PIONEER ENERGY SERVICES CORP. Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements made in good faith that are subject to risks, uncertainties and assumptions. These forward-looking statements are based on our current beliefs, intentions, and expectations and are not guarantees or indicators of future performance. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including risks related to our ability to obtain theBankruptcy Court's approval with respect to motions or other requests made to theBankruptcy Court in the Chapter 11 Cases, including maintaining strategic control as debtor-in-possession, and the outcomes ofBankruptcy Court rulings and the Chapter 11 Cases in general, delays in the Chapter 11 Cases, our ability to consummate the Plan, our ability to achieve our stated goals and continue as a going concern, risks that our assumptions and analyses in the Plan are incorrect, our ability to fund our liquidity requirements during the Chapter 11 Cases, our ability to comply with the covenants under our DIP Facility, the effects of the filing of the Chapter 11 Cases on our business and the interest of various constituents, the actions and decisions of creditors, regulators and other third parties that have an interest in the Chapter 11 Cases, restrictions imposed on us by theBankruptcy Court , general economic and business conditions and industry trends, levels and volatility of oil and gas prices, the continued demand for drilling services or production services in the geographic areas where we operate, the highly competitive nature of our business, technological advancements and trends in our industry and improvements in our competitors' equipment, the loss of one or more of our major clients or a decrease in their demand for our services, operating hazards inherent in our operations, the supply of marketable equipment within the industry, the continued availability of new components for our fleets, the continued availability of qualified personnel, the political, economic, regulatory and other uncertainties encountered by our operations, and changes in, or our failure or inability to comply with, governmental regulations, including those relating to the environment, the occurrence of cybersecurity incidents, the success or failure of future dispositions or acquisitions, future compliance with our debt agreements, and the impact of not having our common stock listed on a national securities exchange. We have discussed many of these factors in more detail elsewhere in this report and, including under the headings "Risk Factors" in Item 1A and "Special Note Regarding Forward-Looking Statements" in the Introductory Note to Part I. These factors are not necessarily all the important factors that could affect us. Other unpredictable or unknown factors could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. All forward-looking statements speak only as of the date on which they are made and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We advise our shareholders that they should (1) recognize that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements. 36
-------------------------------------------------------------------------------- Recent Developments Reorganization, Chapter 11 Proceedings, and Going Concern In an effort to achieve liquidity that would be sufficient to meet all of our commitments, we have undertaken a number of actions, including minimizing capital expenditures and reducing recurring expenses. However, we believe that even after taking these actions, we will not have sufficient liquidity to satisfy all of our future financial obligations, comply with our debt covenants, and execute our business plan. As a result, the Pioneer RSA Parties filed a petition for reorganization under Chapter 11 of the Bankruptcy Code onMarch 1, 2020 . As a result of the commencement of the Chapter 11 Cases onMarch 1, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to significantly de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully or in the time frame contemplated by the RSA. In connection with the Bankruptcy Petitions, we entered into the RSA with the Consenting Creditors. Pursuant to the RSA, the Consenting Creditors and the Pioneer RSA Parties made certain customary commitments to each other, including the Consenting Noteholders committing to vote for, and the Consenting Creditors committing to support, the Restructuring to be effectuated through the Plan to be proposed by the Pioneer RSA Parties. The risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our Debt Instruments, and the weak industry conditions impacting our business raise substantial doubt as to our ability to continue as a going concern. Accordingly, the audit report issued by our independent registered public accounting firm contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , which contemplate our continuation as a going concern. For additional information concerning our bankruptcy proceedings under Chapter 11, see Note 2, Going Concern and Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data, and Item 1A - "Risk Factors" in Part I of this Annual Report on Form 10-K. Company Overview and Business SegmentsPioneer Energy Services Corp. provides land-based drilling services and production services to a diverse group of oil and gas exploration and production companies inthe United States and internationally inColombia . Drilling services and production services are fundamental to establishing and maintaining the flow of oil and natural gas throughout the productive life of a well. Our business is comprised of two business lines - Drilling Services and Production Services. We report our Drilling Services business as two reportable segments: (i) Domestic Drilling and (ii) International Drilling. We report our Production Services business as three reportable segments: (i) Well Servicing, (ii) Wireline Services, and (iii) Coiled Tubing Services. Financial information about our operating segments is included in Note 12, Segment Information, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. 37
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• Drilling Services - Our current drilling rig fleet is 100% pad-capable and
offers the latest advancements in pad drilling, with 17 AC rigs in the US and
8 SCR rigs in
includes the drilling rig, crews, supplies, and most of the ancillary
equipment needed to operate our drilling rigs, which are deployed through our
division offices in the following regions:
Rig Count
Domestic drilling:
Marcellus/Utica 5
Permian Basin and Eagle Ford 10
Bakken 2
International drilling 8
25
• Production Services - Our production services business segments provide well,
wireline and coiled tubing services to producers primarily in
Mid-Continent and
of our production services business segments are as follows:
550 HP 600 HP Total
Well servicing rigs, by horsepower (HP) rating 112 12 124
Total
Wireline services units 93
Coiled tubing services units 9
Market Conditions and Outlook
Industry Overview - Demand for oilfield services offered by our industry is a
function of our clients' willingness and ability to make operating expenditures
and capital expenditures to explore for, develop and produce hydrocarbons, which
is primarily driven by current and expected oil and natural gas prices.
