,140
Gross margin	$	44,752	$	67,914

Drilling revenues for the Current Quarter decreased $94.1 million, or 57%, from the Prior Quarter, primarily due to a 74% decrease in revenue days. Average revenue per revenue day for the Current Quarter decreased 11% from the Prior Quarter primarily due to increased pricing pressure. The share of revenues from non-CHK customers decreased to 39% of total segment revenues in the Current Quarter, compared to 41% for the Prior Quarter.

Drilling operating costs for the Current Quarter decreased $71.0 million, or 72%, from the Prior Quarter, due primarily to a decrease in labor-related costs and lower fleet utilization. As a percentage of drilling revenues, drilling operating costs were 38% and 59% for the Current Quarter and the Prior Quarter, respectively. The decrease was primarily due to a higher proportion of idle-but-contracted rigs, which generate revenue with little associated cost. Drilling restructuring charges were $0.1 million in the Current Quarter.

Hydraulic Fracturing



	Three Months Ended March 31,
	2016		2015
	(In thousands)
Revenues	$	76,308	$	202,017
Operating costs	70,439		171,305
Gross margin	$	5,869	$	30,712

Hydraulic fracturing revenues for the Current Quarter decreased $125.7 million, or 62%, from the Prior Quarter, which was primarily due to a 30% decrease in revenues per stage, in addition to a 46% decrease in completed stages. Revenues from non-CHK customers increased to 30% of total segment revenues in the Current Quarter, compared to 7% in the Prior Quarter.

Hydraulic fracturing operating costs for the Current Quarter decreased $100.9 million, or 59% from the Prior Quarter, primarily due to a 62% decrease in product costs and reduced labor-related costs. As a percentage of hydraulic fracturing revenues, hydraulic fracturing operating costs were 92% and 85% for the Current Quarter and Prior Quarter, respectively. The increase was due to increased pricing pressure. Hydraulic fracturing restructuring charges were $0.1 million in the Current Quarter.

Oilfield Rentals



	Three Months Ended March 31,
	2016			2015
	(In thousands)
Revenues	$	7,145		$	32,488
Operating costs	9,078			23,619
Gross margin	$	(1,933	)	$	8,869

Oilfield rental revenues for the Current Quarter decreased $25.3 million, or 78%, from the Prior Quarter, which was primarily due to a decline in utilization by CHK and pricing pressure. Revenues from non-CHK customers increased to 76% of total segment revenues in the Current Quarter, compared to 44% for the Prior Quarter.

Oilfield rental operating costs for the Current Quarter decreased $14.5 million, or 62%, from the Prior Quarter, which was primarily due to lower utilization and a decrease in labor-related costs. As a percentage of oilfield rental revenues, oilfield rental operating costs were 127% and 73% for the Current Quarter and Prior Quarter, respectively. The increase was due to significant declines in fleet utilization and increased pricing pressure.

Former Oilfield Trucking



	Three Months Ended March 31,
	2016		2015
	(In thousands)
Revenues	$	—	$	29,228
Operating costs	—		36,291
Gross margin	$	—	$	(7,063	)

During the second quarter of 2015, we sold our drilling rig relocation and logistics business and water hauling assets. As of June 30, 2015, there were no remaining assets or operations in the oilfield trucking segment.

Other Financial Statement Items

Depreciation and Amortization. Depreciation and amortization for the Current Quarter and Prior Quarter was $69.6 million and $85.0 million, respectively. The decrease is primarily due to the Prior Quarter including $12.0 million and $5.1 million related to change in accounting estimates and the Former Oilfield Trucking segment, respectively, partially offset by the

placing into service of our new PeakeRigs™. As a percentage of revenues, depreciation and amortization expense was 45% and 20% for the Current Quarter and Prior Quarter, respectively.

General and Administrative Expenses. General and administrative expenses for the Current Quarter and Prior Quarter were $22.3 million and $33.9 million, respectively. During the Prior Quarter, we incurred charges of $5.6 million pursuant to the transition services agreement provided by CHK. Services provided by CHK pursuant to the transition services agreement were terminated in the second quarter of 2015. During the Current Quarter, we recognized restructuring charges of $4.7 million. We incurred non-cash compensation expenses of $4.5 million and $9.5 million and severance-related costs of $0.3 million and $1.4 million during the Current Quarter and Prior Quarter, respectively. As a percentage of revenues, general and administrative expenses were 14% and 8% for the Current Quarter and Prior Quarter, respectively.

