Emergence from Chapter 11 and Fresh Start Accounting

In connection with the Company’s emergence from Chapter 11, on the Effective Date, the Company applied the provisions of fresh start accounting, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, (“ASC 852”), to its consolidated financial statements. The Company qualified for fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (ii) the reorganization value of the Company's assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. FASB ASC 852 requires that fresh start accounting be applied as of the date the Prepackaged Plan were approved, or as of a later date when all material conditions precedent to effectiveness of the Prepackaged Plan are resolved, which occurred on December 23, 2016. We elected to apply fresh start accounting effective December 31, 2016, to coincide with the timing of our normal December accounting period close. We evaluated the events between December 23, 2016 and December 31, 2016 and concluded that the use of an accounting convenience date of December 31, 2016 (the “Convenience Date”) did not have a material impact on our results of operations or financial position. As such, the application of fresh start accounting was reflected in our Consolidated Balance Sheet as of December 31, 2016 and fresh start accounting adjustments related thereto were included in our Consolidated Statements of Operations for the year ended December 31, 2016.

The implementation of the Prepackaged Plan and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our consolidated financial statements and resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, our consolidated financial statements for periods prior to December 31, 2016 will not be comparable to our consolidated financial statements as of December 31, 2016 or for periods subsequent to December 31, 2016. References to “Successor” or “Successor Company” refer to the Company on or after December 31, 2016, after giving effect to the implementation of the Prepackaged Plan and the application of fresh start accounting. References to “Predecessor” or “Predecessor Company” refer to the Company prior to December 31, 2016. Additionally, references to periods on or after December 31, 2016 refer to the Successor and references to periods prior to December 31, 2016 refer to the Predecessor.

Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets and liabilities in conformity with ASC 805, Business Combinations (“ASC 805”). Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets, if present, is reported as goodwill.

Under ASC 852, the Successor Company must determine a value to be assigned to the equity of the emerging company as of the date of adoption of fresh start accounting. To facilitate this calculation, the Company estimated the enterprise value of the Successor Company by using a discounted cash flow (“DCF”) analysis under the income approach. The Company also considered the guideline public company and guideline transactions methods under the market approach as reasonableness checks to the indications from the income approach.

Enterprise value represents the fair value of an entity’s interest-bearing debt and stockholders’ equity. In the disclosure statement associated with the Prepackaged Plan, which was confirmed by the Bankruptcy Court, the Company estimated a range of enterprise values between $425 million and $625 million, with a midpoint of $525 million. The Company deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of $525 million utilized for fresh-start accounting.

To estimate enterprise value utilizing the DCF method, the Company established an estimate of future cash flows for the period ranging from 2017 to 2025 and discounted the estimated future cash flows to present value. The expected cash flows for the period 2017 to 2025 were based on the financial projections and assumptions utilized in the disclosure statement. The expected cash flows for the period 2017 to 2025 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable, and an effective tax rate of 38.5%. A terminal value was included, based on the cash flows of the final year of the forecast period.

The discount rate of 17.0% was estimated based on an after-tax weighted average cost of capital (“WACC”) reflecting the rate of return that would be expected by a market participant. The WACC also takes into consideration a company specific risk premium reflecting the risk associated with the overall uncertainty of the financial projections used to estimate future cash flows.

The guideline public company and guideline transaction analysis identified a group of comparable companies and transactions that have operating and financial characteristics comparable in certain respects to the Company, including, for example, comparable lines of business, business risks and market presence. Under these methodologies, certain financial multiples and ratios that measure financial performance and value are calculated for each selected company or transactions and then compared to the implied multiples from the DCF analysis. The Company considered enterprise value as a multiple of each selected company and transactions publicly available earnings before interest, taxes, depreciation and amortization (“EBITDA”).

The estimated enterprise value and the equity value are highly dependent on the achievement of the future financial results contemplated in the projections that were set forth in the Prepackaged Plan. The estimates and assumptions made in the valuation are inherently subject to significant uncertainties. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would have significantly affected the reorganization value include the assumptions regarding revenue growth, operating expenses, the amount and timing of capital expenditures and the discount rate utilized.