Our business is influenced substantially by exploration and production
companies' spending that is generally categorized as either a capital
expenditure or an operating expenditure. Capital expenditures for the drilling
and completion of exploratory and development wells in proven areas are more
directly influenced by current and expected oil and natural gas prices and
generally reflect the volatility of commodity prices. In contrast, operating
expenditures for the maintenance of existing wells, for which a range of
production services are required in order to maintain production, are relatively
more stable and predictable.
Drilling and production services have historically trended similarly in response
to fluctuations in commodity prices. However, because exploration and production
companies often adjust their budgets for exploration and development drilling
first in response to a change in commodity prices, the demand for drilling
services is generally impacted first and to a greater extent than the demand for
production services which is more dependent on ongoing expenditures that are
necessary to maintain production. Additionally, within the range of production
services businesses, those that derive more revenue from production-related
activity, as opposed to completion of new wells, tend to be less affected by
fluctuations in commodity prices and temporary reductions in industry activity.
However, in a severe downturn that is prolonged, both operating and capital
expenditures are significantly reduced, and the demand for all our service
offerings is significantly impacted. After a prolonged downturn, among the
production services, the demand for completion-oriented services generally
improves first, as exploration and production companies begin to complete wells
that were previously drilled but not completed during the downturn, and to
complete newly drilled wells as the demand for drilling services improves during
recovery.
The level of exploration and production activity within a region can fluctuate
due to a variety of factors which may directly or indirectly impact our
operations in the region. From time to time, temporary regional slowdowns or
constraints occur in our industry due to a variety of factors, including, among
others, infrastructure or takeaway capacity limitations, labor shortages,
increased regulatory or environmental pressures, or an influx of competitors in
a particular region. Any of these
38
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factors can influence the profitability of operations in the affected region.
However, term contract coverage for our drilling services business and the
mobility of all our equipment between regions reduces our exposure to the impact
of regional constraints and fluctuations in demand.
Additionally, because our business depends on the level of spending by our
clients, we are also affected by our clients' ability to access the capital
markets. After several consecutive years without significant improvement in
commodity prices, many exploration and production companies have limited their
spending to a level which can be supported by net operating cash flows alone, as
access to the capital markets through debt or equity financings has become more
challenging in our industry.
Technological advancements and trends in our industry also affect the demand for
certain types of equipment, and can affect the overall demand for the services
our industry provides. Enhanced directional and horizontal drilling techniques
have allowed exploration and production operators to drill increasingly longer
lateral wellbores which enable higher hydrocarbon production per well and reduce
the overall number of wells needed to achieve the desired production. The trend
in our industry toward fewer, but longer, lateral wellbores has led to an
overall reduction in drilling and completion activity and demand for the
equipment in our industry that is more heavily weighted toward the more
specialized equipment available, such as high-spec drilling rigs, higher
horsepower well servicing rigs equipped with taller masts, larger diameter
coiled tubing units, and other higher power ancillary equipment, which is needed
to drill, complete, and provide services to the full length of the wellbore. Our
domestic drilling and production services fleets are highly capable and designed
for operation in today's long lateral, pad-oriented environment.
For additional information concerning the potential effects of volatility in oil
and gas prices and other industry trends, see Item 1A - "Risk Factors" in Part I
of this Annual Report on Form 10-K.
Market Conditions and Outlook - Our industry experienced a severe down cycle
from late 2014 through 2016, during which WTI oil prices dipped below $30 per
barrel in early 2016. A modest recovery in commodity prices began in the latter
half of 2016 with WTI oil prices steadily increasing from just under $50 per
barrel at the end of June 2016 to approximately $60 per barrel at the end of
2017. WTI oil prices continued to increase to a high of $75 per barrel in
October 2018 , but then decreased to $45 per barrel at the end of 2018. Despite
some improvement in 2019, WTI oil prices have, on average, remained in the $55
to $60 per barrel range. However, in early 2020, oil and gas prices have fallen
below $50 per barrel, largely in response to concerns about coronavirus and its
potential impact on worldwide demand for oil.
The trends in spot prices of WTI crude oil and Henry Hub natural gas, and the
resulting trends in domestic land rig counts (per Baker Hughes ) and domestic
well servicing rig counts (per Guiberson/Association of Energy Service
Companies ) over the last three years are illustrated in the graphs below.
[[Image Removed: a3yrspotpricesandrigcountq45.jpg]]
39
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The trends in commodity pricing and domestic rig counts over the last 12 months
are illustrated below:
[[Image Removed: a1yrspotpricesandrigcountq42.jpg]]
The continuing trend toward longer lateral wellbores and the enhanced efficiency
of the equipment in our industry, in combination with current commodity prices
and more disciplined spending by exploration and production companies, has
contributed to an oversupply of equipment in our industry, declining rig counts
and dayrates, and reduced completion activity.
