Organization and Summary of Significant Accounting Policies

Business

Pioneer Energy Services Corp. provides drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia. We also provide two of our services (coiled tubing and wireline services) offshore in the Gulf of Mexico.

Our Drilling Services Segment provides contract land drilling services to a diverse group of oil and gas exploration and production companies through our four drilling divisions in the US, and internationally in Colombia. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. The drilling rigs in our fleet are currently assigned to the following divisions:



Drilling Division	Rig Count
South Texas	10
West Texas	8
North Dakota	8
Appalachia	4
Colombia	8
	38

Beginning in October 2014, domestic and international oil prices have declined significantly resulting in a downturn in our industry, affecting both drilling and production services. In drilling, all rig classes were severely impacted by the industry downturn. However, AC drilling rigs equipped with either a walking or skidding system are the best suited for horizontal pad drilling and we believe they are the most desirable rig design available.

We have deployed four new-build 1,500 horsepower AC drilling rigs under multi-year term contracts during 2015 and expect to complete construction of one more new-build drilling rig by the end of the year. We also sold 28 of our mechanical and lower horsepower electric drilling rigs during 2015 which were the most negatively impacted by the industry downturn.

We expect to end 2015 with a drilling fleet of 39 rigs, of which 95% will be capable of drilling horizontally, with all but one of our AC rigs built within the last five years. The removal of older, less capable rigs from our fleet and the recent and ongoing investments in the construction of new-builds is transforming our fleet into a highly capable, pad optimal fleet focused on the horizontal drilling market.

Currently, 21 of our 38 drilling rigs are earning revenues under drilling contracts, 16 of which are earning under domestic term contracts, and three of which are under term contracts in Colombia. We are actively marketing our five remaining idle drilling rigs in Colombia to various operators to diversify our client base, and evaluating other options including the possibility of the sale of some or all of our assets in Colombia.

Our Production Services Segment provides a range of services to exploration and production companies, including well servicing, wireline services and coiled tubing services. Our production services operations are concentrated in the major United States onshore oil and gas producing regions in the Mid-Continent and Rocky Mountain states and in the Gulf Coast, both onshore and offshore. As of September 30, 2015, we have a fleet of 124 well servicing rigs, consisting of 113 rigs with 550 horsepower and 11 rigs with 600 horsepower, 125 wireline units and 17 coiled tubing units. Our well servicing and coiled tubing utilization rates for the quarter ended September 30, 2015 were 62% and 25%, respectively, based on total fleet count, and we are currently actively marketing approximately 50% of our wireline fleet.

Drilling Contracts

We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with existing or potential clients. Our drilling contracts generally provide for compensation on either a daywork or turnkey basis. Contract terms generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used, and the anticipated duration of the work to be performed. Spot market contracts generally provide for the drilling of a single well and typically permit the client to terminate on short notice. We enter into longer-term drilling contracts for our newly constructed rigs and/or during periods of high rig demand. Currently, we have contracts with original terms of six months to four years in duration.

With most term drilling contracts, we are entitled to receive a full or reduced rate of revenue from our clients if they choose to place a rig on standby or to early terminate the contract before its original expiration term. Generally, these revenues are billed and collected over the remaining term of the contract, as the rig is placed on standby rather than fully released from the contract, and thus may go back to work at the client's decision any time before the end of the contract. Some of our drilling contracts contain "make-whole" provisions whereby if we are able to secure additional work for the rig with another client, then each party is entitled to a make-whole payment. If the dayrates under the new contract are less than the dayrates in the original contract, we would be entitled to a reduced revenue dayrate from the terminating client, and likewise, the terminating client may be entitled to a payment from us if the new contract dayrates exceed those of the original contract. A client may also choose to early terminate the contract and make an upfront early termination payment based on a per day rate for the remaining term of the contract. Revenues derived from rigs placed on standby or from the early termination of term drilling contracts are deferred and recognized as the amounts become fixed or determinable, over the remainder of the original term or when the rig is sold.

In response to the significant decline in oil prices over the last year, term contracts for 16 of our drilling rigs have been early terminated, including five of our 19 drilling rigs that are currently earning revenues under term contracts, resulting in approximately $53.0 million of early termination revenues. Revenues derived from these early terminations are deferred and recognized over the remainder of the original term of the drilling contracts. We recognized $11.7 million and $39.0 million of revenue for early termination payments during the three and nine months ended September 30, 2015, respectively, and $0.3 million in the fourth quarter of 2014.