Fresh start accounting reflects the value of the Successor Company as determined in the confirmed Prepackaged Plan. Under fresh start accounting, asset values are remeasured and allocated based on their respective fair values in conformity with the acquisition method of accounting for business combinations in ASC 805. Liabilities existing as of the Effective Date, other than deferred taxes were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with applicable accounting standards. Predecessor accumulated depreciation, accumulated amortization and retained deficit were eliminated.

Machinery and Equipment

To estimate the fair value of machinery and equipment, the Company considered the income approach, the cost approach, and the sales comparison (market) approach for each individual asset. The primary approaches that were relied upon to value these assets were the cost approach and the market approach. Although the income approach was not applied to value the machinery and equipment assets individually, the Company did consider the earnings of the enterprise of which these assets are a part. When more than one approach is used to develop a valuation, the various approaches are reconciled to determine a final value conclusion.

The typical starting point or basis of the valuation estimate is replacement cost new (RCN), reproduction cost new (CRN), or a combination of both. Once the RCN and CRN estimates are adjusted for physical and functional conditions, they are then compared to market data and other indications of value, where available, to confirm results obtained by the cost approach.

Where direct RCN estimates were not available or deemed inappropriate, the CRN for machinery and equipment was estimated using the indirect (trending) method, in which percentage changes in applicable price indices are applied to historical costs to convert them into indications of current costs. To estimate the CRN amounts, inflation indices from established external sources were then applied to historical costs to estimate the CRN for each asset.

The market approach measures the value of an asset through an analysis of recent sales or offerings of comparable property, and takes into account physical, functional and economic conditions. Where direct or comparable matches could not be reasonably obtained, the Company utilized the percent of cost technique of the market approach. This technique looks at general sales, sales listings, and auction data for each major asset category. This information is then used in conjunction with each asset’s effective age to develop ratios between the sales price and RCN or CRN of similar asset types. A market-based depreciation curve was developed and applied to asset categories where sufficient sales and auction information existed.

Where market information was not available or a market approach was deemed inappropriate, the Company developed a cost approach. In doing so, an indicated value is derived by deducting physical deterioration from the RCN or CRN of each identifiable asset or group of assets. Physical deterioration is the loss in value or usefulness of a property due to the using up or expiration of its useful life caused by wear and tear, deterioration, exposure to various elements, physical stresses, and similar factors.

Functional and economic obsolescence related to these was also considered. Functional obsolescence due to excess capital costs was eliminated through the direct method of the cost approach to estimate the RCN. Functional obsolescence was applied in the form of a cost-to-cure penalty to certain personal property assets needing significant capital repairs. Economic obsolescence was also applied to stacked and underutilized assets based on the status of the asset. Economic obsolescence was also considered in situations in which the earnings of the applicable business segment in which the assets are employed suggest economic obsolescence. When penalizing assets for economic obsolescence, an additional economic obsolescence penalty was levied, while considering scrap value to be the floor value for an asset.

Land and Buildings

In establishing the fair value of the real property assets, each of the three traditional approaches to value: the income approach, the market approach and the cost approach was considered. The Company primarily relied on the market and cost approaches.

Land - In valuing the fee simple interest in the land, the Company utilized the sales comparison approach (market approach). The sales comparison approach estimates value based on what other purchasers and sellers in the market have agreed to as the price for comparable properties. This approach is based on the principle of substitution, which states that the limits of prices, rents and rates tend to be set by the prevailing prices, rents and rates of equally desirable substitutes. In conducting the sales comparison approach, data was gathered on comparable properties and adjustments were made for factors including market conditions, size, access/frontage, zoning, location, and conditions of sale. Greatest weight was typically given to the comparable sales in proximity and similar in size to each of the owned sites. In some cases, market participants were contacted to augment the analysis and to confirm the conclusions of value.

Building & Site Improvements - In valuing the fee simple interest in the real property improvements, the Company utilized the direct and indirect methods of the cost approach. For the direct method cost approach analysis, the starting point or basis of the cost approach is the RCN. In order to estimate the RCN of the buildings and site improvements, various factors were considered including building size, year built, number of stories, and the breakout of the space, property history, and maintenance history. The Company used the data collected to calculate the RCN of the buildings using recognized estimating sources for developing replacement, reproduction, and insurable value costs.