As a result, our drilling services experienced a slight decline in both our
average domestic revenues per day and our international utilization during the
fourth quarter of 2019, as compared to the third quarter. As of December 31,
2019 , 18 of our 25 drilling rigs are earning revenues, 15 of which are under
term contracts, which if not canceled or renewed prior to the end of their
terms, will expire as follows:
Term Contract Expiration by Period
Spot Market Total Term Within 6 Months 1 Year to 18 Months 2 to 4
Contracts Contracts 6 Months to 1 Year 18 Months to 2 Years Years
Domestic rigs 3 12 5 6 - - 1
International rigs:
Earning under contract - 3 - 3 - - -
On standby (not earning) - 2 2 - - - -
3 17 7 9 - - 1
Unlike our domestic term contracts, our international drilling contracts are
cancelable by our clients without penalty, although the contracts require 15 to
30 days notice and payment for demobilization services. The spot contracts for
our domestic drilling rigs are also terminable by our client with 30 days notice
and include a required payment for demobilization services. We are actively
marketing our idle drilling rigs, as well as those that have terms expiring in
the near term or that we otherwise expect to complete their current contracts in
the short term.
As compared to our drilling services businesses which generally perform one type
of service under longer-term contracts, our production services businesses
perform a range of services that are more short-term in nature, and for which
demand can, at times, experience quicker adjustments to regional demand and
capacity. As compared to the third quarter of 2019, demand for our production
services declined as the total number of well servicing rig hours, wireline
jobs, and coiled tubing revenue days decreased by 3%, 20%, and 18%,
respectively, despite slight pricing improvements in both our well servicing and
wireline businesses. The overall decline in activity in the fourth quarter was
driven by typical seasonal impacts combined with increased competition in the
markets we serve, especially as it relates to the market for coiled tubing
services for which an influx of equipment has led to excess capacity and
increased competition in the South Texas and Rocky Mountain regions.
Although we expect a competitive market environment and some additional clients
to decrease their activity during 2020 as their new annual budgets will reflect
the recent market softening, we remain focused on improving margins through
realignment of certain businesses and reducing costs, and we believe our
high-quality equipment, services, and excellent safety record position us well
to compete.
40-------------------------------------------------------------------------------- Liquidity and Capital Resources As a result of the commencement of the Chapter 11 Cases onMarch 1, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to significantly de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully or in the time frame contemplated by the RSA. The commencement of the Chapter 11 Cases also constituted an event of default under certain of our debt instruments that accelerated our obligations under our Senior Notes, the Prepetition ABL Facility, and Term Loan. Under the Bankruptcy Code, holders of our Senior Notes and the lenders under our Term Loan and the Prepetition ABL Facility are stayed from taking any action against us as a result of this event of default. Sources of Capital Resources Our principal sources of liquidity consist of: • cash and cash equivalents;
• cash generated from operations; and
• the availability under our DIP Facility.
Debtor-in-Possession Financing and New Revolver - OnFebruary 28, 2020 , we received commitments pursuant to the Commitment Letter fromPNC Bank, N.A. for a$75 million asset-based revolving loan debtor-in-possession financing facility and a$75 million asset-based revolving exit financing facility. OnMarch 3, 2020 , with the approval of theBankruptcy Court , we entered into the DIP Facility and used the proceeds of the initial extensions of credit thereunder to refinance all outstanding letters of credit under the Prepetition ABL Facility in connection with the termination of the Prepetition ABL Facility and to pay fees and expenses in connection with the Chapter 11 Cases and transactional and professional fees related thereto. The DIP Facility has a 5-month maturity, bears interest at a rate of LIBOR plus 200 basis points per annum, and contains customary covenants and events of default. The borrowers and guarantors under the DIP Facility are the same as the borrowers and guarantors under the Prepetition ABL Facility. Subject to certain exceptions, our obligations under the DIP Facility are superpriority administrative expenses in the Chapter 11 Cases and are secured by a first-priority lien on inventory and cash and a second-priority lien on all other assets of the borrowers and guarantors thereunder. The Commitment Letter contemplates that upon our emergence from the Chapter 11 Cases, subject to the satisfaction of certain customary conditions, the DIP Facility will "roll" into the New Revolver. Subject to the terms and conditions of the Commitment Letter, the New Revolver will have a 5-year maturity, will bear interest at a rate per annum between LIBOR plus 175 basis points and LIBOR plus 225 basis points (depending on the average excess availability under the New Revolver), and will contain customary covenants and events of default. Subject to certain exceptions and permitted liens, the obligations of the borrowers and guarantors under the New Revolver will be secured by a first-priority lien on inventory and cash and a second-priority lien on substantially all other assets of the borrowers and guarantors thereunder. We anticipate that the proceeds of the New Revolver will be used to repay in full all amounts outstanding under the DIP Facility and for general corporate purposes. Uses of Capital Resources Our principal liquidity requirements are currently for: • capital expenditures;
• working capital needs; and
• debt service.
Our operations have historically generated cash flows sufficient to meet our
requirements for debt service and normal capital expenditures. However, our
capital requirements generally increase during periods when rig construction
projects are in progress or during periods of expansion in our production
services business, at which times we have been more likely to access capital
through equity or debt financing. Additionally, our working capital needs may
increase in periods of increasing
41
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activity following a sustained period of low activity. During periods of
sustained low activity and pricing, we may also access additional capital
through the use of available funds under the DIP Facility.