(Gains) losses on Sales of Property and Equipment, Net. We recorded (gains) losses on sales of property and equipment of ($0.5) million and $4.2 million during the Current Quarter and Prior Quarter, respectively.

Impairments and Other. During the Current Quarter and Prior Quarter, we recognized impairments of $0.3 million and $6.3 million, respectively. During the Current Quarter and Prior Quarter, we recognized impairment charges of $0.3 million and $3.3 million for certain drilling rigs and $2.5 million in the Prior Quarter for trucking fluid disposals equipment that we impaired based on future cash flows of these rigs and equipment. We also identified certain other property and equipment during the Prior Quarter that we deemed to be impaired based on our assessment of the market value and expected future cash flows of the related equipment and recognized impairment charges of $0.4 million related to this equipment.

Interest Expense. Interest expense for the Current Quarter and Prior Quarter was $25.3 million and $23.5 million, respectively, related to borrowings under our senior notes, term loans, and credit facility. The increase in interest expense from the Prior Quarter to the Current Quarter was primarily due to the addition of the Incremental Term Loan.

Income from Equity Investee. Income from equity investee was $1.0 million for the Prior Quarter, which was a result of our 49% membership interest in Maalt.

Other Income (Expense). Other income was $1.0 million and ($0.1) million for the Current Quarter and Prior Quarter, respectively.

Income Tax Benefit. We recorded an income tax benefit of $8.1 million and $16.2 million for the Current Quarter and Prior Quarter, respectively. The $8.1 million decrease in income tax benefit is primarily the result of a valuation allowance of $11.6 million being recorded in the Current Quarter which caused our effective tax rate to decrease from 30% in the Prior Quarter to 12% in the Current Quarter.

Off-Balance Sheet Arrangements

Operating Leases

As of March 31, 2016, we were party to five lease agreements with various third parties to utilize 725 rail cars for initial terms of five to seven years. Additional rental payments are required for the use of rail cars in excess of the allowable mileage stated in the respective agreement. We account for these leases as operating leases. As of March 31, 2016, we were also party to various lease agreements for other property and equipment with varying terms. We account for these leases as operating leases.

Aggregate undiscounted minimum future lease payments as of March 31, 2016 under our operating leases are presented below:



	Rail Cars		Other		Total
	(In thousands)
Remainder of 2016	$	3,974	$	1,033	$	5,007
2017	3,360		745		4,105
2018	1,430		374		1,804
2019	715		209		924
Total	$	9,479	$	2,361	$	11,840

Other Commitments

Much of the equipment we purchase requires long production lead times. As a result, we usually have outstanding orders and commitments for such equipment. As of March 31, 2016, we had $31.1 million of purchase commitments related to future inventory and capital expenditures that we expect to incur in 2016.

Critical Accounting Policies

We consider accounting policies related to property and equipment, impairment of long-lived assets, goodwill, revenue recognition and income taxes to be critical policies. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K (Commission File No. 001-36354) filed with the SEC on February 17, 2016.

Forward-Looking Statements

All references in this report to “SSE”, the “Company”, “us”, “we”, and “our” are to Seventy Seven Energy Inc. and its consolidated subsidiaries. Certain statements contained in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “project,” “predict,” “potential,” “targeting,” “exploring,” “intend,” “could,” “might,” “should,” “believe” and similar expressions. These statements involve known and unknown risks and uncertainties and involve assumptions that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Seventy Seven Energy Inc. believes the expectations reflected in these forward-looking statements are reasonable, but we cannot assure you that these expectations will prove to be correct. We caution you not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the filing date.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the following factors:


•	access to and cost of capital;


•	market prices for oil and natural gas;

•our customers’ expenditures for oilfield services;


•	dependence on CHK and its working interest partners for a majority of our revenues and our ability to secure new customers or provide additional services to existing customers;


•	the potential adverse impact of the Restructuring Transactions on our operations, management, and employees and the risks associated with operating the business during the Chapter 11 process;