In the application of the indirect method cost approach, the first step is to estimate a CRN for each improvement via the indirect (trending) method of the cost approach. To estimate the CRN amounts, the Company applied published inflation indices obtained from third party sources to each asset’s historical cost to convert the known cost into an indication of current cost. As historical cost was used as the starting point for estimating RCN, we only considered this approach for assets with historical records.

Once the RCN and CRN of the improvements was computed, the Company estimated an allowance for physical depreciation for the buildings and land improvements based upon its respective age.

Intangible Assets

The financial information used to estimate the fair values of intangible assets was consistent with the information used in estimating the Company’s enterprise value. Tradenames were valued primarily utilizing the relief from royalty method of the income approach. Significant inputs and assumptions included remaining useful lives, the forecasted revenue streams, applicable royalty rates, tax rates, and applicable discount rates. Customer relationships were considered in the analysis, but based on the valuation under the excess earnings methodology, no value was attributed to customer relationships.

The following table reconciles the enterprise value to the estimated fair value of Successor common stock par value $0.01 per share (“Successor Common Stock”), as of the Effective Date (in thousands, except share and per share value):



Enterprise value	$	525,000
Plus: Cash and cash equivalents and restricted cash	101,304
Plus: Non-operating assets	11,324
Fair value of invested capital	637,628
Less: Fair value of Term Loan	(152,838		)
Less: Fair value of Capital Leases	(70,382		)
Stockholders' equity at December 31, 2016	$	414,408
Shares outstanding at December 31, 2016	25,998,844

Per share value	$	15.94

In connection with fresh start accounting, the Company’s Term Loan and capital leases were recorded at fair value of $223.2 million as determined using a market approach. The difference between the $242.2 million principal amount and the fair value recorded in fresh start accounting is being amortized over the life of the debt using the effective interest rate method.

The fair values of the Warrants was estimated to be $4.04. The fair value of the Warrants were estimated using a Black-Scholes pricing model with the following assumptions:



Stock price	$14.66
Strike price	$55.25
Expected volatility	55.7	%
Expected dividend rate	—
Risk free interest rate	2.35	%
Expiration date	December 23, 2023

The fair value of these Warrants was estimated using Level 2 inputs.

The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (in thousands):



Enterprise Value	$	525,000
Plus: Cash and cash equivalents and restricted cash	101,304
Plus: Other non-operating assets	11,324
Fair Value of Invested Capital	637,628
Plus: Current liabilities, excluding current portion of long-term debt	101,353
Plus: Non-current liabilities	29,179
Reorganization Value of Successor Assets	$	768,160

In determining reorganization value, the Company estimated fair value for property and equipment using significant unobservable inputs based on market and income approaches. Basic commissioned third-party appraisal services to estimate the fair value of its revenue-generating fixed assets and considered current market conditions and management’s judgment to estimate the fair value of non-revenue-generating assets.

Consolidated Balance Sheet

The adjustments set forth in the following consolidated balance sheet reflect the effect of the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as estimated fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes highlight methods used to determine estimated fair values or other amounts of assets and liabilities, as well as significant assumptions.