Capital Expenditures - For the year ended December 31, 2019 and 2018, our
primary uses of capital resources were for property and equipment additions, for
which we paid $50.0 million and $67.1 million , respectively. In recent years, we
have limited our capital spending to primarily routine expenditures and select
asset acquisitions to optimize our fleets. In 2019, two-thirds of our total
spending related to routine expenditures to maintain our fleets, including fleet
upgrades, refurbishments and purchases of replacement supporting equipment. We
reduced our capital expenditures in 2019 by 25% from the prior year, primarily
in our production services businesses, as our fleet expansion and other
discretionary spending in these businesses decreased by a total of $15.4
million . Capital expenditures for fleet additions of approximately $7.5 million
and $18.5 million in 2019 and 2018, respectively, included the construction of
our 17th AC domestic drilling rig, which we began in 2018 and deployed in early
2019, the purchase of a coiled tubing unit in 2018, and the remaining
installments on certain fleet additions which were ordered in 2017 but delivered
in 2018, including one coiled tubing unit and three wireline units. Other
discretionary spending during 2019 and 2018 primarily related to select domestic
drilling rig upgrades and the purchase of new support equipment.
Currently, we expect to spend approximately $40 million on capital expenditures
during 2020 primarily to maintain our existing fleets and also re-activate idle
equipment as the industry improves. Actual capital expenditures may vary
depending on the climate of our industry and any resulting increase or decrease
in activity levels, the timing of commitments and payments, availability of
capital resources, and the level of investment opportunities that meet our
strategic and return on capital employed criteria. We expect to fund the capital
expenditures in 2020 from operating cash flow in excess of our working capital
requirements, although available borrowings under our DIP Facility are also
available, if necessary.
Working Capital - Our working capital and current ratio, which we calculate by
dividing current assets by current liabilities, was as follows as of
December 31, 2019 and 2018 (amounts in thousands, except current ratio):
December 31, December 31,
2019 2018 Change
Current assets $ 182,912 $ 215,034 $ (32,122 )
Current liabilities 91,581 104,768 (13,187 )
Working capital $ 91,331 $ 110,266 $ (18,935 )
Current ratio 2.0 2.1 (0.1 )
Our current assets decreased by $32.1 million during 2019, primarily related to
a decrease of $28.9 million in cash and cash equivalents and a net decrease of
$10.0 million in our total trade and unbilled receivables.
• The decrease in cash and cash equivalents is primarily due to $50.0 million of cash used for the purchase of property and equipment, partially offset by
from the sale of property and equipment, and
insurance recoveries.
• The net decrease in our total trade and unbilled receivables is primarily due
to the timing of billing and collection cycles for long-term drilling
contracts in
quarter ended
60 days, and our Colombian trade receivables generally turn over within 120
days.
• These decreases were partially offset by a combined increase of
in inventory and other receivables, primarily attributable to an increase in
inventory levels for our international operations' spare parts and supplies
supporting rigs working in remote locations, as well as an increase in
recoverable income tax receivables associated with increased activity for our
international operations.
Our current liabilities decreased by$13.2 million during 2019, primarily related to a$11.0 million decrease in accrued employee compensation, as well as a decrease in accounts payable. • The decrease in accrued employee compensation and related costs during 2019
resulted from a decrease in accrued incentive cash compensation associated
with the payment of 2018 annual bonuses in the first quarter of 2019 of
million, the
vested in
cash incentive awards in
employee
42--------------------------------------------------------------------------------
compensation and related costs was net of
a decrease of
by an increase in our accruals for operating costs, primarily due to
lengthened vendor payment cycles.
• These decreases were slightly offset by a
accrued expenses during 2019 primarily related to the recognition of
million of current operating lease liabilities due to our adoption of ASU No.
2016-02, Leases, and its related amendments as of
an increase in accrued professional fees. For additional information about
adoption of this standard, see Note 1, Organization and Summary of
Significant Accounting Policies and Note 4, Leases, of the Notes to
Consolidated Financial Statements, included in Part II, Item 8, Financial
Statements and Supplementary Data, of this Annual Report on Form 10-K.
Debt and Other Contractual Obligations - The following table includes
information about the amount and timing of our contractual obligations at
Payments Due by Period
Contractual Obligations Total Within 1 Year 2 to 3 Years 4 to 5 Years Beyond 5 Years
Debt $ 475,000 $ - $ 475,000 $ - $ -
Interest on debt 79,188 35,000 44,188 - -
Purchase commitments 3,612 3,612 - - -
Operating leases 8,716 2,496 3,380 2,029 811
Incentive compensation 4,612 4,065 547 - -
$ 571,128 $ 45,173 $ 523,115 $ 2,029 $ 811
• Debt - Debt obligations at
principal amount outstanding under our Senior Notes which mature on
2022 and
assuming a maturity date of
had no debt outstanding under our Prepetition ABL Facility.
For more information about our debt obligations, see Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. • Interest on debt - Interest payment obligations on our Senior Notes are
calculated based on the coupon interest rate of 6.125% due semi-annually in
arrears on
based on (1) the 9.5% interest rate that was in effect at
and (2) the principal balance of
assuming repayment of the outstanding balance occurs on
• Purchase commitments - Purchase commitments generally relate to capital
projects for the repair, upgrade and maintenance of our equipment, the
construction or purchase of new equipment, and purchase orders for various
job and inventory supplies. At
primarily pertain to $1.6 million of inventory and job supplies for our
coiled tubing operations, as well as support equipment for our wireline
operations and routine refurbishments to our domestic drilling fleet.
