Organization and Summary of Significant Accounting Policies

Business

Pioneer Energy Services Corp. provides land-based drilling services and production services to a diverse group of 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 business segments provide contract land drilling services through four domestic divisions which are located in the Marcellus/Utica, 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 offers the latest advancements in pad drilling. The following table summarizes our current rig fleet count and composition for each drilling services business segment:



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

Our production services business segments provide a range of well, wireline and coiled tubing services to a diverse group of exploration and production companies, with our operations concentrated in the major domestic 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 December 31, 2017, the fleet count and composition for each of our production services business segments is as follows:



	550 HP	600 HP	Total
Well servicing rigs, by horsepower (HP) rating	113	12	125
	Onshore	Offshore	Total
Wireline services units	108	4	112
Coiled tubing services units	10	4	14

Basis of Presentation

The accompanying 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

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

Foreign Currencies

Our functional currency for our foreign subsidiary in Colombia is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the period. Income statement accounts are translated at average rates for the period. Gains and losses from remeasurement of foreign currency financial statements into U.S. dollars and from foreign currency transactions are included in other income or expense.

Revenues and Cost Recognition

Drilling Services—Our drilling services business segments earn revenues by drilling oil and gas wells for our clients under daywork contracts. 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 revenues and costs during the years ended December 31, 2017, 2016 and 2015 were as follows (amounts in thousands):



	Year ended December 31,
	2017		2016		2015
Amortization of deferred revenues	$	2,400	$	1,566	$	1,099
Amortization of deferred costs	4,953		2,813		2,337

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



	December 31, 2017		December 31, 2016
Current:
Deferred revenues	$	905	$	1,449
Deferred costs	1,377		2,290
Long-term:
Deferred revenues	$	558	$	202
Deferred costs	402		212

With most term drilling contracts, we are entitled to receive a full or reduced rate of revenues 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 often 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. Currently, there are no drilling rigs in our fleet with contracts placed on standby.

Drilling Contracts—As of December 31, 2017, all 16 of our domestic drilling rigs are earning revenues, 14 of which are under term contracts. Of the eight rigs in Colombia, six are earning revenues, five of which are under term contracts. The term contracts in Colombia are cancelable by our clients without penalty, although the contract would still require payment for demobilization services and requires 30 days notice. 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.

Production Services—Our production services business segments earn revenues for well servicing, wireline services and coiled tubing services pursuant to master services agreements based on purchase orders, contracts or other arrangements with the client that include fixed or determinable prices. Production services jobs are generally short-term and are charged at current market rates. Production service revenue is recognized when the service has been rendered and collectability is reasonably assured.

All of our revenues are recognized net of sales taxes when applicable.

Concentration of Clients—We derive a significant portion of our revenue from a limited number of major clients. For the years ended December 31, 2017, 2016 and 2015, our drilling and production services to our top three clients accounted for approximately 20%, 26%, and 29%, respectively, of our revenue.

Cash and Restricted Cash

For purposes of the consolidated statements of cash flows, we consider all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. We had no cash equivalents at December 31, 2017 and 2016.

Our restricted cash balance at December 31, 2017 reflects the portion of net proceeds from the issuance of our senior secured term loan which are currently held in a restricted account until the completion of certain administrative tasks related to providing access rights to certain of our real property, which we expect to complete within 12 months. Accordingly, the related restricted cash is presented as current in the accompanying consolidated balance sheets.

Trade Accounts Receivable

We record trade accounts receivable at the amount we invoice to our clients. These accounts do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable as of the balance sheet date. We determine the allowance based on the credit worthiness of our clients and general economic conditions. Consequently, an adverse change in those factors could affect our estimate of our allowance for doubtful accounts.

We review our allowance for doubtful accounts on a monthly basis. Our typical drilling contract provides for payment of invoices in 30 days. We generally do not extend payment terms beyond 30 days and have not extended payment terms beyond 90 days for any of our domestic contracts in the last three fiscal years. Our production services terms generally provide for payment of invoices in 30 days. Balances more than 90 days past due are reviewed individually for collectability. We charge off account balances against the allowance after we have exhausted all reasonable means of collection and determined that the potential for recovery is remote. We do not have any off-balance sheet credit exposure related to our clients.

The changes in our allowance for doubtful accounts consist of the following (amounts in thousands):



	Year ended December 31,
	2017			2016			2015
Balance at beginning of year	$	1,678		$	2,254		$	2,547
Increase (decrease) in allowance charged to expense	(197		)	404			472
Accounts charged against the allowance	(257		)	(980		)	(765		)
Balance at end of year	$	1,224		$	1,678		$	2,254

Unbilled Accounts Receivable

The asset “unbilled receivables” represents revenues we have recognized in excess of amounts billed on drilling contracts and production services completed. We typically bill 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 December 31, 2017 and 2016 were as follows (amounts in thousands):



	December 31, 2017		December 31, 2016
Daywork drilling contracts in progress	$	15,254	$	7,042
Production services	775		375
	$	16,029	$	7,417

Inventories

Inventories primarily consist of drilling rig replacement parts and supplies held for use by our drilling operations in Colombia, and supplies held for use by our wireline and coiled tubing operations. Inventories are valued at the lower of cost (first in, first out or actual) or net realizable value.