•	our ability to consummate the Restructuring Transactions;


•	the terms and availability of any new debt we may obtain upon commencing voluntary Chapter 11 bankruptcy proceedings;


•	the limitations that our level of indebtedness may have on our financial flexibility and restrictions in our debt agreements;


•	our ability to reduce the level of our long-term debt and lower our cash interest obligations;


•	the cyclical nature of the oil and natural gas industry;


•	changes in supply and demand of drilling rigs, hydraulic fracturing fleets and rental equipment;


•	our credit profile;


•	access to and cost of capital;


•	hazards and operational risks that may not be fully covered by insurance;


•	increased labor costs or the unavailability of skilled workers;


•	competitive conditions; and


•	legislative or regulatory changes, including changes in environmental regulations, drilling regulations and liability under federal and state environmental laws and regulations.

Forward-looking statements related to the pre-packaged plan of reorganization involve known and unknown risks,

uncertainties, assumptions and other factors which may cause our actual results, performance or achievements to be materially

different from any results, performance or achievements expressed or implied by our forward-looking statements, including but

not limited to potential adverse effects related to the following: potential de-listing of our common stock on the NYSE;

potential restructuring of our outstanding debt and related effects on the holders of our outstanding common stock; potential

effects of the industry downturn on our business, financial condition and results of operations; potential limitations on our

ability to maintain contracts and other critical business relationships; requirements for adequate liquidity to fund our operations

in the future, including obtaining sufficient financing on acceptable terms; and other matters related to the potential

restructuring and our indebtedness, including any defaults related thereto.

If one or more events related to these or other risks and uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may differ materially from what we anticipate. Except as may be required by law, we do not intend, and do not assume any obligation, to update any forward-looking statements.

New Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation,” which modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. We are currently evaluating what impact this standard will have on our consolidated financial statements.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Historically, we have provided substantially all of our oilfield services to CHK and its working interest partners. For the Current Quarter and Prior Quarter, CHK accounted for approximately 64% and 74% of our revenues, respectively. The decline in commodity prices since mid-2014 has had an adverse effect on CHK’s and our other customers’ capital spending, which has adversely impacted our cash flows and financial position. The extent and length of the current down cycle is uncertain. If it is prolonged or worsens, it could have a further adverse effect on our customers’ capital spending. This would likely have a material adverse impact on our cash flows and financial position and could adversely affect our ability to comply with the financial covenant under our credit facility and limit our ability to fund our planned capital expenditures.

Changes in interest rates affect the amount of interest we earn on our cash, cash equivalents and short-term investments and the interest rate we pay on borrowings under our credit facility and term loans. We have borrowings outstanding under our term loans and may in the future borrow under fixed rate and variable rate debt instruments that give rise to interest rate risk. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect our future earnings and cash flows. Our primary exposure to interest rate risk results from outstanding borrowings under our credit facility and term loans.

The following table provides information about our debt instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on effective rates at March 31, 2016.



Expected Maturity Date	Fixed Rate Maturity		Average Interest Rate		Floating Rate Maturity		Average Interest Rate
	(in thousands)				(in thousands)
2016	—		—		3,750		5.000	%
2017	—		—		5,000		5.000	%
2018	—		—		5,000		5.000	%
2019	650,000		6.625	%	5,000		5.000	%
2020	—		—		5,000		5.000	%
After 2020	450,000		6.500	%	468,250		5.008	%
Total	$	1,100,000			$	492,000
Fair value	$	227,285			$	349,508

Our fuel costs, which consist primarily of diesel fuel used by our various trucks and other equipment, can expose us to commodity price risk and our hydraulic fracturing operations expose us to risks associated with the prices of materials used in hydraulic fracturing, such as sand and chemicals. The prices for fuel and these materials can be volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. We currently do not hedge our exposure to these risks.



Item 4.	Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at a reasonable level of assurance as of March 31, 2016.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



Item 1.	Legal Proceedings

The information set forth under the caption “Legal Proceedings” in Note 7 of the Notes to the Unaudited Consolidated Financial Statements in Item 1 of Part 1 of this report is incorporated by reference in response to this item.