• Operating leases - Our operating lease obligations relate to long-term lease
agreements for office space, operating facilities, field personnel housing,
and office equipment.
• Incentive compensation - Incentive compensation is payable to our employees,
generally contingent upon their continued employment through the date of each
respective award's payout. A portion of our long-term incentive compensation
is performance-based, and therefore, the final amount will be determined
based on our actual performance relative to a pre-determined peer group over
the performance period. At
payable primarily relates to
compensation, which was paid in
Debt Compliance Requirements - As ofMarch 1, 2020 , we were in default under our Term Loan, Prepetition ABL Facility, and Senior Notes. Filing the Chapter 11 Cases accelerated our Term Loan, Prepetition ABL Facility, and Senior Notes obligations. Additionally, events of default under the credit agreements governing our Term Loan and Prepetition ABL Facility and the indenture governing our Senior notes have occurred and are continuing, including as a result of cross- 43
-------------------------------------------------------------------------------- defaults between such credit agreements and indenture. However, any efforts to enforce such payment obligations are automatically stayed under the provisions of the Bankruptcy Code. Our debt instruments contain various restrictions that limit our ability to enter into certain transactions and our debt obligations are, in general, guaranteed by our domestic subsidiaries. Our obligations under the Term Loan are guaranteed by our wholly-owned domestic subsidiaries, and are secured by substantially all of our domestic assets, in each case, subject to certain exceptions and permitted liens. Our obligations under the Prepetition ABL Facility are guaranteed by us and our domestic subsidiaries, subject to certain exceptions, and are secured by (i) a first-priority perfected security interest in all inventory and cash, and (ii) a second-priority perfected security in substantially all of our tangible and intangible assets, in each case, subject to certain exceptions and permitted liens. Our Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our domestic subsidiaries, generally excluding those subsidiaries which operate our international drilling business. The Term Loan contains a financial covenant requiring the ratio of (i) the net orderly liquidation value of our fixed assets (based on appraisals obtained as required by our lenders), on a consolidated basis, in which the lenders under the Term Loan maintain a first priority security interest, plus proceeds of asset dispositions not required to be used to effect a prepayment of the Term Loan to (ii) the outstanding principal amount of the Term Loan, to be at least equal to 1.50 to 1.00 as of anyJune 30 orDecember 31 of any calendar year through maturity. As ofDecember 31, 2019 , the asset coverage ratio, as calculated under the Term Loan, was 1.94 to 1.00. Additionally, if our availability under the Prepetition ABL Facility is less than 15% of the maximum amount (or$11.25 million ), we are required to maintain a minimum fixed charge coverage ratio, as defined in the Prepetition ABL Facility, of at least 1.00 to 1.00, measured on a trailing 12-month basis. Our debt compliance requirements including covenants, restrictions and guarantees are further described in Note 6, Debt, and Note 14, Guarantor/Non-Guarantor Condensed Consolidating Financial Statements, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. 44
-------------------------------------------------------------------------------- Results of Operations The following table provides certain information about our operations, including details of each of our business segments' revenues, operating costs and gross margin, and the percentage of the consolidated amount of each which is attributable to each business segment, for the years endedDecember 31, 2019 and 2018 (amounts in thousands, except percentages): Year ended December 31, 2019 2018 Revenues: Domestic drilling$ 151,769 26 %$ 145,676 25 % International drilling 88,932 15 % 84,161 14 % Drilling services 240,701 41 % 229,837 39 % Well servicing 115,715 20 % 93,800 16 % Wireline services 172,931 31 % 215,858 36 % Coiled tubing services 46,445 8 % 50,602 9 % Production services 335,091 59 % 360,260 61 % Consolidated revenues$ 575,792 100 %$ 590,097 100 % Operating costs: Domestic drilling$ 92,183 21 %$ 86,910 20 % International drilling 65,007 15 % 64,074 15 % Drilling services 157,190 36 % 150,984 35 % Well servicing 83,461 19 % 67,554 16 % Wireline services 151,145 36 % 167,337 39 % Coiled tubing services 39,557 9 % 44,038 10 % Production services 274,163 64 % 278,929 65 %
Consolidated operating costs
Gross margin: Domestic drilling$ 59,586 41 %$ 58,766 37 % International drilling 23,925 17 % 20,087 13 % Drilling services 83,511 58 % 78,853 50 % Well servicing 32,254 22 % 26,246 16 % Wireline services 21,786 15 % 48,521 30 % Coiled tubing services 6,888 5 % 6,564 4 % Production services 60,928 42 % 81,331 50 % Consolidated gross margin$ 144,439 100 %$ 160,184 100 % Consolidated: Net loss$ (63,904 ) $ (49,011 ) Adjusted EBITDA (1)$ 60,153 $ 89,655 (1) Adjusted EBITDA represents income (loss) before interest expense, income tax (expense) benefit, depreciation and amortization, impairment, and any loss on extinguishment of debt. Adjusted EBITDA is a non-GAAP measure that our management uses to facilitate period-to-period comparisons of our core operating performance and to evaluate our long-term financial performance against that of our peers. We believe that this measure is useful to investors and analysts in allowing for greater transparency of our core operating performance and makes it easier to compare our results with those of other companies within our industry. Adjusted EBITDA should not be considered (a) in isolation of, or as a substitute for, net income (loss), (b) as an indication of cash flows from operating activities or (c) as a measure of liquidity. In addition, Adjusted EBITDA does not represent funds available for discretionary use. Adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies. 45 --------------------------------------------------------------------------------