In September 2015, we entered into long-term contracts for three of our drilling rigs in Colombia which are cancelable without penalty provided that our client gives 30 days notice. Including these three contracts in Colombia and the new-build drilling rig that we deployed in early October 2015, 19 of our drilling rigs are currently earning revenues under term contracts, which if not renewed prior to the end of their terms, will expire as follows:



		Term Contract Expiration by Period
	Total Term Contracts	Within 6 Months	6 Months to 1 Year	1 Year to 18 Months	18 Months to 2 Years	2 to 4 Years
United States	16	6	5	—	—	5
Colombia	3	—	1	—	—	2
	19	6	6	—	—	7

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Energy Services Corp. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. We suggest that you read these unaudited condensed consolidated financial statements together with the consolidated financial statements and the related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2014.

In preparing the accompanying unaudited condensed consolidated financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to our recognition of revenues and costs for turnkey contracts, our estimate of the allowance for doubtful accounts, our determination of depreciation and amortization expenses, our estimates of projected cash flows and fair values for impairment evaluations, our estimate of deferred taxes, 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 preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after September 30, 2015, through the filing of this Form 10-Q, for inclusion as necessary.

Unbilled Accounts Receivable

The asset “unbilled receivables” represents revenues we have recognized in excess of amounts billed on drilling contracts and production services completed but not yet invoiced. We typically invoice our clients at 15-day intervals during the performance of daywork drilling contracts and upon completion of the daywork contract. Turnkey drilling contracts are invoiced upon completion of the contract.

Our unbilled receivables totaled $7.7 million at September 30, 2015, of which $6.8 million represented revenue recognized but not yet billed on daywork drilling contracts in progress at September 30, 2015 and $0.9 million related to unbilled receivables for our Production Services Segment. At December 31, 2014, our unbilled receivables totaled $38.0 million, of which $32.8 million represented revenue recognized but not yet billed on daywork drilling contracts in progress at December 31, 2014, $0.8 million related to turnkey drilling contract revenues, and $4.4 million related to unbilled receivables for our Production Services Segment. As of September 30, 2015, we did not have any turnkey contracts in progress.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets include items such as insurance, rent deposits and fees. We routinely expense these items in the normal course of business over the periods these expenses benefit. Prepaid expenses and other current assets also include the current portion of deferred mobilization costs for certain drilling contracts that are recognized on a straight-line basis over the contract term.

Intangible Assets

Our intangible assets were recorded in connection with the acquisitions of production services businesses and are subject to amortization. We evaluate for potential impairment of long-lived tangible and intangible assets subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends include significant declines in revenue rates, utilization rates, oil and natural gas market prices and industry rig counts. In performing an impairment evaluation, we estimate the future undiscounted net cash flows from the use and eventual disposition of long-lived tangible and intangible assets grouped at the lowest level that cash flows can be identified. For our Production Services Segment, we perform an impairment evaluation and estimate future undiscounted cash flows for the individual reporting units (well servicing, wireline and coiled tubing). If the sum of the estimated future undiscounted net cash flows is less than the carrying amount of the asset group, then we would determine the fair value of the asset group. The amount of an impairment charge would be measured as the difference between the carrying amount and the fair value of these assets. The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management judgment.

Other Long-Term Assets

Other long-term assets consist of debt issuance costs net of amortization, cash deposits related to the deductibles on our workers’ compensation insurance policies and the long-term portion of deferred mobilization costs.

Other Current Liabilities

Our other accrued expenses include accruals for items such as property tax, sales tax, Colombian net wealth tax, professional and other fees. We routinely expense these items in the normal course of business over the periods these expenses benefit.

Other Long-Term Liabilities

Our other long-term liabilities consist of the noncurrent portion of liabilities associated with our long-term compensation plans, the long-term portion of deferred revenues and other deferred liabilities.

Related-Party Transactions

During the nine months ended September 30, 2015 and 2014, the Company paid approximately $0.1 million and $0.3 million, respectively, for trucking and equipment rental services, which represented arms-length transactions, to Gulf Coast Lease Service, a trucking and construction company. Joe Freeman, our Senior Vice President of Well Servicing, serves as the President of Gulf Coast Lease Services, which is owned and operated by Mr. Freeman's two sons. Mr. Freeman does not receive compensation from Gulf Coast Lease Service, and he serves primarily in an advisory role to his sons.

Recently Issued Accounting Standards

Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The standard outlines a single comprehensive model for revenue recognition based on the core principle that a company will recognize revenue when promised goods or services are transferred to clients, in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. We are required to apply this new standard beginning with our first quarterly filing in 2018. We are currently evaluating the potential impact of this guidance, but at this time, do not expect that the adoption of this new standard will have a material effect on our financial position or results of operations.

Debt Issuance Costs. On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This ASU requires retrospective adoption and will be effective for us beginning with our first quarterly filing in 2016. Early adoption is permitted. We do not expect this adoption to have a material impact on our financial position or results of operations.

Reclassifications

Certain amounts in the financial statements for the prior years have been reclassified to conform to the current year’s presentation.