Item 1A.	Risk Factors

Security holders and potential investors in our securities should carefully consider the risk factors set forth below and in our Annual Report on Form 10-K (Commission File No. 001-36354) filed with the SEC on February 17, 2016, together with other information in this report and other reports and materials we file with the SEC. We have identified these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by us or on our behalf.

We expect that we may not be able to regain compliance with the continued listing requirement of the NYSE and our common stock will become delisted from trading on NYSE.

On January 18, 2016, we were notified by the NYSE that the average closing price of our common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price required by the NYSE under Section 802.01C of the NYSE Listed Company Manual. The notice has no immediate impact on the listing of our common stock, which will continue to be listed and traded on the NYSE during the six-month period described below, subject to our compliance with other continued listing standards.

We have six months following receipt of the NYSE’s notice to regain compliance with the NYSE’s minimum share price requirement. We can regain compliance at any time during the six-month cure period if on the last trading day of any calendar

month during the cure period our common stock has a closing share price of at least $1.00 and an average closing share price of

at least $1.00 over the 30 trading-day period ending on the last trading day of such month. Notwithstanding the foregoing, if

we determine that we must cure the price condition by taking an action that will require approval of our stockholders (such as a

reverse stock split), we may also regain compliance by: (i) obtaining the requisite stockholder approval by no later than our

next annual meeting, (ii) implementing the action promptly thereafter, and (iii) the price of our common stock promptly

exceeding $1.00 per share, and the price remaining above that level for at least the following 30 trading days. However, if at

any time our common stock price drops to the point where the NYSE considers the price to be “abnormally low,” the NYSE

has the discretion to begin delisting proceedings immediately. While there is no formal definition of “abnormally low” in the

NYSE rules, the NYSE has recently delisted the common stock of issuers when it trades below $0.16 per share. The NYSE may also initiate the delisting process upon an intent to file or the actual filing for relief under the provisions of bankruptcy laws. In addition, the NYSE will promptly initiate suspension and delisting procedures if the NYSE determines that we have an average global market capitalization over a consecutive 30 trading-day period of less than $15.0 million.

After the expiration of this six month period or at an earlier time, if the NYSE initiates the delisting process before the six-month cure period, we expect that our common stock will become delisted from trading on the NYSE and will then be traded on and over-the-counter market. A delisting of our common stock from the NYSE could negatively impact us as it would likely reduce the liquidity and market price of our common stock; reduce the number of investors willing to hold or acquire our common stock; and negatively impact our ability to access equity markets and obtain financing.

The Restructuring Support Agreement is subject to significant conditions and milestones that may be difficult for us to satisfy.

There are certain material conditions we must satisfy under the Restructuring Support Agreement, including the timely satisfaction of milestones in the Chapter 11 proceedings, such as confirmation of the Plan and effectiveness of the Plan. Our ability to timely complete such milestones is subject to risks and uncertainties that may be beyond our control.

If the Restructuring Support Agreement is terminated, our ability to confirm and consummate the Plan could be materially and adversely affected.

The Restructuring Support Agreement contains a number of termination events, upon the occurrence of which certain parties to the Restructuring Support Agreement may terminate the agreement. If the Restructuring Support Agreement is terminated, each of the parties thereto will be released from their obligations in accordance with the terms of the Restructuring Support Agreement. Such termination may result in the loss of support for the Plan by the parties to the Restructuring Support Agreement, which could adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that any new Plan would be as favorable to holders of claims as the current Plan.

We may not be able to obtain confirmation of the Plan as outlined in the Restructuring Support Agreement.

Assuming that the Chapter 11 cases commence as provided in the Restructuring Support Agreement, there can be no assurance that the Plan as outlined in the Restructuring Support Agreement (or any other plan of reorganization) will be approved by the Bankruptcy Court, so we urge caution with respect to existing and future investments in our securities.

The success of any reorganization will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification of their interests as outlined in the plan, and there can be no guarantee of success with respect to the Plan or any other plan of reorganization. For instance, we might receive official objections to confirmation of the Plan from the various bankruptcy committees and stakeholders in the Chapter 11 cases. We cannot predict the impact that any objection might have on the Plan or on a Bankruptcy Court’s decision to confirm the Plan. Any objection may cause us to devote significant resources in response which could materially and adversely affect our business, financial condition and results of operations.