A reconciliation of net loss, as reported, to Adjusted EBITDA, and to consolidated gross margin, are set forth in the following table:
Year ended December 31,
2019 2018
(amounts in thousands)
Net loss $ (63,904 ) $ (49,011 )
Depreciation 90,884 93,554
Impairment 2,667 4,422
Interest expense 39,835 38,782
Income tax expense (benefit) (9,329 ) 1,908
Adjusted EBITDA 60,153 89,655
General and administrative 91,185 74,117
Bad debt expense (recovery), net (79 ) 271
Gain on dispositions of property and equipment, net (4,513 ) (3,121 ) Other income (2,307 ) (738 ) Consolidated gross margin$ 144,439 $ 160,184 Consolidated gross margin - Our consolidated gross margin decreased by$15.7 million , or 10%, during 2019 as compared to 2018, due to a decline in demand for our wireline services, despite an increase in gross margin for all our other business segments in 2019. The$15.7 million overall decrease in consolidated gross margin was net of a$11.0 million increase in gross margin for our other business segments. • Drilling Services - Our drilling services revenues and operating costs
increased by
during 2019 as compared to 2018. The resulting increase in margin during 2019
is primarily due to the deployment of our newest AC drilling rig in March
2019, increased revenues associated with the demobilization of rigs in
domestic drilling contracts. The following table provides operating
statistics for each of our drilling services segments:
Year ended December 31,
2019 2018
Domestic drilling:
Average number of drilling rigs 17 16
Utilization rate 92 % 99 %
Revenue days 5,660 5,808
Average revenues per day
International drilling: Average number of drilling rigs 8 8 Utilization rate 75 % 77 % Revenue days 2,195 2,258
Average revenues per day
Our domestic drilling average revenues and margin per day increased during 2019 as compared to 2018, primarily due to the deployment of our newest AC drilling rig inMarch 2019 and$3.1 million of revenues for the early termination of three of our drilling contracts, as well as the impact of higher average dayrates during 2019. Average dayrates during 2019 were higher than in 2018 primarily due to contract dayrate increases that occurred in late 2018 and early 2019, despite the downward re-pricing of contracts that were either renewed or renegotiated in late 2019. The overall increases in average revenues and margin per day were also partially offset by the impact of reduced utilization in 2019, as compared to 2018. 46
-------------------------------------------------------------------------------- Our international average revenues and margin per day increased during 2019 as compared to 2018 primarily due to$2.5 million of revenues associated with the demobilization of five rigs inColombia during the second half of 2019, as well as increasing dayrates during late 2018 and early 2019. Average margin per day during 2019 also benefited from reduced costs associated with mobilization and demobilization activity during 2019 as compared to 2018. • Production Services - Our revenues and operating costs from production
services decreased by
2019 as compared to 2018. The decrease in revenue is a result of the
decreased demand for wireline completion services, partially offset by
increased demand for our well servicing business which experienced increases
of 23% in both revenue and gross margin during 2019. The following table
provides operating statistics for each of our production services segments:
Year ended December 31,
2019 2018
Well servicing:
Average number of rigs 125 125
Utilization rate 58 % 49 %
Rig hours 201,768 171,851
Average revenue per hour $ 574 $ 546
Wireline services:
Average number of units 97 107
Number of jobs 8,366 10,943
Average revenue per job $ 20,671 $ 19,726
Coiled tubing services:
Average number of units 9 12
Revenue days 1,274 1,472
Average revenue per day $ 36,456 $ 34,376
Our well servicing business experienced an increase in demand during 2019 as
compared to 2018, as the number of completed wells increased during the
improvement our industry experienced in 2017 and 2018, resulting in a larger
inventory of producing wells that now require ongoing maintenance. Our well
servicing rig hours increased by 17%, while revenues per hour increased by 5%
during 2019 as compared to 2018.
Our wireline services business segment experienced a decrease of 24% in the
number of jobs completed during 2019, as compared to 2018 while average revenues
per job increased 5%. The decrease in activity was primarily a result of
decreased demand for completion-related services during 2019, as compared to
2018, when we experienced higher demand for services to complete both newly
drilled wells and the remaining inventory of wells which had been drilled in
prior periods but were not yet completed.
Our coiled tubing services business experienced a decrease of 13% in revenue
days during 2019 as compared to 2018, while average revenue per day increased
6%. An influx of coiled tubing equipment has led to excess capacity and
increased competition in the South Texas and Rocky Mountain regions, while
certain seasonal factors surrounding wildlife migration caused an interruption
to the operations in affected areas of the Rocky Mountains , all of which led to
a decline in revenue days during 2019, as compared to 2018. The increase in
average revenue per day during 2019 was primarily due to a larger proportion of
the work performed with larger diameter coiled tubing units, including the
addition of two new large-diameter coiled tubing units which were placed in
service in July and December 2018 . Large-diameter coiled tubing units typically
earn higher revenue rates as compared to smaller diameter coiled tubing units.