	As of December 31, 2016
	Predecessor Company			Reorganization Adjustments				Fresh Start Adjustments				Successor Company
	(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	27,308		$	71,567		A	$	—			$	98,875
Restricted cash	8,391			(5,962		)	B	—				2,429
Trade accounts receivable	108,655			—				—				108,655
Accounts receivable - related parties	31			—				—				31
Income tax receivable	1,271			—				—				1,271
Inventories	35,691			—				—				35,691
Prepaid expenses	15,575			—				—				15,575
Other current assets	8,506			—				(6,503		)	M	2,003
Total current assets	205,428			65,605				(6,503		)		264,530
Property and equipment, net	667,239			—				(178,391		)	N	488,848
Deferred debt costs, net of amortization	1,249			66			C	(1,315		)	O	—
Other intangible assets, net of amortization	57,227			—				(53,769		)	P	3,458
Other assets	11,324			—				—				11,324
Total assets	$	942,467		$	65,671			$	(239,978	)		$	768,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable	$	47,932		$	27		D	$	—			$	47,959
Accrued expenses	65,056			(13,879		)	E	152				51,329
Current portion of long-term debt	76,865			(36,740		)	F	(1,657		)	Q	38,468
Other current liabilities	2,065			—				—				2,065
Total current liabilities	191,918			(50,592		)		(1,505		)		139,821
Long-term liabilities not subject to compromise:
Long-term debt	39,570			162,525			G	(17,343		)	R	184,752
Deferred tax liabilities	663			—				(663		)	S	—
Other long-term liabilities	29,179			—				—				29,179
Total liabilities not subject to compromise	261,330			111,933				(19,511		)		353,752
Liabilities subject to compromise	979,437			(979,437		)	H	—				—
Total liabilities	1,240,767			(867,504		)		(19,511		)		353,752
Stockholders' equity:
Predecessor common stock, $0.01 par value:	435			(435		)	I	—				—
Predecessor paid-in capital	387,269			—				(387,269		)	J	—
Predecessor treasury stock	(7,519		)	7,519			L	—				—
Successor preferred stock, $0.01 par value:	—			—				—				—
Successor common stock; $0.01 par value;	—			261			I	—				261
Successor additional paid-in capital	—			410,540			J	7,084			J	417,624
Retained deficit	(678,485		)	518,767			K	159,718			T	—
Successor treasury stock	—			(3,477		)	L	—				(3,477		)
Total stockholders' equity	$	(298,300	)	$	933,175			$	(220,467	)		$	414,408
Total liabilities and stockholder's equity	$	942,467		$	65,671			$	(239,978	)		$	768,160

Reorganization Adjustments

A. Reflects the cash receipts (payments) from implementation of the Prepackaged Plan (in thousands):



Record receipt of $125 million under the Rights Offering for New Convertible Notes deemed to have been converted to Successor Common Stock	$	125,000
Capital Lease Fees & Expenses	(62		)
Creditors' professional fees transferred to Fee Escrow Account	(6,630		)
Debtors' professional fees transferred to Fee Escrow Account	(9,526		)
Fees for establishing the Fee Escrow Account	(5		)
Payment of ABL Facility Claims on account of fees, charges, or other amounts payable under the ABL Credit Agreement.	(66		)
Payment of ABL Facility Claims on account of interest payable under the ABL Credit Agreement.	(618		)
Payment of Allowed Term Loan Claim on account of fees, charges, or other amounts payable under the Term Loan Agreement	(41		)
Payment of closing fees & expenses for the Amended and Restated ABL Credit Agreement	(1,610		)
Payment of Debtor in Possession Facility Claims, Fees and Accrued Interest	(40,296		)
Payment of Fees and Expenses under Debtor in Possession Facility Order	(452		)
Payments to 2019 & 2022 Notes Indenture Trustees	(89		)
Release of restricted cash to unrestricted cash	5,962
Net Cash Receipts	$	71,567

B. Reflects the release of restricted cash to unrestricted cash.

C. Reflects the fees to reinstate the Asset Based Loan under the Prepackaged Plan.

D. Rights offering expense for filing with the SEC.

E. Reflects payment (receipts) of expenses incurred as part of the reorganization and paid in accordance with the Prepackaged Plan upon emergence (in thousands).



Debtors' professional fees transferred to Fee Escrow Account	$	9,526
Creditors' professional fees transferred to Fee Escrow Account	6,630
Payment of Debtor in Possession Facility Claims	1,907
Payment of ABL Facility Claims on account of interest payable under the ABL Credit Agreement.	618
Payment of Fees and Expenses under Debtor in Possession Facility Order	452
Payments to 2019 & 2022 Notes Indenture Trustees	89
Income tax withholding	(3,477		)
To reinstate claim deemed to be accrued and unpaid interest under the Amended and Restated Term Loan.	(1,866		)
Net Payment of Accrued Expenses	$	13,879

F. Repayment of the Debtor in Possession Financing of $38.4 million partially offset by the reinstatement of short-term portion of the Term Loan debt of $1.6 million in accordance with the Prepackaged Plan

