Organization and Summary of Significant Accounting Policies

Business and Principles of Consolidation

Pioneer Drilling Company provides drilling services and production services to independent and major 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.

Our Drilling Services Division provides contract land drilling services with its fleet of 62 drilling rigs which are currently assigned to the following locations:



Drilling Division Locations		Rig Count
South Texas		15
East Texas		3
West Texas		19
North Dakota		9
Utah		4
Appalachia		4
Colombia		8
		62

Drilling revenues and rig utilization steadily improved during 2010 and 2011, primarily due to increased demand for drilling services in domestic shale plays and oil or liquid rich regions. We capitalized on this trend by moving drilling rigs in our fleet to these higher demand regions from lower demand regions. As a result, we closed our Oklahoma and North Texas drilling division locations during 2011 and established our West Texas drilling division location in early 2011.

In March 2012, we evaluated the drilling rigs in our fleet that have remained idle and decided to retire two mechanical drilling rigs that were assigned to our East Texas drilling division location, with most of their components to be used for spare equipment. Therefore, our fleet count has been reduced from 64 to 62 drilling rigs at March 31, 2012. We recognized an impairment charge of $0.6 million in March 2012 in association with our decision to retire these two drilling rigs.

We currently have term contracts for ten new-build AC drilling rigs that are fit for purpose for domestic shale plays, for which we expect seven to begin working by the end of 2012, with the remaining three during the first quarter of 2013. As of April 20, 2012, 55 drilling rigs are operating under drilling contracts, 45 of which are under term contracts. We have seven drilling rigs that are idle and are actively marketing all our idle drilling rigs.

In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We obtain our contracts for drilling oil and natural gas wells either through competitive bidding or through direct negotiations with customers. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage 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.

Our Production Services Division provides a range of services to exploration and production companies, including well services, wireline services, coiled tubing services, and fishing and rental services. Our production services operations are managed through locations concentrated in the major United States onshore oil and gas producing regions in the Gulf Coast, Mid-Continent, Rocky Mountain and Appalachian states. As of April 20, 2012, we have a fleet of 97 well service rigs consisting of eighty-seven 550 horsepower rigs, nine 600 horsepower rigs and one 400 horsepower rig. All our well service rigs are currently operating or are being actively marketed. We currently provide wireline and coiled tubing services with a fleet of 108 wireline units and ten coiled tubing units, and we provide rental services with approximately $15.4 million of fishing and rental tools. We plan to add another 11 well service rigs, 11 wireline units and three coiled tubing units by the end of 2012. In March 2012, we decided to retire two older wireline units and certain wireline equipment resulting in an impairment charge of approximately $0.4 million.

The accompanying unaudited condensed consolidated financial statements include the accounts of Pioneer Drilling Company 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. 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 estimate of the liability relating to the self-insurance portion of our health and workers’ compensation insurance, our estimate of asset impairments, our estimate of deferred taxes, our estimate of compensation related accruals and our determination of depreciation and amortization expense. The condensed consolidated balance sheet as of December 31, 2011 has been derived from our audited financial statements. We suggest that you read these 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, 2011.

In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed events that have occurred after March 31, 2012, through the filing of this Form 10-Q, for inclusion as necessary.

Recently Issued Accounting Standards

Fair Value Measurement. In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies existing guidance about how fair value should be applied where it already is required or permitted and provides wording changes that align this standard with International Financial Reporting Standards (IFRS). We are required to apply this guidance prospectively beginning with our first quarterly filing in 2012. The adoption of this new guidance has not had an impact on our financial position or results of operations.

Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update increases the prominence of other comprehensive income in financial statements, eliminating the option of presenting other comprehensive income in the statement of changes in equity, and instead, giving companies the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. We are required to comply with this guidance prospectively beginning with our first quarterly filing in 2012. We have not recognized any other comprehensive income during either of the three month periods ended March 31, 2012 or 2011. The adoption of this new guidance has not had an impact on our financial position or results of operations.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update delays the effective date of the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.

Intangibles–Goodwill and Other. In September 2011, the FASB issued ASU No. 2011-08, Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update allows entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step one of the two-step goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this new guidance has not had an impact on our financial position or results of operations.

Drilling Contracts

Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage 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. Generally, our contracts provide for the drilling of a single well and typically permit the customer to terminate on short notice. During periods of high rig demand, or for our newly constructed rigs, we enter into longer-term drilling contracts. Currently, we have contracts with terms of six months to four years in duration. As of April 20, 2012, we have 45 drilling rigs operating under term contracts. Of these 45 contracts, if not renewed at the end of their terms, 25 will expire by October 20, 2012, 19 will expire by April 20, 2013 and one will expire by April 20, 2014. We also have term contracts for ten new-build AC drilling rigs that are fit for purpose for domestic shale plays, for which we expect seven to begin working by the end of 2012, with the remaining three during the first quarter of 2013.

Restricted Cash

As of March 31, 2012, we had restricted cash in the amount of $0.7 million held in an escrow account to be used for a future payment due March 2013 in connection with the acquisition of Prairie Investors d/b/a Competition Wireline (“Competition”). Restricted cash of $0.7 million is recorded in other current assets and the associated obligation of $0.7 million is recorded in accrued expenses.

Investments

At December 31, 2010, we held $15.9 million (par value) of auction rate preferred securities (“ARPSs”), which were variable-rate preferred securities with a long-term maturity that were classified as held for sale. On January 19, 2011, we entered into an agreement with a financial institution to sell the ARPSs for $12.6 million, which represented 79% of the par value, plus accrued interest. Under the ARPSs sales agreement, we retained the unilateral right for a period ending January 7, 2013 to: (a) repurchase all the ARPSs that were sold at the $12.6 million price at which they were initially sold to the financial institution; and (b) if not repurchased, receive additional proceeds from the financial institution upon redemption of the ARPSs by the original issuer of these securities (collectively, the “ARPSs Call Option”). Upon origination, the fair value of the ARPSs Call Option was estimated to be $0.6 million and was recognized as other income in our consolidated statement of operations for 2011. We are required to assess the value of the ARPSs Call Option at the end of each reporting period, with any changes in fair value recorded within our consolidated statement of operations. As of March 31, 2012, the ARPSs Call Option had an estimated fair value of $0.2 million, and was included in our other long-term assets in our condensed consolidated balance sheet.

Property and Equipment

As of March 31, 2012, we have incurred a total of $158.3 million of construction costs, primarily on our ten new-build drilling rigs that were under construction at March 31, 2012. During three months ended March 31, 2012, we capitalized $2.0 million of interest costs, primarily related to the ten new-build drilling rigs.