Depreciation expense - Our depreciation expense decreased by $2.7 million during
2019, primarily in our wireline and coiled tubing segments, which currently
operate with an overall smaller fleet as compared to 2018.
Impairment - During the years ended December 31, 2019 and 2018, we recognized
impairment charges of $2.7 million and $4.4 million , respectively, to reduce the
carrying values of certain assets which were classified as held for sale, to
their estimated fair values based on expected sale prices. For more detail, see
Note 5, Property and Equipment, of the Notes to Consolidated Financial
Statements, included in Part II, Item 8, Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
47
--------------------------------------------------------------------------------
Interest expense - Our interest expense increased by $1.1 million during 2019,
as compared to 2018, primarily due to an increase in the LIBOR interest rate
applicable to our Term Loan. For more detail see, Note 6, Debt, of the Notes to
Consolidated Financial Statements, included in Part II, Item 8, Financial
Statements and Supplementary Data, of this Annual Report on Form 10-K.
Income tax expense (benefit) - Our effective tax rates differ from the
applicable U.S. statutory rates due to a number of factors, primarily due to our
domestic valuation allowance and reversals of our foreign valuation allowance in
2019, as well as the impact of permanent items and the mix of profit and loss
between federal, state and international taxing jurisdictions. The change in our
income tax expense (benefit) during 2019 as compared to 2018 is largely due to
the reversal of our valuation allowance for foreign deferred tax assets, which
resulted in recognizing a benefit of $14.8 million during 2019. For more detail,
see Note 7, Income Taxes, of the Notes to Consolidated Financial Statements,
included in Part II, Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
General and administrative expense - Our general and administrative expense
increased by $17.1 million , or 23%, during 2019 as compared to 2018, largely due
to a net increase in incentive compensation of $9.4 million associated with
retention and incentive compensation awards granted in the second half of 2019,
partially offset by the concurrent termination of the previous annual and
long-term cash incentive awards. The increase is also attributable to an
increase in professional fees of $6.5 million during 2019 as compared to 2018
related in part to the evaluation of strategic alternatives and the ultimate
preparation for the filing of the Chapter 11 Cases in 2020 as well as costs
incurred in connection with the evaluation and selection of a company-wide
enterprise resource planning system.
Gain on dispositions of property and equipment, net - During the years ended
December 31, 2019 and 2018, we recognized net gains of $4.5 million and $3.1
million , respectively, on the disposition or sale of various property and
equipment, primarily including drill pipe and collars, a domestic drilling yard,
and certain older and/or underutilized equipment, most of which were previously
held for sale.
Other income - The increase in our other income during 2019 is primarily related
to net foreign currency gains recognized for our Colombian operations, as
compared to net foreign currency losses during 2018.
Inflation
When the demand for drilling and production services increases, we may be
affected by inflation, which primarily impacts:
• wage rates for our operations personnel which increase when the
availability of personnel is scarce;
• materials and supplies used in our operations;
• equipment repair and maintenance costs;
• costs to upgrade existing equipment; and
• costs to construct new equipment.
With the increases in activity in our industry, we estimate that inflation had a modest impact on our operations during 2018 and 2019. Although it varies by business, we do not expect significant inflationary pressure to impact our business in 2020. Critical Accounting Policies and Estimates The preparation of financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates. Going concern - The accompanying financial statements have been prepared assuming that we will continue as a going concern. In an effort to achieve liquidity that would be sufficient to meet all of our commitments, we have undertaken a number of actions, including minimizing capital expenditures and reducing recurring expenses. However, we believe that even after taking these actions, we will not have sufficient liquidity to satisfy all of our future financial obligations, comply with our debt covenants, and execute our business plan. As a result, the Pioneer RSA Parties filed a petition for reorganization under Chapter 11 of the Bankruptcy Code onMarch 1, 2020 . The risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our Debt Instruments, and the weak industry conditions impacting our business raise substantial doubt as to our ability to continue as a going concern. For more information, see Note 2, Going Concern and Subsequent Events, of the Notes to Consolidated Financial Statements, included in Part II, Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. 48 -------------------------------------------------------------------------------- Leases - InFebruary 2016 , the FASB issued ASU No. 2016-02, Leases, which among other things, requires lessees to recognize substantially all leases on the balance sheet, with expense recognition that is similar to the former lease standard, and aligns the principles of lessor accounting with the principles of the FASB's new revenue guidance in ASC Topic 606. InJuly 2018 , the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, which provides an option to apply the guidance prospectively, and provides a practical expedient allowing lessors to combine the lease and non-lease components of revenues where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease. The practical expedient also allows a lessor to account for the combined lease and non-lease components under ASC Topic 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined component. As a lessor, we elected to apply the practical expedient which allows us to continue to recognize our revenues (both lease and service components) under ASC Topic 606, and continue to present them as one revenue stream in our consolidated statements of operations. As a lessee, this standard primarily impacts our accounting for long-term real estate and office equipment leases, for which we recognized an operating lease asset and a corresponding operating lease liability on our consolidated balance sheet of$9.8 million at the adoption date ofJanuary 1, 2019 . For leases that commenced prior to adoption of ASC Topic 842, we elected to apply the package of practical expedients which allows us to carry forward the historical lease classification. The adoption of ASC Topic 842 also resulted in a cumulative effect