G. Reinstatement of long-term debt in accordance with the Prepackaged Plan.

H. Liabilities subject to compromise were settled as follows in accordance with the Prepackaged Plan (in thousands):



Outstanding principal amount of Term Loan	$	164,175
Accrued interest on Term Loan	1,866
Outstanding Unsecured Notes	775,000
Accrued interest on Unsecured Notes	38,396
Balance of Liabilities Subject to Compromise	979,437

To reinstate the outstanding principal amount of Term Loan under the Amended and Restated Term Loan Facility.	$	(164,175	)
To reinstate claim deemed to be accrued and unpaid interest under the Amended and Restated Term Loan.	(1,866		)
Record issuance of equity to holders of Unsecured Notes	(273,103		)
Recoveries pursuant to the Prepackaged Plan	(439,144		)

Net Gain on Debt Discharge	$	540,293

I. Cancellation of Predecessor equity to additional paid-in capital and distribution of 26,095,431 shares of Successor Common Stock at par value of $0.01 per share.



				Shares Issued
Rights Offering				10,825,620
Stock to Predecessor shareholders				75,001
Management Incentive Plan (MIP)				269,810
Stock to Senior Note claimants				14,925,000
Total Successor Shares Issued				26,095,431

J. Record additional paid-in capital adjustments on elimination of Predecessor equity and issuance of shares of Successor Common Stock.

K. Reflects the cumulative impact of the reorganization adjustments on retained deficits discussed above (in thousands):



Net Gain on Debt discharge	$	540,293
Capital lease fees and expenses	(62		)
Fees for establishing the fee escrow account	(5		)
Issuance of warrants per terms of the Plan and the Warrant Agreement	(8,358		)
Payment of Allowed Term Loan Claim on account of fees, charges, or other amounts payable under the Term Loan Agreement	(42		)
Payment of closing fees and expenses for the Amended and Restated ABL Credit Agreement	(1,610		)
Record distribution of 0.5% of the 15 million shares of Successor Common Stock (subject to dilution) to holders of Existing Equity Interests.	(1,372		)
Restricted stock amortization expense	(216		)
Record issuance of shares for initially vested RSUs under MIP	(9,861		)
Net retained earnings impact resulting from implementation of the Prepackaged Plan	$	518,767

L. Elimination of Predecessor Treasury Stock and withholding on shares issued under MIP.

Fresh Start Adjustments

M. Impairment of assets held for sale.

N. Reflects a $178.4 million reduction in the net book value of property and equipment to estimated fair value.

The following table summarizes the components of property and equipment, net of the Predecessor Company and Successor Company (in thousands):



	Successor		Predecessor
Land	$	21,010	$	22,135
Buildings and improvements	39,588		74,263
Well service units and equipment	96,365		349,001
Fracturing/test tanks	75,506		354,398
Pumping equipment	85,247		345,991
Fluid services equipment	57,359		265,599
Disposal facilities	47,507		161,220
Contract drilling equipment	12,257		112,289
Rental equipment	32,582		96,724
Light vehicles	12,722		65,434
Software	641		21,914
Other	3,885		13,533
Construction equipment	1,485		15,223
Brine and fresh water stations	2,694		16,035
	488,848		1,913,759
Less accumulated depreciation and amortization	—		1,246,520
Total	$	488,848	$	667,239

O. Elimination of deferred debt costs.

P. Reflects a $53.8 million reduction of the net book value of intangible assets.

Q. Discount to fair market value of current portion of capital leases of $1.7 million, and increase in the fair market value of operating leases of $0.2 million.

R. Discount to fair market value of Term Loan of $11.4 million and long-term portion of capital leases of $6 million.

S. Elimination of deferred tax liabilities.

T. Reflects the cumulative impact of fresh start adjustments as discussed above (in thousands):



Retained Deficit Adjustments
Eliminate historical loss from Predecessor	$	(678,485	)
Eliminate retained deficit due to Prepackaged Plan Effects upon emergence	518,767
Net retained deficit impact of fresh start accounting	$	(159,718	)