If the Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if any, distributions holders of claims against us, including holders of our secured and unsecured debt and equity, would ultimately receive with respect to their claims. Once commenced, there can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 cases.

Trading in our securities is highly speculative and poses substantial risks. We expect that the existing common stock of the Company will be extinguished and the warrants proposed to be issued to existing equity holders under the Plan may not have any value.

The Plan, as outlined in the Restructuring Support Agreement, provides that our outstanding notes will be converted into equity of the reorganized Company and that the existing common stock of the Company will be extinguished upon the Company’s emergence from Chapter 11. The Plan provides that all equity interests of existing equity holders will be extinguished. If at least two-thirds in amount and one-half in number of each class of claims entitled to vote on the Plan vote to accept the Plan, equity holders will receive two series of warrants representing the right to purchase new common stock in the reorganized Company. If any class of claims fails to vote to accept the Plan, existing equity holders will receive no distribution under the Plan. Even if the Plan is confirmed as currently outlined, the value of any warrants that are issued is highly speculative and the exercise prices of such warrants are based upon assumed equity values that may never be attained.

Our historical financial information may not be indicative of our future financial performance.

Our capital structure will likely be significantly altered under any plan of reorganization ultimately confirmed by the Bankruptcy Court. Under fresh-start reporting rules that may apply to us upon the effective date of a plan of reorganization, our assets and liabilities would be adjusted to fair values and our accumulated deficit would be restated to zero. Accordingly, if fresh-start reporting rules apply, our financial condition and results of operations following our emergence from Chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

The pursuit of the Chapter 11 cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.

While the Chapter 11 cases continue, our management will be required to spend a significant amount of time and effort focusing on the cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Chapter 11 cases are protracted.

During the pendency of the Chapter 11 cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased^(a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased under the Plans or Program
January 1, 2016 - January 31, 2016	41,561	$	0.87	—	—
February 1, 2016 - February 29, 2016	1,012	0.48		—	—
March 1, 2016 - March 31, 2016	384,687	0.70		—	—
Total	427,260	$	0.71	—	—


(a)	Reflects shares surrendered as payment for statutory withholding taxes upon the vesting of restricted stock issued pursuant to the Seventy Seven Energy Inc. 2014 Incentive Plan and the Seventy Seven Energy Inc. Amended and Restated 2014 Incentive Plan.



Item 5.	Other Information

Not applicable.



Item 6.	Exhibits

The following exhibits are filed as a part of this report:

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

Commission

File No.

Exhibit

Filing Date

Filed

Herewith

Furnished

Herewith

10.1

2016 Performance Incentive Compensation Plan*

10.2

2016 Performance Incentive Compensation Plan Form of Award Agreement*

10.3

Restructuring Support Agreement dated April 15, 2016

8-K

001-36354

10.1

4/19/2016

10.4

Amendment to Restructuring Support Agreement dated April 22, 2016

12.1

Schedule of Computation of Ratio of Earnings to Fixed Charges.

31.1

Certification of Chief Executive Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934.

31.2

Certification of Chief Financial Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1

Interactive data files pursuant to Rule 405 of Regulation S-T.



*	Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



April 25, 2016	SEVENTY SEVEN ENERGY INC.
	By:	/s/ Jerry Winchester
		Jerry Winchester
		Director, President and Chief Executive Officer

	By:	/s/ Cary Baetz
		Cary Baetz
		Chief Financial Officer and Treasurer

INDEX TO EXHIBITS

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

Commission

File No.

Exhibit

Filing Date

Filed

Herewith

Furnished

Herewith

10.1

2016 Performance Incentive Compensation Plan*

10.2

2016 Performance Incentive Compensation Plan Form of Award Agreement*

10.3

Restructuring Support Agreement dated April 15, 2016

8-K

001-36354

10.1

4/19/2016

10.4

Amendment to Restructuring Support Agreement dated April 22, 2016

12.1

Schedule of Computation of Ratio of Earnings to Fixed Charges.

31.1

Certification of Chief Executive Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934.

31.2

Certification of Chief Financial Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1

Interactive data files pursuant to Rule 405 of Regulation S-T.



*	Management contract or compensatory plan or arrangement.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company