Organization and Summary of Significant Accounting Policies

Business

Pioneer Energy Services Corp. (formerly called “Pioneer Drilling Company”) provides land-based drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies in 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 through our four domestic divisions which are located in the Marcellus, Eagle Ford, Permian Basin and Bakken regions, 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. Our drilling rig fleet is 100% pad-capable and consists of the following:



	Multi-well, Pad-capable
	AC rigs	SCR rigs	Total
Domestic rigs	16	—	16
Colombia rigs	—	8	8
			24

Our Production Services Segment provides a range of services to a diverse group of exploration and production companies, with our operations 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 March 31, 2017, our production services fleets are as follows:



	550 HP	600 HP	Total
Well servicing rigs, by horsepower (HP) rating	113	12	125
	Offshore	Onshore	Total
Wireline units	6	108	114
Coiled tubing units	5	12	17

Revenues and Cost Recognition

Drilling Contracts—Our drilling contracts generally provide for compensation on a daywork basis. Spot market contracts generally provide for the drilling of a single well and typically permit the client to terminate on short notice. We typically enter into longer-term drilling contracts for our newly constructed rigs and/or during periods of high rig demand. We recognize revenues on daywork contracts for the days completed based on the dayrate specified in each contract.

With most drilling contracts, we receive payments contractually designated for the mobilization of rigs and other equipment. Payments received, and costs incurred for the mobilization services are deferred and recognized on a straight line basis over the related contract term. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. Reimbursements that we receive for out-of-pocket expenses are recorded as revenues and the out-of-pocket expenses for which they relate are recorded as operating costs. Amortization of deferred mobilization revenues was $0.8 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively.

Our current and long-term deferred revenues and costs as of March 31, 2017 and December 31, 2016 were as follows (amounts in thousands):



	March 31, 2017		December 31, 2016
Current:
Deferred revenues	$	581	$	1,449
Deferred costs	984		2,290
Long-term:
Deferred revenues	$	61	$	202
Deferred costs	51		212

As of May 1, 2017, 15 of our 16 domestic drilling rigs are earning revenues, eleven of which are under term contracts, and the final domestic rig is undergoing an upgrade, which we expect to deploy under its new term contract late in the second quarter. Of the eight rigs in Colombia, three are earning revenues, two of which are under term contracts. The term contracts in Colombia are cancelable by our client without penalty, and by us if rig operations are suspended without an associated dayrate. We are actively marketing our idle drilling rigs in Colombia to various operators and we are evaluating other options, including the possibility of the sale of some or all of our assets in Colombia.

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.

Our unbilled receivables as of March 31, 2017 and December 31, 2016 were as follows (amounts in thousands):



	March 31, 2017		December 31, 2016
Daywork drilling contracts in progress	$	10,416	$	7,042
Production services	634		375
	$	11,050	$	7,417

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.

Other Long-Term Assets

Other long-term assets consist of cash deposits related to the deductibles on our workers’ compensation insurance policies, deferred compensation plan investments, the long-term portion of deferred mobilization costs, and intangible assets.

Other Current Liabilities

Our other accrued expenses include accruals for items such as property tax, sales tax, and 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, deferred lease liabilities, and the long-term portion of deferred mobilization revenues.

Related-Party Transactions

During the three months ended March 31, 2017 and 2016, the Company paid approximately $17,000 and $24,000, respectively, for trucking and equipment rental services, which represented arms-length transactions, to Gulf Coast Lease Service. Joe Freeman, our Senior Vice President of Well Servicing, serves as the President of Gulf Coast Lease Service, 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.

Comprehensive Income

We have not reported comprehensive income due to the absence of items of other comprehensive income in the periods presented.

Recently Issued Accounting Standards

Changes to accounting principles generally accepted in the United States of America (“U.S. GAAP”) are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). We consider the applicability and impact of all ASUs; any ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

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Revenue Recognition. In May 2014, the FASB issued 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 have performed a scoping and preliminary assessment of the impact of this new standard. We continue to evaluate the impact of this guidance, but currently expect the adoption of this new standard to primarily affect the timing for the recognition of certain types of revenues derived from drilling contracts, and to require expanded disclosure. We are required to apply this new standard beginning January 1, 2018. Two methods of transition are permitted under this standard: the full retrospective method, in which the standard would be applied retrospectively to each prior reporting period presented, subject to certain allowable exceptions; or the modified retrospective method, in which the standard would be applied to all contracts existing as of the date of initial application, with the cumulative effect of applying the standard recognized in retained earnings. We currently anticipate adopting this standard using the modified retrospective method.

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Leases. In February 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 current lease standard, and aligns the principles of lessor accounting with the principles of the FASB’s new revenue guidance (referenced above). This ASU is effective for us beginning January 1, 2019. We are currently evaluating the potential impact of this guidance and have not yet determined its impact on our financial position and results of operations.

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Stock-Based Compensation. In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

We adopted this ASU as of January 1, 2017 and we recognized a $3.1 million deferred tax asset for previously unrecognized tax benefits, which was then fully reserved by a valuation allowance (see Note 3, Valuation Allowances on Deferred Tax Assets). Additionally, we elected to prospectively account for forfeitures as they occur, rather than estimating future forfeitures. The total cumulative-effect impact of adoption, net of valuation allowances, was approximately $55,000 relating to our change in accounting for forfeitures, and was recognized as a reduction to retained earnings. The adoption of this ASU also results in the presentation of any excess tax benefits resulting from the exercise of stock options as operating cash flows in the statement of cash flows, which we will apply retrospectively for any comparative periods affected.

Reclassifications

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

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 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 year ended December 31, 2016.

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 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 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, our estimate of compensation related accruals and our estimate of sales tax audit liability.

In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after March 31, 2017, through the filing of this Form 10-Q, for inclusion as necessary.