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.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided for our assets over the estimated useful lives of the assets using the straight-line method. We record the same depreciation expense whether our equipment is idle or working. We charge our expenses for maintenance and repairs to operating costs. We capitalize expenditures for renewals and betterments to the appropriate property and equipment accounts.

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.

Treasury Stock

Treasury stock purchases are accounted for under the cost method whereby the cost of the acquired common stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of treasury stock shares are credited or charged to additional paid in capital using the average cost method.

Stock-based Compensation

We recognize compensation cost for our stock-based compensation awards based on the fair value estimated in accordance with ASC Topic 718, Compensation—Stock Compensation. For our awards with graded vesting, we recognize compensation expense on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. We adopted ASU 2016-09 in the first quarter of 2017 and elected to prospectively recognize forfeitures when they occur, rather than estimating future forfeitures.

Income Taxes

We follow the asset and liability method of accounting for income taxes, under which we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure our deferred tax assets and liabilities by using the enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. The effect of a change in tax rates on deferred tax assets and liabilities is reflected in income in the period of enactment. The recent change in tax rates resulting from the enactment of the Tax Cuts and Jobs Act enacted on December 22, 2017 is described in more detail in Note 5, Income Taxes.

Related-Party Transactions

During the years ended December 31, 2017, 2016 and 2015, the Company paid approximately $0.2 million in each period 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 an immaterial 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 substantially completed our assessment of the impact of this new standard.

We expect that the application of this new standard will result in the recognition of our services as a single performance obligation comprised of a series of distinct time increments which are satisfied over time. Revenues associated with mobilization and demobilization, which do not relate to a distinct good or service, will be estimated and recognized ratably over the term of the contract. All other revenues associated with the services we provide, including dayrate revenues and production services revenues, will continue to be recognized in the period during which the services are performed. We expect our revenue recognition under the new standard to differ from our current revenue recognition pattern primarily as it relates to drilling demobilization revenue, which, prior to the new standard, is recognized when the demobilization activity occurs at the end of the contract term, but under the new guidance will be estimated and recognized over the term of the contract.

This new standard is effective for us beginning January 1, 2018, which we have adopted using the modified retrospective method, in which the standard is applied to all contracts existing as of the date of initial application, with the cumulative effect of applying the standard recognized in retained earnings (the adoption date adjustments). We estimate that the adoption of this standard results in a cumulative effect adjustment of less than $1.0 million before applicable income taxes, which primarily consists of the impact of the timing difference related to recognition of demobilization revenue for affected contracts.

As we work towards finalizing our assessment, we are continuing to evaluate the requirements of this standard and complete other implementation activities such as implementing new procedures, finalizing the adoption date adjustment and drafting disclosures.

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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 and requires a modified retrospective application, although certain practical expedients are permitted.

We have performed a scoping and preliminary assessment of the impact of this new standard. As a lessee, this standard will impact us in situations where we lease real estate and office equipment, for which we will recognize a right-of-use asset and a corresponding lease liability on our consolidated balance sheet. The future lease obligations disclosed in Note 4, Leases, provides some insight to the estimated impact of adoption for us as a lessee. As a lessor, we expect the adoption of this new standard will apply to our drilling contracts and as a result, we expect to have a lease component and a service component of our revenues derived from these contracts. We have not yet determined the impact this standard may have on our production services businesses. We continue to evaluate the 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 5, Income Taxes). 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 in our consolidated statement of shareholders’ equity, together with the impact of stock-based compensation expense. 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 apply retrospectively for any comparative periods affected.

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Restricted Cash in Statement of Cash Flows. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows. This guidance must be applied retrospectively to all periods presented. We early adopted this ASU effective December 31, 2017. See Cash and Restricted Cash section above, included in this Note 1, Organization and Summary of Significant Accounting Policies, for detail regarding the nature of our restricted cash.

Reclassifications

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

We revised our reportable business segments as of the fourth quarter of 2017, which now include five operating segments, comprised of two drilling services business segments (domestic and international drilling) and three production services business segments (well servicing, wireline services and coiled tubing services). We revised our segments to reflect changes in the basis used by management in making decisions regarding our business for resource allocation and performance assessment. These changes reflect our current operating focus as is required by ASC Topic 280, Segment Reporting. See Note 10, Segment Information for this revised presentation.