adjustment of$0.3 million after applicable income taxes, related to the write off of previously unamortized deferred lease liabilities at the date of adoption. For more information about the accounting under ASC Topic 842, and disclosures under the new standard, see Note 4, Leases, of the Notes to Consolidated Financial Statements, included in Part II, Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Accounting estimates - Material estimates that are particularly susceptible to significant changes in the near term relate to our estimates of certain variable revenues and amortization periods of certain deferred revenues and costs associated with drilling daywork contacts, our estimates of projected cash flows and fair values for impairment evaluations, our estimate of the valuation allowance for deferred tax assets, our estimate of the liability relating to the self-insurance portion of our health and workers' compensation insurance, and our estimate of compensation-related accruals. • In accordance with ASC Topic 606, Revenue from Contracts with Customers, we
estimate certain variable revenues associated with the demobilization of our
drilling rigs under daywork drilling contracts. We also make estimates of the
applicable amortization periods for deferred mobilization costs, and for
mobilization revenues related to cancelable term contracts which represent a
material right to our clients. These estimates and assumptions are described
in more detail in Note 3, Revenue from Contracts with Customers. In order to
make these estimates, management considers all the facts and circumstances
pertaining to each particular contract, our past experience and knowledge of
current market conditions. For more information, see Note 3, Revenue from
Contracts with Customers, of the Notes to Consolidated Financial Statements,
included in Part II, Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
• In accordance with ASC Topic 360, Property, Plant and Equipment, we monitor
all indicators of potential impairments. Due to lower-than-anticipated
operating results and a decline in our projected cash flows for the coiled
tubing reporting unit, we performed an impairment analysis of this reporting
unit at
this analysis, we concluded that this reporting unit was not at risk of
impairment because the estimated fair value of the reporting unit's assets
was in excess of the carrying value. The assumptions we use in the evaluation
for impairment are inherently uncertain and require management judgment.
Although we believe the assumptions and estimates used in our impairment
analysis are reasonable, different assumptions and estimates could materially
impact the analysis and resulting conclusions. The most significant inputs
used in our impairment analysis include the projected utilization and pricing
of our services, as well as the estimated proceeds upon any future sale or
disposal of the assets, all of which are classified as Level 3 inputs as
defined by ASC Topic 820, Fair Value Measurements and Disclosures. Ifcommodity prices decrease or remain at current levels for an extended period
of time, or if the demand for any of our services decreases below what we are
currently projecting, our estimated cash flows may decrease and our estimates
of the fair value of certain assets may decrease as well. If any of the
foregoing were to occur, we could incur impairment charges on the related
assets. For more information, see Note 5, Property and Equipment, of the
Notes to Consolidated Financial Statements, included in Part II, Item 8,
Financial Statements and Supplementary Data, of this Annual Report on Form
10-K.
• As of
tax assets related to domestic and foreign net operating losses,
respectively, that are available to reduce future taxable income. In
assessing the realizability of
49-------------------------------------------------------------------------------- our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the fourth quarter of 2019, as a result of sustained profitability in our foreign operations, forecasted earnings, and other positive evidence, we determined that our foreign deferred tax assets, which include net operating loss carryforwards, were likely to be fully realized, and as a result, we reduced our valuation allowance and recorded a related income tax benefit of$14.8 million . As ofDecember 31, 2019 , we continue to maintain a valuation allowance of$59.8 million that offsets a portion of our domestic net deferred tax assets. For more information, see Note 7, Income Taxes, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. • We use a combination of self-insurance and third-party insurance for various
types of coverage. We have stop-loss coverage of
individual per year under our health insurance and a deductible of
per occurrence under our workers' compensation insurance. We have a
deductible of $250,000 per occurrence under both our general liability
insurance and auto liability insurance, as well as an additional annual
aggregate deductible of $250,000 under our general liability insurance. At
approximately
self-insurance portion of our health insurance and approximately
of accruals for costs associated with our workers' compensation insurance. We
accrue for these costs as claims are incurred using an actuarial calculation
that is based on industry and our company's historical claim development
data, and we accrue the cost of administrative services associated with
claims processing.
• Our compensation expense includes estimates for certain of our long-term
incentive compensation plans which have performance-based award components
dependent upon our performance over a set performance period, as compared to
the performance of a pre-defined peer group. The accruals for these awards
include estimates which affect our compensation expense, employee-related
accruals and equity. The accruals are adjusted based on actual achievement
levels at the end of the pre-determined performance periods. Additionally,
our phantom stock unit awards are classified as liability awards under ASC
Topic 718, Compensation-Stock Compensation, because we expect to settle the
awards in cash when they vest, and are remeasured at fair value at the end of
each reporting period until they vest. The change in fair value is recognized
as a current period compensation expense in our consolidated statements of
operations. Therefore, changes in the inputs used to measure fair value can
result in volatility in our compensation expense. This volatility increases
as the phantom stock awards approach the vesting date. For more information,
see Note 10, Stock-Based Compensation Plans, of the Notes to Consolidated
Financial Statements, included in Part II, Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
Recently Issued Accounting Standards For a detail of recently issued accounting standards, see Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements.
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